IFRS 9 Content, Challenges and Tools
25th February 2015
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Your Contacts in KPMG
Murat AlsanPartnerHead of AuditHead of Financial Services
Tel +9 0216 681 90 02 Mobile +9 0533 276 21 [email protected]
Christoph Radermacher PartnerFinancial Services
Tel +49 211 475-7212Mobile +49 172 [email protected]
Dr. Jürgen RingschmidtDirector, Financial Services FRM, Head of Credit Analytics Team
Tel +49 69 9587-3420Mobile +49 173 [email protected]
Jörg HashagenPartnerFinancial Services
Tel: +49 69 9587-2787Mobile: +49 172 [email protected]
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IFRS 9 Impairment Details and SolutionsIFRS 9 Impairment Details and Solutions
Agenda
A Brief Overview & Challenges & BRSA-IAS 39 A Brief Overview & Challenges & BRSA-IAS 39
IFRS 9 Impairment IntroductionIFRS 9 Impairment Introduction
WRAP UP WRAP UP
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The new IFRS 9 standard also amends IFRS 7 „Financial Instruments: Disclosures“ due to newly imposed disclosure requirements (esp. for Impairment)
FASB is, in parallel to IASB, reworking their regime for the accounting of financial instruments.Attempts to converge accounting models in the area of impairment have finally been abandonedUsers will have to comply with two conceptually different accounting models
No US GAAP convergence
Entity shall apply IFRS 9 for annual periods beginning on or after January 1, 2018.Early application permitted but generally requires application of all entire standard at the same time (exception: FVtPL)No requirement regarding comparatives; Provision: requires availability of reliable dataEU endorsement of IFRS 9 outstanding –situation in Europe is also not finalized
Effective Date
■ Principle- instead of Rules-based Standard for the accounting of financial instruments■ IASB Feedback to KPMG indicates that there will not be as much Implementation
guidance as requested by practitioners
Version Content Carried over from IAS 39
IFRS 9 (2009)
IFRS 9 (2010)
IFRS 9 (2013)
New accounting rules for the Classification and Measurement of financial assets and financial liabilities
IFRS 9 (Complete Standard)
New rules for the use of Hedge Accounting
Amendments to the 2009/2010 draft regarding Classification and MeasurementIntroduction of new Expected Loss Model for recognition and measurement of loan loss allowances
Rules for recognition and derecognition of financial instruments; only minor amendments.
The bumpy path to the final standard:
A Brief Overview of IFRS 9IFRS 9 issued July 27th 2014
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Significant level of judgment in the determination of the business model classification of
Classification at amortized cost is an explicit goal of the majority of banks
Amendments of IT-Systems and processes required to provide additional information product features as basis for Classification and Measurement
Efficient Classification through operationalization of processes and IT support (tools)
Ongoing subjects of discussion
Documentation requirements in the classification process
Systemic review of current features on loan agreements as well as their impact oriented evaluation for the future business
Review potential impact on pricing Higher P&L volatility as well as higher volatility in B/S
and Regulatory Capital levels as a result of broader Fair Value accounting.
Business Impacts
Debt Instruments
Business Model Holding
Business Model Mixed
Cash FlowCriterion
Fair ValueOption
Cash FlowCriterion
DerivativesEquity Instruments
Held for Trading
OCI Option
Fair ValueOption
Business ModelNon Holding
Fair Value Option
FVO
Fair Value through Other
Comprehensive Income
FVOCI
Amortized Cost
AC
Fair Value through Other
Comprehensive Income
FVOCI
Fair Value through
Profit and Loss
FV
OCI Option
yes
yes
no
no
no
no noyes
yes
yes
yes
Benchmark Test
Classification of Financial Instruments on the asset side
A Brief Overview of IFRS 9Phase 1: Classification and Measurement
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Core ElementsCredit Deterioration Model / 3 Stage Approach
Stage 3EL
Lifetime
1yr
Significant increase in PD, non-investment
grade
Object evidence of impairment
Stage 2EL
Lifetime
1yr
Stage 1EL
Lifetime
1yr
Decision on design and possible areas of discretion in: Relative transfer criteria Lifetime EL parameters
Delineation of the use of the standard IFRS 9 model and separate rules for special cases (POCI)
Significant changes required for the existing IT systems in credit risk management
Extensive disclosure requirements require increased data quality and data availability
Retrospective initialization of the new model for existing business
Key Topics
Opportunity to synergize IFRS 9 with risk management processes, models and internal/external reporting processes
Increased provisioning levels reduce equity, which increased provisioning volatility and complicates capital planning
Implications for strategy including ideas for new business, new products, pricing and other steering mechanisms
Opportunity to actively manage the IFRS 9 initialization effects
Business Impacts
A Brief Overview of IFRS 9Phase 2: Impairment
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More direct interaction between hedge accounting and risk management
Room for interpretation through the loss of hedge effectiveness bright lines and the option to rebalance
Increased universe of permissible hedging instruments and hedged items
Increased hedging options through the use of non-derivative instruments
Necessity for process and IT changes to fulfil new accounting and disclosure requirements
Key Topics
Review of existing and designation of new hedge relationships
Evaluation of new hedge accounting strategies for example by analyzing risk components of non-financial line items
Integration of risk management and accounting Implementation of the rebalancing requirements
Business Impacts
Hedge Accounting Model
Hedged items and hedging instruments
Disclosures
A Brief Overview of IFRS 9Phase 3: Hedge Accounting
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BDDK ve UFRS Karşılık Uygulamaları
UFRS anlatıldığı şekilde ilke bazlı muhasebe uygulamalarına yöneldiği için, BDDK ve UFRS uygulamaları Banka finansal tabloları üzerinde farklı etkiler doğurmaktadır. Bu etkiler yandaki tabloda özetlenmiştir.
BDDK•Kural Bazlı•Kural bazlı olması sonucunda tüm Bankaların aynı muhasebe politikası uygulaması nedeniyle daha kolay karşılaştırılabilir finansal tablolar
•Detaylı kurallar geliştirme düzenleme sayısında fazlalığa ve düzenlemelerde karmaşıklığa yol açmaktadır
•Kural bazlı düzenlemeler daha şekle yönelik bir yapıdadır
•Kural bazlı uygulamalar esnek değildir•Kural bazlı uygulamalarda düzenleme boşluklarının doğma ihtimali daha azdır
UFRS• İlke bazlı• İlke bazlı olmanın sonucunda Bankadan
Bankaya değişecek olan muhasebe politikalarının da etkisiyle karşılaştırılabilirliğin daha zor sağlanması
• Anlaşılabilir, basit uygulamalar• Düzenlemelerin özü ön plandadır• İlkeler birbirinden farklı durumlara yanıt
verebilme ve esnek olabilme özelliğine sahiptir
• İlke bazlı düzenleme yaklaşımı doğası gereği bazı alanlarda düzenleme boşluklarının doğmasına neden olabilmektedir
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BDDK ve UFRS Karşılık Uygulamaları
Nakdi krediler için ayrılan karşılıklar
Kredileri beş grup altında sınıflamıştır: Birçok niteliksel koşulun yanında bu beş gruba girmesi gereken kredileri tahsilatın gecikme sürelerine göre belirlemiştir. Bu şekilde sınıflandırılan kredi ve alacakların; (teminat yapıları da dikkate alınarak) III. gruba alındığı tarihten itibaren en az yüzde yirmisi (%20), IV. gruba alındığı tarihten itibaren en az yüzde ellisi (%50), V. gruba alındığı tarihten itibaren yüzde yüzü (%100), oranında özel karşılık ayrılır.
