On January 9, 2015 the Office of the Superintendent of Financial
Institutions ("OSFI") issued the final
version of its advisory with respect to the early adoption of IFRS
9 for Domestic Systemically Important Banks
("D-SIBs") requiring that D-SIBs adopt
IFRS 9 for the annual period beginning on November 1, 2017. The
banks determined by OSFI to be D-SIBs are the six largest banks in
Canada, namely: Bank of Montreal, Bank of Nova Scotia, Canadian
Imperial Bank of Commerce, National Bank of Canada, Royal Bank of
Canada, and Toronto-Dominion Bank of Canada. Smaller, less systemic
Federally Regulated Entities ("FREs")
with annual periods ending October 31, 2017 can choose to adopt the
standard on November 1, 2017 or wait until January 1, 2018 when all
FREs with annual periods beginning January 1, 2018 are required to
adopt the standard.
IFRS 9 is a more forward-looking approach that replaces the
previous incurred loss model, known as IAS 39. IAS 39 has been
widely criticized and implicated as contributing to the global
financial crisis of 2008 through the delayed recognition of credit
losses on loans and other financial instruments. The final version
of IFRS 9 was published by the International Accounting Standards
Board ("IASB") in July, 2014. It aims to
improve issues arising from the method of accounting for financial
instruments, simplify the existing rules and enhance investor
confidence in the financial system in Canada. More specifically,
IFRS 9 introduces a new model of classification and measurement,
new evaluation criteria of expected losses and new rules for the
recognition of derivatives.
The replacement of IFRS 39 with IFRS 9 was a key project for the
IASB. Its implementation, once complete, is expected to represent a
milestone achievement with respect to the ability of financial
institutions to react more quickly to changes in the marketplace.
However, implementation of this new accounting standard is not an
easy task and will require, in most cases, a complete overhaul of
current accounting systems. In requiring that D-SIBs achieve
implementation before FREs, OSFI is placing reliance on D-SIBs to
work out any implementation hurdles before smaller FREs are put in
the hot seat. Unfortunately for D-SIBs, it appears that they are
being asked to do this in relative darkness. OSFI indicates that it
is working with international peer regulators to obtain guidance
from the Basel Committee on Banking Supervision with respect to the
implementation and operation of IFRS 9. In the meantime, a
discussion forum called the IFRS Transition Resource Group for
Impairment of Financial Instruments
("ITG") has been set up to explore
implementation issues and forwarding these issues to the IASB for
consideration. The ITG will not itself issue any guidance.
Since financial markets are globally integrated, the full potential
of IFRS 9 will not be realized unless a consistent implementation
of similar regulatory changes is achieved internationally. In this
regard, Canada's early implementation of IFRS 9 will make it a
global leader. At present, it appears that the European Union may
delay its endorsement of IFRS 9. As for the United States, the
Financial Accounting Standards Board continues to deliberate on the
model that will eventually be implemented.
Although critics are quick to point out that inconsistent models
implemented at different times across jurisdictions will present a
challenge for investors and increased costs for financial
institutions who may need to prepare figures based on both or
perhaps several accounting models, the implementation of IFRS 9 in
Canada is the result of a lengthy and complex international effort
that is expected to enhance the transparency and financial
stability of our markets and protect us from another financial
crisis.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2015
