RiskTech Forum

Wolters Kluwer: IFRS 9 - Closing the Gap between Risk and Finance

Posted: 29 August 2013  |  Source: Wolters Kluwer

The global financial crisis has changed the landscape of the financial industry significantly.
This paper examines the ongoing convergence in the measures used by risk and finance functions and the potential for developing a ‘single version of the truth’ for both.

The two separate worlds of risk and finance, and their frameworks, have much in common; despite being written to achieve different objectives, they often work in a complementary manner. This is well demonstrated in the recent International Financial Reporting Standards (IFRS) 9 issued by the International Accounting Standards Board (IASB), in which it indicates that some risk management information should be disclosed, and also notes that risk management may form the elementary input for accounting in some areas. There are two clear examples of the latter.

Firstly, in the Exposure Draft titled ‘Financial Instruments: Expected Credit Losses’ released by the IASB on 7 March 2013, the way that the risk management function builds its internal rating classes can have an effect on the way that expected losses are calculated. Secondly, it can be observed that financial institutions have tied some technical definitions to the structure and identification of exposures as they relate to the value defined in the underlying accounting standard. For example the definition of ‘fair value’ exposures relates back to the fair value definitions as disclosed on the balance sheet giving an indirect pointer to the IFRS 13 standard around fair value measurements.

How close is convergence?

Despite some interconnectedness, there remain major differences. Both frameworks have separate definitions of fair value, expected losses and offsetting amongst others. Consequently, an entity should be able to understand and reconcile these differences.

The financial crisis has acted as a catalyst for convergence between different accounting standards. The idea of convergence between different standards originated in the 1950s and the process of convergence has been supported along the way since then by numerous statements from the G20, which have repeatedly pushed for a more uniform way of reporting and disclosures.

After the global financial crisis a number of convergence projects were set out between US standards body, the Financial Accounting Standards Body (FASB), which is responsible for US Generally Accepted Accounting Principles GAAP, and the IASB. However many projects were delayed and after the last IASB Exposure Draft the two sets of rules had not found complete alignment.

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