Role of European banks in comment and endorsement process of IFRS 9

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Alan Powers
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1 Role of European banks in comment and endorsement process of IFRS 9 Filename: Date: Author: _RBI_ACCA_Conference_Harvankova.ppt Renata Harvankova

2 Agenda 1. Adoption of IFRS in EU for statutory financial statements 2. Enhancement of EU role in promoting high quality accounting standards 3. EFRAG governance review 4. Role of European Supervisory Authorities in IFRS interpretations, in particular ESMA 5. Platforms for influencing the IFRS 6. IFRS 9 Main achievements of European stakeholder community 7. Influencing IASB 2

3 Adoption of IFRS in EU for statutory financial statements IFRS for separate FS of listed bank, April 2012 Restricted Permitted Required Information is not guaranteed 3

4 Adoption of IFRS in EU for statutory financial statements IFRS for separate FS of non-listed bank (certain size criteria), April 2012 Restricted Permitted Required Information is not guaranteed 4

5 Enhancement of EU role in promoting high quality accounting standards 10 years after the adoption of the IAS Regulation, the EC also needs to carry a costs/benefits analysis of the IAS Regulation As a result of the Lisbon Treaty, endorsement of IFRS would no longer be subject of voting of ARC Accounting Regulatory Committee (consisting of Member states representatives) could develop into Advisory Expert Group EFRAG endorsement advise will be still needed ECOFIN 13 December 2012: EU commitment towards IFRS need to reinforce the EU voice in the standard setting process called for a strengthened role of the ARC perceived lack of public legitimacy of EFRAG, and thus its inability to represent the European general interest 5

6 Enhancement of EU role in promoting high quality accounting standards As a follow up, Commissioner Barmier has appointed Mr Philippe Maystadt, as Special Adviser in charge of providing him with recommendations to enhance the EU s role in promoting high quality accounting standards. Maystadt review: how to integrate different perspectives and ensure a single voice for the EU recast bodies and committees, new composition, review of funding, etc. considering the creation of new structures and processes draft report is expected for September 2013 basis for reform of relevant structures - final recommendations in November 2013 What should be the role of national standard setters in a European framework? When and how to react if a standard is not acceptable? 6

7 Enhancement of EU role in promoting high quality accounting standards The European Parliament is currently debating the Regulation on establishing Union Program to support specific activities in the field of financial reporting and auditing for : financing, governance and legitimacy of EFRAG financing of the IASB and its governance purpose of annual accounts relevance of IFRS in today s economic environment and whether they still fit for purpose to need to review the endorsement process more flexible endorsement possibility to modify the final standard carve-in or IFRS adoption system similar to the Basel implementation via CRD IV The Rapporteur is Stolojam Theodor Dumitru (member of European Parliament, Partidul Democrat-Liberal, Romania) 7

European Commission Funding = 2 x (NFM+MO) MO (Member Organizations) ESBG European Savings Banks Group EACB European Association of

8 EFRAG governance review EFRAG Funding structure EFRAG European Financial Reporting Advisory Group Banking Industry EBF European Banking Federation France Standard Setter Germany Standard Setter Italy Standard Setter UK Standard Setter NFM (National Funding Mechanism) European Commission Funding = 2 x (NFM+MO) MO (Member Organizations) ESBG European Savings Banks Group EACB European Association of Cooperative Banks EFAA European Federation of Accountants and Auditors FEE Federation of European Accountants Business Europe Insurance Europe 8

9 EFRAG governance review Current EFRAG structure 9

10 EFRAG governance review EFRAG is a private sector body established by European organizations (Member Organizations) Supervisory body is independent members are required to commit themselves formally to acting in the European public interest TEG (Technical Expert Body) delivering the EFRAG technical positions and endorsement decisions advice, members not paid by EFRAG 4 national Standard Setters are non-voting member EC and ESMA attend TEG meetings as observers EFRAG governance review further integration of the standard setters (4 or 28?) whether EFRAG TEG should remain independent how funding organizations should be involved? whether ESMA (ECB) be involved/integrated and how? 10