Önceki yıllarda gider yazılan fakat cari dönemde iptal edilen özel karşılıklar nedeniyle elde edilen gelirler, önceki yıllara ait gelirler hesabında muhasebeleştirilmektedir.
Teminat yapılarının dikkate alınmasında BDDK düzenlemeleri detaylı yönergeler barındırmaktadır. Teminat gruplarına göre, karşılık hesaplamasında dikkate alınma oranları farklılık göstermektedir.
Donuk alacak olarak kabul edilen kredi ve diğer alacaklar değerlemeye tabi tutulmaz ve bunlar için faiz tahakkuku ve reeskontu yapılmaz. Önceden yapılmış bulunanlar ise iptal edilir.
BDDK Her raporlama dönemi sonunda, krediler için değer düşüklüğüne uğradığına dair tarafsız göstergeler bulunup bulunmadığı değerlendirilir. Krediler değer düşüklüğüne uğradıklarına ilişkin tarafsız bir göstergenin bulunması durumunda, ilgili zararın tutarı, gelecekteki tahmini nakit akışlarının, kredinin orijinal faiz oranı üzerinden iskonto edilerek hesaplanan bugünkü değeri ile defter değeri arasındaki fark olarak ölçülür. Bu hesaplama yapılırken her bir kredi bireysel olarak değerlendirilir.
Önceki yıllarda gider yazılan fakat cari dönemde iptal edilen özel karşılıklar nedeniyle elde edilen gelirler, cari yıla ait karşılık giderleri hesabında net gösterilmek suretiyle muhasebeleştirilmektedirler.
Donuk alacaklardan elde edilen faiz gelirlerine, gelecekteki nakit akışlarının ilgili değer düşüklüğü zararının ölçülmesi amacıyla iskonto edilmelerinde kullanılan faiz oranı kullanılmak suretiyle muhasebeleştirilmesine izin verilmektedir.
Teminatın nakde çevrilmesinin muhtemel olup olmamasından bağımsız olarak, nakde çevirme eksi teminatı edinme ve satma maliyetlerinden kaynaklanan nakit akışlarını yansıtır. Kredi ve alacakları için yukarıda anlatılan değer düşüklüğü hesaplamalarında teminatlardan kaynaklanan bu nakit akışları da dahil edilmektedir
UMS 39
1 1
22
33
4 4
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BDDK ve UFRS Karşılık Uygulamaları
Gayri nakdi krediler için ayrılan karşılıklar
“Tasfiye Olunacak Alacaklar Hesabı”na aktarma zorunluluğu, gayrinakdi kredilerin tahsil edilmeyen, nakit krediye dönüşmüş ya da tazmin edilmiş bedelleri için de geçerlidir. Ancak, gayrinakdi kredinin nakde dönüştüğü andan itibaren, nakde dönüşen tutarın tamamı donuk alacak olarak dikkate alınır.
BDDK
UMS 39’da açık ve net olarak ifade edilmeyen gayrinakdi krediler için ayrılacak olan karşılıklarda nakdi krediler bölümünde ifade edildiği gibi tarafsız göstergelerin varlığı halinde, Bankaların şirketlerden olan nakdi ve gayrinakdi riskleri değer düşüklüğü için beraber değerlendirilmelidir.UMS 37 hükümleri gereği karşılık olarak finansal tablolara yansıtılacak tutara ilişkin belirsizlikler koşullara bağlı olarak farklı açılardan ele alınmaktadır. Değerleme konusu karşılığın çok sayıda kalemden oluştuğu durumda, ilgili yükümlülük her türlü getiriyi bunlara ilişkin olasılıklara göre ağırlıklandırmak suretiyle tahmin edilir. Bankalar bilanço dışı yükümlülükleri için karşılık ayırırken geçmiş tecrübelerine dayanarak “beklenen değer” metodunu kullanabilmektedirler.
UMS 39
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BDDK ve UFRS Karşılık Uygulamaları
Genel karşılıklar / Portföy karşılıkları
Bankalar BDDK tarafından belirlenmiş oranlarda standard ve yakın izlemedeki krediler için genel karşılık hesaplamaktadır.
BDDK
UFRS’de ise kredi ve alacaklar için Yönetmelikte belirtilen yönergeler ile hesaplanan bir genel karşılık bulunmamaktadır.UFRS’ye göre Banka, öncelikle, değer düşüklüğüne ilişkin tarafsız göstergenin bireysel olarak önemli olan kredi ve alacakları için bireysel bir şekilde, bireysel olarak önemli olmayan kredi ve alacaklar için ise bireysel veya toplu bir şekilde bulunup bulunmadığını değerlendirir.İki yöntem sıklıkla kullanılmaktadır. Bu yöntemlerden ilki tarihsel istatistik (Historic loss rate), ikincisi ise yaşlandırma (aging) metodudur.
UMS 39
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Trade off between flexibility in business activities and the desired 'At Cost' Measurement
Increasing Full Fair Value Measurement requires management of increasing P&L volatility risks
Changes in bank steering, e.g. KPI, pricing models, treasury concepts, …
SPPI Test requires input parameters which are not yet captured in the loan systems
New Impairment rules require implementation of Lifetime Expected Loss Model
Development of new processes, organizational changes and adjustments of IT-functionalities
Integration of IFRS 9 in existing project portfolio
Consequences
First Time Adoption
Time Frame
Involvement
Implementation period of three years expected
IASB requires valuable and complete implementation
Adjustments concerning Accounting, Processes and IT required
Consideration of business model and product features in classification decisions
Reshaping Impairment calculation methods based on a 3-stage Expected Loss Model
Modification of Hedge Accounting framework and one-time exercising of accounting choices
Phase 1: C & M
Phase 2: Impairment
Phase 3: Hedge
Accounting
Final IFRS 9 standard in place Entities are required to apply IFRS
9 for annual periods beginning on or after the 1st of January 2018
IFRS 9 – Hot Topics
A Brief Overview of IFRS 9The challenges involve extensive technical requirements…
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Operative Systems
Integration
Central Data Storage
Methods
Reporting Data
Reporting application
Division I Division nDivision II External data source
Client data(Insourcing)
DivisionalReporting
Analysis/ Planning/
Management
ExecutiveReporting
ExternalReporting/ Regulatory Reporting
…
Transfer,Conversion
Norm
Data Enrichment
QualityMgmt.
CreationCash Flows Splitting Security
allocation
Raw and result data(appropriate for the receiver/ aggregated)
Accounting
HG
B
US
GA
AP
IFR
S
P&Lstatement
.
