PRA’s dear CFO letter on ‘disclosures about IFRS 9 ECL accounting’

What do the PRA expect

In the letter, the PRA state that they expect firms to adopt the DECL Report’s recommendations in full, in a manner that is consistent with the commitments made in the British Bankers’ Association Code for Financial Reporting Disclosure (BBA Disclosure Code).

Acknowledging that the DECL Report’s recommendations are stretching, the PRA are aware of the difficulties some firms would experience and that they may be unable to provide all the recommended disclosures in full immediately. However, firms should aim to make progress as quickly as possible and the PRA will ask firms for updates on an ad-hoc basis.

The PRA formally request CFOs to provide updates on the progress made to implement the DECL recommendations, specifically asking for:

• How far their firm has progressed in adopting each of the DECL Taskforce’s recommendation
• What their firms’ plans are for adopting the recommendation not so far adopted in full

While responding to the PRA’s request is voluntary, responses will help with the PRA’s work to encourage UK banks to embrace the objectives underlying the DECL Taskforce’s work, which is the provision of a high quality, comprehensive and comparable set of ECL disclosures.

Having transparency on these disclosures will not only help market participants, it will also contribute to achieve greater consistency in the numbers themselves, which will further aid market participants and enables the PRA’s regulatory capital regime to operate more effectively.

Timetable

The PRA have requested that any responses be submitted within six weeks of the firms finalising their 2020 (or 2020/21) year-end annual report, by email to enquiries@bankofengland.co.uk or letter.

DECL Taskforce’s recommendations

In late 2018, the DECL Taskforce published their recommendations on a comprehensive set of IFRS 9 Expected Credit Loss disclosures.

The recommendations focused on:

• Alignment between accounting for credit losses and credit risk management activities
• New IFRS 9 specific policies and methodologies
• Incorporation of forward-looking information in the estimation of ECL
• Tracking on the movement and coverage across stages
• A summary of any changes in the balance sheet ECL estimate
• Credit risk profile
• Measurement uncertainty, future economic conditions and critical judgements and estimates
• Regulatory capital
• Governance and oversight

Background

In early 2018, CFOs of the larger UK-headquartered credit institutions already received a letter where the PRA set out their expectations regarding the implementation of IFRS 9 ECL requirements. These expectations were based on the recommendations issued by the Taskforce on DECL.

While it is not the PRA’s role to set, interpret or enforce accounting standards, they have an interest in ensuring these standards are implemented in a precise manner because the application of those standards has a direct impact on the PRA’s statutory objectives.

Indeed, IFRS 9 ECL requirements are fundamental to the financial statements of credit institutions with large (relative to balance sheet) credit portfolios and it is crucial that market participants understand the implications for credit institutions of the move from IAS 39 incurred loss provisioning model to ECL.

References

• PRA dear CFO letter 16/02/2021– disclosures about IFRS 9 ECL
• PRA dear CFO letter 08/01/2018 – transition disclosures for IFRS 9 ‘financial instruments’
• DECL recommendations on a comprehensive set of IFRS 9 ECL disclosures
• BBA policies