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IFRS 9: Findings from the first audit of the annual financial statements

First audit of the annual financial statements

The tasks of identifying the business model and of analyzing cash flows that must consist exclusively of interest and repayments are predicated upon appropriate and accurate documentation.

Patrik Sandell

Director, Financial Risk Management

KPMG i Sverige


Relaterat innehåll

Dekorbild: IFRS 9: Findings from the first audit of the annual financial statements

Most industrial companies have prepared their first annual financial statements pursuant to IFRS 9.

This article summarises the main findings from these financial statements, together with the topics that posed the greatest challenges.

The European Commission adopted the standard presented in IFRS 9 for application in Europe with the publication of Regulation (EC) No 2016/2067 of 22 November 2016. The initial application date within the EU followed the IASB’s specifications, making the standard mandatory as of 1 January 2018 (transition). It thus entered into the annual financial statements of many companies for the first time as at 31 December 2018. As was to be expected, IFRS 9 presented companies with major challenges; these challenges will be presented based on examples drawn from the phases of Classification & Measurement, Impairment, Hedge Accounting and the Notes.

Classification & Measurement

Phase 1 of IFRS 9 is defined with regard to subsequent measurement of financial assets, specifically through identification of the ‘business model’ and analysis of the ‘SPPI criterion’ (Solely Payments of Principal and Interest). The tasks of identifying the business model and of analysing cash flows that must consist exclu-sively of interest and repayments are predicated upon appropriate and accurate documentation. By the same token, this content must be anchored in a company’s group-wide processes in order to meet the associated requirements sustainably and continuously. This makes it essential to heighten local managers’ awareness of these topics and, beyond this, to establish group-wide contract management in the effort to meet the re-quirements of the SPPI criterion (on the basis of a contract database, for example).

In practice, one encounters situations in which these topics often have not been implemented holistically throughout a group of companies. As a result, although business models may be specified and documented centrally, local entities often institute these only to a limited extent. Practices around analysis of the SPPI criterion are even more deficient. As a result, contracts are increasingly appraised at central level – preferably in the treasury. Often, a process that is sustained, group-wide and documented is either established only to a limited extent or not established at all. Establishing such a process, however, would be expedient and advis-able, not least because other standards (IFRS 15, 16), as well as other provisions of IFRS 9 (Embedded De-rivatives), call for holistic contract management.


The new model for value adjustment probably constituted the greatest challenge for companies. Key implementation requirements certainly included modelling, provision of (historical) data, the configuration of IT as well as the automation of processes and responsibilities.

In their practical application, the topics of modelling and data provisioning are the most advanced, yet the quality of available receivables-management data in particular is often in need of improvement. Against this backdrop, IT configuration and process automation will gain in significance and importance in future in the effort to ensure efficient and error-free determinations of impairment. Coupled with decisions taken on mat-ters of materiality in the first year of implementation of IFRS 9, or a lack of concepts for back-testing, there is certain to be an increased need for action around implementation of the new impairment model in the years to come.

Hedge Accounting

The hedge accounting requirements amended by IFRS 9 should simplify the designation of hedge relationships and their implementation in the accounts compared to IAS 39. Another objective is to get more operational transactions into hedge accounting, for example through component designation; this constitutes a simplification, particularly in commodity hedge accounting.

It can be noted that there has been no reduction in the complexity involved in operational implementation. Separation of the currency base, for example, regularly led to operational difficulties that were also reflected in implementation in the system. It thus emerged that treasury management systems currently have great dif-ficulty automatically processing individual components of derivative financial instruments in harmony with the requirements of IFRS 9 and ensuring, inter alia, appropriate reversal of the cash flow hedge reserve and of the cost of hedging reserve. There was also no discernible increase in designated hedging relationships dur-ing the first year.


Apart from impairment, the greatest challenges to operational implementation likely occurred with respect to the generation of the notes. Among other things, these challenges include:

  • the reconciliation of the OCI in the context of hedge accounting, broken down by risk categories, designated part and cost of hedging,
  • determination of average rates of exchange in the context of designated hedging relationships,
  • value-adjustment rates or ratings within the framework of the value-adjustment matrices or
  • the granularity applied to qualitative presentation of specific impairment assumptions (e.g. default event, significant increase in credit risk, etc.).

With regard to the notes, it can also be stated that there is a need for adaptation in the manner of technical and procedural implementation in order to ensure efficient and correct data generation.

In their further implementation or standardisation of IFRS 9, companies should devote particular focus to technical configuration and process automation and develop solutions in this regard. Failing this, in future IFRS 9 will continue to require a high amount of manual adjustment and recurring workloads; this may result, not least, in proneness to error and also in delay in the preparation of the annual financial statements.

© 2021 KPMG AB, a Swedish Aktiebolag and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.


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