Wednesday 6 July 2016

IFRS 9: The road to intelligent implementation

As the 2018 deadline approaches, the implementation of accounting standard IFRS 9 is revealing itself to be a transformational event instead of just one more item on a crowded to-do list. 

Banks are, accordingly, starting to understand that they will require system architectures and solutions that embody the models they are striving for internally – ones that seamlessly integrate multiple functions, create areas of common ground and feature the efficiency and flexibility to embrace the many changes yet to come. Here Jeroen Van Doorsselaere, vice president, Risk and Finance, at Wolters Kluwer, provides IBS with his thoughts on how to intelligently approach implementation.

"IFRS 9 updates International Accounting Standards Board (IASB) guidelines for the treatment of balance-sheet assets and is substantially a replacement for its IAS 39 rubric. The board intends IFRS 9 to be compatible with broader Basel III risk management practices, particularly with its emphasis on a principles-based approach, rather than one that compels institutions to follow a set of hard and fast rules.

Whether it is viewed as a benefit or a curse, the principles-based nature of IFRS 9 and its inherent flexibility permit firms to travel many different paths to compliance. The shortest, most comfortable route between here and there will depend on a range of factors, including size and business mix.

The first steps along the journey for any firm should, however, always include an assessment of its existing resources that identifies any gaps in historical data, as well as deficiencies in systems that would hinder development of the credit risk models that the standard calls for. Banks may not have to start over, even if they find that their systems are not up to scratch; they may be able to reconfigure, add to or link among them to support IFRS 9 requirements.

Given the constraints of time – 2018 will arrive sooner than you think – and resources, many banks will be compelled to perform triage, focusing on the most urgent matters. Before a more comprehensive overhaul, for instance, they may emphasise bridging the gaps between certain key applications, especially those that relate to their main impairment risks, as these are most likely to have a near-term impact on the bottom line.

When it comes to implementing technology solutions, firms should seek a partner with the well-established methodology necessary to provide support throughout the process. The right approach is vital especially during the assessment stage for auditing existing resources and mapping out key functional and technical requirements to identify where new IFRS 9 software should be integrated with existing banking systems.

These assessments must be based on an understanding of an institution’s commercial and regulatory environment in order to find a solution that dovetails with it. IFRS 9 is likely to highlight the need for organizational and technical reforms alike. The vendor should be able, therefore, to help drive conversations with stakeholders to foster support for the project and to develop shared expectations regarding its various stages and outcomes. All of this requires a deep pool of regulatory, risk management and finance expertise, as well as industry and technical acumen.

There’s more to IFRS 9 than crunching numbers in new and interesting ways. The numbers and the conclusions drawn from them must be reported to supervisors, also in new and interesting ways. Among other elements, firms will have to disclose and explain the formulas underlying internal risk rating grades and any developments that may affect the P&L statement. A data engine that captures information both from Finance and Risk is essential in meeting those obligations.

While existing finance and risk systems may be able to meet some of the new requirements, they are unlikely to meet them all. Some finance systems, on one hand, are based on set periods and mainly report past events, leaving them hard pressed to generate forward-looking information or absorb new financial models. Pure risk solutions, on the other, can generate snapshots and run through ad-hoc simulations, but they lack the ability to track changes over multiple accounting years or to dive into the data and decisions that underlie the modeling and the simulations they perform.

As the limitations of a piecemeal approach become more evident in IFRS 9 compliance, so does the need to develop a centralized data engine. But there is nothing centralised about financial supervision. The right system also will be capable of automatically generating and filing required reports, again according to pre-established rules, to regulators at national, regional and global levels, in multiple formats.

The deadline to put IFRS 9 into practice is well over a year away, yet agencies around the world are setting different requirements for firms in their jurisdictions. Europe, Canada, Australia, Singapore and Hong Kong, for instance, seem determined to honour the 2018 deadline for full implementation, whereas others, notably, India, Thailand and the Philippines, are allowing institutions to adopt a more staged or partial approach.

None of the many and varied supervisory authorities are going away any time soon after 2018, either, so systems need an added dimension of flexibility to protect firms, their data and their models against the caprices of tomorrow. IFRS 9 and the other rules and standards to which firms must adapt are bound to continue to change as the implementation deadline passes and regulators are able to judge performance in real life.

Faced with such a slippery target, compliance officers can expect that tracking regulatory developments – and ensuring that they are reflected in data systems – will be a major burden in the run up to 2018 and beyond. An IFRS 9 solution should support compliance in this effort by making it relatively painless to institute changes, for example, by automating the process as much as possible.

A service provider with the requisite expertise in reporting issues should be in a position to provide an ongoing regulatory update service, where the solution is linked to a database maintained by the provider that logs and interprets changes in key requirements. These changes can then be incorporated automatically into a client’s system and reports. While oversight of regulatory developments can never be outsourced completely, a solution with this level of functionality at least can remove some of the pressures associated with day-to-day monitoring."

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