The International Auditing and Assurance Standards Board (IAASB) today released a publication highlighting the audit issues arising from the shift to Expected Credit Loss (ECL) models when accounting for loan losses. ECL models are now required, or will soon be required, by some financial reporting frameworks, including IFRS 9, Financial Instruments, which will come into effect from January 1, 2018.

“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,” explained IAASB Chairman Prof. Arnold Schilder. “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 publication summarizes the audit challenges identified with respect to ECL and sets out initial thinking on how these challenges may be addressed under the current International Standards on Auditing (ISA). The publication has been developed by a task force comprised 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 US Public Company Accounting Oversight Board.

“Our work to date has benefited from input from different stakeholders from around the world,” highlighted Task Force Chair Rich Sharko. “The publication issued today is the result of extensive outreach with regulators, expert auditors from different industries, and others to capture the significant issues that arise in dealing with ECL models, as well as how they may be addressed under the current ISA pronouncements.”

“As a result, the publication is particularly relevant for auditors of financial institutions and other entities that have substantial credit risk exposures through holdings of loans and similar financial assets,” noted Task Force Co-Chair Marc Pickeur.

The publication also 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 seek to further address these and other challenges that have been noted in respect of auditing accounting estimates, including in relation to audits of financial institutions.

“Accounting estimates are becoming more complex and subjective, and are critical to a user’s understanding of an entity’s performance,” noted IAASB Technical Director Kathleen Healy. “The IAASB will consider what revisions are necessary to ISA 540 to promote audit quality in the varied and complex scenarios that arise today, and that are likely to continue to evolve in the future.”

For more information, visit www.iaasb.org/auditing-estimates.

About the International Auditing and Assurance Standards Board (IAASB)
The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).

About IFAC^®
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of more than 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce.

This IAASB publication was developed by a task force comprised 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 US Public Company Accounting Oversight Board.

Accountants working in small- and medium-sized practices (SMPs) are generally optimistic about performance in 2016, as a majority predict revenues will stay the same or increase across all service lines, according to the latest IFAC Global SMP Survey results (full report and summary). However, optimism is not at the same level as a year ago as growth projections across service lines have dropped since 2014.

While performance expectations decreased from a year ago, SMPs indicate that their challenges are somewhat less acute than last year. As in 2014, the most pressing challenges for SMPs in 2015 were: attracting new clients (47% high or very high challenge), keeping up with new regulations and standards (44%), differentiating from the competition (43%), and pressure to lower fees (41%).

The 2015 IFAC Global SMP Survey received 6,725 respondents, representing 169 countries and more than 800,000 SME clients around the world, making it the largest survey of SMPs. The survey was conducted October–November 2015 in 22 languages.

It is well recognized that professional accountants are a preferred source of advice for SMEs, typically forming long-term relationships founded on trust. SMEs account for the vast majority of businesses globally and, in most jurisdictions, account for the majority of private sector GDP, employment, and growth.

“Collectively, this is a large and important sector whose views are important to hear,” said IFAC CEO Fayez Choudhury. “The health of the SME sector is a barometer of the vitality of a nation’s economy and of global trade and commerce at large. Listening to SMEs through their accountants—who know them well—is a critical exercise that allows IFAC and its member organizations to better support them, which in turn supports stability and growth more broadly.

Additional key findings from the survey include:

SMPs recognize the value of offering business advisory and consultancy services.

• A significant majority of respondents provide some form of advisory services, with tax planning (52%), corporate advisory (45%), and management accounting (41%) being the most common.

SMEs face a number of challenges, with economic uncertainty consistently topping the list.

• Consistent with 2014, the top challenges facing SME clients were economic uncertainty (61% high or very high challenge) and rising costs (58%).

Looking ahead, competition and regulatory developments will continue to be dominant factors in the SMP business environment.

• Consistent with 2014, the regulatory environment (52% high or very high impact) and competition (46%) topped the list of environmental factors most likely to impact SMPs over the next five years, followed by technology developments (43%).

“For the second consecutive year, SMPs have predicted that technology and regulatory developments will have the biggest impact on them in the future; they will need to be nimble and adapt in order to remain competitive,” said IFAC SMP Committee Chair Giancarlo Attolini. “While changes in technology are inevitable, we need to continue contributing to the development of international standards that are stable, relevant, and can be applied in a manner proportionate to the size of the entity or practice. And, as a profession, we need to help SMPs and SMEs adapt and prepare for changes by continuing to listen, develop guidance, and encourage knowledge sharing so they are well positioned to thrive in the future.”

The survey design and reporting were undertaken in collaboration with Sarah Webber and Donna L. Street, lead researchers from the University of Dayton (US). IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the survey. See the full results, including breakdowns by region and size of practice, and subscribe to receive SMP updates, on the IFAC website: www.ifac.org/SMP.

Some regions, countries, and larger SMPs were not well represented in the survey results; caution should be exercised when attempting to generalize survey results to specific countries, specific regions, or SMPs of all sizes.

About the SMP Committee
The SMP Committee of the International Federation of Accountants^® (IFAC^®) represents the interests of professional accountants operating in small- and medium-sized practices (SMPs). The committee develops guidance and tools and works to ensure the needs of the SMPs are considered by standard setters, regulators, and policy makers. The committee also speaks out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of more than 175 members and associates in 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce.