The Global Public Policy Committee (GPPC)¹ paper, The auditor’s response to the risks of material mis­state­ment posed by estimates of expected credit losses under IFRS 9, is addressed primarily to the audit com­mit­tees of sys­tem­i­cally-im­por­tant banks, although much of its content will be relevant to other banks and financial in­sti­tu­tions, and aims to promote the im­ple­men­ta­tion of accounting for expected credit losses to a high standard.

The paper notes that in­tro­duc­tion of new re­quire­ments for the accounting of expected credit losses in IFRS 9, Financial In­stru­ments, will be a sig­nif­i­cant change to the financial reporting of banks when required in 2018. Banks are expected to design and implement high-qual­ity policies, pro­ce­dures, internal controls, systems and models in ac­cor­dance with the accounting standard to enable bank man­age­ment to exercise ap­pro­pri­ate judge­ments when es­ti­mat­ing expected credit losses (ECL).

However, the paper also notes that there are risks of material mis­state­ment related to the es­ti­ma­tion of ECL under IFRS 9, are as a result of: the com­plex­ity of es­ti­mat­ing expected losses; a higher number of inputs and as­sump­tions, which are subject to judgement; an increased es­ti­ma­tion un­cer­tainty; and the potential magnitude of the ECL estimate for sys­tem­i­cally-im­por­tant banks.

The GPPC hopes the paper will help those charged with gov­er­nance to ef­fec­tively evaluate the quality of the auditor’s response to the risks of material mis­state­ment posed by estimates of expected credit losses.

For further details refer to the press release on the GPPC’s website.

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¹ The Global Public Policy Committee (GPPC) of the six largest international accounting networks comprises rep­re­sen­ta­tives of BDO, Deloitte, EY, Grant Thornton, KPMG and PwC, and focuses on public policy issues for the pro­fes­sion.