For years, accounting and risk management have not always been fully in sync. Limitations in the prevailing accounting standard meant that firms were not always able to accurately reflect their risk management activities in financial statements. While the emphasis of accounting was on the forensics of company finances, risk management was traditionally focused on the prospective future. IFRS 9 will help to clarify the role and outcome of risk management in the accounting output.
IFRS 9’s impact - and opportunity - will be in encouraging clarity among stakeholders and providing a common language and framework that finance, treasury, risk functions and the CFO can use. Closer collaboration across multiple functions should improve the information flowing to the treasurer and CFO, and enable them to better communicate financial performance to investors in a way that helps them understand the risks a company faces.
Key changes introduced to achieve closer alignment
The global financial crisis exposed many problems with IFRS 9’s predecessor, IAS 39. It was viewed as complex, challenging to implement, inflexible and confusing to investors in its treatment and reporting of risk management. The crisis highlighted the deficiencies of the incurred loss impairment model, whereby a provision is booked after a loss event has happened, resulting in delayed credit-loss recognition. This was commonly referred to as ‘too little, too late’. A further criticism of IAS 39 was the complicated and restrictive nature of the hedge accounting requirements. Companies often found themselves unable to achieve hedge accounting for common hedging strategies. The inability to achieve hedge accounting and postponement of credit losses resulted in financial statements not necessarily reflecting the true status of risk management application.
Key changes under IFRS 9 aim to address the weaknesses found in IAS 39. IFRS 9 sees a general shift from a prescriptive to a principle-based approach, changes to the way financial assets are classified and measured based on their nature and how they are managed, changes to the impairment model based on expected rather than incurred credit losses, and a move to hedge accounting guidelines that are less rigid and more aligned to the underlying transactions.