RA
RO
C,
RO
RA
C, e
tc
Internal models(Devel.,
Validation, Calibration)
Risk Controlling
Por
tfolio
-Mod
el
OP
Ris
k
Liqu
idity
Ris
k
Mar
ket p
rice
Ris
k
Cre
dit R
isk
DataHistory
MasterData
VariableData
CashFlows
BusinessPartner
StructureData
…
Costs
Risk results
Raw data &
derived Data
Securities
Exploitation
Measurem.
ExternalData
The planning approach is subject to the depth of the business and IT specifications
Phase 1: C & M
Phase 2: Impairment
Phase 3: Hedge
Accounting
Implementation of new holding categories in all level
Decision about automatic or manual implementation of business model and SPPI-Tests in IT
Decision about automatic or semi-automatic transfer of measurement data into the back office or general ledger
Examination whether current allowance engines can be expanded or used further
Examination of the possibility to integrate risk management data into accounting
IFRS 9-Implications for the IT-Implementation
A Brief Overview of IFRS 9…and implications for technical implementation
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Implementation considerationsKey challenges
■ The current range of maturity within the industry is varied. However, the main key success criteria for more advanced firms seems to be an ability to collaborate cross functionally across traditional silos.
Strategy
Finance
IT
Risk
■ Most firms struggle with data and ensuring that they can identify the correct data from the correct source system and being able to replicate the information horizontally across different businesses.
?
Risk
Finance
FO
Cross-functional governance Focus on data standards Broadening control coverage
■ There are a range of processes which will come within the audit scope –granular credit rating systems, regulatory capital and economic forecasting may be particularly challenging.
Alignment to wider regulatory and control developments
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IFRS 9 poses a strategic challenge that has far reaching implications beyond just accounting
The extensive impacts of IFRS 9 require a coordinated approach and proven solutions to minimize risks and maximize potential
Businessmanagement
Classification
Data feeds
ValidationFair Value/Credit management
Impairment
Accounting/Reporting/Governance
Trading/LendingBusiness
Business Processes
SystemsPeople
■ KPI setup/scorecard■ (Pre-)Pricing■ Validation business model■ Update portfolio structure
■ New Product Process■ Update/Harmonize product catalogue■ Monitoring individual agreements
■ Expand data model■ Adjust data transfer■ functional data harmonization (e.g. use of
Basel parameters for Impairment calculation)
■ Adjust methods & master data■ Expand data history■ Implement Fair Value measurement loans
■ SPPI test■ Documentation product features■ Adjust approval process
■ Capital allocation■ Fair Value management■ Credit treasury■ Adjust hedge accounting strategy
■ Expand calculation model■ Increase data history■ Validate basic parameter (e.g. lifetime
expected credit loss)
■ Expand ledger structure■ Update accounting policies and guidelines■ Adjust ICS processes■ Additional Capital Requirements expected■ Market communication
■ Business areas have to be involved up from the beginning■ Adjustment of product design and portfolio management in 2015 reduces effects in 2018■ Total effect on equity capital requires an integrated view in accounting & risk
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■ Leverage Ratio (LR)o Implications on both input quantities
■ Net Stable Funding Ratio (NSFR)o Direct implications most possible
■ Liquidity Coverage Ratio (LCR)o No direct implications
■ Leverage Ratio (LR)o Implications on both input quantities
■ Net Stable Funding Ratio (NSFR)o Direct implications most possible
■ Liquidity Coverage Ratio (LCR)o No direct implications
■ Product pricingo Long-term business may tie up more capital depending on
product and client segmento Pricing scheme to be reviewed
o Check of strategic options for long-term business (like co-operation with insurance)
■ CRA Volatilityo requires more sophisticated planning
and steering methods/processes ■ Risk-taking capacity
o Basically reduced core capital
■ Product pricingo Long-term business may tie up more capital depending on
product and client segmento Pricing scheme to be reviewed
o Check of strategic options for long-term business (like co-operation with insurance)
■ CRA Volatilityo requires more sophisticated planning
and steering methods/processes ■ Risk-taking capacity
o Basically reduced core capital
■ FINREPo Adaption of formal FINREP
template structureo Interdependencies regarding
reporting frequency and processes■ CRR Disclosure
o Qualitative and quantitative modifications
■ Large loan exposure limitso will be reduced due to decrease in capital
■ FINREPo Adaption of formal FINREP
template structureo Interdependencies regarding
reporting frequency and processes■ CRR Disclosure
o Qualitative and quantitative modifications
■ Large loan exposure limitso will be reduced due to decrease in capital
■ Available regulatory capitalo Reduction of CET11 via decreased retained earningso IRBA EL/CRA2-comparison increase surplus or reduce
shortfall; gen. CRA in STA3 may increase Tier 2 capitalo Increase of Deferred Tax Assets due to mismatch
with tax B/S - DTA lead to increased earnings, but RW4 100% or 250% or capital deduction
■ Capital requirementso Reduced Exposure Value in STA by
specific CRA; no change in IRBA
■ Available regulatory capitalo Reduction of CET11 via decreased retained earningso IRBA EL/CRA2-comparison increase surplus or reduce
shortfall; gen. CRA in STA3 may increase Tier 2 capitalo Increase of Deferred Tax Assets due to mismatch
with tax B/S - DTA lead to increased earnings, but RW4 100% or 250% or capital deduction
■ Capital requirementso Reduced Exposure Value in STA by
specific CRA; no change in IRBA
In particular, IFRS 9 Impairment has many implications on regulatory areas
IFRS 9Impairment
1 Common Equity Tier 1 (regulatory „core capital“) 2Credit Risk Adjustments 3Stdandardized Approach 4 Risk Weight
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Basel III Solvability
Reduction of CET1 via decreased retained earnings
Increase of Deferred Tax Assets due to mismatch with tax B/S
Additional CRA will increase expenses in accounting
This will immediately reduce retained earnings which are part of the CET1
Thus CET1 will decrease by the increase of CRA on introduction of IFRS 9 impairment
Higher earnings in tax accounting compared to IFRS will lead to (additional) deferred tax assets (DTA)
Economically, this would mean bank pays to much tax given that IFRS valuing is the “true” value, which will be most likely compensated on future realization of this “true” value
But with increased CRA due to IFRS 9, this would only be valid in crisis situations, because risk (CRA) in stage 2 will be overstated in non-crisis situations compared to fair value
Basically, DTA will increase retained earnings
However, DTA itself will be either part of RWA or be even deducted from CET1 depending on the classification of the DTA (reliance on future profitability, CRR Art. 38)
CRARetained earnings
CET1
IAS
39
CRA Retained earnings
CET1IFR
S 9 Add.
