european ifrs banking conference (june 2017) - ey · pdf filecontents 1. introduction 2. iasb...

European IFRS banking conference Frankfurt 14 June 2017

Contents

1. Introduction

2. IASB update

3. IFRS 9: The final countdown

4. Multiple economic scenarios

5. IFRS 9 thematic review

6. IFRS 9 EBA regulatory update and impact study

7. Implications on the normative internal and economic internal perspective under ICAAP

8. IFRS 9: What do we expect on disclosures?

9. IFRS 9 classification and measurement survey findings

2

3

4

5

6

8

9 11

13

European IFRS banking conference | 2

1. Introduction

EY biannual European International Financial Reporting Standards (IFRS) banking conference on 14 June 2017 in Frankfurt was attended by representatives from 61 different banks across 16 countries, as well as representatives from standard-setters and industry bodies.

The discussions revolved around the ongoing challenges arising from changes to accounting and regulatory rules affecting the banking industry.

The event focused on IFRS 9 Financial Instruments with points of views from EY, banks, regulators and the International Accounting Standards Board (IASB), but also included a wider update on recent IASB developments.

This document provides a high-level summary of insightful thoughts from discussions with leading specialists and peers across the European financial services industry, as well as the findings of real-time polls taken during the conference.

During the conference, a number of polling questions were asked of the audience. A selection of the responses is included in the respective sections of this publication.

We hope that you find the contents of this report useful in planning around the forthcoming changes.

3 | European IFRS banking conference

2. IASB update

Stephen Cooper, Board Member of the IASB, provided an update on the board’s activities that impact the banking industry.

• Prepayment features with negative compensation — proposed amendments to IFRS 9

Constituents have raised concerns in response to the exposure draft about the contents of the basis for conclusions of the prepayment features. The board will redeliberate the basis for conclusions and aim to publish the final amended standard in October 2017.

• Impairment webcast: expected life of revolving credit facilities

Broadcast in May 2017, the webcast responds to a question received from those implementing IFRS 9 about the application of paragraph B5.5.40, which sets out the factors to consider when an entity determines the life expectancy of revolving facilities, such as credit cards.

Link to the impairment webcast: www.ifrs.org/webcast/ ?webcastid=1145211

• Modification of financial liabilities

In November 2016, the IFRS Interpretations Committee (IFRIC) discussed the submission relating to the recognition of gains or losses arising from modification or exchange of financial liabilities when the financial liabilities are not derecognised as a result of the modification. Stephen emphasised that these discussions only dealt with financial liabilities where IFRS 9 is already considered to be clear on the treatment for financial assets.

While the IASB Staff proposed a final agenda decision confirming that the effective interest rate (EIR) of a modified liability will be kept constant and a catch-up adjustment recorded in profit or loss, this was rejected by the IFRIC and will be discussed by the board.

• Applying IFRS 9 to assets held for sale

The IFRIC have discussed the application of the business model assessment and cash flow hedge accounting for assets held for sale from the perspective of the consolidated entity.

The board will be discussing this further at an upcoming meeting.

• Financial assets eligible for the fair value through other comprehensive income (FVOCI) presentation election

IFRIC was clear on the fact that puttable financial assets as described in the submission do not meet the definition of an equity instrument and are therefore not eligible for the FVOCI presentation election for the holder.

• Dynamic risk management

The board has gone back to first principles to develop an accounting model that better reflects the dynamic risk management in the financial statements. The IASB is trying to better understand how banks approach this. The focus will be on the presentation of net interest margin.

A second discussion paper is expected to be released in early 2018.

• Financial instruments with characteristics of equity

This is a project on the board’s research agenda, investigating:

• The classification of liabilities and equity, and related disclosures

• The presentation of gains and losses for both liabilities and equity

It is expected that this will result in more financial instruments being classified as liabilities, but with more gains and losses being reported in other comprehensive income (OCI) instead of in profit and loss.

A discussion paper is expected toward the end of 2017.


Hengameh Shikhi-Vijeh, Commerzbank, highlighted some of the significant challenges and complexities the bank has had to work through and shared some IFRS 9 programme priorities which have helped them navigate through a successful implementation.

