IFRS 9 Overview
AxiomSL’s solution for International Financial Reporting Standard 9 (IFRS 9) addresses all key aspects of the Standard, from classification and measurement of assets and liabilities to impairments and disclosures. Clients have the option of using their own models or models developed by AxiomSL; all of them can be plugged onto AxiomSL’s Data Integration platform to calculate Expected Credit Loss (ECL) at all required levels.
AxiomSL’s platform supports effectively the resolution of all these challenges. Not only it can fetch and aggregate the necessary financial, risk and macro-economic data, but is does so without duplicating them thus avoiding ETL (Extract, Transform and Load) layers and intermediate databases that are painful to feed and maintain. And it does so all the while checking data quality and granting user a control that facilitates collaboration between different functions, such as risk and finance, and supports sound data governance practices such as BCBS 239.
Once the relevant bank’s data has been aggregated, it is pushed through the business rules that determine assets classification and measurement, impairment and disclosures.
For modeling, clients have multiple options: They can plug their own or third party models onto AxiomSL’s platform that will feed and run them and extract the results; or they can rewrite their models under R within AxiomSL’s platform; or they can use one or several of the models developed by AxiomSL. For instance AxiomSL’s CSF Model (Calibrated Stochastic simulations of Fundamentals) offers state-of-the-art PIT ECL assessment for Corporates.
Once ECL calculations are completed, disclosures and reporting can be produced in accordance with the IFRS taxonomy, with internal management information (MI) reports, under XBRL, in the form of excel exports or in many other forms.
The unparalleled transparency offered by AxiomSL includes the ability to drill from each value of every report produced down to the source data; it also allows users to make manual adjustments if required, all of them being automatically recorded and reversible. The flexibility of the solution allows users to do scenario testing, to explore the impact of their choices on provisioning levels, in short to really master their provisioning process.
The IFRS 9 solution is built on the same platform as all of the solutions AxiomSL provides for different regulatory calculations and reporting requirements. This ‘one platform’ approach allows clients to leverage the data they are using for other requirements, such as FINREP. It also reduces cost and complexity because banks do not need to maintain separate systems to comply with different requirements and it speeds up implementation.
IFRS 9 End-to-End Process
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IFRS 9 Background
The International Accounting Standards Board (IASB) has developed IFRS 9 to address the shortcomings of the incumbent IAS 39 standard to properly disclose mounting risks, as uncovered after the financial crisis.
As part of IFRS 9, firms will need to make their business models explicit as well as their expectations of the future cash flows of their financial assets and liabilities. The number of assets that will be classified at amortized cost will be reduced, while more will be accounted for at fair value, thus increasing P&L volatility.
For impairment calculations, challenges include the requirement to calculate the ECL over 12-months and/or lifetime, the obligation to define what is the “significant increase in credit risk” that triggers the change of calculation, the ability to assess credit risk until the maturity of the transactions/portfolios and the constraint to include forward-looking elements into multiple probability-weighted scenarios.
Consequently, banks face a major challenge to source and integrate the disparate data required for IFRS 9. Most of it will come from risk and finance – two functions that have historically operated in isolation from one another, applying different standards to the data they use.
Also, banks provisioning requirements are likely to be greater under IFRS 9 than under IAS 39, as the new standard includes multiple instances under which ECL must be assessed for lifetime instead of for 1 year. As a result, firms will try to mitigate and stabilize their provisioning requirements using levers such as the proportion between amortized assets (impaired but with low impact on P&L volatility) and assets in fair value through P&L (no impairment but high impact on P&L volatility), or by playing on the perimeter and segmentation of portfolios collectively impaired.
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Much ink has been spilt on the credit risk analytics and credit impairment methodologies concerning IFRS 9. Moving from a passive, annual credit review regime to an active monthly credit reporting has been a cultural sea change for most organizations.