RiskTech Forum

Wolters Kluwer: IFRS 9: The road to 2018 compliance

Posted: 1 September 2015  |  Author: Jeroen Van Doorsselaere  |  Source: Wolters Kluwer

That IFRS9 will have a multi department impact is, of course, a given. And regulators seems to be pushing for a “one model fits all” for both Basel as well as IFRS despite their differences. The base model should, however, at least be the same, it can be argued.

Financial institutions are, as a result, faced with an internal model requirement, expected lifetime analysis, stage assessments and practical expedients – all in accordance with IFRS9 and in line with what the BCBS noted within their expected loss guidance earlier this year. The impact for the departments will be different but what is important is that all will seek to work together.

Some of the departmental challenges include the below:

This is only a snapshot of what needs to be faced by 2018. And given the fact that this impacts the whole organization, a parallel run will be required to inform all stakeholders regarding a once off P&L effect and the continuing impact IFRS9 will have on the numbers.

So including a parallel run and thinking back from 2018, how will firms best plan the IFRS9 implementation?

After studying the progress at different banks it is evident that to tackle all these challenges is a challenge in itself. Since this is impacting so many stakeholders financial institutions generally have indicated they want to use a year for a parallel run. Many financial institutions see this parallel run as a buffer to absorb any overruns within previous planning.

This leaves no more than two years for financial institutions to do the actual implementation after a gap analysis. Within this two year period financial institutions from a risk perspective will need to align on the different models chosen to accommodate the IFRS9 requirements.

Financial institutions using the standardized approach under Basel will have to build internal models and calibrate them. In addition to that these banks will, of course, face difficulties around the validation of the model by the regulator. For IRB banks the discussion is different. There are plenty of financial institutions that have invested in building a validated internal model and found now that that model has some shortcomings to be compliant with IFRS9. Building adjustments, new models or an additional layer on top of these models will be the main question for these financial institutions as well as trying to implement the different principles of the BCBS within an IFRS9 context.

For Finance departments (who will be adjusting the internal policy, setting up compliant business models and benchmark testing), the challenge starts with leveraging on IAS 39 EIR implementations and assumptions or tackling all the current IAS39 challenges with the future IFRS9 challenges in one go. In the end, of course, the whole IFRS9 implementation should be integrated. This is clearly supported by the fact that regulators seems to more and more aligned with different Finance and Risk reporting.

Finally, it’s worth considering to a recent study by Wolters Kluwer Financial Services of more than 530 participants worldwide. It shows that a staggering 66% have not started implementation of the IFRS9 standard or are only conducting a gap analysis. This is a sign that financial institutions will have to develop intermediate solutions before being completely ready.

Although the road is still long it seems it financial institutions are facing considerable challenges when it comes to adopting a Risk Finance compliant infrastructure to meet the deadline of 2018. Having an end to end modular solution will certainly give firms the guarantee that they can fulfill the complete IFRS9 requirements.