The auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9

The in­tro­duc­tion of new re­quire­ments for the accounting for expected credit losses in IFRS 9 'Financial In­stru­ments' will be a sig­nif­i­cant change to the financial reporting of banks when required in 2018.

The Global Public Policy Committee (GPPC)¹ have issued a paper titled The auditor’s response to the risks of material mis­state­ment posed by estimates of expected credit losses under IFRS 9.

The paper is addressed primarily to the audit com­mit­tees of sys­tem­i­cally-im­por­tant banks, although much of its content will be relevant to other banks and financial in­sti­tu­tions, and aims to promote the im­ple­men­ta­tion of accounting for expected credit losses to a high standard.

The paper notes that in­tro­duc­tion of new re­quire­ments for the accounting of expected credit losses in IFRS 9 Financial In­stru­ments will be a sig­nif­i­cant change to the financial reporting of banks when required in 2018. Banks are expected to design and implement high-qual­ity policies, pro­ce­dures, internal controls, systems and models in ac­cor­dance with the accounting standard to enable bank man­age­ment to exercise ap­pro­pri­ate judge­ments when es­ti­mat­ing expected credit losses (ECL).

However, the paper also notes that there are risks of material mis­state­ment related to the es­ti­ma­tion of ECL under IFRS 9, are as a result of:

the com­plex­ity of es­ti­mat­ing expected losses;

a higher number of inputs and as­sump­tions, which are subject to judgement;

an increased es­ti­ma­tion un­cer­tainty; and

the potential magnitude of the ECL estimate for sys­tem­i­cally-im­por­tant banks.

The GPPC hopes the paper will help those charged with gov­er­nance to ef­fec­tively evaluate the quality of the auditor’s response to the risks of material mis­state­ment posed by estimates of expected credit losses.