European Union: IFRS 9: Can A Phase-In Arrangement Be Agreed In Time?

Last Updated: 28 March 2017
Article by Tom Clifford, Rod Hardcastle and Scott Martin

Most Read Contributor in UK, August 2017

The introduction of IFRS 9 from 1 January 2018 will have a significant effect on regulatory capital across the banking industry, with four-fifths of EU banks expecting their stock of impairments to rise under the new rules according to a Deloitte survey. The European Banking Authority's (EBA) estimates for the increase of impairment stock (provisions), compared to the current levels under IAS 39, is 18% on average and up to 30% for some firms. This led to an estimated decrease in Common Equity Tier 1 (CET1) and total capital ratios by an average of 59 bps and 45 bps, respectively. As a result, finding a mechanism to smooth any unwanted impacts following the IFRS 9 adoption, by avoiding a capital cliff-effect on day one, has rapidly become a priority for prudential regulators.  

In October 2016, the Basel Committee on Banking Supervision (BCBS) published a consultative document discussing the impact that the introduction of IFRS 9's Expected Credit Losses (ECL) approach could have on the capital adequacy of banks, suggesting that prudential regulators may consider using transitional measures to smooth the adoption of the new rules. Just over a month later, the European Commission, recognising the same concern, included a transitional phase-in arrangement for IFRS 9 in its proposal to review the EU Capital Requirements Regulation (CRR2).

The Commission proposed to allow banks to temporarily include a reducing proportion of ECL provisions for performing loans in their CET1 capital requirements over a five year period after CRR2's entry into force (starting at a 100% allowance and decreasing by 20% per year). With IFRS 9 coming into force at the end of 2017, however, there is a growing view among industry practitioners and policymakers that a quicker solution is needed.

The EU legislative process is complex and often slow moving, with CRR2 (a broad and controversial package of prudential rules for banks) expected to take at least two years of negotiations before a final law can enter into force. This would see its IFRS 9 phase-in allowances being applied in Q1 2019 at the earliest, already more than a year after banks will have to start applying the new ECL accounting standard.

Getting there in time

The Commission has acknowledged that its IFRS 9 phase-in proposal is a "candidate for fast-tracking" but has not yet committed to any next steps. But what does "fast-tracking" EU legislation mean? The CRR2 package cannot itself be fast-tracked in its entirety. It is simply too far-reaching and complex. To be accelerated, the IFRS 9 proposal would have to be split out of CRR2 and would likely then be re-proposed by the Commission as a standalone law. 

The new standalone IFRS 9 proposal would then have to go through the same EU legislative process as any other proposal. The speed of an agreement would entirely depend on the willingness of EU Member States and the European Parliament to see the IFRS 9 phase-in proposal as non-controversial and wave it through the process. There is precedent for such an approach: it was done for the recent delays of the EU's MiFID II and PRIIPs rules, but the legal and legislative procedures involved mean that this could still take several months at best. What's more, legislators may seek improvements to the Commission's proposal, including those set out in the opinion issued by the EBA last week, calling for a simpler one-off transitional allowance to be calculated (without the 100% allowance in year one) instead of the Commission's five-year dynamic approach. 

One important question is how soon a transitional phase-in for IFRS 9 needs to be ready to be of meaningful assistance to banks. Having transitional rules ready before the end of the year is a start. In practice though, banks and their supervisors arguably need more time to prepare for IFRS 9 implementation from a capital management and prudential point of view, in order to better understand and anticipate its effect on different kinds of asset classes, exposures and business models.

In order to maximise the usefulness of a phase-in period, these rules would ideally be in place before supervisors make their bank-by-bank Pillar 2 capital adequacy decisions as part of the Supervisory Review and Evaluation Process (for the ECB, this is usually finalised in September). This would allow supervisors to understand the amount of additional capital banks will be required to hold from 1 January 2018, and to make Pillar 2 capital requirement decisions that ensure regulatory capital adequately reflects the risks prudential regulators have identified in each bank.

That does not leave much time for a standalone phase-in arrangement to be negotiated and finalised, if a new proposal even ends up being made.

What if a phase-in arrangement isn't ready in time?

Broad support for a transitional phase-in of IFRS 9 appears to exist among supervisors, national governments, the Commission and the European Parliament. However, the challenges around rushing through a fast-track proposal at the EU level or the expected slow pace of CRR2 negotiations leave the very real possibility of a phase-in arrangement not being ready in time. 

If so, supervisors may be able to use the discretion they have in setting Pillar 2 capital requirements to smooth the impact of IFRS 9 adoption. The UK Prudential Regulation Authority's (PRA) consultation on its Pillar 2A framework last month raised the impact of IFRS 9 on capital adequacy. This signalled that the PRA will seek to even out the disproportionately large impact that ECL provisions are expected to have on banks using standardised approaches for risk measurement relative to those using internal ratings-based (IRB) models.

This could address some concerns around IFRS 9 adoption, although without a clear EU-wide phase-in arrangement, ad hoc supervisory approaches could be inconsistent with each other (e.g. between the UK and Eurozone) and not the comprehensive solution many banks and prudential regulators would like to see. For example, supervisory approaches similar to that being outlined by the PRA, may not offer relief to banks using IRB models, even though IFRS 9's effect on them is less clear-cut.

In the face of this uncertainty between now and the end of the year, banks should engage closely with their supervisors to understand their expectations of them and the approach they will likely take either with our without an EU-level phase-in arrangement on the books.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.