Article: Banks take on IFRS 9 Regulation

Author: Sarah Werner

Publication Date: June 10, 2015

Banks take on IFRS 9 Regulation The new IFRS 9 standard is expected to significantly increase the workload across diverse functional groups such as risk and finance. In this article, we take a look at how IFRS 9 will affect finance and where they will encounter challenges.

In July 2014, the International Accounting Standards Board IASB) published the final version of the IFRS 9 Financial Instruments standard. Designed to replace IAS39, it introduces a new model for the classification and measurement of financial assets, a single expected loss impairment model that will require recognition of current expected credit losses (CECL), stretching to asset lifetime, and a reformed (as yet in progress) approach to hedge accounting. (source)

The introduction of this standard is expected to significantly increase the workload across diverse functional groups such as risk and finance. As a direct consequence, industry advisors report that most banks have started projects and are actively analyzing solution approaches.

Understandably, risk departments are driving IFRS 9 projects as they work to revise their classification and impairment models thereby ensuring that data and processes are aligned to support the new standard.

However, analysts have advised that IFRS 9 compliance will also require the significant involvement of finance leaders and their teams.

The impact of IFRS 9 on Finance Departments

To date, the impact of the change on finance departments has not been fully assessed. The new stresses on finance operations will not just be restricted to the higher accounting churn and data transaction volumes stemming from increased volatility in reported numbers. Challenges will also come from:

IFRS 9 will challenge finance departments in these areas: • Depth of disclosure and reporting

requirements

• Need to get closer to and understandrisk models

• Requirement to support the detailbehind the valuation and provisionadjustments by way of drilldown

• The need to annotate and justify thenew balance sheet and incomestatement figures.

Article: Banks take on IFRS 9 Regulation

Author: Sarah Werner

Publication Date: June 10, 2015

• Depth of disclosure and reporting requirements • The need to get closer to and understand the

risk models • The requirement to support the detail behind

the valuation and provision adjustments by way of drilldown

• The need to annotate and justify the new balance sheet and income statement figures

All of this requires a greater emphasis on the wider control environment, workflow and the ability to interrogate, adjust and provide commentary on state changes at a granular level.

Additionally, it may mean running two or more GAAPs during the 2017 transition year, with clear understanding of the differences to ensure stakeholder confidence is maintained. Adding to complexity, individual jurisdictions will have their own interpretations which will require global organizations to account for varying accounting treatments and potential consolidation issues. This

will be exacerbated by the divergences between the IFRS and FASB stipulations, timelines and interpretations.

Since much of this will fall to already beleaguered finance departments to manage, what are the key areas where finance should be involved and where does the industry expect to identify potential challenges? Finance teams will need to be involved in the areas of:

• Provision of timely finance data into the risk engine • Understanding the risk models to provide

commentaries on the changes to Balance Sheet and Income Statements

• Managing the accounting impact of the stage shift in impairment categories

• Relevant adjustments and comparative analysis stemming from Asset Reclassification

• Sign-off of management overlays to risk based movements

• Owning the hedge accounting changes

Article: Banks take on IFRS 9 Regulation

Author: Sarah Werner

Publication Date: June 10, 2015

Data and process changes affecting finance

The IFRS 9-based expected loss models will require data at a more granular level than has previously been required. It suggests a ‘coming together’ of risk and finance data that typically has not been fully realized in supporting Basel II & IAS39. This may represent a golden opportunity to improve the risk and finance information architecture, if intelligently aligned to other on-going initiatives (such as supporting intraday liquidity). What organizations must avoid at all costs, is disparate change occurring at multiple points in their data architectures, which would be complex and costly and may not realize the full benefits obtainable by closer alignment of finance and risk.

In particular, the interface between the enhanced risk model outputs and the accounting stream is going to be increasingly important and companies will need to apply appropriate automation and control, with clear data lineage and management oversight. Finance teams may also want the ability to apply results from scenario modelling to the accounts (financial results) prior to hardening into posted state.

All of this will need to be executed without disrupting business-as-usual. One option many are considering is to apply IFRS 9 accounting as an adjusted posting to existing detailed books and records entries. This approach has the advantage of providing a clear view of the financial impact on reported financials, including management visibility into the incurred and expected loss basis, as well as delivering a compliant solution without engaging in major finance architecture

transformation. Flexibility and agility without volatility are watchwords.

Other key considerations and challenges Understand project overlap

Many organizations will see this project overlap with on-going finance projects as well as general accounting and finance transformation work and will have included IFRS 9 implementation as a work stream within a large-scale accounting and regulatory change projects. Finance leaders should make sure they understand how they can maximize their use of precious resources and budget by looking at flexible solutions that can help meet multiple regulatory initiatives at the same time. Ideally, these solutions will also enable the business to streamline processes and access a deeper level of analytics to drive growth.

Regulators will require more than Excel

While the risk models will typically operate at the portfolio level based along risk lines, the accounting will need to be applied at the individual loan level. As loans move back and forth between impairment stages, significant movement (churn) in reported financial amounts are to be expected. It will be critical for finance teams to have a solution that provides a high degree of transparency, with the ability to explain and justify any movements at the lowest level of granularity. Spreadsheets are not able to provide the workflow controls coupled with data lineage and visibility required to support the regulation.

Article: Banks take on IFRS 9 Regulation

Author: Sarah Werner

Publication Date: June 10, 2015

 

 Subject Matter Expert shortages

A key stress point for banks will be resourcing. Their own subject matter experts are likely to have limited bandwidth for an IFRS 9 project. This is the case due to project complexity and the already established regulatory and finance transformation projects discussed above. Engagement with a knowledgeable external advisory and consultancy will reduce implementation risk.

About Aptitude Software

Aptitude Software brings years of finance, accounting and software domain expertise and has helped clients with countless finance challenges, including those posed by IFRS regulation. Our specialist finance solutions serve smart CFOs, empowering them to streamline processes, supercharge reporting and drive

data-led decision-making. Email us at info@aptitudesoftware.com for more information.

   

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This article was written by Sarah Werner, Marketing Manager for Aptitude Software. Sarah specializes in understanding CFO challenges and how the right finance IT architecture can add business value.

Sarah welcomes comments and discussion on this topic and can be reached at sarah.werner@aptitudesoftware.com