Publication - EBA publishes final Guidelines on credit institutions credit risk management practices and accounting for expected credit losses
The European Banking Authority (EBA) published today its final Guidelines on credit institutions' credit risk management practices and accounting for expected credit losses. These Guidelines aim at ensuring sound credit risk management practices associated with the implementation and on-going application of the accounting for expected credit losses. The Guidelines are part of the EBA's work on the implementation of IFRS 9 and its interaction with prudential requirements and build on the Guidance published by the Basel Committee on the same matter.
Executive Summary
These guidelines are issued pursuant to Article 16(1) of Regulation (EU) No 1093/2010 on the EBA’s own initiative in order to ensure common, uniform and consistent application of Union law and to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision (‘ESFS’).
A significant number of credit institutions apply the International Financial Reporting Standards® (‘IFRS® Standards’) as these are incorporated into the EU legal framework through EU regulations, in accordance with the procedures set out in Regulation (EC) No 1606/20021 . IFRS 9 Financial Instruments (‘IFRS 9’), which will replace IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’), for the accounting periods beginning on or after 1 January 20182 , requires the measurement of impairment loss allowances to be based on an expected credit loss (‘ECL’) accounting model rather than on an incurred loss accounting model.
The EBA welcomes the move from an incurred loss model to an ECL model under IFRS 93 . IFRS 9 is, overall, an improvement compared with IAS 39 in the accounting for financial instruments, and the changes to credit loss provisioning should contribute to addressing the G20’s concerns about the issue of ‘too little, too late’ recognition of credit losses, and improve the accounting recognition of loan loss provisions by incorporating a broader range of credit information. IFRS 9 is therefore expected to address some prudential concerns and contribute to financial stability. However, the application of IFRS 9 also requires the use of judgement in the ECL assessment and measurement process, which could potentially affect the consistent application of IFRS 9 across credit institutions and the comparability of credit institutions’ financial statements.
In December 2015, the Basel Committee on Banking Supervision (‘BCBS’) issued supervisory guidance on credit risk and accounting for expected credit losses4 (the ‘BCBS guidance’), which sets out supervisory expectations for credit institutions related to sound credit risk practices associated with implementing and applying an ECL accounting model. In addition, it contains an Annex specific to jurisdictions applying IFRS.
Building on the BCBS guidance, these guidelines aim at ensuring sound credit risk management practices for credit institutions, associated with the implementation and ongoing application of ECL accounting models. The existence of supervisory guidance emphasises the importance of high-quality and consistent application of IFRS 9 and could help to promote consistent interpretations and practices. The objective of the EBA guidelines is to be in line with the BCBS guidance. The EBA guidelines would not prevent credit institutions from meeting the impairment requirements in IFRS 9.
page source http://www.eba.europa.eu/documents/
