European Union: ESMA's Requirements For Corporate Entities In Light Of IFRS 9

Our last posts presented the expectations of ESMA regarding the new IFRSs (IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, and IFRS 16 Leases). In this article we'll turn to the details of IFRS 9 for corporates (see ESMA's original text in the appendix of its statement issued in October 2017).

ESMA keeps repeating that corporates should disclose not only the qualitative impact of IFRS-9-related changes, but also the quantitative impact.

It has also reminded corporate issuers that the new impairment model should be used for all financial assets including investments in corporate bonds, which are measured at amortised cost. Corporate issuers are expected to determine the impact of the new impairment model on receivables, particularly whether a significant increase in credit risk (SICR) has taken place. Corporates should keep in mind that, if there is a significant increase in credit risk, then lifetime expected credit loss (ECL) should be recognised for receivables whose contractual maturity is 12+ months.

Corporate entities should also assess the impact of the new hedge accounting model, if it is applicable to them. In the notes, issuers should be clear about whether they want to change their hedge accounting and, if they do, then how. The purpose of the new hedge accounting requirements is to align risk management objectives with the accounting, so this should be reflected in the disclosures as well.

Finally, as a reminder about ESMA's requirements, issuers should be entity-specific in their disclosures and avoid boilerplate language.

KPMG comment

For most companies the date of initial application (DIA) of IFRS 9 is 1 January 2018, and it is thus required that accounting reflect the facts and circumstances from that date. Here is a list of decisions that should have been made before the IFRS 9 DIA: we invite you to check out it out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.