CRA
CRA
DTA
additional CRA partly offset by DTA
mult. by tax rate
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defaulted non-defaulted
Basel III Solvability (cont’d)
IRBA EL/CRA1-comparison increase surplus or reduce shortfall
General CRA in Standardized Approach may increase Tier 2 capital
Comparison is done separately for defaulted and non-defaulted assets (no compensation between them)
As CRA may increase in stage 1 (possibly due to LIP factor) and increases in stage 2 the comparison of non-defaulted assets will mainly change
In the most likely event of having a future surplus, additional CRA will transform into Tier 2 capital, but capped by 0.6 % of RWA
In Standardized Approach, only general CRA (or GLLP) will effect the capital site
Additional general CRA will increase Tier 2 capital, but capped at 1.25 % of RWA in Standardized Approach
CRASurp
lus
EL
CRAshor
tfall
EL
Main Focus of increase in stage 1 and 2 !
Basically, increases Tier 2
capital, but capped by 0.6 % of RWA!
Reduces CET1 deductions!
Reduced Exposure Value in STA by specific CRA
In Standardized Approach, specific CRA (or GLLP) will be deducted from the accounting value (and result into the so-called exposure value)
Additional CRA will decrease the exposure value and consequently also the associated RWA
In case of defaulted assets, additionally there would be also a reduction of RW (not of big relevance, because major changes in stage 1 and 2)
Cap
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Basel III Ratios
Leverage Ratio (LR)
Net Stable Funding Ratio (NSFR)
Liquidity Coverage Ratio (LCR)
Leverage Ratio
NSFR
LCR
=
=
=
Tier 1 Capital
Exposure Value
Available stable funding
Required stable funding
Liquid high quality assets
Net liquidity outflow (30 days stress)
> 3 %
100 %
100 %
Exposure Value effect only for STA
Driven by negative effect of reduced capital on available funding
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FINREP and CRR Disclosure
FINREP CRR Disclosure
Current FINREP reporting structure is based on IAS 39
The FINREP reporting structure will need for integration of IFRS 9 specific information
There may be interaction between the forborne status with rating and stage migration, especially with change of loan conditions
FINREP reporting frequency is quarterly and thus, CRA information is needed at least quarterly
Due to changed definitions with IFRS 9 compared to IAS 39, extensions and adjustments of the disclosure scheme more than likely
Higher volatility of CRA due to migration effects and consequential higher volatility of capital will require comprehensive explanation in disclosure report
Structural changes due to IFRS 9 possibly require adjustments of data supply
Depending on the reporting level, the relevant forms will be prescribed by the ECB
1 Balance sheet
2 Income statement
5 Classification of the loans
and borrowings
8 Classification financial liabilities
10 Derivatives - trade
11 Derivatives - hedge
accounting
18 Performing and non-
performing exposures
19 Forborne exposures
4 Classification financial assets
9 Loan commitments, financial guarantee and other commitments
12 Report on impairment of loans and equity capital instruments
14 FV hierarchy: Financial instruments on FV
6 Loans / borrowings pursuant to
NACE
13 Received securities and guarantees
16 Classification selected balance sheet / income statement items
17 Reconciliation accounting and
supervisory basis of consolidation
20 Geographic outline 40 Group structure
3 Statement of comprehensive income
7 Adjusted financial assets that are cancelled or impaired
15 Derecognition and liabilities connected to transferred assets
21 Tangible and intangible assets; assets within operating lease
30 Off-balance-sheet business: interest from non-consolidated struct. comp.
22 Asset management and other service functions
31 Affiliated companies 41 Fair Value 42 Tangible and intangible assets: carrying amount according to val. method 43 Provisions
44 Pension plan and social security payments 45 Classification of selected balance sheet and income statement items 46 Setup of changes in the equity capital
Setting up of the relevant reporting forms*Downgrade level
DataPoints
Over-Simplified
Simplified FINREP
Full FINREP
21© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
A most recent message from the Basel Committee on IFRS 9 Impairment
Guidance on accounting for expected credit losses
Completely revised issue (consultation document) of the “guidance on sound credit risk assessment and valuation for loans” (SCRAVL, 2006) which gave guidance to the implementation of IAS 39
Consultation period ends at 30th April 2015 Detailed provisions on how IFRS banks shall implement IFRS 9
impairment Specification of concrete dos and don’ts for banks especially in the
context that banks are leader in credit risk measurement and IFRS 9 is written for all industry segments
Structured in 11 principles with emphasis on responsibility of senior mgmt., need for validation, robust consideration of forward looking information and the following
Fundamental requirements and procedures, including appropriate tools to identify, assess and price credit risk appropriately, are to be met by the banks
Expectation that banks maximally use and leverage existing data, models and processes
No specific details or explicit hint on the calibration of the transfer criterion included, but change of credit risk over expected life of loan is to be considered
Expectation that more sophisticated banks shall not use definite simplifications in IFRS 9 Impairment, however a proportionality principle for banks is assumed
Document claims not to undermine and redefine accounting rules
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Involvement of stakeholders of all Functional Building Blocks required
IFRS 9 is not only a pure accounting project in fact the involvement of stakeholders from all areas of the bank is required
No. Concept0 Design Framework1 Design Framework C&M2 Design BM & Portfolio Management
3 SPPI Test & NPP-Adjustments4 Fair Value Measurement 5 Reporting & Chart of Accounts6 Booking Engines & Posting Rules7 Internal Reporting8 Reclassification9 Initial Application & Migration10 Disclosure/Notes11 Fair Value & Performance Management12 Framework Impairment13 Bucket Allocation & Transfer Logic14 EL Methodology15 Credit-impaired Assets16 Interest Income Recognition17 First Time Adoption Impairment18 Disclosures / Notes Impairment
19Posting Rules & Reconciliation Impairment
20 Internal Reporting Impairment21 Hedge Accounting
22Disclosures / Notes for Hedge Accounting
23 Selective Topics/Professional Opinions24 Scenario Analysis25 Tax Implications26 Harmonisation of Methods27 Training & Communication28 Bank Management, Planning &
Budgeting29 GAAP Reconciliation
Functional Building Blocks
Own Issues Payment
Transactions
Trading Business Front Office
Interest-FX-Business
Market and Master Data for Trading Business
Equity/ FX Trade
Other Commercial
Business
Lendings Settlement and
Back Office
Settlement of Deposits
Banking Transactions
Settlement of Commission & Fee-earn-ing
Business
Settlement of Payment
Transactions
Group Internal Provider Management
Settlement of Interest-
earning Operations
Settlement of Security
Transactions
Settlement of other
Commercial Business
Banking Book Sub Ledger Trading Book Sub Ledger
General Ledger
Accounting Data Management
Business CommercialAccounting
Credit Risk Controlling
ALM
Int. and ext. Regulatory Reporting
Financial Controlling
Risk Controlling Data Management
Market Risk Determination
Tax
Controlling Operational
Risks
Credit Derivatives Business
Settlement of own Issues
Settlement of Credit
Derivatives business
General Bank Management
Controlling Other Risks
Commercial Business Front Office
LendingBusiness
Market and Master Data for Commercial Business
Deposit Banking Business
Commission and Fee-earning
Business
Fron
t-Offi
ceB
ack-
Offi
ceC
ontr
ollin
g Ac
coun
ting
Ris
k M
ngm
t.
