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Thursday, October 29, 2015 - 02:16
Technical challenge

As financial institutions ready themselves for the implementation of IFRS 9 Financial Instruments (IFRS 9) in 2018, many expect the new standard to have a substantial impact on their balance sheets. This is according to the 2015 Deloitte Global IFRS Banking Survey, the fifth one conducted by Deloitte to establish how banks are responding to the accounting changes required by IFRS 9.
IFRS stands for ‘International Financial Reporting Standards’.
Deloitte says it collated the views of 59 banks from Europe, the Middle East & Africa, Asia Pacific and the Americas, 42 of which are IFRS reporters. Responses were received from 17 of the 30 global systemically important financial institutions (G-SIFIs), as determined by the Financial Stability Board. This included 12 of the 18 G-SIFIs that are IFRS reporters.
Jonathan Sykes, Capital Markets Partner at Deloitte, says that the market was initially hopeful that IFRS 9 would remedy inconsistency between practices in the market. “Based on our survey, however, the new accounting standard is going to result in less comparability. This is because additional interpretation will be required as well as forward looking expectations being taken into account.
“The standard does not stipulate what type of forward looking information needs to be considered and lenders are going to have different views. Combined with a lack of clarity on certain definitions within the standard, this is likely to result in inconsistencies within practices across organisations.”
Sykes says this need not be viewed as a negative. “IFRS 9 is addressing much of what has gone wrong in the past. Previous accounting standards were characterised by an incurred loss type of model. IFRS 9 stipulates a forward-looking approach, which is aimed at recognising losses earlier, something the industry and shareholders have been requesting for a long time.”
Notably, survey participants indicated that budgets for the implementation of IFRS 9 had doubled since last year. “As lenders have started to unpack the implications of IFRS 9, they are realising that not only are new models needed, but new data and system changes are required. With the new standard, some lenders will now be extracting data from risk and finance systems, which don’t always talk to each other,” says Sykes.
Three fifths of the banks surveyed think they do not have adequate technical resources to deliver their IFRS 9 projects and a quarter of these further doubts there will be sufficient skills available in the market to cover any shortfall. “This is particularly a problem in South Africa, which is suffering a skills shortage in general, especially in respect of credit modellers.”
Most respondents estimate that the new IFRS 9 rules on credit exposures will result in loan loss provisions increasing by up to 50% across asset classes, which will affect the amount of capital that banks need to hold. “If you increase your provision, the result is less equity, which has a knock-on effect in terms of capital holdings as well as on certain other regulatory capital ratios such as the leverage ratio.
“Lenders are asking themselves whether they are going to be adequately capitalised in three years’ time and whether they are going to be in breach of any regulatory capital requirements on the back of IFRS 9.”
One third of participants do not know what the effect of IFRS 9 will be on their balance sheet on transition. “Whilst it remains an unknown, there is no doubt it will have a material knock-on,” says Sykes.
Deloitte has noted a trend in the market to view IFRS 9 as a mechanism to improve the quality of data as well as enhance modelling and credit risk management. “There is definitely a move by participants to adopt a sophisticated approach and ensure a higher quality implementation.”
On the question of how banks are going to forecast, Sykes says the majority of banks are opting for alignment with existing stress-testing models and forecast methodologies. “Banks are trying to align how forecasting exists at the moment within institutions from a budgeting and stress testing point of view and leveraging off these mechanisms to bring future expectations into their impairment models.”
From a local point of view, we are well positioned to commence the IFRS 9 journey as the majority of banks can leverage off synergies achieved as a result of Basel III compliance.”
Ultimately, says Sykes, businesses will need to achieve the right balance between cost and benefits. “The standard will not only have an impact on financial results, but also a business-wide impact on areas such as strategy, data management, technology and people. Costs can be reduced by identifying synergies with existing initiatives, processes and models. Ultimately, proper and timely planning will allow banks to apply the accounting and business changes effectively, achieve compliance and garner tangible business benefits.”
 

Copyright © Insurance Times and Investments® Vol:28.10 1st October, 2015
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