FIS Blog

Preparing for IFRS 9


Andrew Bateman | Wednesday, June 7, 2017

The new accounting standard for financial instruments, IFRS 9, should be at the top of treasurers’ agenda this year as the January 2018 deadline fast approaches. Treasurers who have not already planned their implementation, and discussed the system implications with their supplier – or suppliers, should be doing so as a priority.

IFRS 9 has far-reaching implications for every bank treasury. For example, the new credit loss model is likely to result in an increase in reported credit losses, which impacts risk and profitability. The classification of financial assets involves more judgment and could affect the calculation of capital requirements. Hedge accounting rules have changed and are allowed for a wider range of hedging strategies , and new disclosures are required. As a result, not only does IFRS 9 have policy, process and decision-making implications, but the associated system changes, in terms of functionality, integration and reporting may also be significant. So, what questions should treasurers be asking their vendors to help prepare for these changes?

Credit losses: The new credit loss model relies on historic loss and forecast data, as well as calculations to estimate 12 month and lifetime expected credit losses.

  • Can the system store, report and calculate this information?
  • Does it have the integration capabilities to source data from relevant internal or external systems?

Classification and measurement. The classification of financial assets is based on its cash flow profile, which relies on a degree of judgment, e.g., for instruments with floating rate, periodic interest schedule. Treasurers will, therefore, need to review their portfolio to make sure that their classification and measurement is compliant with the new standard.

  • Does the system support the information required for classification and measurement?
  • Does the system provide auditability of judgments made on classification?
  • Can the system support changes to contractual terms that could impact the future cash flow profile?

Hedge accounting. While the new model is more flexible in allowing hedge accounting treatment on a wider range of strategies, there may be an impact on existing hedging strategies.

  • Does the system support the new IFRS 9 hedging model, including accommodating principles-based effectiveness testing in an efficient way?

Disclosures. IFRS 9 includes a wide range of new disclosure requirements, both qualitative and quantitative, to show how judgment has been exercised and for impairment.

  • What gaps does the system have in supporting the new disclosure requirements?
  • How and when will these be addressed?

This latter question is particularly significant. Not only does the treasury system need to support the new standard, but sufficient time and resources also need to be allocated for implementation, configuration and testing. This becomes more challenging in treasury functions where multiple systems are in use, e.g., across different asset classes or functional areas. In some cases, it may be easier, and potentially more cost-effective, to implement a new, single system to manage the full spectrum of the treasury’s responsibilities, including IFRS 9, to simplify and reduce the implementation and compliance burden as regulatory, market and strategic requirements evolve over time.

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Tagged in: Banking and Wealth, IFRS 9

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