Editorial

IASB review of IFRS 9, Financial Instruments

This month the WAR features an article on the IASB's review of the way in which the impairment model in IFRS 9, the standard for financial instruments, has worked in practice since 2018. The work is timely, as IFRS 9 was the board's response to criticisms of the accounting requirements of the predecessor standard (IAS 39) during the financial crisis. The sight of depositors seeking to withdraw their money from Northern Rock in 2007 is often cited as being the first sign of the catastrophe that was to see Halifax-Bank of Scotland (HBOS) being taken over by Lloyds Bank, Royal Bank of Scotland being taken into government care, and the collapse of Lehman Brothers. During the 2008 crisis, it was suggested that the accounting treatment applied by banks had to some extent contributed to the problems by masking the underlying reality of the banks' financial strength as some exposures to sub-prime mortgages and other poor quality assets were held off-balance sheet, and loan impairment provisions were not recognised on a timely basis. Furthermore, some claimed that the use of fair value measurement for financial instruments had exacerbated falls in stock market indices, although this latter point was, and still is, much contested. Despite the measures taken by regulators around the world to strengthen the financial system in the light of those events, in recent weeks Silicon Valley Bank, First Republic and Credit Suisse have all proved to be vulnerable to the point that central banks have had to intervene to provide support. Stock markets are jittery, and there have been significant divestments of bank shares. Bank regulators around the world are monitoring developments, and there can be no doubt that the IASB and the FASB will be watching the unfolding events. The two standard-setters will be trying to assess whether, once again, their standards will come under the spotlight. If any financial reporting issues were to come to light in the current round of bank failures, it will be important to understand the extent to which the standards of the two bodies have the same or equivalent requirements. Convergence is a highly topical issue in the domain of sustainability reporting standards, but it could be argued that it has not loomed as large on the financial reporting agenda since IFRS 9 was published in 2014; this may be about to change.