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IFRS 9 provisioning methodology
Banking alert | 28 September 2016 | IFRS 9 provisioning methodology
- Impairment requirements under IFRS 9
- Key impacts of the new requirements
- Deloitte’s IFRS 9 Software Solution: Finevare
- Related topics
Impairment requirements under IFRS 9
The impairment methodology under IFRS 9 follows an expected loss model, in contrast to the incurred loss model under IAS 39, where provisions are recognised only if objective evidence of impairment exists at the reporting date.
The revised standard requires banks to account for expected credit losses (ECLs) from the point exposures are first recognised, and periodically update provisions for significant increases in credit risk according to the three-stage model. The three stages of credit risk are as follows:
- Stage 1 includes financial instruments with no significant increase in credit risk since initial recognition, or financial instruments that have low credit risk at the reporting date. For these assets, 12-month ECLs are recognised.
- Stage 2 includes financial instruments with significant deterioration in credit quality since initial recognition, but with no objective evidence of impairment. For Stage 2 assets lifetime ECLs are recognised.
- Stage 3 comprises financial instruments for which objective evidence indicates impairment at the reporting date. For Stage 3 assets, lifetime ECLs are recognised.
Key impacts of the new requirements
Capital Pillar 1 – IFRS 9 will require earlier and higher provisions, reducing CET1 via decreased retained earnings.
Pillar 2 – Credit risk models will be reviewed under SREP
Pillar 3 – The increased complexity of the ECL
People – Require training
Systems & Data – Require enhancement
Processes – Require updating
Client information – Require collection of more granular information
Pricing – To reflect ECL model
Deloitte’s IFRS 9 Software Solution: Finevare
Finevare is a comprehensive industry-strength software solution developed by Deloitte to support banks in their transition to IFRS 9. As an open solution, Finevare supports an integrated modular approach for data management, provisioning, reporting, accounting and can be further leveraged for business-driven benefits based on statistical analysis and reporting of historical data.
Provisioning functionality includes the following:
- Finevare’s model of expected loss estimation is designed to easily incorporate various methodological assumptions and a range of risk parameters modelling techniques:
- Individual components of expected loss model can be either estimated directly in Finevare (based on historical data) or manually configured/loaded from external sources.
- Available range of different sophistication levels allows to align the methods to the client’s data availability, local regulatory requirements and specific needs.
- Scenario analysis and stress testing of results allows to better capture potential future impact.
- Finevare’s functionalities enable deep insight into the root causes of provision level changes through individual components stressing as well as comprehensive scenario analysis.
- Finevare is a tested solution focusing on small and medium sized banks, making it an ideal cost sensitive solution for the banking sector in Malta.
For more information on Finevare, please do not hesitate to contact us.