Trading Business Accounting IT
Accounting Standards and
Financial Accounting
InvestmentControlling
Retained Organisation External Provider Management
Spe
cial
Top
ic: F
raud
Pre
v. a
nd
Sec
urity
Spe
cial
Top
ic:
HR
Issu
es
Risk Strategy
Market Risk Controlling
Spe
cial
Top
ic:
Com
plia
nce
Business Management3
3 3 3
29
4 20 23 20 3
2
2 3
5 6
5 6
2033 8
2 29
1 2 20
5 7 19 2429 26
20
28
28
2
20
1 10 30 21 10
282726overall 23 24 25
1 1 14 20
8 5 6 8
8 18
5 7 5 7 17 7 10 19
1 4 10
10
10
4
11 12
13 14 15
16
4
17 18
20
20
18
29
1 4 5
7 8 10
13 14 15
16 17
19
4
8
23© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
PHASE 2:Detailed analysis and design
PHASE 1:Assess
PHASE 3:Implement
Q3-14: Initial insight on the potential impact, key focus areas and required resources
Q4 2014:■ Validate plan for
Phase 2 and secure resources■ Set up the PMO
and governance■ Mobilise resources
Q3-15: ■Establish BAU
governance structure■Final decision on
accounting policies and hedging strategy
Q2-15: ■Refresh of impact analysis
following finalised standard■Completion of impact
analysis■Initial design of models,
data flows and architecture completed
Q3-15: Implementation plan and senior stakeholder communication completed
Q2-15: ■Provide insight into both
the one-off and annual impact on financial reporting, regulatory requirements and tax■Mock-up disclosures
designed and accounting manuals updated
Q3-15:■Transfer criteria and risk parameters
signed-off■ Skills matrices detailing current and
required skill profiles developed■Existing credit policies reviewed and
enhancements to align with IFRS 9 made■Design specifications
for data sourcing, systems, models, controls and processes completed
Q1-15: ■Business model
documentation completed■Senior
stakeholder communication plan agreed
2014
Q2-15: Cash flow
characteristic tests
completed
Q1-15:Hedging feasibility study and review of existing hedging strategies completed
2015
Implementation considerationsOverview timeline
24© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
PHASE 3:Implement
PHASE 4:Sustain
Q1-18: First IFRS 9 compliant financial statements
Q4-15: Valuation solution built for fair value and amortised cost measurements
Q2-16: ■Solutions to
implement ECL model rolled out■Pro-forma
financial statements and disclosures drafted
Q2-16: Hedge
documentation and effectiveness testing templates
ready
Q2-16: System changes built and configured
Q3-16: System changes
tested
Q4-16: IFRS 9 tools, applications,
processes, controls, knowledge and
governance structure successfully implemented
2015 2016 2017 2018
Q1-17: Remainder of IFRS 9 handed over from programme to BAU
Q1- 17: Post implementation tests completed
Q3-15: ■ Resources secured for implementation■ System changes and timing agreed based on system specifications
Q1-16: Final credit
risk policies reviewed and
signed off
1 January 2018:IFRS 9 effective
date
1 January 2017:
IFRS 9 go-live (Parallel run
begins)
Implementation considerationsOverview timeline (continued)
25© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Impairment –Quantitative Analysis
Impairment Calculator*
■ Quick availability of initial IFRS 9 impacts on loan impairment
■ Available for use in daily work after implementation project
Impairment –Qualitative Analysis
gCLAS**
■ Efficient determination of gaps between status quo and target scenario
■ Enables effective and correct project and resource planning
I Nr. Soll-Anforderung IFRS 9 Ist-Ausprägung Identifiziertes Gap Erfüllungsgrad 1 2 3 4 5 Erforderliche Anpassungen en /Betroe und A
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2 ….. ….. ….. [auswählen]
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IT-Funktionalitäten
Kern
elem
ent 1
Methodik
Daten-verfügbarkeit
Prozesse
Perspektive
Gap-Analyse IFRS 9 Impairment
Classification Loan Portfolio
Lending Tool*
■ Rapid analysis of securities portfolio
■ Enlarged master data incl. KPMG add-ons
■ Complete documentation of classification decisions
■ Available for use during and after implementation project
■ For local and global use
ClassificationSecurities Portfolio
iRADAR*
■ Structured workflow for loan portfolio analysis
■ Documentation of classification decisions at deal level
■ Available for use during and after implementation project
Overview Toolkit
Scope
Your Value
Scenario tool to support the quantitative analysis regarding the changes in impairment processes and methods
KPMG template for an efficient definition of qualitative impairment requirements and documentation of status quo
KPMG Database with numerous market and product information. Enables KPMG iRADAR team to produce a classification suggestion of the securities portfolio with minimal effort
Automated decision trees & questionnaires to speed up the portfolio screening and the individual decision regarding the individual classification of loans
LENDING TOOL
Identification new disclosure requirements
Data Dictionary*
Standalone tool for identification of data and data flows required forIFRS 9 compliant
quantitative disclosures
■ Reporting and accounting data mapped to IFRS 9 disclosure requirements
■ Identification of disclosure requirements that need interpretation, calculation and /or judgment
*) Tools for IFRS 9 projects**) Software
26© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Agenda
IFRS 9 Impairment Details and SolutionsIFRS 9 Impairment Details and Solutions
A Brief Overview & ChallengesA Brief Overview & Challenges
IFRS 9 Impairment IntroductionIFRS 9 Impairment Introduction
WRAP UP WRAP UP
27© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Gross basis
■ No significant deterioration in credit quality
■ 12 month expected credit losses - The portion of lifetime expected credit losses that represent the ECLs that result from default events occurring within the 12 months after the reporting date, weighted by the probability of that default occurring.
Net basisInterest revenue
■ Significant increase in credit risk
■ Change relates to probability of default rather than changes in LGD
■ Rebuttable presumption that the criterion for lifetime expected credit losses is met if payment are more than 30 days past due (but cf. BCBS CAECL!)
■ Credit-impaired financial assets (includes purchased and originated credit-impaired assets)
■ Interest is calculated on amortised cost (i.e. net of loss allowance). Consistent with the amount IAS 39 requirement for all financial assets and financial liabilities
■ Interest is calculated by applying the EIR to the gross carrying amount (i.e. before the loss allowance)
Scope of changes
■ The proposed Expected Credit Losses (ECL) model uses a dual measurement approach depending on the extent of credit deterioration since initial recognition:
− Stage 1: ‘12 months’ expected credit losses’ if the credit risk has NOT increased significantly since initial recognition; and
− Stage 2/3: ‘Lifetime expected credit losses’ would be recognised if the credit risk has increased significantly since initial recognition
■ Extensive new disclosures – e.g. effects of deteriorations and improvements in credit quality and the critical judgments made in measuring the ECL accounts.
