Point de vue

Rapid, tactical IFRS 9 implementation

A need and the solution

Year 2018 will be remarkable for European financial sector industry as a first reporting date to present financial statement according to International Financial Reporting Standard 9 “Financial instruments” (Replacement of IAS 39). This change brings many challenges to all members of financial market.

There are two major areas of impairment related changes coming with new regulation from International Accounting standard Board: (1) classification and measurement of financial assets based on the entity’s business model and the contractual cash flow characteristics (C&M), and (2) modified expected loss calculation model (ECL).

What does it actually mean for financial institutions with loan portfolio?

In order to be compliant with IFRS 9, banks have to develop comprehensive frameworks answering complex an extensive data requirements, model adjustments required to calculate lifetime expected credit loss and forward looking behaviour. Changes in the processes in infrastructure are required as well to address ad-hoc and batch classification of the financial instruments to AC/FVPL/FVOCI methods, and implement measurement accordingly. New governance may be needed, as the future provisioning will heavily rely upon risk estimators not all easily understandable by Finance or Business representatives.

Time constrains created need for a tactical IFRS 9 solution...

...rapid to implement, agile for modifications and ongoing adjustments, and supporting controlled calculation process. It may be the answer to current struggle of multiple banks (as well as their advisors and solution providers) with delayed IFRS9 projects (due to late start, issues with IT integration of heavy solutions, or tools not agile enough to follow IFRS9 models and methodology changes).

• Data history requirements range from 1 to 7 years depending on the modelling solution. Availability and quality of data also ranges and potentially considered as part of modelling choices.

• Banks struggle with quality and availability of detailed data characterizing individual loans, to support appropriate staging and ECL calculations. Data availability is often an issue also in the area in business classification of financial instruments and consequent measurement. A solution proof to standard data errors and with minimum data requirement would be desired.

• The relations between “usual” credit risk indicators, ALM models for behavioural components and finally forward looking, and relative models, lead to a complex methodological framework. Such framework introduces a higher volatility in provisioning, and thus, needs to be detailed and explained to internal decision takers and investors with well-designed reporting.

• Finally, between regulatory reporting and current “fast close” accounting procedures, time will be short to comply with all reporting constraints, ensuring a proper consistency and reliance. A repeatable, auditable process needs to be established even considering a tactical solution, calculating not only final ECL and measurement numbers, but also appropriate disclosures data.

Different strategies have been set-up by banks to answer these challenges and implement their frameworks, based on both internal development and external providers. In all cases however, the reported progress appear to be limited considered the very short deadline.

Indeed, it seems that for many financial institutions, work is still on progress on all dimensions – methodology, data input, impairment calculation, governance and control – without yet considering the practical application and calibration of all components in the different business and entities of banking groups.

IFRS 9 projects: the need for security

The situation progressively raises need to secure IFRS 9 projects considering their unmovable deadlines, with the objective first to ensure that all exposures will be properly considered in the first application in January 2018. Equally important is to enable additional control steps that would improve the efficiency of the resulting short parallel run and test period, and finally to enable banks to concentrate their efforts on the most material and sensitive areas.

As a result, and potentially simultaneously with on-going long term projects, banks are looking for IFRS 9 tactical solutions. Expectations to a tactical solution include: (1) flexibility of the calculation engine adjustable to banks specificities; (2) easiness of implementation and short implementation timeline of 1 to 2 months until the moment of first calculation; (3) auditability of calculations. Such implementation might also bring the solution to deal with recently acquired activities, or in the opposite, portfolios for which no further IT investments would be expected, or even answer the need for progressive replacement while refining methodologies after the FTA.

The residual question being then to consider solutions that could in addition guarantee a satisfying level of control and thus avoid multiplying the project risks…