2018 is fast approaching which means the inevitable January deadline for reporting under IFRS 9 is upon us. The new standard brings key improvements to accounting by moving towards a principle-based, forward-thinking model. Time is running out and IFRS 9 is a complex application to implement, bringing to light concerns around what challenges an application of this standard may create for financial institutions.
In 2016 nearly half of big banks across the world were identified as being underprepared for the new reporting standard, which leads us to ask – what preparations are happening today?
Respondents to a survey by IACPM/McKinsey, reveal that IFRS 9 adopters have been working on technicalities, with new understanding of what the standard might mean for their business.
“In 2018 we may see a very different set of stresses and results because of the impact IFRS9 will have on how banks forecast, calculate and provision for risks.” Rob Smith, a partner at KPMG. As the deadline moves ever closer, a couple of recent surveys reveal the impact of IFRS 9 implementation and the challenges financial institutions could embark on in the coming months.
In IACPM/McKinsey’s survey, around 65% of IFRS 9 adopters expect the differences between the reporting standards will cause variance in provisions levels and volatility, causing some product lines to become less profitable. Portfolio strategy reviews will need to be carried out in order to determine any changes, although nearly 46% of respondents expect no change in the evolution of their lending mix. This could depend on a number of factors including duration, rating and guarantee.
Any impact on a bank’s product lines caused by IFRS 9 would need to be communicated to customers which can have a knock-on effect on the time dedicated to finding tactical solutions to meet the deadline.
Banks are anticipating a shock to their capital and, thus, have been carrying out parallel runs, producing their accounts under IFRS 9 guidelines alongside current IAS 39 rules. As projected in EBA’s July report, banks failing to do parallel runs could face a 32 basis point extra capital hit. In a recent survey by S&P Global Market Intelligence, an increase of at least 15% in total balance sheet allowances are expected by more than half of survey respondents as a result of IFRS 9. This is accompanied by 80% who expect more volatile income.
Data & modelling
A substantial amount of data is required under IFRS 9, more than the previous IAS 39 standard. Looking at both surveys, almost a quarter of respondents are concerned about meeting data requirements to support ECL modelling. For example, banks may find limitations in their existing models making it difficult to run them on a quarterly basis, as opposed to annual runs. Investments in technology could be necessary to enhance internal data resources or explore using newly sourced external data in order to build the ECL model.
To meet the new accounting standard, banks have looked at their existing infrastructure and processes to determine areas that need refining to develop a robust and flexible systems infrastructure. In fact, more than 60% of the IFRS 9 said they expect implementation will be challenging and this will no doubt continue into 2018. Short-term solutions do not always work with legacy systems and many banks planning this approach have identified that a complete overhaul of their infrastructure is necessary after all.
IFRS 9 outlook
It looks like IFRS 9 is going to affect banks into the New Year and beyond, hitting smaller institutions harder than their larger counterparts. The IASB originally intended the new standard to be implemented without adding undue costs, however, this is not the reality of the situation. It is said that almost half of survey respondents expect to spend more than $1 million on IFRS 9 implementation. Once banks have met the deadline, strategic process improvements will need to be fulfilled in forecasting, validation and modelling.
What should firms be considering now?
The impact of IFRS 9 will become evident on day 1, however, future risks are a bigger threat to capital ratios. In 2018, firms should perform a full forecast impact assessment to analyse capital deployment and optimise allocation as part of their capital planning. Unfinished regulatory reforms and potential high volatility in future provisioning may mean re-balancing capital throughout the business.
Further assessments should be carried out to understand the full implications on a firm’s regulatory reporting and disclosure requirements. Risk and Finance teams should continue to unite in order that new regulatory reporting data requirements are considered as paramount in the overall IFRS 9 implementation strategy.
Phillip Wood, Director, Albany Beck Risk Practice commented:
“IFRS 9 has been an industry-wide concern, and with the requirement for a solution to be in place by January 1st, 2018, it has driven a significant demand for talent within the regulatory risk modelling space. This has resulted in the risk practice being required to invest heavily in the candidate relationships we have to ensure that, among the many voices trying to speak to the best candidates, it is ours that is heard; allowing us to deliver the very best interim and permanent staff to our clients.”
At InterQuest Group we can help organisations overcome the challenges brought upon IFRS 9 implementation. Recognised as market experts, our success is founded on the quality, intelligence and commitment of our consultants who apply their knowledge of niche sectors, such as ensuring our clients operating in regulated risk markets have timely access to the solutions they need.