International Financial Reporting Standard (IFRS) 9, Financial Instruments, becomes effective for periods beginning on or after 1 January 2018. The impairment methodology changes it contains will affect accountants and auditors.

After the global financial crisis in 2008, questions were raised on whether the use of the incurred credit loss model for impairment provisioning had contributed to the crisis. The model does not take into account losses that could be expected with regard to financial assets. This led to the introduction of the expected credit loss (ECL) model in IFRS 9, 1in terms of which it will no longer be necessary for a credit event to have occurred before credit losses are recognised.

David Binder, in his article in the Mortgage Finance Gazette titled ‘Are you on track for IFRS 9’, says: ‘The adoption of the IFRS 9 standard will change what “business as usual” means. Virtually every credit decision made across the full credit life cycle today will be different under IFRS 9.’

The extant International Standard on Auditing (ISA) 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, deals with the auditor’s responsibilities with regard to accounting estimates and related disclosures in an audit of financial statements. The finalisation of this Standard as part of the International Auditing and Assurance Standards Board’s (IAASB) Clarity Project, have led to changes to accounting standards and developments in the business environment, with accompanying new auditing challenges.

The new auditing challenges have been identified in a number of forums, two of which are highlighted below.


The International Forum of Independent Audit Regulators (IFIAR) brings together independent audit regulators from 51 jurisdictions. It publishes its survey of inspection findings on an annual basis, based on matters identified by its members in their individual inspections of audit firms affiliated with six large international audit firm networks. The 20142 and 20153 IFIAR survey results revealed that one of the top three findings from listed public interest entity (PIE) audits related to procedures for fair value measurement (ISA 540) and from audits of systemically important financial institutions (SIFI) and specifically the audit of the allowance for loan losses and loan impairments (ISA 540).


In March 2009 the IAASB completed its Clarity Project on the ISAs, in which ISA 540 was one of the Standards revised and redrafted as part of the project.

The IAASB embarked on a post-implementation review of the clarified ISAs to determine if any further changes were needed

  • To increase the consistency of auditors’ understanding of the ISAs, and
  • For recently revised ISAs to achieve the IAASB’s goals in revising them

The review findings4 identified a number of themes where improvements could be made to ISA 540.


In view of all these developments, the IAASB approved its project proposal5 to revise the extant ISA 540 in December 2015. It is expected that the IAASB will approve the proposed ISA 540 (Revised) for exposure in March 2017, with the final revised standard planned to be approved in early 2018.

One of the two project objectives for the revision of extant ISA 540 is to ‘establish more robust requirements and appropriate detailed guidance to foster audit quality by driving auditors to perform appropriate procedures in relation to accounting estimates and related disclosures. It is anticipated that these revisions would also seek to emphasise the importance of the appropriate application of professional scepticism when auditing accounting estimates.’

The scheduled finalisation of the revision of ISA 540 may leave little time to provide adequate guidance to auditors with regard to the audit implications of IFRS 9 and the ECL model ahead of its effective date.


In response to the interest and concerns raised about the audit implications of the ECL model, the Independent Regulatory Board for Auditors (IRBA) issued a non-authoritative6 IRBA Staff Audit Practice Alert, The Audit Implications of the Expected Credit Loss Model for the Auditors of Banks7 (issued September 2016), to provide registered auditors with the following:

  • A background to the risks and audit implications of IFRS 9 and the ECL model
  • A checklist that can be used by the audit firm and the engagement team when considering certain audit implications of the ECL model, and
  • Related notes

An auditor may find the Alert, if adapted as necessary, useful when auditing entities apart from banks that have adopted IFRS 9 and the use of the ECL model.

The checklist covers the following aspects for consideration by the audit firm and/or the engagement team:

  • Firm-level risk management processes, including multi-location and multi-national considerations
  • The audit of transitional disclosures made by banks in terms of ISA 8, Accounting Policies, Changes in Accounting Estimates and Errors
  • The development of an audit firm’s independent ‘firm view’ on the subjective inputs into ECL models (including forward-looking information)
  • The economic and market volatility that will impact these subjective inputs
  • The communication with those charged with governance
  • Group audit engagements, including groups with foreign subsidiaries and local branches of foreign banks
  • How and on what a registered auditor should apply professional scepticism in ‘challenging’ their banking clients, regarding the subjective inputs of banks in the on-going development and maintenance of their ECL models
  • Cross-reviews and how to address material differences of opinion between joint auditors in the calculation of impairment provisions
  • How an auditor can inform the SARB when disagreements resulting in material differences that may result in a modified audit opinion arise between impairment provisions calculated by the bank and those supported by the auditor’s audit evidence
  • The audit of additional information disclosed in the bank’s financial statements (for example sensitivity analysis)
  • Consideration of the communication of key audit matters (KAM) on the impairment provisions contained in the bank’s financial statements
  • Other interventions that an audit firm and the engagement team could put in place to address the audit implications of ECL
  • How current audit approaches to auditing complex accounting estimates (such as  in banking and insurance industries) can be used to assist auditors in the approach to the audit implications of ECL
  • Ethical considerations when an audit firm is engaged to consult with a bank on the development of their ECL models and the potential of a self-review threat
  • Auditor succession and challenges to predecessor auditors
  • Internal control testing, and
  • The audit of South African income tax implications

The IAASB ISA 540 Task Force also issued a Project Update8 in March 2016 outlining an overview of the auditing challenges arising from the adoption of ECL models, which includes the following:

  • Challenges with data and assumptions
  • Identification of significant risks of material misstatement related to an ECL model
  • Audit procedures on models: understanding and assessing models and controls thereon
  • Governance and controls over models and data
  • Management’s and auditor’s experts
  • Addressing the estimation uncertainty implicit in ECL models
  • Management bias, and
  • Implications for reporting


Banks, auditors and others are preparing for the implementation of IFRS 9 and the ECL model. Timely preparation for these changes will allow accountants and auditors to overcome the challenges posed by IFRS 9 and the ECL model and allow for a smooth transition.


1 http://www.mortgagefinancegazette.com/features/track-ifrs-9-05-09-2016/

2 https://www.ifiar.org/IFIAR/media/Documents/General/IFIAR%20Global%20Survey%20Media%20Coverage/IFIAR-2014-Survey-of-Inspection-Findings.pdf

3 https://www.ifiar.org/IFIAR/media/Documents/General/About%20Us/IFIAR-2015-Survey-of-Inspection-Findings.pdf

4 http://www.ifac.org/system/files/publications/files/Implementation-Review-of-the-Clarified-ISAs.pdf

5 http://www.ifac.org/publications-resources/project-proposal-revision-isa-540

6 The IRBA Staff Audit Practice Alert has been prepared by the IFRS 9 ECL Task Group of the IRBA’s Committee for Auditing Standards (CFAS). It does not constitute an authoritative pronouncement from the IRBA, nor does it amend or override the International Standards on Auditing, South African Standards on Auditing, South African Auditing Practice Statements, or South African Guides (collectively called pronouncements).

7 http://www.irba.co.za/upload/Post%20CFAS%20-%20IFRS%209%20ECL%20Draft%20STAFF%20AUDIT%20PRACTICE%20ALERT.pdf

8 http://www.ifac.org/system/files/publications/files/IAASB-ISA-540-Project-Publication.pdf

Author: Nicolette Bester is Professional Manager: Standards at the Independent Regulatory Board for Auditors (IRBA)