AdSlot 1 (Leaderboard)

An integrated approach between the finance and risk functions is vital for IFRS 9 success

WHILE taking an estimated two to three years to prepare for, many companies are only just waking up to the sheer size of the IFRS 9 task.

To illustrate, recent research we conducted found that almost half of the financial professionals surveyed feel they are at risk of missing the 2018 deadline and almost a quarter of those anticipate a ‘significant’ delay with their programmes. While concerning, this is not surprising given the sizable challenges that the new programme presents.

Firstly, implementation is likely to require a significant data and systems overhaul. Our research also showed that nine in ten programmes are having to redevelop their databases and/or systems, with two thirds saying they consider this redevelopment a high impact problem.

Further, many firms undergoing IFRS 9 programmes are also struggling with the fact that the guidelines from the regulators themselves are not overly prescriptive. This has resulted in some industry-wide head scratching over key parts of the regulation, such as significant deterioration and integrating forecasting into a measure that has, under IAS 39, been backward looking. This has caused uncertainty across firms and is undoubtedly a cause of some of the delay in progress.

So what are the risks of falling further behind?

While the actual regulatory deadline is January 2018, investors are likely to put early demands on firms to be able to communicate where they stand with IFRS 9 in the near future, if not already.

The new requirements are likely to have a significant impact on a firm’s capital position, particularly those using the standardised approach, as well as its balance sheet provisions and profit and loss accounts. This is likely to raise some concern amongst investors, and firms will have to get well ahead of the game if they are going to keep investors and key stakeholders satisfied with any requests.

The substantial data and systems overhauls will also mean significantly more time and money needing to be spent. This will be on top of an already overflowing regulatory workload.

Firms will need to figure out how IFRS 9 can be managed within existing compliance requirements and demands, in order to avoid unwanted cost or resource surprises later down the line.

The lack of prescriptive guidelines from regulators also means that firms should begin ensuring their projects are in line with their industry peers or they risk becoming an ‘outlier’. As with any regulatory change it is important to benchmark against peers, or firms may find the project does not meet requirements from the regulators and is not on par with the general industry.

Governance structures

Nevertheless, there are some actions firms can undertake to ease the IFRS 9 headache. Firstly, firms will help themselves considerably by getting the right governance structures organised at the outset.

For IFRS 9 to be delivered successfully, it needs to be a joint effort between both the finance and risk functions.

During the recent conversations we have had with finance professionals about their programmes, for most of them the realisation is only just beginning to dawn of the extent that they need to involve the risk teams in the project. This is concerning given how many risk elements and risk related requirements are needed for the programme.
Fundamental to the project is the oversight of both the CFO and the CRO, and an ongoing dialogue between the two functions.

Secondly, firms can also reduce the impact on time, money and resources by using as much existing data as they have available to them. While it is impossible to avoid the preparation of entirely new data and methodologies, they should leverage overlaps with existing regulatory programmes such as FINREP, annual stress tests and BCBS 239 as well as existing business planning and forecasting cycles.

Firms should use what they can in order to avoid wasting time on new data and systems projects they may already be running elsewhere and be able to tweak relatively easily.

Finally, it is important to conduct impact assessments on an increasingly frequent basis (at least twice a year for 2015 and 2016 and quarterly as a minimum for 2017). The changes required for IFRS 9 will have a big impact on balance sheet provisioning, so it is worth understanding what these impacts are likely to look like ahead of time.
For firms using the standardised approach to regulatory capital, this will allow for senior and executive management to understand how much additional capital they will be required to hold. For those firms using the advanced approach, management will be able to understand the impact to Tier 1 and Tier 2 capital, as provisions may well exceed regulatory expected credit losses under IFRS 9.

Understanding this impact will also allow them to be fully versed on the drivers of the key changes and will in turn give them good ammunition to communicate the impacts of IFRS 9 to important stakeholders.

Ultimately, while IFRS 9 is undeniably a challenge, it will enable finance directors to be more forward looking in their approaches. If they see storm clouds coming, IFRS 9 will allow them to make suitable provisions, unlike with IAS 39, where firms were only able to make provisions for what had already been impaired. This meant it was not possible to deal with the storm until it hit.

The new rules will allow firms more control over provisioning to ensure that they can weather any imminent storms with greater ease. Thus, once the issues with getting the programme ready passes, firms should feel the benefits the new regulations will bring.

Simon Wilson is a partner at financial services consultancy Parker Fitzgerald

Related reading

/IMG/200/112200/fraud
brexit-referendum-uk-flag-fd
/IMG/166/267166/money-pound-notes2
/IMG/277/124277/frc