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The auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9

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Jul 28, 2017

On July 28, 2017, the world’s six largest accounting networks under the auspices of the Global Public Policy Committee (GPPC) have issued a paper to promote high quality audits of the accounting for expected credit losses by globally systemically important banks.

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.

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