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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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28 Jul 2017

The introduction of new requirements for the accounting for expected credit losses in IFRS 9 'Financial Instruments' will be a significant change to the financial reporting of banks when required in 2018.

The Global Public Policy Committee (GPPC)1 have issued a paper titled The auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9.

The paper 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.

Please click to access The auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9 and a corresponding press release.

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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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