IFRS 9 – Closing the Gap: a look into the Governance process


IFRS 9After the financial crisis of 2008, concerns have been raised about “too little, too late” provisioning for loan losses and IFRS 9 is coming to enforce the adoption of a new expected credit loss (‘ECL’) model for the measurement and recognition of impairment. This aims to address concerns and accelerates the recognition of losses by requiring provisions to cover both already-incurred losses and losses expected in the future.

As we all very well know by now, IFRS 9 will have a significant impact on existing business processes, technology systems and infrastructure of Banks, due to the fact that IFRS 9 redefines how banks account for credit losses in their loan portfolios.

The timelines for IFRS 9

The IFRS 9 mandatory adoption date is January 1, 2018, which is very fast approaching. According to international accounting and consulting firms, it will take most banks at least three years to successfully and completely implement the standard. Even for Banks that have already started early on its adoption process, it will still be a significant challenge for implementation teams to meet the 2018 deadline given the large scale and scope of the multi-disciplinary project that will be required in many cases.

But still, besides understanding the long way that banks need to travel to reach full compliance with the new standard, a large number of banks around the world have not yet started its implementation for several reasons. The main reason for that is the “push” from local regulators. For example in the EU, banks were awaiting the EU endorsement of the Standard, which finally came on June 27th, when the Accounting Regulatory Committee (ARC) voted in favor of endorsing the IFRS 9 for use in the European Union. The final endorsement is currently expected within this final quarter of 2016.

Integration of Risk & Finance

One aspect that I consider very important for a successful implementation, is to achieve, early on, the significant involvement and close cooperation of the Risk and Finance functions to the project. This is a significant challenge as historically, banks have seen limited interaction between the two functions. This governance arrangement will bring complexities to the process, if not managed effectively right from the start. For example, this can introduce complexities as to who owns and has overall responsibility of the implementation project.

From my perspective, I expect that there should be an IFRS 9 Steering Committee established with the responsibility to monitor and take significant decisions in relation to the adoption of the new standard, so that the process can be more efficiently progressed. The said Committee will be established at a management level with members being the CRO, the CFO, the Compliance Officer and the CIO. Furthermore, I see the establishment of a number of multi-disciplinary working groups to support the Steering Committee’s operation and manage, on a day-to-day basis, the progress of the project implementation.

Definitely, of significant value would be the contribution of the Regulatory Reporting unit and the PMO which will be handling project management issues. Here it would be important to note that input from the business functions would be of essence as to handle operational and business aspects that are impacted by the changes that the standard will bring to products, processes and definitions. The CEO and the Board of Directors should be the recipients of regular updates as to the progress of the project and the evolution of the practical aspects that it entails. Of course the third line of defense, i.e. the Audit Function should be there to overview and scrutinize the efficacy and correctness of the process.

“There is no one size fits all approach that can be adopted for a successful implementation of the IFRS 9…”

Risk Management quote

It is clear that there is a need and I would say requirement for integration and collaboration as well as transparency across functions and throughout the organization to have a successful result. Banks need to consider how these will in practice be achieved through this implementation project since this touches so many other practical and technical aspects, aside from these governance considerations. This is where Banks need to focus on the implementation of a robust and integrated infrastructure that will in turn bring everything together and integrate to the largest possible degree the worlds of finance and risk. A common technological platform that will have the capability to support the automation of the complex, I would call it, governance structure of this initiative for the years to come, being flexible enough to adjust to the amendments that the future may bring to the requirements posed.

Data integration is key

The first and foremost point of integration is data. This integration is only achievable if banks set up the right IT architecture to support the integration between the risk model outputs with the accounting stream. Banks need to apply appropriate automation and controls, with clear data lineage and management oversight. A data reconciliation process should run between finance and risk systems at every step of the ECL measurement process. This reconciliation will provide confidence as to the consistency and accuracy of the information flowing between the two functions. Talking and discussing the subject with many Banks, it is evident that this is one of the most prevalent concerns for achieving consistent financial reporting.

Furthermore, to satisfy the audit requirements of both internal and external parties, e.g. the Audit Function and the Regulatory Authorities, the technological infrastructure required to support IFRS 9 compliance needs to be fully auditable and traceability should be enforced at all levels. The internal processes designed and implemented for compliance with the new standard will be under severe scrutiny by the regulatory authorities and the auditors. Manual-based calculations and processes will no longer be acceptable without following a controlled process with a proper, documented justification. This will push for an infrastructure that can provide efficient documentation, change controls, model management, traceability, workflow and audit trails to avoid manual processes.

To conclude

Taking all the above into consideration, I need to say that each Bank will have to undertake a deep and comprehensive analysis of its environment (technological and business) and based on their level of maturity and complexity to apply the standard to their own circumstances, in the most appropriate way. There is no one size fits all approach that can be adopted for the implementation of the standard and a solid and robust governance framework around the project is what will secure successful compliance with the requirements.

If you want to learn more about how SAS approaches a successful implementation of the requirements of the new standard, take a look at our IFRS 9 overview.


About Author

Chrysostomos Kridiotis

Chrysostomos is a SAS Sales Manager, managing the office of SAS in Cyprus and the Banking Industry clients of SAS in Bulgaria. He is working closely with organizations, mostly in the financial sector, to identify business problems and needs and propose solutions that have to do with data management, analytics and business intelligence. He has a strong background on Financial Risk Management, and his previous experience includes working as a business consultant for financial institutions in the area of Risk Management, Governance, Compliance and Strategy.  In the past he has been teaching professionals a course on Governance, Risk and Ethics and enjoys sharing ideas and views on new and innovative technologies in the area of Risk Management. He strongly believes that creating and fostering relationships - and sharing experiences - is a cornerstone of conducting business today and applies this mentality in his everyday business life. You can find him on Twitter or Linkedin.

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