# Are you ready to be IFRS 9 compliant?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2016-08-22
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Unlocking the Key to IFRS 9 Compliance
Meta Description: Prepare for the upcoming changes in accounting standards with a detailed look at the difficulties financial institutions are facing and the necessary steps to
URL: https://financedigest.com/are-you-ready-to-be-ifrs-9-complianthtml

![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/img6455-1095-1-1736844568915-compressed.jpg)

In just over a year, International Accounting Standards 39 (IAS 39) will be replaced by International Financial Reporting Standards 9 (IFRS 9). This new accounting standard will directly influence the financial statements of banks and other financial institutions all over the world, and compliance is required by January 2018.

Following last decade’s financial crisis, the International Accounting Standards Board (IASB) concluded that some of the accounting practices used in the 2000s were overly optimistic and did not adequately account for future risks. IFRS 9 was introduced to correct some of the accounting wrongs that came to [light after the recession to help build a stronger financial industry](https://www.financedigest.com/industrial-lighting-market-estimates-the-market-to-expand-at-around-6-6-cagr-from-2021-to-2031.html "Industrial Lighting Market Estimates the market to expand at around 6.6% CAGR from 2021 to 2031").

**Achieving IFRS 9 compliance: a difficult but essential task**

As financial institutions prepare to comply with IFRS 9, they’ll [face a number of challenges](https://www.financedigest.com/factbox-the-challenges-automakers-and-now-tesla-face-with-humanoid-robots.html "Factbox-The challenges automakers, and now Tesla, face with humanoid robots"). The implementation of this standard will affect almost every business area, including but not [limited to the Risk](https://www.financedigest.com/omicron-poses-very-high-risk-but-data-on-severity-limited.html "Omicron poses ‘very high’ risk but data on severity limited"), IT, Modelling, Finance, Treasury, and Commercial teams. Senior [management will need to ensure that these teams work](https://www.financedigest.com/new-research-suggests-over-13-million-brits-were-inadequately-managed-while-working-remotely-2.html "NEW RESEARCH SUGGESTS OVER 13 MILLION BRITS WERE INADEQUATELY MANAGED WHILE WORKING REMOTELY*") together effectively during and after IFRS 9 deployment, and that they are all appropriately developing the modelling, reporting, and other business capabilities required for full compliance. Institutions do not have an easy task ahead of them, but it is a necessary one.

Modelling challenges

The first, and most significant, challenge of IFRS 9 deployment relates to modelling. [Models developed](https://www.financedigest.com/research-and-technological-innovations-to-bolster-developments-in-animal-model-market.html "Research and Technological Innovations to Bolster Developments in Animal Model Market") for Basel compliance provide several of the basic components needed for IFRS 9, including probability of default (PD), exposure at default (EAD), and loss given default (LGD) calculations. However, models built to achieve Basel compliance are not sufficient: IFRS 9 requires lifetime rather than 12-month views of expected loss; accurate point-in-time assessments rather than conservative through-the-cycle or downturn assessments; and consideration for a range of macro-economic forecasts and other forward-looking data.

Further, under IFRS 9 all [accounts must be assigned to one of three “stages” based on current](https://www.financedigest.com/coffee-current-accounts-and-the-commoditisation-conundrum.html "Coffee, current accounts and the commoditisation conundrum") credit risk performance vs. original expectations to determine whether impairment will be based on a 12-month or lifetime expected credit loss assessment, andto calculate [interest income](https://www.financedigest.com/abn-amros-q3-profit-jumps-as-interest-income-recovers.html "ABN Amro’s Q3 profit jumps as interest income recovers") accurately. IFRS 9 models will, therefore, be significantly more complex than impairment models have been in the past and thus require more development time and modelling expertise.

_IFRS 9 stages_

Operational hurdles

As well as needing to manage additional modelling complexity to be IFRS 9 compliant, organisations will require high-performance production [engines to run such intensive models](https://www.financedigest.com/mercedes-benz-launches-e-class-its-last-new-combustion-engine-model.html "Mercedes-Benz launches E-Class, its last new combustion engine model"). This is because provisions will need to be calculated in just a few days to meet month-end reporting requirements (and potentially faster to support BCBS 239 stress/crisis principles).Institutions will [need to assess the granularity and quality of their models against the requirements of the IFRS 9 standard](https://www.financedigest.com/instant-payments-and-the-need-for-standardization.html "Instant payments and the need for standardization"). It will also be of the utmost importance to [ensure accounts are assigned to stages in a logical and defendable manner that aligns](https://www.financedigest.com/how-can-we-ensure-that-africas-energy-transition-aligns-with-its-development-ambitions.html "How can we ensure that Africa’s energy transition aligns with its development ambitions?") with current risk management practices. Despite this additional complexity, IFRS 9 models will still need to produce accurate results quickly to [maintain compliance](https://www.financedigest.com/maintaining-security-and-compliance-amid-digital-transformation-in-financial-services.html "Maintaining Security and Compliance amid Digital Transformation in Financial Services").

For organisations to successfully deploy IFRS 9, and to be able to overcome the aforementioned challenges, they will need to ensure that they have strong governance in place as well as strict controls to [manage changes](https://www.financedigest.com/uk-at-forefront-of-fx-management-change.html "UK at Forefront of FX Management Change") to data, models, processes, and reports used to perform the calculations. All modelling and operational changes made will need to be clearly auditable. Strict [user permissions will be key](https://www.financedigest.com/ammonium-phosphatides-market-2022-research-on-user-demand-size-applications-key-players.html "Ammonium Phosphatides Market 2022 Research on User Demand, Size, Applications, Key Players") to ensuring that modifications are recorded in a transparent way and to allow financial institutions to remain compliant during and following implementation. Simply deploying IFRS 9 is not enough –every [step of the process needs to be thoroughly and accurately tracked to meet auditor and regulator](https://www.financedigest.com/uk-regulators-head-of-enforcement-to-step-down-in-2023.html "UK regulator’s head of enforcement to step down in 2023") expectations.