11 Role of European Supervisory Authorities in IFRS interpretations, in particular ESMA ESMA (European Securities and Markets Authority) program: strengthen its role in the convergence of enforcement practices through issuance of statements and opinions What are concerns of EU banks? the role as the only IFRS interpretation body is assigned to IFRIC could go ESMA opinions beyond the mandate of ESMA and conflicts with the role of IFRIG? far-reaching consequences: auditors are not in the position to ignore the ESMA interpretations auditors even start use it as a checklist IFRS Principal Based ESMA Interpretations EU IFRS Rule Based? 11

Parliament, Council, EBA, ESRB, ECB, EFRAG

Stakeholders WTO,FSB, BASEL Cttee, IASB,

Businesseurope, BEUC, EFAMA, FEE Financial

12 Example of various stakeholders Euopean Institutions & Agencies Commission, Parliament, Council, EBA, ESRB, ECB, EFRAG International Institutions Other Stakeholders WTO,FSB, BASEL Cttee, IASB, IOSCO National Banking Associations Businesseurope, BEUC, EFAMA, FEE Financial Institutions EFR, ESBG, EACB, EBIC, EPC, IBFED, IIF Banking Industry Stakeholders 12

13 Platforms for influencing the IFRS Bilateral Meetings EFRAG Survey on Financial Instruments ED Comment Letter to IASB IASB Effect Analysis EFRAG Comment Letter Response IASB Request for Information EFRAG Field Testing EBF Accounts Committee Meeting EBF Banking Supervision Committee Bilateral Meetings with IASB IASB Outreach Activities EFRAG Proactive Work National Standard Setters Accounting Task Force of Basel Committee Conferences of Banking Associations EFRAG Workshops And many more 13

14 New principles for influencing the IFRS Conceptual and technical arguments Objective evidence of operational difficulties and implementation costs Product examples from banking practice Statistics, time lines, mathematical models Reflection of risk management practices Honest partnership 14

15 IFRS 9 Phase 1: Classification and Measurement Standard Financial Assets November 2009 Standard (+ Liabilities carried forward from IAS 39 + own credit risk in FVO) October 2010 Limited amendments to IFRS 9 ED November 2012 Phase 2: Impairment Exposure Draft November 2009 Expert Advisory Panel consultations H Supplement to ED/2009/12 January 2011 Re-exposure Draft March 2013 Phase 3: Hedge Accounting Exposure Draft December 2010 Decoupling Macro Hedging from IFRS 9 May 2012 Review Draft on general hedge accounting requirements September

16 IFRS 9 Initiative of endorsement rests with European Commission Most probable scenario IFRS 9 considered for endorsement when 3 phases completed: 1. Classification and Measurement 2. Impairment 3. General (micro) Hedge Accounting Macro Hedge Accounting will be treated separately Endorsement in 2014? IASB effective date 1 January 2015 (still no change) Preparers require for implementation 3 years time after endorsement Postponement to 2017 or 2018??? 16

IFRS 9 Classification and measurement Main achievements Mix-measurement approach Change the attempt from full FV measurement to both (AC and FV) Thank crisis also Interest Rate Mismatch Interest rate

17 IFRS 9 Classification and measurement Main achievements Mix-measurement approach Change the attempt from full FV measurement to both (AC and FV) Thank crisis also Interest Rate Mismatch Interest rate mismatch disqualifies some classical loan book products from amortized cost IASB introduced limited amendments to IFRS 9 in 11/2012 Business model Role of Business Model in IFRS (economic management of instruments) IFRS 9 formally introduced the Business Model notion Own Credit Risk Own credit risk should not be reflected in the financial statements Changes are not reflected in net income anymore, but in OCI (partial success only) 17

