Banks Urged to Explore IFRS 9 by Wolters Kluwer

The implementation of accounting standard IFRS 9 is revealing itself to be a truly transformational event, according to a new client communication from Wolters Kluwer. While some bank’s existing finance and risk technology systems may be able to meet some of the new requirements, they are unlikely to meet them all, according to the paper just released by the finance, risk and regulatory reporting technology firm. And banks are now being urged to explore the implementation challenges that lie ahead.

IFRS 9 effectively updates International Accounting Standards Board (IASB) guidelines for the treatment of balance-sheet assets, as 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. Implementation is due in 2018. The ultimate aim of IFRS 9 is to encourage banks to assess credit and risk in a more comprehensive, prospective way that takes myriad internal and external factors into account in order to spot trouble before it arrives.

Jeroen Van Doorsselaere, vice president, Risk and Finance, at Wolters Kluwer, and one of the authors of the paper, notes that banks should initially examine existing resources to identify 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,” he notes.

Notably, to succeed in implementation, banks will need to dismantle barriers between departments such as Finance and Risk, as well as spruce up data management capabilities in order to make more accurate and longer-term credit assessments. “These changes will come in handy not just for implementing IFRS 9 but other elements of the new supervisory architecture, too,” Van Doorsselaere says. “With so much at stake, introducing IFRS 9 must be an urgent priority across the industry. And yet although many organizations are engaged in intensive preparations, an unsettlingly high proportion, appear nowhere near ready to put the standard into practice.”

In fact, a recent Wolters Kluwer survey, undertaken in conjunction with Risk.net in May 2016, found that 15% of institutions had not even begun the implementation process, while 34% were at gap analysis phase.

At its best IFRS 9 should, however, act as a bridge between departments, driving them to act as one unified organism, producing and consuming information for the benefit of the entire firm, not just for each isolated silo. Risk teams will be more conscious of the impact of their decisions on P&L and capital requirements; finance staff will pay greater heed to risk when formulating forward looking statements. And, a shared understanding of the potential threats and opportunities faced by the institution will help build a common sense of purpose in safeguarding against the former and capitalizing on the latter, the paper says.

In purely financial terms, after the initial impact of changes to credit risk models (and consequent provisions) have been absorbed, a greater focus on forward-looking assessments should lead to a more accurate pricing of risk and better informed risk taking, the paper continues, noting the opportunities provided by a strategic approach to implementation. “This, in turn, will encourage a more precise segmentation of customers and products brought to market; firms are likely to focus more on their core activities than on trying to be all things to all people,“ Van Doorsselaere  tells FinTech Finance. “The ultimate result will be more efficient banking, better allocation of capital – precisely what was intended by regulators – and more positive contributions to the balance sheet.”