The International Auditing and Assurance Standards Board (IAASB) is highlighting the challenges that auditors and others that deal with a company's financial statement may face as a result of new financial reporting standards requiring reporting of expected credit losses related to financial instruments.
Those changes may arrive with two new standards: IFRS 9, Financial Instruments, which will take effect Jan. 1, 2018, contains a new expected credit loss (ECL) model; FASB also is working on a financial instruments standard that is expected to include requirements to report expected credit losses.
In response, the IAASB issued a new publication explaining its project to revise International Standard on Auditing 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The publication provides a detailed summary of the initial thinking on special audit considerations related to ECL provisions, including related estimation uncertainty.
Broadly, it advises auditors, management, and those charged with governance to act now to understand how an ECL model can be implemented. Auditors also are advised to:
- Communicate effectively on audits of entities that will be significantly affected by these changes. Communication will be important because entities may need to develop or change systems and models to obtain the necessary data and expertise.
- Be aware that the ECL provision's complexity, estimation uncertainty, and materiality thresholds may lead to complex or difficult judgments regarding key data and assumptions, creating significant risks of material misstatement.
- Be aware that disclosures related to expected credit losses, including transitional disclosures, are likely to require significant attention from auditors because high estimation uncertainty is likely.