The International Auditing and Assurance Standards Board has released a publication describing some of the audit issues arising from the shift to Expected Credit Loss models when accounting for loan losses under new accounting standards.

ECL models are now required, or will soon be required, by some financial reporting frameworks, including the International Accounting Standards Board’s IFRS 9, Financial Instruments, which will take effect Jan. 1, 2018. The Financial Accounting Standards Board is expected to release its own version of the financial instruments accounting standard this year for loan losses under U.S. GAAP, taking a somewhat different approach to expected credit losses than the IASB’s version for International Financial Reporting Standards.

“The adoption and implementation of ECL models will, in many cases, bring significant challenges for auditors, management, those charged with governance (e.g., audit committees), supervisors, and users,” said IAASB Chairman Prof. Arnold Schilder in a statement last week. “Auditors need to be aware of the changes related to ECL and the implications for audits. Auditors will need to be actively engaged in 2016 and 2017, in particular to understanding how an entity is planning for the adoption and implementation of its ECL models.”

The IAASB operates under the auspices of the International Federation of Accountants. The publication summarizes the audit challenges identified with respect to ECL and describes some of the initial thinking on how these challenges may be addressed under the current International Standards on Auditing, particularly for auditors of financial institutions. The publication was developed by a task force of IAASB members and technical advisors, representatives from the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, bank auditors, and an observer from the U.S. Public Company Accounting Oversight Board.

The publication discusses how the IAASB’s new standard-setting project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, will further address these and other challenges in terms of auditing accounting estimates, particularly for audits of financial institutions.

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