3. IFRS 9: The final countdown

The audience was asked about when banks first started planning for IFRS 9.

Hengameh provided an overview of the challenges Commerzbank’s IFRS 9 implementation project had faced:

• The need to integrate finance and risk data and process flows,which creates a complex systems landscape

• Understanding and dealing with the interplay between IFRS 9 and FINREP

• Designing and building a solution that adequately catersto subsidiaries and branches whilst providing a degree offlexibility

Hengameh discussed the priorities of the IFRS 9 implementation programme

• Maintaining a tightly defined programme scope usingintegrated planning and introducing a hard deadline for anypotential scope increases

• Early engagement and education with the business to promoteawareness and create clearly defined programme roles andownership

• Taking a structured assessment in defining the transitionalapproach by analysing several alternatives and againstpredefined criteria

• Defining the end-to-end process at an early stage in theprogramme to help understand the scope, implications for thebusiness and to inform process ownership

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

2013 2014 2015 2016

14.3% 16.6%

42.9%

26.2%


4. Multiple economic scenarios

Mark Gregory and Tony Clifford of EY talked about some of the key considerations and challenges in developing and applying multiple economic scenarios for reporting expected credit losses (ECL) under IFRS 9.

Tony’s key messages included:

• Incorporation of multiple economic scenarios (MES) in the calculation of ECLs continues to be very challenging, primarily because of the lack of data, not only to frame and weigh possible economic futures, but also to estimate the consequent losses.

• There are a range of approaches being considered and different forecast outcomes reflecting, in part, the different sensitivity to non-linearity of different portfolios. The effect of MES is expected to be greatest for:

• Exposures in volatile economies

• Where the risk of default is linked to commodity or property prices

• Exposures collateralised by assets whose values are volatile or correlated with probabilities of default, such as mortgages

• The EY 2017 impairment survey results showed that nearly half of the responders who had a view expected more than a 5% uplift in their ECL as a result of the incorporation of MES.

Mark’s key messages included:

• Banks will need to understand the correlations and economic dynamics between parameters to ensure that assumptions are applied consistently across portfolios and jurisdictions.

• To avoid creating overly pessimistic results, scenarios should factor in any governmental actions, such as policy responses, which could dampen the effects of an adverse economic environment.

• Informing users about MES forecasts, without confusing them with excessive information, is challenging. One possibility would be to provide information on the base case scenario without going into details about how the alternative scenarios were calculated and quantifying the effect of using MES.

We expect our full survey with the MES results to be available in August 2017.

ECL uplift on base case

36%

17%17%

0%–5%5%–10%10%–20%Don’t yet know

30%


5. IFRS 9 thematic review

Patrick Amis, European Central Bank (ECB) discussed the ECB’s approach to the IFRS 9 thematic review, preliminary observations and reflected on some of the prudential implications.

• Key areas of focus for the thematic review were consistencywith the regulatory framework and the importance ofjudgement in implementing IFRS 9.

• Whilst the focus so far has been on impairment, the ECB will notlose sight of the effects of classification and measurement, andthe interplay with governance and risk management.

The audience was asked whether they felt IFRS 9 would be more pro-cyclical than IAS 39.

The audience was asked to what degree they expected their bank to be ready for 1 January 2018.

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

How could I know? For sure Difference won’t be material

84.7%

8.5% 6.8%

4.7%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Yes, fully Yes, barely Not in general Yes, but in a diverse manner

15.6%

46.9%

32.8%


• Findings of the thematic review suggest that many banks needto make significant enhancements to their documentationin respect of the initial classification and measurementassessment and ongoing governance framework, as well as themethodologies for the calculation of expected credit losses.

• Patrick expressed concerns that the reliance on onlyquantitative indicators might result in late transfers to stage 2 and that qualitative indicators could be used as well.

• Banks need to clarify the interaction between forbearance andstage 2 classification.

• Patrick noted there was a ‘wait and see’ approach relating todisclosures.

• The findings of the IFRS 9 thematic review outcome will beincluded in the supervisory review and evaluation process inthe sub-category internal governance and risk management.

