Bank accounting: the key IFRS issues

Why is bank accounting different?

Three features set banks apart. Their assets and liabilities are almost all financial instruments, so IFRS 9, IFRS 7 and IFRS 13 matter more than any other standards. They are highly leveraged, with equity often only 5% to 10% of total assets, so small percentage errors in loan values move capital materially. And they are regulated, with capital and liquidity rules that start from the accounts but adjust them, so accounting choices have regulatory consequences.

Which IFRS issues matter most in bank accounting?

How are a bank's financial assets classified?

Under IFRS 9, by business model and cash flow characteristics. Most loans are held to collect contractual cash flows of principal and interest, so they are measured at amortised cost. Liquidity portfolios of government bonds, held to collect but sold when needed, are often at fair value through other comprehensive income. Trading books and derivatives are at fair value through profit or loss. Loans with features that fail the SPPI test, such as returns linked to equity prices, are at fair value too. See IFRS 9 classification.

Why is ECL the biggest judgement for banks?

The allowance for expected credit losses is usually a bank's largest estimate and its most scrutinised. Loans move between stage 1 (12-month ECL), stage 2 (lifetime ECL after a significant increase in credit risk) and stage 3 (credit-impaired), and the allowance depends on PDs, LGDs, exposures, economic scenarios and management overlays. The ECL section covers each element in depth, from SICR and PD to scenario weighting and IFRS 7 disclosures.

How do banks recognise interest and loan fees?

Interest income on amortised cost loans is recognised using the effective interest rate, which spreads fees integral to the loan, such as arrangement fees, net of direct origination costs, over the loan's expected life. A 2% arrangement fee on a five-year loan is not income on day one; it raises the effective yield over five years. Fees for services, such as account maintenance, card fees and advisory work, fall under IFRS 15 instead. See the effective interest method.

How do banks hedge interest rate risk?

Banks lend at fixed rates and fund themselves at floating rates, or the reverse, and use interest rate swaps to manage the mismatch. Because their exposures are large portfolios that change every day, many banks apply macro hedge accounting. IFRS 9 allows banks to keep applying IAS 39's portfolio fair value hedge of interest rate risk while the IASB works on a dynamic risk management model. See IFRS 9 hedge accounting.

Why does fair value measurement matter?

Trading assets, derivatives and many investment securities are measured at fair value, and IFRS 13 requires them to be categorised in a three-level hierarchy. Level 3 instruments, valued using significant unobservable inputs, attract detailed disclosure and audit focus, because the bank's own models determine the value.

When do banks derecognise loans?

When they transfer the rights to the cash flows and substantially all the risks and rewards, for example in a true sale of a loan portfolio. In many securitisations the bank keeps the subordinated tranche or provides credit enhancement, so it keeps the loans on its balance sheet and records the proceeds as a liability. Securitisation vehicles may also need to be consolidated under IFRS 10. See derecognition of financial assets.

How are restructured loans accounted for?

When a bank renegotiates a loan with a borrower in difficulty, the loan is usually modified rather than derecognised: its gross carrying amount is recalculated at the original effective rate, with a modification gain or loss, and the modification is evidence for staging. Forbearance is a key indicator of a significant increase in credit risk or credit impairment. See modifications of financial assets.

Can banks offset assets and liabilities?

Only when they have a legally enforceable right of set-off and intend to settle net or simultaneously, under IAS 32. Derivatives under master netting agreements usually stay gross on the balance sheet, because the right of set-off applies only on default, but IFRS 7 requires disclosure of the netting arrangements and their effect.

How do IFRS figures relate to regulatory capital?

Regulatory capital, such as common equity tier 1, starts from IFRS equity and then deducts goodwill and intangible assets, certain deferred tax assets, and other items, and adjusts for prudential valuation. When IFRS 9 increased banks' loss allowances in 2018, regulators allowed the capital effect to be phased in. Accounting decisions therefore often have a direct capital impact.

What do banks disclose?

IFRS 7 requires extensive disclosures about credit risk, including the ECL reconciliation by stage and credit quality, liquidity risk with contractual maturities, and market risk with sensitivity analysis, alongside fair value hierarchy and offsetting disclosures. Many banks combine these with the risk management and regulatory disclosures in a single risk report.

Which bank KPIs relate to the accounts?

Net interest margin, net interest income divided by average interest-earning assets; the cost-to-income ratio; the cost of risk, the ECL charge as a percentage of average loans; and return on equity. Under IFRS 18, from 2027, banks present income and expenses in categories adapted to their main business activity, with most interest income and expense in the operating category. See IFRS 18 for entities with specified main business activities.

How does US GAAP differ for banks?

US banks measure credit losses under CECL, recognising lifetime expected losses on all loans from day one, classify debt securities by intent as held-to-maturity, available-for-sale or trading, and apply ASC 815 for hedging. See IFRS 9 vs CECL and IFRS 9 vs US GAAP classification.

Where can I read more about each banking issue?

Each issue has its own guide: loan fees and the effective interest rate, hedge accounting for interest rate risk, regulatory capital vs IFRS equity, customer deposits, forbearance and modifications, write-off policies, fair value levels and offsetting and netting. There are also guides on Islamic banking, bank fee income, securitisation, risk disclosures, reading a bank's financial statements and stage 2 lending.

This guide is general information. It is not tax or legal advice for your situation.