IFRS 9 in retrospect

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After issuing the final version in July 2014, IFRS 9 “Financial Instruments” finally came into effect on 1 January 2018, replacing the old accounting standard IAS 39. From the outset, it was recognized that IFRS 9 was going to have a significant effect on banks’ financial statements and business processes. The transition from IAS 39 to IFRS 9 was expected to increase banks’ impairment provisions and decrease their Common Equity Tier 1 (CET1) capital.

Indeed, the European Banking Authority (EBA) predicted in its second impact assessment in 2017 that IFRS 9 would result in an average reduction in banks’ CET1 ratios of 45 basis points. The IFRS 9 transition reports issued in early 2018, however, showed that the increase in impairment provisions and resulting reductions in CET1 capital for many major banks were not as great as had been anticipated in EBA’s impact assessment.

During 2018, many banks continued to improve on and refine their ECL models and processes, partially as a result of not having completed all aspects of their IFRS 9 implementation projects in the run-up to the 1 January 2018 deadline. During this time, FCG supported several clients in “post-implementation” projects, providing second opinions on IFRS 9 frameworks as well as developing and validating new and existing ECL models.

Looking forward to 2019

As we approach the end of 2018, banks are now preparing their financial statements for 2018 in which new disclosures must be made on their ECL model frameworks as specified in IFRS 7. These will provide users of financial statements with additional information on the impact and implementation of IFRS 9 on banks and other institutions.

As FCG has previously written about, one area that has proven particularly challenging for many banks has been developing an appropriate model validation framework for their ECL models. As a result, FCG published a white paper which provided guidance on how banks could go about validating their IFRS 9 models and later launched an outsourcing service (‘validation as a service’) under which the validation process with respect to banks’ ECL models is outsourced to FCG. Model validation is expected to remain a major issue within IFRS 9 also in 2019 as industry best practices in this area are still evolving.

IRB banks are also busy planning for the implementing of new guidelines and technical standards issues by EBA including a new definition of default, materiality threshold for credit obligations past due, and new requirements on the estimation of PD and LGD and treatment of defaulted exposures. Insofar as IRB banks apply the same definition of default or use common models for IRB and IFRS 9 purposes, revisions to existing IFRS 9 frameworks may also be necessary as a consequence of these coming regulatory changes.