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IFRS 9 Ready Or Not

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Credit Analysis
IFRS 9 Ready Or Not

Oct. 06 2017 — With the effective date just around the corner, new research conducted by Regulation Asia, in partnership with S&P Global Market Intelligence, provides a unique insight into the preparedness of firms. The research also highlights where firms are currently falling short in their implementation efforts.

In July 2017, the European Banking Authority released its second impact assessment of IFRS 9 on banks. While the report highlights that banks have made further progress on the implementation of IFRS 9 in recent months, it also notes that there is significant work still to be done, especially around some of the more complex aspects of the standard .

Furthermore, the EBA’s report states that smaller banks are falling behind on IFRS 9 implementation, a finding which is echoed in the recent survey that Regulation Asia conducted for risk and finance professionals across EMEA.

While almost 40% of respondents are nearly fully prepared for the new accounting standard (as of the beginning of July 2017), 49% have not yet selected which model they intend to use, and in general, the smaller institutions have much more groundwork to put in. This disparity, according to a survey respondent from a Kenyan bank, is in large part because smaller institutions are having to custom-build IFRS 9 models from scratch, whereas organizations which have previously implemented Basel II, Basel III, or stress-testing programmes are able to leverage extant models and data systems for IFRS 9 implementation.

ECL headaches

One of the most challenging models to get right for IFRS 9 compliance appears to be the ECL calculation. In fact, 75% of non-bank finance companies and 39% of retail and commercial banks expect to need an extension to the January 2018 deadline for this particular aspect of the new standard[1].

Here, it is interesting to note that only 31% of all banks surveyed do not expect to use the practical expedients included in IFRS 9. More than one third (36%) intend to use the exemptions from lifetime ECL for instruments regarded as ‘low’ credit risk, and 19% expect to use the provision matrix to estimate ECL for trade and lease receivables. Of course, it is likely that those using these practical expedients will be the smaller banks.

No big bang

While the larger banks have reduced recourse to such options, they have the benefit of scale, experience, and significant resources. In fact, some of the largest institutions surveyed are now conducting parallel runs between IFRS 9 and the old standard, IAS 39, to improve their new operating model.

One area where size does not seem to discriminate, however, is in banks choosing to introduce the new operating model in phases, according to a UK-based risk consultant who was surveyed as part of the research. A phased approach, he says, is important to get risk and finance working smoothly together on solutions and understanding each other.

Be prepared to compromise

Banks’ internal teams will also have to become increasingly accustomed to working with external parties, given that 76% of European respondents will be turning to consultants to help them make the IFRS 9 grade.

For these banks, compromise will be an essential part of IFRS 9 compliance. It is likely that quick-fix solutions may need to be implemented in order to avoid running past the implementation date, with longer-term, strategic solutions being built or bought in post-January 2018.

Find out how we can help you get the resources you need to meet the January 1, 2018 deadline.

[1] EBA updates on the impact of IFRS 9 on banks across the EU and highlights current implementation issues