In the aftermath of the recent financial crisis, there was an increased willingness from global accounting standard setters to work towards the objective of creating a single set of high-quality global standards.
In response to this, the IASB decided to accelerate its project to replace IAS 39, and sub-divided it into three main phases: classification and measurement; impairment; and hedging. This three-stage process to accounting for financial instruments resulted in the development of IFRS 9. This standard contains a new impairment model which will result in earlier recognition of losses, better known as the ‘expected loss approach’.
Auditors are now required to consider the attributes of ‘credit risk’ and ‘objective evidence of impairment’ in determining the level of expected credit losses to be accounted for. These changes are having a significant impact on entities that have significant financial assets and in particular financial institutions. Conversely, there are still doubts as to whether this more prudent approach will contribute towards the achievement of financial stability.