Oct. 03 2017 — The January 2018 deadline for reporting under IFRS 9 is fast approaching, yet many financial institutions across EMEA still have a long implementation journey ahead. With only a short time left in which to comply, S&P Global Market Intelligence analyzes the key challenges banks are facing, drawing on illuminating new research.
IFRS 9 is much more than an upgrade from IAS 39. In fact, the new accounting standard for financial instruments represents a major shift in international accounting practices, adopting a principles-based approach to classification of financial assets and liabilities based on business models and cash flow.
The standard also provides for a single impairment model to facilitate the recognition of expected credit loss (ECL). Under this new model, banks are required to estimate ECLs on financial assets on an ongoing basis and provision for these. This is vastly different from IAS 39, which recognizes loan losses at the point of default.
What’s more, the new standard overhauls hedge accounting policies, aiming to better align accounting treatment with risk management activities.
Given the sweeping nature of these changes, many banks are falling behind with their IFRS 9 implementation projects. A survey of risk and finance professionals across EMEA, conducted by Regulation Asia in partnership with S&P Global Market Intelligence, found that 26% of banks may fail to meet the January 1, 2018 deadline for IFRS 9 compliance (note that the effective date for insurance companies is January 1, 2021).
The reasons for this delay vary from institution to institution, but five key IFRS 9 implementation challenges emerge from the survey results:
1. Capital and income volatility. More than half of respondents expect an increase of at least 15% in total balance sheet allowances because of IFRS 9, and over 80% expect more volatile income. In anticipation of potential capital shocks, some banks are already producing their accounts under IFRS 9 guidelines alongside current IAS 39 rules, with significant implications in terms of the additional resource required.
2. Shifting product lines. According to an IFRS 9 lead at a global bank in the Netherlands, the new accounting standard will cause banks to reconsider their product line-ups. Depending on their duration, rating, and guarantee, some products might become unprofitable. This means that banks are spending a great deal of time looking at the strategic impact of IFRS 9 and communicating it to customers, which is eating into the time spent on tactical solutions to meet the effective date.
3. Data and modeling. Much more data is required under IFRS 9 than IAS 39. Not just historical data, but risk data too. As such, almost a quarter (23%) of respondents are concerned about meeting data requirements to support ECL modelling. More than half have partial to substantial data gaps in ECL estimation. Finding the necessary resources, whether in-house or external, to build the ECL model is also a significant concern for banks urgently working toward the deadline.
4. Systems infrastructure. IFRS 9 will require complicated calculations to be done within short timescales and using a large amount of data. In turn, this requires a robust and flexible systems infrastructure. But a number of banks are finding that preparing the systems infrastructure for IFRS 9 is proving tough - and that even where short-term solutions have been identified, they do not always work with legacy systems. As such, many banks that were planning to adopt a sticking plaster approach are finding that a complete systems infrastructure overhaul is necessary after all.
5. Cost. Despite International Accounting Standards Board’s original intent for IFRS 9 to be performed without additional undue costs, almost half of respondents expect to spend more than USD1 million on IFRS 9 implementation. And the cost goes far beyond transition into ongoing operational processes such as forecasting, validation, and modeling – all of which will require niche and specialized resources which inevitably have a price tag attached.
The road ahead
The impact of IFRS 9 is likely to hit smaller institutions harder than their larger counterparts. Nevertheless, banks across the spectrum are finding IFRS 9 implementation more challenging than they had initially envisaged.
In the months ahead, banks who are behind on their IFRS 9 implementation projects will need to work closely with consultants and vendors in order to find tactical solutions to meet the deadline. Once compliance is achieved, there will still be time to look at IFRS from a strategic perspective, and to use the momentum that the project generates to find internal efficiencies.