• Patrick mentioned that a third of the queried banks aresignificantly behind in their IFRS 9 implementation readiness.

• Patrick stated that the ECB’s initial preference was for a static (rather than the dynamic) approach with respect toFTA prudential filters, as this is seen as more conducive totransparency and comparability.

The audience was asked for their views on how transitional arrangements should be calculated for the regulatory capital purposes.

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

What are you talking about? Static for sure Dynamic of course!

39.3%

14.3%

46.4%


6. IFRS 9 EBA regulatory update andimpact study

Delphine Reymondon, European Banking Authority (EBA), gave an overview of the work which has been carried out to date by the EBA in respect of the introduction of IFRS 9 and highlighted some of the initiatives and areas of focus for the EBA in the future. The following is a summary of the highlights:

• The second impact assessment will be published at the end ofJune. Delphine summarised some of the main messages to bedrawn, related, in particular, to the state of implementation,parallel runs, main challenges, alignment with prudentialrequirements, use of scenarios and practical expedients, andthe estimated volatility of provisions.

• With respect to the transition arrangements for the effect ofIFRS 9 impairment on capital requirements, Delphine notedthe EBA’s preference for a ‘static’ approach. It is simpler tounderstand and apply, and achieves a better balance betweensimplicity and prudence. Also, disclosure of the full effect willbe key whatever transition approach is chosen.

• Delphine also reminded the audience of other initiatives by theEBA, such as:

• The guidelines on expected credit losses

• Guidelines on communication between competent authoritiesand auditors

• Implementation of technical standard supervisory reportingchanges related to IFRS 9

• She closed by listing some future initiatives, such as:

• IFRS 9 to be incorporated into the 2018 stress-testmethodology — guidance will be communicated to banksbefore it is issued

• A post-implementation review of effectiveness of the EBAguidelines on ECLs

• Monitoring of implementation issues to understand theeffects of different methodologies, models, scenarios, etc.

• Monitoring of the interaction between accounting andregulatory capital impacts

• Long-term assessment of the impact of IFRS 9 on volatility ofown funds


7. Implications on the normative internaland economic internal perspective underICAAP

Thomas Werner from Deutsche Bank discussed the interaction between IFRS 9 ECL and the regulatory treatment of accounting provisions with specific focus on the implications of IFRS 9 on ICAAP from both normative internal and economic internal perspectives.

With the IFRS 9 go-live date approaching, there has been an increase in focus from regulators and supervisors on the implications of ECL on regulatory capital. His presentation focused on further substantiating some of the high-level arguments raised by the industry in the consultation process, with specific attention to the long-term treatment of the IFRS 9 impact on the regulatory requirements, which are still to be finalised by regulators. The following is a summary of the key points made during presentation:

• Cycle sensitiveness

The overall expectation from the industry is an increase in regulatory capital volatility, although offsetting effects exist in the accounting framework.

• Horizon

Because of the recognition of lifetime ECL for Stage 2 assets, there is an expectation of shifts from expected loss (EL) shortfalls to EL surpluses for internal rating-based approach (IRBA) banks.

This is asymmetric because an EL surplus does not count toward common equity tier 1 (CET1) capital under the current regulatory treatment.

• Forward-looking information

Thomas noted that forward-looking information introduces a potentially complex interaction with regulatory requirements and various buffers.

• Solutions

The first potential solution could be to introduce a symmetric treatment of EL shortfall and EL surplus, i.e., the amount of EL surplus to be added back to CET1 capital.

An alternative solution could be to adjust the IRBA risk-weighted assets (RWA) formula.

The audience was asked for their views on the long-term regulatory treatment of accounting provisions.60%

50%

40%

30%

20%

10%

0%

Very urgent, should be completed before IFRS 9 goes live in 2018

Relatively urgent, should be completed between 2018 and 2020 (when US ECL

goes live)

Not urgent, can be completed after 2020

34.0%

59.6%

6.4%


The audience was asked for their views on what is the best expected loss framework going forward given the new IFRS 9 regime for bank steering purposes.

