IFRS 9, 15 and 16 have been implemented by firms, although these new standards continue to be embedded, and regulators continue to seeking greater harmony in firms’ IFRS 9 approaches.
The focus of regulators and firms has now expanded to IFRS 17, which represents a fundamental change to the way insurers report to the market. Additionally, the financial sector has a key role to play in the transition to a lower-carbon economy. A new type of risk will affect firms and their Internal Audit plans going forward.

Our view of the change in IA focus from prior year to now:

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Banking and Capital Markets


Investment and Private Equity

3.1 IFRS 17 and 9

Overview IFRS 17 (Insurance Contracts) has been described as the most significant change to insurance accounting for a generation, similar in scale and complexity to the implementation of Solvency II in 2016. The Standard will bring the industry closer to a ‘margin’ model of accounting, showing insurance revenues and insurance service expenses separately. This will enable the market to better compare insurers across industries. This reporting change will have a knock-on effect on all parts of a business and introduce a need for new data, systems and ways of working.

The UK banking industry, in particular the large UK retail banks, has invested significant resources to update financial and regulatory reporting for IFRS 9 (Financial Instruments). The shift now moves to embedding the new Standard, and implementing strategic solutions within IFRS 9 modelling to replace tactical ones. Firms are also reflecting on regulatory feedback on their approaches in particular in response to the PRA’s Dear CFO letter issued in April 2019, and in some cases considering changes to their IFRS 9 methodologies.
IA's role On IFRS 17, IA should consider performing reviews over business readiness for new standards from a project governance, technology and resourcing perspective, including second-order impacts such as investor relations and reward. IA should also consider providing early assurance over technology solutions implemented to improve firms’ reporting capabilities.

On IFRS 9, IA should focus on governance over model and methodology refinements and ongoing operational effectiveness of controls. IA should also consider the following areas in scope, which reflect areas of complexity and/or regulatory focus:

  • Sensitivity disclosures.
  • Assumptions about customer behaviour (‘behavioural lives’).
  • Significant increases in credit risk.
  • Post-model adjustments.
  • Multiple economic scenarios.

3.2 Climate Change

Overview Climate change and the resulting catastrophic effects on the environment have never been more apparent. Government bodies have begun to take action through legal frameworks and global initiatives such as The Paris Agreement. There is now increased pressure on the financial sector to recognise its critical role in transitioning to a lower-carbon economy and the recent UK net zero legislation are just some of the major adaptations to legal frameworks, which highlight the need to take action. The FCA and PRA recognise that the risks arising from climate change, be they transitional or physical, will have an impact on firm’s strategic objectives.

Additionally, firms need to disclose in the financial statements the financial impact of climate change recognising that failure to do so may impact investor decisions.

It is essential that firms recognise the need to engage with regulatory bodies to advance the development of their approach to managing climate change-related risks.
IA's role IA focus areas should include:

  • Review of risk management and governance frameworks to determine if the design facilitates effective discussion and management of climate change related risks.
  • Assess the level of collaboration within firms, ensuring firm-wide understanding of the potential impact that climate change poses.
  • Assess the understanding of the varying levels of climate related physical and transition risks to which the firm is exposed and how these manifest within each business line.
  • Review of progress relative to regulatory statements and guidance (e.g. the PRA’s supervisory statement 3/19).
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