The end of 2018 spelled a sigh of relief for auditing firms in Dubai and UAE responsible for executing IFRS 9. All the fundamental changes to accounting models, policies, and strategies were created and enforced.
Much of the work has only begun for auditors in Dubai and UAE. Just like chartered accountants who are also dealing with the new standards of IFRS 9, IFRS 15, and IFRS 16, some auditing services in Dubai and UAE might be asking themselves, “are the new standards-essential?”
As of 31st December 2018, audit firms in Dubai and UAE implementing IFRS prepared their first financial statements based on IFRS 9, therefore, adapting its guidelines of financial instruments accounting.
Accounting for Financial Instruments as A Process
As opposed to IAS 39, in IFRS 9, accounting treatment of financial instruments is mainly aligned auditors manage financial instruments. There are several bright-line rules and stringent thresholds that external auditors in Dubai and UAE must apply. In reality, accounting has to reflect the business reality of financial instruments applications and how Dubai companies manage their exposure in financial instruments.
We shall share evident instances of this:
Impairment of Financial Assets
To execute the three-stage general formula of impairment, Dubai and UAE audit firms must model the credit risk paraments of portfolios and exposures, as well as the ideal estimates of future changes, known as “forward-looking information” Because there is always constant change in risk expectation and parameters of exposures, auditors must conduct regular testing, re-parametrization, and validation. The impairments model takes after a living person, growing from one reporting season to the other, which makes the entire cycle a continuous process.
Classification of Debt Financial Assets
IFRS 9 requires entities to classify debt instruments according to a business model, which can be derived from the economic function of the assets in an organization. It is not expected that business models will change frequently, but neither are they set in stone. As business realities fluctuate, entities must adjust their financial assets to remain relevant, which may ultimately require reclassification.
IFRS 9 requires a continuing process of modeling and judgment that may change over time as model assumptions and judgments change from one reporting date to the next, as shown by both examples above.
Internal Auditors Are Likely to Be Impacted by This Phenomenon
The examiners will have to evaluate all control mechanisms connected to an entity’s accounting processes when assessing its transition to IFRS 9 and make sure that accommodating assumptions and judgments to changing business conditions will not negatively impact their quality.
The Importance of Judgment
To comply with IFRS 9, an entity’s credit allowances calculation methodology must be aligned with its credit risk management model. Thus, calculating credit allowances may differ from a Dubai entity to another, as will the quality and reasonableness of the entities’ assumptions and judgments. In addition to the impairment of financial assets, judgment will be essential to the quality of numbers reported under IFRS 9.
In addition to the impairment of financial assets, judgment will be essential to the quality of numbers reported under IFRS 9. An example of one such area is determining if a change in contractual terms should result in the derecognition of a modified asset if the contractual terms are modified.
Changes For Internal Audit and External Audit Processes
External audits of the 2018 year-end financial statements are expected to improve the final implementation by assisting their clients to achieve a higher level of comparability with peers. In addition, it can be expected that both financial institutions and non-financial corporations will undergo internal auditing scrutiny during the first half of 2019.
An entity’s internal audit team and an external audit firm approach IFRS 9 audits differently in that:
- In assessing the implementation, external auditors will look at the methodologies applied and the information reported in the financial statements but must also consider other components.
- Auditing internal processes consist primarily of examining and evaluating them.
- External auditors of financial statements will have a more difficult task than internal auditors.
- IFRS 9 does not speak to an organization’s underlying processes, only what must be calculated, recognized, and disclosed.
Both internal and external auditors must be knowledgeable of the IFRS 9 requirements and the scope and magnitude of changes required by IFRS 9. The logic, mechanics, and suitable measures for implementing it appropriately in entities with varying complexity and exposure to financial instruments and risks, which they generate, must also be included.
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Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.