Stage 1Performing
Stage 2Underperforming
Stage 3Non-performing
TransferIf the credit risk on the financial asset has increased significantly since initial recognition
Move backIf transfer conditions above is no
longer met
Change in credit risk since initial recognition
Expected Credit LossesApproach
New:Calculate Lifetime
Expected Losses in a new stage 2
New:Implement transfer criterion from stage 1 to 2 based on LtPD
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Expected Credit LossesTechnical accounting/risk – Key issues and trends
Transfer criteria: What deterioration in credit quality is considered ‘significant’?
Selection of transfer criteria and indicators are required (e.g. types of downgrades and where the boundary of low risk lies).
Transfer criteria should incorporate current conditions and forecasts/forward looking information.
More than 30 days past due rebuttable presumption to serve as a backstop, to identify financial instruments that have experienced significant increase in credit risk, if no other forward looking, borrower-specific information available.
Assessment based on the change in the risk of a default occurring in the next 12 months permitted unless a lifetime assessment is necessary.
Assessment can be performed at counterparty level if the objectives of the expected loss model can be met.
Assessment of significant increase in credit risk on an individual vs. collective basis
Flexibility of using a variety of information. Assessment can also be based on a combination of a specific internal credit rating category; and qualitative factors that are not captured through the internal credit ratings process , if both information arerelevant.
For financial assets at FVOCI (e.g. treasury securities), the expected losses should reflect management’s expectations of credit losses. When considering ‘best available information’, the observable market information about credit risk should be considered.
Technical considerations
Expected loss drivers (e.g.
PD/ LGD)
Discount rates
Definition of default
Maturity
Transfer criteria
Most firms are considering the statement about undue cost and effort to justify their choices in
estimating expected credit losses.However, they are also conscious of the reaction from the regulators
and how they will explain any differences in approach.
Specific issues/trends
Some firms have opted a PD based threshold and downgrade criteria; others have opted to use a their watch list/ stressed process as a way to segregate the portfolio.
The retail method of calculating days in arrears is usually different from commercial exposures. Firms should consider whether a unified definition is appropriate or how to disclose differences in definitions across portfolios.
In light of the 30 days past due continues to be stressed as a backstop, a robust approach should be established to ensure earlier position will be picked up when recognising lifetime expected credit losses.
29© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Expected Credit LossesTechnical accounting/risk – Key issues and trends
Low credit risk
Practical expedient - A financial instrument has not significantly increased in credit risk if it has low credit risk at the end of the reporting period.
The low credit risk notion is not a bright-line trigger for lifetime ECL
Not required to be externally rated, however, low credit risk equates to a global credit rating definition of ‘investment grade’, as an example.
Loss given default (LGD)
Similarly, LGD as defined by IFRS 9 and Basel III are different:
■ Point-in-time versus downturn LGDs
Specific issues/trends
Most firms have applied a simplistic assumption for the assessment of expected credit losses by LGD segments which measure the economic loss incurred on a credit exposure in the event of default.
Specific issues/trends
Most firms recognised the need to be as point in time PD estimates to quantify expected credit losses .This is more pronounced for treasury assets where in most cases market prices and rating agency views are the main source of information
Implementation and governance over forward looking measures will be challenging
Term structures for less sophisticated firms using standardised approach for assessment of regulatory capital are normally based on external data
Probability of default (PD)
There is a difference between expected losses as defined by IFRS 9 and Basel III for firms leveraging off Basel regulatory expected losses,:
■ Point-in-time versus through-the-cycle PDs
■ Forward-looking information would need to be considered in assessing lifetime expected losses
Technical considerations
Expected loss drivers (e.g.
PD/ LGD)
Discount rates
Definition of default
Maturity
Transfer criteria
Specific issues/trends
While this may offer some degree of operational simplification, firmsshould:
■ Establish a credit risk framework to define and justify their threshold of low credit risk;
■ Implement monitoring mechanismto track the credit risk movement of those low credit risk instruments.
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Discount rate
The expected credit losses should be discounted at the effective interest rate (EIR) at initial recognition or an approximation thereof (current EIR for variable rate loans)
Applies to both drawn and undrawn balance of loan commitments, financial guarantee contracts and revolving credit facilities.
Definition of default
Rebuttable presumption that default does not occur later than 90 days past due.
Definition of default should be consistent with credit risk management practices.
Qualitative indicators of default should be considered when appropriate (e.g. covenants).
Specific issues/ TrendsSpecific issues/trends
Most firms have used behavioral maturity for revolving credit portfolios (e.g. credit cards) where this is more prudent, and contractual period for all other financial instruments.
Maturity
The maximum period for the measurement of ECL is the maximum contractual period (includingextension options) over which the entity is exposed to credit risk, except for revolving credit facilities where the measurement period is based on the behavioral life.
Technical considerations
Expected loss drivers (e.g.
PD/ LGD)
Discount rates
Definition of default
Maturity
Transfer criteria
Specific issues/trends
Some firms indicated the challenge in generating original EIR across all or some portfolios.
Expected Credit Losses Technical accounting/risk – Key issues and trends (cont.)
Specific issues/trends
Varying definitions between portfolios (retail versus corporate books)
Most firms have opted to useregulatory definition of defaultconsistent with the Basel II definition of default that underpins their PD models. However, firms should re-assess their definition of default to take into account the 90 days past due rebuttable presumptions for default and other qualitative indicators.
31© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Assets modification
The modification requirements apply to all modifications or renegotiations of contractual cash flows, regardless of the reason for the modification.
Modified financial assets are subject to the same assessment of significant increase in credit risk as unmodified financial instruments and the same ‘symmetrical’ treatment, i.e. could revert back to 12-month expected losses.
The credit risk on a financial asset would not automatically improve merely because the contractual cash flows have been modified.
To assess whether there has been a significant increase in the credit risk of a modified asset, compare the risk of default occurring at the reporting date based on the modified contractual terms and the risk of a default occurring at initial recognition based on the original, unmodified contractual terms.
Technical considerations
Expected loss drivers (e.g.
PD/ LGD)
Discount rates
Definition of default
Maturity
Transfer criteria
Specific issues/trends
Appropriate modification policy and monitoring mechanisms should be established, in particular setting specific conditions to assess whether the credit risk of the modified financial instruments has improved and whether the criteria for the recognition of lifetime expected credit losses are no longer met. Examples of conditions to consider are:
• an analysis of the financial condition of the borrower showing it no longer meet the criteria for recognition of lifetime expected credit losses.
• establish a minimum period to monitor whether the credit risk of the modified financial instrument has improved• regular payments of principal and interest amount have been made during the minimum period • none of the exposures to the borrower is more than 30 days past-due at the end of the minimum period.
Expected Credit LossesTechnical accounting/risk – Key issues and trends (cont.)
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Financial reporting controls
Evaluating governance and framework of controls around the Credit Losses process (including all relevant data flows, modeling and appropriate documentation) to ensure they are robust for financial reporting purposes and SOX-compliant.
Governance over data
Ownership of data and quality issues are likely to emerge though the reconciliation of risk and finance data
Specific issues/ Trends
The issues and trends in this space seem to be bifurcated between firms that have a centralised data model versus firms that have a more federated approach.
By far the majority of issues lies with federated systems and their reconciliation horizontally across silos.
