IFRS 9 - Audit of Expected Credit Losses

The Global Public Policy Committee (GPPC), a global forum of representatives of the six largest international accounting networks, has released 'The Auditor's Response to the Risk of Material Misstatement Posed by Estimates of Expected Credit Losses under IFRS 9' (the Paper).

This Paper is addressed to the audit committees of systemically important financial institutions. It represents the consensus views of the GPPC members regarding key considerations for auditors of globally systemically important banks. The views contained in the Paper may also be of wider interest to other financial institutions.

Implementing IFRS 9 to a high standard

The introduction of the requirement to estimate expected credit losses (ECL) under IFRS 9 ‘Financial Instruments’ marks a significant change in the financial reporting of banks. Given the importance of banks in global capital markets and the wider economy, it’s important that participants in capital markets have confidence that banks are implementing IFRS 9 to a high standard, producing estimates upon which financial statement users can rely. Bank management teams, audit committees and auditors all have crucial roles to play.

Systemically Important Banks (SIBs)

This Paper seeks to advance the objective of high-quality audit procedures over estimates of, and disclosures regarding, ECL in accordance with IFRS 9 and ISA 540 for material portfolios at Systemically Important Banks (SIBs). The Paper begins by discussing certain concepts that are fundamental to the audit of estimates of ECLs, followed by the following sections:

• accounting policies
• procedures and internal control
• information systems
• models
• reasonable and supportable judgments
• financial statement disclosures.

Additionally, each of these sections discusses the implications for the bank, and implications for the auditor. With regard to implications for the auditor, each section focuses on the importance of the auditor’s (a) sufficient knowledge, (b) evaluation of the bank’s judgments, (c) testing for accuracy and consistency, and (d) assessment of the bank’s estimate for bias.

Finally, the paper includes a list of questions audit committees may wish to discuss with their auditors.