Enhanced risk disclosure needed during the transition period to IFRS 9
(Extract from page 48 of BIS Quarterly Review, March 2017)
The importance to market confidence of useful disclosure by financial institutions of their risk exposures and risk management practices has been underscored during the GFC and its aftermath. At the FSB's request, the Enhanced Disclosure Task Force (EDTF) recommended disclosures to help market participants understand the upcoming changes to ECL approaches and to promote consistency and comparability.
The EDTF's report, published in December 2015, found that investors and other financial report users want to understand the specific reasons for any changes at transition in ECL loan loss provisions compared with the existing approach and the ongoing drivers of variability in credit losses.
The EDTF recommended that a gradual and phased approach during the transition period would be most useful to users by giving them clearer insights, as implementation progresses, into the likely impacts of the new ECL standards and to allow users to make useful comparisons between banks. The initial focus should be on qualitative disclosures but quantitative disclosures - including the impact on earnings and capital of ECL approaches - should be added as soon as they can be practicably determined and are reliable but, at the latest, in 2017 annual reports for banks following IFRS. For example, the EDTF recommends banks following IFRS should provide:
- qualitative disclosures about general ECL concepts, differences from the current approach, and implementation strategy, starting with 2015 and 2016 annual reports;
- qualitative disclosures about detailed principles, governance organisation and capital planning impact starting with 2016 annual reports; and
- disclosure of quantitative assessments of the impact of adoption of the ECL approach starting when practicable and reliable but, at the latest, in 2017 annual reports.
In addition, the EDTF recommended that the granularity of disclosures should improve each year during this transition period. When IFRS 9 becomes effective, banks would provide the required ECL disclosures.
The FSB convened the EDTF in May 2012 to develop principles for improved bank disclosures and identify leading practice risk disclosures. The EDTF comprised senior officials and experts representing financial institutions, investors and analysts, credit rating agencies and external auditors. In October 2012, it reported recommendations to the FSB (EDTF (2012)), which were welcomed by the G20 Leaders, the FSB and the chairs of the IASB and FASB. EDTF (2015). A similar approach, adjusted for the applicable transition period years, would be used for banks subject to US GAAP, including the FASB's CECL standard.