In response to the financial crisis of 2008, IASB found that the current requirements for provisioning lacked forward visibility, resulting in large impairments after incurring losses. To address this, IASB issued IFRS 9 to replace the existing IAS 39 standard for financial assets. This new standard introduces a more robust impairment model that is forward looking and incorporates macroeconomic information into the impairment calculation. IFRS 9 has three phases: the first phase deals with the classification and measurement of assets and liabilities, the second phase focuses on impairment and the third phase covers hedge accounting. Financial institutions are expected to publish IFRS 9-compliant financials starting 1 January 2018.
The new standard is likely to have a significant impact on the current processes and systems of financial companies, with banks bearing the maximum impact of the change. While the standard outlines detailed methodology for the calculations, it does not provide specific guidance on the optimal approach for institutions of varying sizes and complexities. This leaves considerable room for expert judgment and places the onus of substantiating its methodology on the institution without clear industry benchmarks. Regardless of the approach taken, the new requirement would require significant amounts of data. Organizations with decentralized models and systems would face the greatest challenge implementing IFRS 9. Given the complexities, we urge clients to allow significant time and budget for the implementation of IFRS9.
Author: Erik Rood