The impact of IFRS 9 on capital and regulatory reporting

Background

Regulatory reporting and disclosure requirements will change significantly for firms under IFRS 9 as highlighted by recent European Banking Authority (EBA) and Prudential Regulatory Authority (PRA) publications.

IFRS 9 determines how firms should classify and measure financial assets and liabilities for accounting purposes and includes three main areas: Classification & Measurement, Impairment and Hedge Accounting rules. These accounting changes are reflected in regulatory reporting across FINREP, COREP and Pillar 3 disclosures, where some of the first results will be observed.

Crucially, IFRS 9 marks a fundamental shift in accounting credit impairment rules. The accounting standard, which officially takes effect on 1st January 2018, requires firms to recognise impairment sooner and estimate lifetime expected credit loss (ECL) for a wider spectrum of assets. In its latest blog, the UK's Financial Services team analyses the impact of IFRS 9 on capital requirements, resourcing, disclosure and reporting requirements.

How will IFRS 9 impact capital requirements and resources?

The capital impact of these changes may be significant both on the IFRS 9 effective date (“Day 1 impact”) and on an ongoing basis for capital forecasting (and also stress testing) purposes. As a result, a five year transitional arrangement has been proposed by the European Commission, allowing firms to “phase in” the Day 1 capital impact of IFRS 9.

The transition period aims to mitigate the impact of the introduction of IFRS 9 on capital resources (or more specifically, the level of “own funds”). Regulators and banks anticipate that the application of IFRS 9 will lead to a sudden, significant increase in credit impairment and consequently a decrease in firms’ Common Equity Tier 1 (CET1) capital. During the proposed five year transition period, specified percentages of ‘new’ impairment stock recognised as a result of IFRS 9 adoption will be added back to CET1 capital.

How will disclosure and reporting change under IFRS 9?

The EBA and PRA have published a number of papers covering regulatory reporting and disclosure with respect to IFRS 9. We focus on three papers related to the new regime1 .

The PRA’s CP 46/16 sets out the changes to regulatory reporting requirements for UK Banks and building societies resulting from IFRS 9 implementation. The key changes affect the reporting of credit quality, including arrears and impairments, currently reported in the FSA015 regulatory return. The changes will affect all banks and building societies applying IFRS 9, under both IFRS and UK Generally Accepted Accounting Practice (UK GAAP). Firms will be required to report 12 FINREP templates, which will replace the existing FSA015, on an individual and consolidated basis.

 The template changes required in CP 46/16 are set out in the table below.

Reporting templates required by reporting regime and asset base 

The CP 46/16 proposals have now been implemented in PS 18/17, which will take effect from 1st January 2018. For firms with a December reporting period, the first application date will be 1st January 2018 (IFRS 9), with a first reference date of 31 March 2018 for FINREP.

The EBA’s CP 2017/11 built on the draft transitional arrangement text, requiring institutions that choose to apply the transitional arrangements, to disclose, together with their actual capital and leverage ratios, the value of these parameters on an IFRS 9 “fully loaded basis”. The guidelines include a quantitative template that should be submitted on a quarterly, semi-annual or annual basis (in line with existing guidance EBA/GL/2014/14 and EBA/GL/2016/11). This template contains information on own funds (capital and leverage ratios) and it also requires explanations of the changes to Risk Weighted Assets (RWA) and the leverage exposure measure as a result of the application of IFRS 9.

What should firms be considering now?

The introduction of IFRS 9 will have an immediate, significant day-1 capital impact. The proposed transitional arrangements which are expected to be widely adopted, will introduce some capital relief. However, firms will need to undertake a full forecast impact assessment as part of their capital planning, and to analyse capital deployment on a portfolio level basis to optimise allocation after the 1st January 2018, this may mean rebalancing capital throughout the business.

Firms should also understand and assess the full implications on their regulatory reporting and disclosure requirements, including data sourcing, system, process and control requirements. Regulatory Reporting teams should continue to engage with the IFRS 9 project/accounting and Finance teams to ensure that new regulatory reporting data requirements are considered as a core element of the overall IFRS 9 implementation programme.

Discover more about the impacts of IFRS 9 on banking sector regulatory capital with Deloitte UK 's  full report.

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_{1PRA policy statements (PS) 18/17 and consultation paper (CP) 46/16 sets out key changes related to existing regulatory reporting requirements under IFRS 9.
EBA ITS/2016/07 final draft implementing technical standards (ITS) amends the Commission Implementing Regulation (EU) 680/2014 on supervisory reporting of institutions with regards to financial reporting (FINREP) post changes in IFRS 9. 
EBA CP/2017/11 specifying disclosure requirements of an IFRS 9 transitional arrangements}