For firms more advanced in implementation, the focus has been on consistency with regulatory reporting
Specific issues/ Trends
Relevant data flows are unknown or poorly mapped.
Data sources and systems have not been subject to the same amount of rigor as those used for financial reporting
Risk documentation for provisioning methodology is improving across the industry but is generally not at the level required for financial reporting
Specific issues/ Trends
More advanced firms in this space have clear management buy-inbetween the CFO and CRO
Some firms have set up overarching program management to look over various change projects to leverage other projects
Credit risk and accounting teams have found it difficult to speak the same language and this potentially leads to multiple policy rewrites at one firm
The current range of maturity within the industry is varied.
However, the main key success criteria for more advanced firms
seems to be an ability to collaborate cross functionally
across traditional silos
Cross functional collaboration
IFRS 9 implementation demands skilled resources across the firm that are similar to other large scale change programme including Finance, Risk and IT collaboration.
Strategy
Finance
IT
RiskWhat is your track record for cross functional collaboration?
Expected Credit LossesOperational – Key issues and trends
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Expected Credit LossesImplementation – Specific challenges and trends
Data quality and integrity
Data quality across the industry is a known issue and many firms are addressing these concerns through specific IT projects to manage and maintain a single customer view across secured and unsecured lending products.
Modeling choices
Most firms with IRB risk models embedded are leveraging these models in implementing IFRS9 primarily to evaluate migration across rating grades.
Specific issues/trends
Some firms consider an integrated framework for capital and expected credit loss assessment which link but do not constrain migration across rating grades and defaults.
Most firms are planning to use a mixed methodology such as a combination of leveraging existing Basel expected loss model and building new models for more complex portfolios.
Models used for regulatory capital calculations often have conservatism embedded within them
Specific issues/trends
Many firms encountered problems with unpacking top level portfolio adjustments into deal level adjustments
Data for most firms were sourced from a combination of risk, finance and front office systems. Many firms had issues with reconciliation between these systems
Challenges also exist in overcoming capability limitations such as data management problems and constraints imposed by legacy systems across the organisation
Portfolio coverage
Many firms have identified specific portfolios as a pilot before rolling implementation out more widely.
In terms of implementation, most firms struggle with data and ensuring that they can identify the
correct data from the correct source system and being able to
replicate the information horizontally across different
businesses
Most firms struggle with their internal data architecture and getting one version of the truth
?Risk
Finance
FO
Specific issues/trends
Some firms have experienced difficulties in ensuring the completeness of population of loans within the entity.
Many firms encountered issues with portfolios where IRB models do not currently exist (e.g. standardised portfolios)
34© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Agenda
IFRS 9 Impairment Details and SolutionsIFRS 9 Impairment Details and Solutions
A Brief Overview & ChallengesA Brief Overview & Challenges
IFRS 9 Impairment IntroductionIFRS 9 Impairment Introduction
WRAP UP WRAP UP
35© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
The basic idea of IFRS 9 Impairment explains some counter-intuitive behavior with respect to the transfer criterion
risk margin needed at origination given the rating at origination and the corresponding Lifetime EL
risk margin needed at reporting date Tx given the rating at Tx and the corresponding Lifetime EL
Consequences within IFRS 9 Impairment framework
However, the transfer criterion does not rely on LtEL but on Lifetime PD (“Significant increase in credit risk”), so a sole decrease in collateral value e.g. may not trigger a transfer from stage 1 to 2
Although this is the basic idea, the standard does not obey this idea comprehensively (e.g. revolving credit with right to increase price must be considered via behavioral life)
Comparison of LtPD must be done on matchable time frames:
Nota bene:
Book value minus LtEL is basically lower than the Fair Value because the latter allow for “offsetting” the increased EL for each period of lifetime with the original risk-adequate margin as part of the cash flows (only increase of LtEL effectively driving the decrease in FV)
T2T1T0
Dt0
Ct0 Ct1
Loan Dtransfered to stage 2
Obligor Rating BBB B CCCBB
Comparison of risk margins
Timeline
Dt1
Comparison of risk margins
Loan Eremains in stage 1
Case study as example
One obligor with 2 loans originated at different dates with different obligor ratings
Assumption: bank gets the needed risk margin for such an EL over lifetime of each loan via the adequate pricing at origination date
In case of significant deviation of currently needed LtEL from the LtEL originally calculated at origination, the bank does not even closely cover the currently anticipated LtEL via the original price
Comparison of forward cumulative PD at initial recognition with current LtPD
1,5 %
2,5 %t2t1t0
Cumulative PD
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The transfer criterion has to be applied on Lifetime-PD level so that a quantile-based approach basically is most reasonable
x
x
x
x
x
x
t
LtPD
x Expected remaining LtPD at t=0Threshold at 75% quantile
Box plot Lifetime PD evolution
When implementing a LtPD-based transfer criteria, a threshold defined by a quantile of the distribution of
expected LtPDs at the reporting dates is a reasonable approach
37© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Calculating and recognizing expected credit losses the most significant change compared to IAS 39
Transfer of individual assets when■ No longer Investment Grade and■ Significant increase in PD since origination
Transfer of individual assets from stage 2 to stage 3 when impairment triggers are observed
Transfer of individual assets back to stage 2 when asset has recovered from default*Transfer of individual assets back to stage 1 when
criteria above are no longer met (symmetric model)* Assets that are credit-impaired at acquisition or origination remain in stage 3 until maturity
Provisioning Cliff Effect1
Stage 1Status: not deterioratedProvision: 1 year ECL
2
Stage 2Status: deterioratedProvision: Lifetime ECL
3
Stage 3Status: credit impairedProvision: Lifetime ECL
The accounting treatment is decided by the IFRS 9 stage, which is a function of credit quality and deterioration
Source: KPMG's 2014 IFRS 9
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Determining the IFRS 9 stage depends on a number of factors and can require significant amounts of historical data
DefaultInvestment Grade Non Investment Grade
Definition “Credit-impaired”
PD-Threshold(Non-investment grade)
PD
Dt0 Dt1
Et1
Xt0
Loan X at the end of the first period (t1)
Loan X at origination (t0)
Stage 1
Stage 2
Stage 3Lifetime ECL
1yr ECL
Ct0
Significant deterioration
Insignificant deterioration
Ct1
Bt1Bt0
Ft1Ft0“Assets with low credit risk”
At0 At1
Xt1
■ IFRS 9 requires different levels of provisioning for different assets depending on whether or not there has been significant deterioration in the past
■ Determining the correct stage requires knowledge of the current and original credit risk levels, which is information not readily available in typical front office and risk systems
Allocating the assets to stages and providing historical information for disclosures is a new challenge that is not possible in legacy systems and requires an extended data warehouse
Source: KPMG's 2014 IFRS 9
Et0
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The idea of expected credit losses is nothing new, but the Basel environment is typically limited to a 12 month horizon
