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Article:

How corporates can improve their IFRS 9 related disclosures

12 December 2019

In October 2019, the FRC published a thematic review of disclosures provided by banking and non-banking entities in the first full reporting period following the adoption of IFRS 9 Financial Instruments. In this article, we highlight and consider the FRC’s findings which are applicable to non-banking entities that have applied IFRS 9 for the first time in their annual accounts.

Scope and purpose

The FRC reviewed the annual accounts of a small sample of entities across a number of industry sectors including banking, other financial institutions, oil and gas and telecommunications. The review considered the comprehensiveness and quality of the disclosures provided by those entities against the requirements of IFRS 9, IFRS 7 Financial Instruments: Disclosures and the judgments and estimates requirements that are set out in IAS 1 Presentation of Financial Statements. The purpose of the review was to identify key areas of improvement as well as to highlight examples of good practice from published annual accounts.

What were the key improvement areas identified?

While the FRC was pleased with the progress made by most entities, they did identify disclosure areas that needed improvement, particularly with respect to impairment but also in relation to classification and measurement.

Classification and measurement

The majority of non-banking entities did not hold particularly complex instruments and, as a result, the most common classification categories were amortised cost (for cash and cash equivalents and trade receivables) and fair value through other comprehensive income (for equity investments). The FRC identified the following specific areas that could be improved upon:

Issue

Suggested improvement

Business models

While non-banking entities might be expected to have a hold-to-collect business model, entities should, however, explain how they have conducted and concluded on this assessment, and how this interacts with the classification decision.

Accounting policies

Accounting policies should be clear, concise and relevant, e.g. they should not be provided for instruments that are not held by the entity.

Terminology

Old IAS 39 terminology should be updated to reflect new IFRS 9 terminology.

 

In addition, the FRC reminded entities not to overlook the new requirement that IFRS 9 introduced for the
subsequent measurement of financial liabilities that have been modified but not derecognised. Under IFRS 9, the IASB has clarified that the difference between the old and new carrying values is required to be recognised immediately in profit or loss.

Impairment

All of the non-banking entities within the sample applied the simplified approach, with some entities also applying the general approach to non-current receivables. Specific areas for improvement were:

Issue

Suggested improvement

Application of the simplified approach

Entities should make clear whether and how they have applied the simplified approach to their trade receivables, contract assets and lease receivables. This includes giving due consideration to the need to incorporate forward-looking information, eg how the effect of economic variables such as GDP or unemployment rates have been incorporated into the measurement of Expected Credit Losses (ECL).

Disclosure of gross carrying amount by credit risk rating grades

This disclosure is required for all exposures within the scope of the impairment requirements, including trade receivables, contract assets and lease receivables to which the simplified approach is applied. The requirement can be based on the provision matrix used to calculate ECLs, or by segregating exposures by the number of days past due.

Contract assets

The impairment requirements must be applied not only to trade receivables but also contract assets (as defined in IFRS 15 Revenue from contracts with customers).

Terminology

The impairment policy should refer to an ECL basis. References to an incurred loss basis should be removed.

Estimation uncertainty

Where ECLs are identified as a source of estimation uncertainty, key assumptions and a sensitivity analysis should be provided.

 

In addition, the FRC reminded entities not to overlook the application of IFRS 9 to the separate financial statements of the parent company. For example, loans to subsidiaries, which are often material, will typically be within the scope of the impairment requirements (see our BDO Global publication Applying IFRS 9 to related company loans for more details on this topic).

Next steps

The FRC will continue to challenge entities during its routine reviews of accounts and it is likely that it will focus on those areas already identified as needing improvement. All entities applying IFRS 9 should familiarise themselves with these improvement areas and the examples of what the FRC considers good practice.

For help and advice on financial instruments related matters please get in touch with your usual BDO contact or Mark Spencer.

Read the thematic review report.

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