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Basel framework ‘through-the-cycle’

‘Point-in-time’ (risk sensitive) Hybrid I don’t know

16.2%

48.7 %

27.0% 8.1%

The audience was asked for their expectation on the change in regulatory capital volatility under IFRS 9.

The audience was asked for their views on expected changes in banks’ portfolio management and pricing strategy under IFRS 9.

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Yes, because cost of doing business is higher under IFRS 9 and this cost increase should be

partly transferred via pricing

Yes, but for other reasons than answer 1

No, because the underlying risk profile of clients or transactions

is unchanged under IFRS 9 compared with IAS 39

No, but for other reasons than answer 2

32.0%

12.0%14.0%

42.0%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Increase Decrease No change I don’t know

80.8%

11.5%

1.9%5.8%


8. IFRS 9: What do we expect ondisclosures?

Tara Kengla, EY, discussed what was disclosed in 2016, and what to expect for the rest of 2017 and upon transition in 2018.

• With respect to 2016, EY performed a desktop survey againstthe Enhanced Disclosure Task Force (EDTF) recommendationsand noted that disclosures progressed in 2016. However, theextent and details diverged across banks. The disclosureswere still heavily focused on the changes and new accountingrequirements under IFRS 9. Many disclosed that they wouldnot make a quantitative impact disclosure until it’s practicableto provide reliable estimates, which will be no later than in the2017 annual accounts. One bank wrote that further validationand testing needed to be done until a reliable estimate couldbe provided.

• In terms of what to expect in 2017 relating to quantitativedisclosures, EY showed some preliminary results from theirupcoming 2017 IFRS 9 survey. This showed that only 16 banksexpect to disclose a quantitative impact before the year-end2017 financial statements are published. This is unchangedfrom the 2016 EY survey, except that a number of bankschanged their answer from undecided to disclosure some timein 2018.

Period when the quantitative disclosure is expected to be available (number of respondents).

25

20

15

10

5

0Already disclosed During Q3 During Q4 During 2018 Undecided

2

5

11

23

8


• With respect to year-end 2017, EY expects the extent andgranularity of information will continue to be diverse. Banks willprovide continued updates on the implementation status andmaybe more information on assumptions used.

In terms of the quantitative impact, banks may disclose the effect of the IFRS 9 phases separately. They may also provide further details on the quantitative impact if they have already disclosed the effect.

• It is important that banks also start to plan their firstdisclosures about transition in 2018 and consider:

• If they will adopt the full IAS 8 requirements in the firstinterim report

• How much details to include on the changes in classificationcategories and provisions as compared with under IAS 39,along with the related detail on the stage allocations

• If they will provide a separate document to provide moredetails on the changes upon the move to IFRS 9

• Ahead of adoption of IFRS 9, there is a lot to plan and considerwith respect to disclosures of the impact. At the same timecompanies are planning the transition disclosures early in2018, not to mention the ongoing extensive IFRS 7 disclosuresrequired from an annual basis starting from year-end 2018.Some of the most challenging disclosures are expected tobe the sensitivity disclosures, rating and vintage details,movement tables by class, and the new hedge accountingdisclosures.

Tara asked the audience where they expect their bank to provide first time quantitative impact disclosures.

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%In the interim IFRS financial

statementsOutside the interim financial statements in the front-end

section

Analysts’ presentation Will only be disclosed in the year-end financial statements

or in 2018

28.0%

14.0%

52.0%

6.0%

The audience was asked whether they expect to comply with the EDTF recommendations on pre-transition disclosures as of year-end 2017.

35%

30%

25%

20%

15%

10%

5%

0%Yes, expect to

comply with all, where material

Yes, expect to comply with most,

where material

Only expect to comply with some,

where material

Only to comply where there is

overlap with existing IAS 8 requirements

Haven’t decided yet EDTF compliance is not a priority

11.6% 14.0%9.3%9.3%

23.3%

32.5%


SPPI assessment and testing

• Products for which a more extensive and detailed SPPI testingis required include non-recourse assets and products with nointerest rates.

