Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Prudential Regulation Authority Publishes Expectations on Disclosures of Expected Credit Loss Under IFRS 9
Financial Regulatory Developments Focus
  • UK Prudential Regulation Authority Publishes Expectations on Disclosures of Expected Credit Loss Under IFRS 9
    The UK Prudential Regulation Authority has published a "Dear CFO" letter that was sent to the Chief Finance Officers of larger UK-headquartered credit institutions. The "Dear CFO" letter sets out the PRA's expectations as to the minimum disclosures those firms should be making on transition to the new standard for loan loss provisioning based on "expected credit losses" that forms part of standard 9 of International Financial Reporting Standards. The ECL requirements will replace the old "incurred loss" provisioning model that was contained in standard 39 of the International Accounting Standards. ECL will require banks to provision for expected credit losses from the time a loan is originated, rather than awaiting "trigger events" signaling imminent losses. IFRS 9 has been implemented through Commission Regulation (EU) 2016/2067, which requires credit institutions and investment firms that use IFRS to prepare their financial statements to apply IFRS 9 as of the starting date of their first financial year starting on or after January 1, 2018. The Regulation permits banks and investment firms that are required to use IFRS 9 to apply transitional provisions where the application of IFRS 9 leads to a significant increase in credit loss provisions and a decrease in the firm's Common Equity Tier 1 capital. Firms that use these transitional arrangements must publicly disclose their own funds, capital ratios and leverage ratios with and without the application of those arrangements.

    The "Dear CFO" letter sets out general comments on the scope and objective of the ECL transition disclosures and specifies the minimum content that those disclosures should contain. It also provides some guidance as to how firms should go about making disclosures related to quantitative measurement uncertainty and sensitivity. The letter notes that a dedicated taskforce on disclosures about ECL will also be developing a form of quantitative sensitivity disclosure that is most useful for market participants.

    View the Dear CFO letter.