IAASB shines light on credit loss models

Expected credit loss (ECL) models are now required, or will soon be required, by some financial reporting frameworks, including IFRS 9, Financial Instruments, which will come into effect from 1 January 2018.

The latest IAASB publication entitled ISA 540 Revision Project seeks to summarise the audit challenges identified with respect to ECL and sets out how challenges may be addressed under existing accounting standards.

“The adoption and implementation of ECL models will, in many cases, bring significant challenges for auditors, management, those charged with governance [eg, audit committees], supervisors, and users,” explained IAASB Chairman Professor Arnold Schilder.

"Auditors need to be aware of the changes related to ECL and the implications for audits. Auditors will need to be actively engaged in 2016 and 2017, in particular to understanding how an entity is planning for the adoption and implementation of its ECL models," Professor Schilder added.

The publication has been developed by a task force comprised of IAASB members and technical advisers, representatives from the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, bank auditors, and an observer from the US Public Company Accounting Oversight Board.

“Accounting estimates are becoming more complex and subjective, and are critical to a user’s understanding of an entity’s performance,” noted IAASB Technical Director Kathleen Healy. “The IAASB will consider what revisions are necessary to promote audit quality in the varied and complex scenarios that arise today, and that are likely to continue to evolve in the future.