The International Financial Reporting Standard (IFRS) 9, the new accounting principle for financial instruments, has several implications on financial institutions. IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. In other words, IFRS 9 is being implemented through three stages; Classification & measurement of financial instruments, impairment of financial assets and hedge accounting. IFRS 9 will cover financial institutions across Europe, the Middle East, Asia, Africa, and Oceania.
Given the IFRS 9 requirements, banks are required to make some changes to the way they do business, allocate capital, and manage the quality of loans and provisions at origination. Here are the findings of the IFRS 9 Survey by Moody’s Analytics, providing a summary of the impacts of IFRS 9.
IFRS 9 will affect the business models, processes, analytics, data, and systems across several dimensions.
Capital, Lending, Underwriting, and Origination
- Provision levels are expected to substantially increase under IFRS 9 versus IAS.
- Further equity issuances may be needed, with the potential for greater pro-cyclicality on lending and provisioning owing to IFRS 9. Capital levels and deal pricing will be affected by the expected provisions, but must be evaluated under different economic cycles and scenarios.
- Banks will have to estimate and book an upfront, forward-looking expected loss over the life of the financial facility and monitor for ongoing credit-quality deterioration.
- Rating and scoring systems may have to be updated, especially for those banks without Internal Ratings-Based (IRB) models
Asset Reclassification, Reconciliation, and Measurement
- Banks will need to reclassify assets and reconcile them with IAS. They will also need to map products that can be categorized before the calculation (contractual cash flow test) or create a workflow to capture the purpose (business model test). An additional effort could be required to identify those products that can be considered out of scope (e.g., short-term cash facilities and/or covenant-like facilities).
- Institutions will have to align, compare, and reconcile metrics consistently (e.g., Basel vs. IFRS 9).
Cross-Coordination Across Risk, Finance, and Business Units
- Financial institutions will have to coordinate finance, credit, and risk resources for which current accounting systems are not equipped.
Credit Impairment Calculation and Valuation
- The IFRS 9 provision model will make banks evaluate, at origination, how economic changes will affect their business models, capital plans, and provisioning levels.
- A methodology to calculate a forward-looking measurement will have to be developed and/or updated (e.g., transformation from TTC to PiT), while the cash flow valuation analysis must be scenario-driven.
- IFRS 9 will affect the existing documentation and hedge accounting frameworks.
Data, Systems, Processes, Reporting, and Automation
- Systems will need to change significantly to calculate and record changes requested by IFRS 9 in a cost-effective, scalable way.
- Data requirements will increase to meet IFRS 9-related calculations and ongoing monitoring.
- Retrieval of old portfolio data will also be needed, especially for the transactions originated before the A-IRB models have been introduced.
- IFRS 9 impairment calculation requires higher volumes of data than IAS, which may substantially increase the performance and computational requirements of a credit-loss impairment calculation engine.
- Financial reporting and reconciliation will be needed to align with other regulatory requirements.
Documentation and Governance
- IFRS 9 makes the provisioning exercise a cross-functional activity, with coordination needed across the risk, finance, accounting, and business functions.
Useful Links for Reference
- IFRS 9 Financial Instruments
For the full article, please read here:
- IFRS 9 Will Significantly Impact Banks’ Provisions and Financial Statements
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Interested to read more IFRS 9 articles? Check out Implications of IFRS 9 on Banks
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