Introduced in 2014 as a direct replacement for the International Accounting Standards Board’s IAS 39, IFRS 9 is the International Financial Reporting Standards’ most updated set of guidelines on classifying and measuring financial assets and liabilities. IFRS 9 offers exhaustive requirements for financial institutions like banks with regard to the following:
- How to categorize financial instruments according to amortized cost, fair value through comprehensive income, or fair value through profit and loss;
- How to sort accounts into IFRS 9-specific impairment stages based on each account’s unique credit risk characteristics, and;
- How to do hedge accounting in accordance with IFRS 9 guidelines.
At the heart of this admittedly complex standard is a desire to make financial institutions more risk-sensitive and more careful about taking on too much credit risk. And though the provisions may be initially difficult to adjust to—especially for smaller banks with modest regulatory tech infrastructure—investing in an IFRS 9 application and achieving compliance as early as possible will have its rewards.
To illustrate, here’s a briefer on the five biggest ways that IFRS 9 will affect banks. If you intend to start your IFRS 9 compliance journey soon, these are the hurdles—as well as the victories—that your own bank can expect.
It Will Lead Banks to Develop More Risk-Sensitive Temperaments
One significant impact that IFRS 9 will have when it’s fully embraced by banks is that it will compel them to cultivate more risk-sensitive outlooks. IFRS 9 calls for a shift away from top-down and rules-based risk modeling approaches and advocates for risk modeling that’s more grounded in the present situation.
Your bank can use IFRS 9’s guidelines on impairment stages as its basis for risk modeling and loss modeling of financial instruments. IFRS 9’s impairment classification will definitely give you cause to examine your current accounts and distinguish those whose credit quality and ability to make repayments may result in losses for you. This will allow you and your staff to prepare for the probability of default and to devise contingency plans according to your risk outlook.
It Will Compel Banks to Be More Exhaustive with Their Regulatory Data Management Strategies
IFRS 9 will also require banks to do intensive calculations for items like expected credit loss (ECL), expected interest rate (EIR), and effective interest spread (EIS). Of course, to achieve full accuracy and timeliness in the calculation of these, banks will need to be conscientious about the data that serves as their basis.
For sure, it will be a challenge not only to handle massive volumes of risk-related data, but also to ensure that this data is clean, up to date, and properly reconciled. Your bank will have a much easier time managing all your IFRS 9 calculations from a consolidated platform. Consider a solution that can flexibly analyze data related to risk, such as an individual asset’s payment status, the home industry of the borrower, and the borrower’s internal and external credit scores. This mastery over your data will help you arrive at the clearest possible picture of your expected losses.
It Will Require Banks to Fine-Tune Their Capital Management Strategies
You can also expect the IFRS 9 guidelines to have an impact on your bank’s capital planning and capital management strategies for the near term. One clear example pertains to IFRS 9’s requirement of calculations for expected credit loss, or ECL. For a long time, banks subscribed to the Generally Accepted Accounting Principles’ (GAAP) incurred loss model, which prompted the calculation of losses only after they had already occurred. The current expected credit loss model, however, calls for the opposite—i.e., for banks to preemptively begin calculating all losses that are expected over the life of their financial instruments upon either their origination or their acquisition (except for those measured at fair value).
Upon arriving at those calculations, your bank will be able to make important decisions like how much more to allot in your loan or loss reserves or how to adjust your pricing strategies to factor in these imminent credit losses. By no means are these easy decisions to arrive at, but having more foresight about your expected credit losses will definitely cushion the blows a little better.
It Will Reward Compliant Banks with Regulators’ Trust
The shift to IFRS 9 will initially be a stressful experience for banks, especially in terms of regulatory compliance. But banks that can complete the transition will be able to avoid steep penalties and experience fewer complications from rushed or late-stage compliance.
Eventually, more banks will develop stronger foundations for complete and accurate financial reporting not only for IFRS 9, but also for related standards like the Financial Accounting Standards Board’s Accounting Standard Update 2016-13 and the Basel Committee on Bank Supervision’s Standard No. 239. If your organization can bolster its regulatory performance in this way, you’ll earn a coveted seal of approval from your regulators.
It Will Increase Financial Transparency and Rainy-Day Readiness in Banks
Lastly, IFRS 9 will impart banks with two things they need in this day and age: a strengthened commitment to financial transparency and readiness for unpredictable times. It must be remembered that the IFRS 9 accounting standard was conceptualized in the wake of the 2008 financial crisis. It was meant to serve as a wake-up call for banks to reevaluate the decisions they made amidst a volatile economy.
Today’s banks need to be just as wary of risk and as prepared for critical losses in light of the financial crisis brought about by the global pandemic. At the same time, they must also heed the call for financial transparency and levelheaded financial housekeeping practices for the sake of their customers. Thus, it would be good for your bank to see IFRS 9 as more than just a compliance-related hassle and instead, as a means for attaining resilience and trustworthiness.
Conclusion
The IFRS 9 compliance journey will be hardest for banks when they are still adjusting to the requirements. But after they’ve undergone the necessary infrastructure upgrades and adjustments to their regulatory reporting protocols, they’ll be even readier to manage their repertoire of financial instruments in risky, unpredictable times. Give your bank a fighting chance at adjusting to the circumstances, and get a head start on your IFRS 9 compliance.