Financial impact

While operational impacts will be most significantly felt during implementation, IFRS 9 will also significantly affect financial [planning and ongoing strategies](https://www.financedigest.com/tax-planning-strategies.html "Tax Planning Strategies").

The most [important change](https://www.financedigest.com/popcorn-containers-market-important-changes-in-industry-dynamics-during-2017-2027.html "Popcorn Containers Market  Important Changes in Industry Dynamics during 2017-2027") relates to the accounting of impairment. Financial planning is complicated due to the dynamic and comprehensive nature of IFRS 9 impairment calculations. Under IAS 39, accounts become impaired only when they [experience incurred loss events such as missed payments](https://www.financedigest.com/how-netflix-justeat-and-uber-raised-the-bar-for-the-payments-experience.html "How Netflix, JustEat and Uber raised the bar for the payments experience"). However, with IFRS 9 all accounts will attract an impairment provision based on expected losses, even if there is no evidence of impairment at the reporting date, taking future economic conditions into consideration. Institutions must now also hold provisions against [credit exposure](https://www.financedigest.com/enhancing-credit-exposure-management-through-graph-analytics.html "Enhancing Credit Exposure Management Through Graph Analytics"), not just drawn balances. Therefore, although IFRS 9 itself will not affect the [timing of expected cash flows](https://www.financedigest.com/in-line-transit-time-ultrasonic-flow-meters-sales-are-set-to-be-valued-at-us-337-5-mn-in-2021.html "In-Line Transit Time Ultrasonic Flow Meters sales are set to be valued at US$ 337.5 Mn in 2021") or write-offs, it will accelerate the recognition of expected losses across all portfolios. This change in timing will significantly impact financial planning and require a deep understanding of [model sensitivities and portfolio dynamics](https://www.financedigest.com/the-australia-new-zealand-surgical-respirator-masks-market-to-get-through-the-dynamic-model-of-innovation.html "The Australia New Zealand Surgical Respirator Masks Market To Get Through The Dynamic Model Of Innovation") under IFRS 9.

[Business strategies](https://www.financedigest.com/albumin-market-in-depth-analysis-business-strategies-and-growth-rate.html "Albumin Market In-depth Analysis, Business Strategies, and Growth Rate") will also need to be revisited and re-assessed. For example, one clearly affected area will be credit line management, both at origination and throughout accounts’ lives, as unused credit lineswill now attract impairment provision and will [need to be managed](https://www.financedigest.com/looking-to-buy-a-rental-property-heres-why-you-need-a-property-manager.html "Looking to Buy a Rental Property? Here’s Why You Need a Property Manager") carefully. Further, certain collections strategies (e.g. re-aging)will impact impairment less immediately and less significantly. Pricing, underwriting, and high risk account management will also be affected.Planning for these changes should start well before the “go-live” date.

**IFRS 9: worth the hard work**

IFRS 9 will [impact the organisation as a whole in the race to meet the hard 2018 deadline](https://www.financedigest.com/how-does-the-fca-deadline-extension-impact-uk-merchants.html "How Does the FCA Deadline Extension Impact UK Merchants?"). Compliance with IFRS 9 will likely require new models, new skills,new ways of working, new management strategies, and new investments in IT and data. Although the effort is significant, organisations will be better off for being able to centralise data resources and processes, [automate reporting](https://www.financedigest.com/increasing-industrialization-and-industrial-automation-to-fuel-growth-of-combination-filler-machine-market-fact-mr-report.html "Increasing Industrialization and Industrial Automation to Fuel Growth of Combination Filler Machine Market: Fact.MR Report"), simplify impairment methodologies, and be more consistent and transparent across the business.

To benefit from the experience, organisations need to handle implementation carefully in order to overcome these obstacles and minimise the financial and [operational impact](https://www.financedigest.com/zurich-insurance-h1-operating-profit-leaps-60-as-covid-impact-wanes.html "Zurich Insurance H1 operating profit leaps 60% as COVID impact wanes") of IFRS 9 compliance. A complete solution, such as [FICO’s IFRS 9 Impairment Management Solution](http://www.fico.com/en/node/8140?file=10776), will help institutions to overcome any hurdles and meet IFRS 9 goals.

Effectively addressing the challenges of this new standard will enable senior management to make better-informed, forward-looking strategic decisions for risk management and help them to understand the evolving nature of risk in today’s dynamic financial [services industry](https://www.financedigest.com/financial-services-industry-blazes-the-trail-for-cloud-migration-post-pandemic.html "Financial services industry blazes the trail for cloud migration post-pandemic"). Getting there, though, won’t be easy.

_David Binder is a senior principal consultant at analytic software firm_ [_FICO_](http://www.fico.com) _, specialising in regulatory compliance. He previously led Barclaycard’s global impairment, capital demand and [stress testing](https://www.financedigest.com/stress-test-backs-extending-lifespan-of-two-german-nuclear-plants-sources.html "Stress test backs extending lifespan of two German nuclear plants: sources") team, and worked on behalf of major financial institutions worldwide for US-based financial services consultancies._


---
This blog is powered by Superblog. Visit https://superblog.ai to know more.
---