September 1, 2015 – By Fraser Hall, Head of Service Delivery, EMEA
It is over a year since International Financial Reporting Standard 9 (IFRS 9) was published. Questions still remain about how some aspects of the standard should be interpreted. However, there is no doubt IFRS 9 will have a major impact on accounting practices by placing a new emphasis on the expected performance of financial assets.
In order to implement IFRS 9 in the most effective and efficient way possible, I believe there are five key questions that firms should focus on:
1) How will you integrate risk and finance?
Accounting reports have traditionally focused on financial data. However, under IFRS 9 financial data will need to be combined with risk data to provide a clearer view of the likely future value of assets. In this way, IFRS 9 joins a growing list of requirements (such as BCBS 239 and AnaCredit) that call for a much closer relationship between risk and finance.
These two functions have historically operated in isolation from one another, employing different governance procedures, operating models and data formats. Finance is accustomed to external reporting and being held to account by regulators. Whereas risk is usually an internal monitoring process, which must adhere to internal, rather than industry-wide, standards.
The simplest way for firms to reconcile these differences and to comply with IFRS 9 is by implementing a single reporting platform on top of the systems they currently use to manage risk data and financial data. The platform should integrate and normalize data from the different systems and ensure it conforms to the same standards. The platform should also include user control functionality that will facilitate more rigorous data governance procedures within risk.
2) How will you source new data attributes?
Not all of the data required for IFRS 9 will be readily available within risk and finance. For example, the impairment of an asset will depend on whether a firm intends to hold it to maturity or trade it in the short term. This kind of business model information is not held in a systematic manner at present.
As part of their preparations for IFRS 9, firms will need to establish a mechanism for collecting this type of data, along with many other data attributes (such as credit ratings) that are widely available, but spread across many different sources.
3) Can you leverage your FINREP data?
There is a significant amount of overlap between IFRS 9 and Financial Reporting (FINREP) – a requirement which greatly increased the granularity of the financial data that firms must report when it was introduced by the European Banking Authority (EBA).
In order to mitigate the impact of IFRS 9, firms should re-use the data they have already reported for FINREP, rather than loading and processing the same data multiple times. This will only be possible if they use the same reporting platform for both IFRS 9 and FINREP.
4) Does your IFRS 9 solution support scenario testing?
Implementing IFRS 9 is a major undertaking for firms, who should therefore analyze every opportunity to harness business benefits from the work they put into their compliance projects.
One way in which firms can benefit from IFRS 9 is by using a flexible, transparent solution that enables them to do scenario testing. Users should be able to explore the impact that different inputs and parameters have on the results of their impairment modelling. This will allow them to better prepare for different eventualities.
5) Does your IFRS 9 solution support impact analysis?
Firms are set to spend hundreds of man-hours preparing for IFRS 9 over the coming years. As they do so, they need to make sure they get the most out of all of the preparatory work they do.
It has become common for firms to rely on ad-hoc, manual processes when assessing the impact of requirements like IFRS 9 and doing trial runs. This is a highly inefficient approach as it means that when they are satisfied with the results, they must begin configuring their platform in line with the changes they have worked out on paper.
Instead, firms should do their impact analysis work within the platform they intend to use to deliver their final IFRS 9 reports. The platform should archive the logic that a firm uses as part of the impact analysis. This will mean the firm will already have much of the groundwork saved in its platform and will be able to move quickly from the impact analysis to production of the final results, when IFRS 9 comes into force.
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