Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), has stated that IFRS 9 will be finished very soon, but concedes that standards bodies have been struggling with the inherent complexity of accounting for financial instruments.
Speaking at the joint ICAEW and IFRS Foundation Financial Institutions IFRS Conference, Hoogervorst acknowledged the complexity of the accounting requirements, coupled with the fact the financial industry is 'extraordinarily sensitive' to accounting rules, which he said had made it difficult to develop the right solution.
'Banks and insurance companies have huge balance sheets and those balance sheets matter hugely. Relatively small changes in the balance sheet can have an enormous impact on earnings. Future cash flows are very much dependent on the financial instruments on banks' and insurance companies' balance sheets,' Hoogervorst said.
He pointed out that for many financial instruments, it is their current value that counts and stated: 'It is exactly this undeniable importance of current measurement techniques that makes accounting for the financial industry so controversial.'
Hoogervorst said the financial crisis had made it clear that the current impairment model, based on incurred losses, does not work well and had led to IASB 's decision to replace this with an expected loss model which he said was much more forward-looking.
However, he said that current hedge accounting is not capable of properly reflecting the management of net positions in open portfolios. Hoogervorst said the ISAB is looking to develop a new macro hedging model so it is possible to match the current value of interest rate exposures that are embedded in open portfolios with the fair value of the derivatives that are used to hedge those exposures. This activity will take place separately from the rest of IFRS 9.
'IFRS 9 is practically finished and will soon be ready to be endorsed. Because of the significant improvements that IFRS 9 makes in classification and measurement, and also in general hedging and impairment, I have no doubt that it will be endorsed around the world,' Hoogervorst said.
Robert Hodgkinson, ICAEW executive director, described progress on updating financial instruments accounting in the wake of the financial crisis as 'a rather tangled and frustratingly slow process'.
In addition, Hodgkinson warned that this action alone may not be sufficient to ensure banks can provide a full picture of their financial health, saying that the lack of consistency and reliability of capital ratios represents as big an issue for banks as the unfinished accounting standards.
'It is increasingly clear that bank capital ratios are neither as comparable nor as reliable as they should be, irrespective of the accounting treatment. Banks use internal models to calculate their capital ratios. Recent exercises by bank supervisors have highlighted wide differences in how different bank models would assess the capital requirements for the same hypothetical group of assets,' Hodgkinson said.