PD LGDx x=
■ Expected credit loss is a statistical measure used to reflect expectations of future losses based on historical data
■ The three primary components are derived based on observation, empirical evidence and expert judgment
■ The objective is to quantify loss expectations over a 12 month forecast
■ Probability of default for an asset or class of assets over the next year
■ PD represents an average expectation over the course of an entire business cycle (through-the-cycle) as opposed to specific current expectations (point-in-time)
■ Loss given default based on losses resulting from defaults over the next 12 months
■ Ideally the LGD will be separated for secured and unsecured portions of an exposure
■ LGD is a prudent parameter based on an assumed downturn in the economic conditions
■ Exposure at default represents the amount a bank stands to lose in the event of a default event
■ For a 12 month horizon, the EAD is defined as the current exposure without considering payments
■ Undrawn commitments are factored in using statistical probabilities of drawing
ECL EAD
Changes to existing models are necessary to comply with lifetime expected credit loss (LECL) requirements
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Extensive extensions are required to the Basel parameters to extend to a lifetime expected credit loss
Extrapolating parameters and accurately forecasting cash flows are the main challenges of implementation for a financial institution of any size
IFRS 9 Require-ments
■ Use of best available (internal and external) information* for making forward-looking loss estimations that is reasonably available, including information about: past events current conditions reasonable and supportable
forecasts of future events and economic conditions
■ EL is defined as a probability-weighted expected value
■ EL includes losses on both, principal and interest on a discounted basis
■ Validation / backtesting required
Note
■ EL-estimations may consist of a combination of ■ short-term estimations and■ extrapolation of projections from
available, detailed information for periods far in the future
ttt
T
tt DEADLGDPDEL
1
■Marginal PDs over the remaining expected lifetime of the asset
■Consideration of cures/re-aging (after default)
■Point-in-time PD required
General requirements:■Consideration of macroeconomic forecasts
■Point-in-time analysis required (Through-the-cycle averages not adequate)■Consider correlations between the parameters PD, LGD and EAD
■All assumptions must be validated (conservative assumptions are not allowed)
■On b/s portion: Estimation of cash flow structure over the lifetime, based on IFRS Book Value
■Separate EL estimation for off b/s items:Estimation of usage behaviour over the lifetime of the loan commitment or financial guarantee
Discount factor:■On-b/s items: EIR■Off-b/s items: Current market rate
■Marginal LGD over the lifetime of the asset ■Point-in-time view required; no downturn scenario
* Cost-Benefit Consideration:Information (fulfilling the requirements above) should be used if it is available “without undue cost and effort”
41© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
How models should be extended or be built up in the most efficient way
From/To AAA AA A BBB BB B CCC/C DOne-yearAAA 90,23% 8,99% 0,56% 0,05% 0,08% 0,03% 0,05% 0,00%AA 0,56% 89,94% 8,71% 0,59% 0,06% 0,08% 0,02% 0,02%A 0,03% 1,95% 91,58% 5,80% 0,38% 0,16% 0,02% 0,07%BBB 0,01% 0,13% 3,78% 90,90% 4,14% 0,65% 0,15% 0,24%BB 0,02% 0,04% 0,17% 5,74% 84,31% 7,97% 0,80% 0,95%B 0,00% 0,03% 0,12% 0,26% 6,14% 83,61% 4,98% 4,85%CCC/C 0,00% 0,00% 0,19% 0,28% 0,85% 16,00% 51,30% 31,38%D 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 100,00%
Example: S&P Default Study
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Realized CPDs (dashed) vs. CPDs calculated by 1 yr. MMX (solid) per rating class
100 %
0 %
Lifetime parameters or all the other needed preliminaries for this may be already in the bank for several reasons
Lifetime models should maximally make use of existing data, models and parameters
Lifetime models should not have unnecessary ballast and must be robust under the necessary validation to be applied in future (migration matrices e.g. may not fulfill this requirement for definite business models)
It is most likely, that additional models will be needed in the bank for IFRS 9 purposes
Provided simplifications of IFRS 9 Impairment may not be usable for banks (cf. “Guidance on accounting for expected credit losses” by BCBS 2015, Feb.)
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Overview on (lifetime) parameter estimation for IFRS 9 Impairment based on Advanced IRB Basel II parameters
Lt-PD
Lt-LGD
Lt-EAD
Transfer-criterion
Future economic conditions
Basel II/CRR What additionally is needed Where sources for this could be found
only 12 months PDs! Should be more like PIT for usage
without adjustment
only LGDs based on EAD of reporting date! For IFRS purposes need to use EIR,
excl. internal costs & downturn add-on!
marginal PDs for future periods needed (may be derived from forward/conditional PDs) not directly derivable from Basel II PD
re-calculation for future periods: e.g. with a structural model: include
expected change of collateral market value and exposure over time
Pre-calculation/pricing FV calculation (e.g. IFRS13) Migration Risk within CPM/CVaR-
calculation
no equivalent requirementmay be already integrated in models
via macro-eco. input-parameters
no equivalent requirementmust be basically grounded on lifetime-
PDs
only exposure at reporting date available
some adequate add-on (layer) for models to integrate future economic outlook for a couple of next years
historical data of loan origin with Lt-PD for incomplete data approximations
necessary e.g. transformation model Lifetime/12M
Roll-out cash flows, derive run-down EAD for each future period account for embedded options,
prolongation rights etc.
concept to deal with collateral market value fluctuations, econ. depreciations Extension of LGD model Pre-calc./Pricing/FV/CPM
Stress-testing bases cases research of economic department
data history of rating and pricing
Liquidity risk modelling Pre-calc./Pricing/FV/CPM
Lifetime no corresponding requirement (M in A-IRB is different)
lifetime basically implicitly by Lt-EADRevolving loans via behavioural Life
s. above
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KPMG offers an efficient and value-added solution to the challenges posed by IFRS 9
The core functionality of the system includes:
Combine loan data directly from the core banking system and risk data into a central model
Create transition matrices based on rating information or delinquency data or import matrices based on external risk models
Roll out cash flows over the lifetime of individual assets including modeling of prepayments using industry-standard models and calculating effective interest rates
Measure expected credit losses based on predicted cash shortfalls on a one-year or remaining lifetime basis
Manage stage allocation based on user settings and generate journal vouchers to accommodate changes in provisioning levels over time
Generate journal vouchers for stage 3 accounting Extensive reporting and analytics capabilities including
all disclosure requirements
KPMG’s Global Credit Loss Accounting Solution (“gCLAS”) is a full service impairment accounting solution that functions as a modular add-on to existing accounting systems and processes. Our multi-phase delivery process provides for effective integration of the system within the business.
gCLAS provides a solution to the challenges posed by IFRS 9 impairment
44© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
Agenda
IFRS 9 Impairment Details and SolutionsIFRS 9 Impairment Details and Solutions
A Brief Overview & ChallengesA Brief Overview & Challenges
IFRS 9 Impairment IntroductionIFRS 9 Impairment Introduction
WRAP UP WRAP UP
45© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.
WRAP Up
BDDK`nin karari ve aksiyon plani
IAS39 mu? IFRS9 mu?
Sayisal Etki
2 yil uyun bir süre mi?
Ön calisma
© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.