Requirements of the new Standard
Classification & Measurement: IFRS 9 assumes that classification of financial assets will depend on results of:
- assessment of the business model for the management of particular portfolio of financial assets and
- assessment of the contractual features of the particular financial asset in order to verify whether the contractual cash flows are solely payments of principal and interest on outstanding principal amount (being consideration for the credit risk and the time value of money).
Change of approach to the classification of financial assets may result in the reclassification and consequent change of measurement method for the part of banks’ financial assets.
Impairment: IFRS 9 introduces fundamental change in terms of determining impairment of financial assets. In accordance with the new Standard entities will be required to recognize and calculate impairment based on expected losses concept, in place of current concept - incurred losses. Change in the approach will result in a significant increase in the importance of estimations and assumptions for the purpose of impairment measurement, in particular in identification of significant increase in credit risk of exposure and associated with it calculation of lifetime expected credit losses over the entire life of the exposure.
Implementation of the new impairment model will result in overall increase of provisions amount and potentially increase its volatility in financial statements due to requirement to take into account both current and future events (forward-looking information), including macroeconomic forecasts.
Hedge accounting: New standard is aimed at better alignment of hedge accounting with the risk management framework and is introducing an approach that is more principle-based than the current model, criticized for being too complex, not reflecting the risk management activities, rules-based and resulting in arbitrary results.
KPMG’s professionals have an adequate knowledge and experience to support financial institutions in dealing with challenges linked with the implementation of new Standard.
KPMG’s team can help in all aspects of the IFRS 9 implementation process, in particular with:
- Preparation of the gap analysis between the solutions currently applied by the bank and target model aligned with the requirements of new Standard
- Performance of the classification analysis for the financial assets portfolio (business model assessment and SPPI Tests)
- Impact analysis of the implementation of IFRS 9 on balance-sheet positions, P/L and capital adequacy (including simulation of the impact of changes of credit risk parameters on the level of provisions)
- Support in the identification of necessary changes in business processes, IT systems and internal documentation of the bank
- Design of the target methodology for the classification and measurement of financial assets
- Design and implementation of the IT tool facilitating the classification decision under IFRS 9
- Design of the complex impairment methodology, including in particular identification of the significant deterioration of credit quality and calculation of expected losses in one-year and life-time horizon
- Preparation of algorithms implementing the designed solutions in the area of loan loss provision methodology (with complete documentation)
- Recommendations regarding the potential optimization of the IFRS 9 impact on financial situation and capital adequacy
- Support in UAT tests
- Preparation of the template disclosures and notes in the financial statements prepared in accordance with IFRS 9
- Analysis of the possibility of hedge accounting application for the existing hedge relations.
- KPMG supports largest polish banks in the implementation of IFRS 9.
- KPMG’s Financial Risk Management professionals have a wide practical knowledge gained from projects and meetings with domestic and international Clients.
- KPMG applies an approach tailored to the type and scale of business and the specific requirements of the Client.