For banks across Asia and Europe, a new accounting standard is of increasing importance – IFRS 9. With the first IFRS 9 reporting deadline looming January 1, 2018, banks are trying to understand what they need to do to be ready.
At its core, the IFRS 9 accounting standard introduces a new approach to calculating impairment allowance of financial instruments, now based on expected credit loss (ECL) modeling. This will have a significant impact on the way banks account for credit losses on their loan portfolios.
Recently, I participated on a panel via webcast with other IFRS 9 experts to discuss what banks need to focus on to meet the 2018 deadline. The good news is that all of us on the panel felt IFRS 9 challenges are being taken seriously. The banking community is also starting to realize IFRS 9 implementation is more complex than originally thought, especially when connecting risk and finance.
It is a core objective from the regulators that existing finance and risk silos should be eliminated and the two groups should simply talk more.
One barrier to realizing this desired cooperation is in the differing languages of business used by the two groups. Finance has focused on accounting. Risk has focused on meeting regulatory requirements. So there are a lot of communication barriers in conversations involving needs and solutions.
During the webcast, a polling question asked, “How far ahead are you in your IFRS 9 implementation?” Nearly 67 percent replied they have a lot left to do, while amazingly, close to 23 percent flagged they had not even started.
These percentages echo my experience regarding the current state of affairs with IFRS 9. There is a crescendo of awareness – finance looked at it with their business as usual perspective, then risk determined their approach, and now the issue is to reconcile the two.
Meanwhile there is not much guidance in terms of methodology. While banks clearly understand this is a principles-based set of requirements, they also want to know what others are doing. Banks want to understand how they should approach the guidelines. Understanding how to interpret the rules and the potential impact is something banks are testing.
Despite the many and varied IFRS 9 challenges banks will face, there are long-term benefits. The exercise leads to modernization – contributing to bringing data, risk and finance together – enabling new business models to be evaluated using risk analytics.
The immediate steps are hard, but banks recognize there are real benefits in the long run. They just need to learn to speak a language everyone can understand.
To learn more, review the white paper Navigating the route to IFRS 9 compliance and view the full webcast of the Risk.net IFRS 9 panel below.
