3 minute read 23 Dec 2019
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How the DECL recommendations on IFRS 9 could affect credit risk disclosures

By EY FS Insights

Minds Made for Financial Services

3 minute read 23 Dec 2019

On 13 Dec 2019, the UK Taskforce for disclosures on IFRS 9 Expected Credit Loss disclosures (the 'Taskforce') issued its second report. 

The Taskforce is a jointly established and sponsored initiative established by the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Prudential Regulatory Authority (PRA) (together the 'Regulators') in November 2017. It is a partnership between the preparer community and the investor and analyst community, coming together to develop ECL disclosures, based on a similar model to that followed by the Enhanced Disclosure Task Force (EDTF) initiative of the Financial Stability Board. 

The objective of the Taskforce is to promote high quality disclosures for ECL. Over time, the aim is to encourage greater consistency and comparability of those disclosures, whilst recognizing the need for them to reflect each reporting entity’s facts and circumstances

The Taskforce’s first report, which was issued in November 2018, builds on the requirements in IFRS 7 Financial Instruments: Disclosures and the recommendations in the December 2015 report of the Enhanced Disclosure Task Force. The Regulators asked the Taskforce to develop guidance and illustrative examples showing how the information described in the first report can be presented in a way that enhances comparability between banks.  The second report, which was published on 13 December 2019, sets out that guidance and those illustrative examples.

Click here (pdf) for the report.

The Taskforce’s second report focuses mainly on disclosures that help users to understand the types and extent of credit risk exposure a bank has and how that risk has evolved; the forward-looking information about macro-economic conditions used in estimating ECL; and the sensitivity of ECL provisions to different macro-economic conditions. Illustrative examples, suggesting how the recommended disclosures could be presented in a broadly harmonized way from bank-to-bank, are provided in support of the main recommendations.

The recommendations and illustrative examples in the report include the following topics:

  1. Alignment between accounting for credit losses and credit risk management activities
  2. Policies and methodologies
  3. Forward-looking information
  4. Movement and coverage across stages
  5. Changes in the balance sheet ECL estimate
  6. Credit risk profile
  7. Measurement uncertainty, future economic conditions and critical judgements and estimates
  8. Regulatory capital
  9. Governance and oversight

The material in the report has been developed primarily for use by the preparer banks represented on the Taskforce (Barclays, HSBC, Lloyds Banking Group, Nationwide, The Royal Bank of Scotland Group, Santander UK and Standard Chartered Bank). Nevertheless, it may be of relevance to other banks and similar financial institutions as a guide to best practice.

EY has issued several publications on IFRS 9 disclosures, including IFRS 9 disclosure checklist (pdf) and Good Bank (International) Limited (December 2019).

Summary

EY teams welcome the initiative of the DECL Taskforce and expects it will help driving an improved level of consistency of credit risk disclosures amongst the large UK banks. It may also be considered a helpful reference for what a good set of disclosures looks like, even for smaller banks and banks in other jurisdictions, to the extent relevant and applicable, considering their specific facts and circumstances, including materiality.

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By EY FS Insights

Minds Made for Financial Services