Adoption of IFRS 9 is two years away – or less for early adopters. What are the implications for non-financial corporates and how can they ensure compliance with the new accounting standards?

When the International Accounting Standards Board (IASB) first issued IFRS 9 in 2009, non-financial entities knew that they would have to comply with the new standards for reporting periods beginning on or after 1 January 2018. IFRS 9 replaced IAS 39 and the final version was issued in July 2014. Early application is permitted, meaning that early adoption of the standards could be just around the corner for many companies and in any case, significant preparation will be needed to meet the requirements on time.

The implications for non-financial corporates include the following:

• introduction of fair value through other comprehensive income (FVTOCI), for debt instruments. According to Deloitte, this could result in less profit or loss volatility for corporates that invest in long‐term debt instruments and manage the overall return generated by collecting the contractual cash flows and selling assets to reinvest to get a higher return.
• FVTOCI replaces the available-for-sale (AFS) classification under IAS 39.
• IFRS 9 introduces a new expected loss impairment model which replaces IAS 39’s incurred loss model.
• the loan loss allowance is recognised on initial recognition and measured as either a 12-month expected loss allowance or a lifetime expected loss allowance.
• an earlier trigger for recognising impairment losses means entities will have to establish appropriate systems and processes for identifying when there has been a significant increase in credit risk.
• corporates will have to use data not previously required under IAS 39, for example in the calculation of loss allowances measured on a probability‐weighted basis.

IFRS 9 also applies to banks and other financial institutions. A blog post written by an expert in credit risk management outlines the steps that banks need to take to ensure they will be in line with the regulations. But many of these key steps also apply to corporates. Ben O'Brien, risk practice director at Jaywing, writes: “Those who start now to work towards implementation stand themselves in good stead to meet the requirements on time but also to establish a robust and efficient framework that leverages existing tools. Taking this approach and starting work now will leave risk and finance teams with a well thought out IFRS 9 infrastructure that will be straightforward to manage in the future.”

His advice that could apply to corporates just as well as to banks includes:

• Assess your current situation. It is imperative to assess your organisation’s data, system and model infrastructure for suitability under IFRS 9.
• Review historical data and existing risk models. A thorough review of data items early in the project will pinpoint any shortfalls in the capture, storage or processing of data.
• Develop the right methodology and explore alternative methodologies.
• Building prototype models then refine your methodology and ensure that modelling adheres to already established standards with sound model validation and documentation to ensure they are robust, predictive and relevant.
• Implement models and parallel runs. The models must be implemented and run in parallel alongside IAS 39 models. They must also be monitored regularly.