Dealing with “Uncertainties” in IFRS Financial Statements

As we all know, we do not live in a perfect world. The preparation of financial information in IFRS requires use of judgements and estimates about future conditions which are uncertain. 

In case of financial services sector (e.g., banks and financial institutions), critical estimates often include the measurement of expected credit loss (ECL) impairment allowance, which requires consideration of different scenarios of relevant forward-looking macro-economic factors such as GDP, interest rates, unemployment, real estate index and commodity prices. 

There may also be other material items such as measurement of value in use for goodwill impairment or reversals of impairment on assets other than goodwill which may require material estimates.

In view of the inherent uncertainties and high level of subjectivity involved in the recognition or measurement of such items, it is possible that in the following year, there is a different impact on financial statements compared to what was originally anticipated. 

What are the disclosure considerations for uncertainties in the financial statements?

Entities are required to disclose information that help users to understand the judgements made about the future and sources of measurement uncertainty, including:

·      sensitivity of carrying amounts to the methods, assumptions, and estimates underlying their calculation, and

·      expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected

The International Accounting Standards Board (IASB) has recently published six illustrative examples covering different standards on how an entity applies the requirements in IFRS Accounting Standards to disclose uncertainties in the financial statements. 

The examples include scenarios wherein materiality judgements may or may not lead to additional disclosures. While the examples focus on climate-related scenarios, it applies equally to other types of uncertainties. 

In our opinion, given the current economic uncertainty and climate-related risks, the key considerations for financial services sector includes:

·      Detailed description of all significant judgements, including explanations of uncertainties involved

·      Nature and extent of material risks (including ESG risks in lending business) arising from financial instruments and disclosure of related risk management, where applicable

·      Geopolitical risk and uncertainties which may affect asset impairments, valuation of financial instruments, deferred tax assets, and require disclosure of any significant changes in financial risks

·      Adjustments to IFRS 9 ECL for tariffs and climate-related risks through post-model adjustments, unless existing models incorporate these risks

·      Assessment of the impact of US tariffs on customers e.g. increase in credit risk, liquidity risk, FX hedging, disclosure of tariff-related risks

Note the above is not an exhaustive list. It is important that we fully comply with all the quantitative and qualitative disclosure requirements in IFRS 7 Financial Instruments: Disclosures. The UK and EU regulators also set out their disclosure expectations, based on their review of IFRS financial statements, current economic environment and upcoming changes.