18 IFRS 9 Impairment Main achievements More operational standard ED 2009/12 very conceptual, but not operational ACC and RM systems decoupled IASB listened to preparers and EAP ED 2013/03 Risk Management Practices Open vs. Closed portfolio Absolute vs. Relative approach (RM doesn t track all changes) partial success only 12M EL For bucket 1 FASB model = Day1 Losses IASB supports 12M EL despite of putting on risk Convergence IFRS and US GAAP Impact Analysis IASB launched effect analysis 04/13 EFRAG started with field test the same time EFRAG organizes workshops for contributors 06/13 18

19 IFRS 9 Hedge Accounting Main achievements Decoupling General and Macro Hedging Speed-up IFRS 9 finalizing IASB focuses on macro FVH on IRR, should not limit to this RM of open portfolios that cannot be dealt within the general hedge accounting Option to use IAS 39 or IFRS 9 Current CFH practices not necessarily compliant with IFRS 9 IAS 39 whole hedge accounting remains available as option (incl. curve-out) 04/13 Risk Management Practices Indicate risk components as a hedged item Hedging of net positions Designation of aggregated exposures (with derivatives) as eligible hedge item Impact Analysis IASB effect analysis EFRAG survey and field test Q4/12 19

20 Influencing the IASB Influencing the standard-setting process Influencing of IASB agenda setting Proactive activities Providing input outside of consultation process Preventing IASB from introducing unnecessary changes in standard 20

21 Influencing the IASB 1. Preventing IASB from introducing unnecessary changes in standard IASB was advocating the elimination of Net Income as a bottom line in income statement EFRAG reacted: reporting of company performance strongly differentiate between income and OCI Full Fair Value Measurement attempt by IASB: Mix-measurement approach» IFRS 9 based on both (cost and FV) Role of Business Model in IFRS (economic management of instruments)» IFRS 9 formally introduced the Business Model notion Hedge Accounting should reflect risk management practices Own credit risk should not be reflected in the financial statements» Changes are not reflected in net income anymore, but in equity (partial success only) 21

22 Influencing the IASB 2. Providing input outside of consultation process 2011 IASB proposals on Revenue Recognition and Leases concerned European stakeholder community. Results: New direction in Revenue Recognition Leases project continued to raise significant concerns Outcry for re-exposure led to IASB decision to re-exposure of both ED 3. Proactive activities Disclosure overload Ever growing volume of disclosures while the perception that relevant information is missing remains IASB Council recommended a principle-based approach to disclosures 22

23 Influencing the IASB 4. Influencing of IASB agenda setting Europe requested public consultations on agenda setting process The first agenda consultation took place in 2011 EFRAG main recommendations are reflected in IASB decisions:» Disclosures overload» Revision of conceptual framework» Consistent application of IFRS: goal is a single accounting practice, not the same label ESBG has been focusing on the issue outside the consultation process for two years 5. Influencing the standard-setting process No active project should be started without evidence of the need for improvement in practice IASB introduced:» Research phase» and Public Consultations before works start 23

24 Influencing the IASB Example for success is the revision of IAS 37» Public consultations contributed to stop the project Effect analysis of accounting standards IASB set up international working group to define and agree the methodology for effect analysis IASB launched effect analysis of IFRS 9 Impairment with selected companies in April

25 References PWC, IFRS adoption by country EFRAG, EFRAG effective in influencing IASB EBF, Accounts Committee materials ESBG, Audit and Accounting Committee materials 25

EFRAG. USERS NATIONAL STANDARD SETTERS European Supervisory Authorities. Financial services EUROPEAN COMMISSION OUR MISSION INVESTORS AUDITORS

EFRAG. USERS NATIONAL STANDARD SETTERS European Supervisory Authorities. Financial services EUROPEAN COMMISSION OUR MISSION INVESTORS AUDITORS INTRODUCING EFRAG OUR MISSION EFRAG European Financial Reporting Advisory Group is a private association established in 2001 with the encouragement of the European Commission to serve the public interest.