Advice for producing high-quality expected credit loss disclosures

The Taskforce on Disclosures About Expected Credit Losses has published updated guidance on IFRS 9, Expected Credit Loss Accounting (ECL) disclosures.

The group, set up by the UK's Financial Reporting Council, Financial Conduct Authority, and Prudential Regulation Authority, issued a third report that includes a comparison of preparers' and users' assessments of adoption of task force recommendations, good practice disclosure examples, and other amendments to address gaps and deficiencies or to otherwise improve existing material.

The report builds on the requirements in IFRS 7, Financial Instruments: Disclosures, and the recommendations in the December 2015 report of the Enhanced Disclosure Task Force.

"ECL is important but complex, and it is not easy to provide disclosures that give users what they need. This third report will further help preparers focus their disclosures on the things that matter and to do so at an appropriate level of granularity," task force co-Chair Simon Samuels said in a press release.

The guidance is aimed primarily at the biggest UK-headquartered banks and building societies, but it is also likely to be relevant to a wider group of preparers.

IFRS 7 explains that the purpose of its credit risk disclosures is to "enable users of financial statements to understand the effect of credit risk on the amount, timing, and uncertainty of future cash flows."

The report says that high-quality, ECL-related disclosures need to:

• Present complex concepts and the results of ECL computations in a clear and understandable way.
• Present relevant information on material items that reflects the activities and risk exposures of a bank.
• Provide a range of disclosures that, when taken together, provide insight into the effects of the policies, methodologies, inputs, and assumptions used in determining ECL.
• Explain the judgements and estimates that are material to determining ECL and to facilitate comparison of a bank's results over time.
• Facilitate improved comparability between banks and help users to better understand the reasons for differences in their risk exposures and provisioning levels.

Adopting the updated guidance is encouraged now. The guidance is "ideally and where practicable" for accounting periods ending on or after 31 December 2023.

— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.