IFRS 9 set to raise compliance costs for financial institutions

As deadlines loom for the introduction of  new IFRS standards and changes to regulatory frameworks, financial institutions must ensure they have the right finance, risk and regulatory reporting management systems in place to manage the added workload and rein in compliance costs, warn IFRS experts at Wolters Kluwer

A white paper published by Wolters Kluwer warns that the overhaul of standards by the two main arbiters of accounting practices, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), will raise costs for financial institutions.

The most significant changes are the Current Expected Credit Loss (CECL) and IFRS 9 Financial Instruments protocols, set to come into force in 2019. At the same time, financial institutions also need to implement guidelines issued by national authorities on how to interpret and apply the standards, and to meet requirements set out by the Basel Committee on Banking Supervision (BCBS).

Standard setters and regulators ‘insist that they’re all part of one big, happy family of overseers striving to reach a common goal of ensuring that firms operate in an efficient and prudent manner,’ the white paper notes.

But as they come to grips with the new supervisory order, financial institutions are realising that even slight discrepancies in how that goal is envisioned and the mechanisms instituted to try to achieve it, are likely to create added confusion, work and expense.

‘Banks will not just need good systems to handle their Basel and accounting requirements; they will need them in the run-up to implementation, an event that the majority acknowledge they are not ready for,’ says Jeroen Van Doorsselaere, vice president, risk & finance, EMEA, at Wolters Kluwer’s Finance, Risk & Reporting business and co-author of the paper.

‘Preparing for and implementing IFRS 9, CECL and other regulation will compel firms to think about credit risk in new ways and to develop new models to account for it, with matters being especially thorny and complex for institutions that operate across borders.

‘Such a formidable undertaking will also require talking, not just thinking; effective communication among functions – including risk, finance, compliance, reporting and technology – is essential.’

The situation will be further complicated as the new regulatory and accounting frameworks call for bankers to adhere to principles – which are open to interpretation and therefore to misinterpretation – rather than fixed rules.

While it’s probably too early to gauge the effects of the CECL framework on key metrics, forecasts of the damage that IFRS 9 will cause in the implementation phase, due to the need to account for future losses while current losses are still affecting performance, will make uncomfortable reading for senior bankers, especially in Western Europe.

There is concern that the impact will be especially severe for institutions in Asia. In a survey of risk officers at the FICO APAC CRO Forum in Singapore this year, 88% said that up to 30% of their retained earnings might have to be set aside for loan loss provisions.

Banks will need to ensure that they have proper risk management, reporting and general operating practices in place, and the data systems to execute them, Wolters Kluwers’ experts note.

The Wolters Kluwer IFRS 9, CECL, BCBS 311: Preparing for Financial Standards around the World is available here

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