• Some respondents are discussing with peers and externalauditors their SPPI interpretations: for instance, bankshave not finalised yet the application of ‘de minimis’ and‘not genuine’ concepts, which represent significant areas ofjudgement.

9. IFRS 9 classification and measurementsurvey findings

Francesca Amatimaggio of EY presented some of the results of the EY IFRS 9 Classification and Measurement (C&M) bank survey which was conducted in 2017.

Overall state of readiness

• Some participants are finalising their implementation ofboth the business model and solely payments of principaland interest (SPPI) testing, although others are late in theirpreparation process.

• Banks are still debating topics, such as the identificationof thresholds for ‘significant sales’ for the business modelassessment, as well as the adoption of a specific benchmark

cash flow test methodology for SPPI testing.

• The majority of banks have developed an internal tool in orderto perform the SPPI test, either purchasing the data from anexternal provider or leveraging their internal databases.

Status of Implementation(number of banks in each phase)

Business model assessment

SPPI testing Policy Operating model and control framework

Data and systems

25

20

15

10

5

0

Impact assessment Design-early stage Design-advanced stage

Implementation phase Complete No response

Frequency of cited causes for contractual terms failing SPPI (frequency increase as datapoint is further from the centre)

Leveraged coupon, inverse floater or structured

coupon formula

Failed benchmark cash flow test

Prepayment features and

extension feature

Equity features

Non-recourse assets

Investments in funds

Instruments with no additional interests

on deferred amounts

Contractually linked instruments

Non-viability contingency

provision (or bail-in instruments)


Business model test

• The most common approach to set the ‘significance’ threshold for ‘held to collect’ assets is based on the amount of the assets expected to be sold as compared with the total amount of the portfolio.

• The destination of the liquidity portfolio (HQLA) is still under discussion. Some banks are considering a split of the portfolio, with participants intending to use a ‘held to collect and sell’ and held to collect combination. A significant number of banks, on the other hand, state that the portfolio is held to collect and sell (and thus measured as FVOCI).

• The majority of banks that state that they hold loans and receivables with a potential “originate to sell or to distribute” business model (mainly for syndicated loans) are considering a FVPL measurement for the to-be syndicated portion.

Identification of a significance threshold for sale of held to collect assets

42%

20%

YesNoNot decided

38%

42%

20%

YesNoNot decided

38%

Liquidity portfolio business model

48%

FVOCI and ACFVOCIFVTPL and ACFVTPL

4%

10%

38%

48%

FVOCI and ACFVOCIFVTPL and ACFVTPL

4%

10%

38%

Impact on the process related to the credit committee

YesNoNot decided yet

22%

58%

20%YesNoNot decided yet

22%

58%

20%

Governance

• Most banks had not decided how to validate and authorise the origination of new products on the basis of the new IFRS 9 Classification and Measurement requirements.

• For those banks who plan to involve their credit committees when developing new products, the most common adjustments will be to:

1. Include the test outcome in the documentation

2. Develop specific consultation procedures in order to prevent products failing the SPPI test for the banking book.

• We observed that the ongoing assessment of the new classifications requires the input of multiple stakeholders, as shown in the graph.

The complete EY IFRS 9 Classification and Measurement survey will be published in August 2017.

Functions involved in the Classification and Measurement assessment following transition

Middle office

Risk management

Front office

Not decided yet

Finance and accounting

Others

18

15

14

13

8

4

We hope to welcome you to our next European IFRS banking conference in November 2017 in London, UK.

Tony Clifford Partner, Ernst & Young LLP

T: +44 20 7951 2250 E: [email protected]

Michiel van der Lof Partner, Ernst & Young Accountants LLP


Dr. Jana Währisch Partner, Ernst & Young GmbH


Mark Gregory Partner, Ernst & Young LLP

T: +44 20 7951 5890 E: [email protected] @MarkGregoryEY

Tara Kengla Partner, Ernst & Young LLP

T: +44 20 7951 3054 E: [email protected] @TaraKengla_EY

Fabio Fabiani Partner, Ernst & Young LLP


Francesca Amatimaggio Partner, EY S.p.A.

T: +39 02722122035 E: [email protected]

Laure Guégan Partner, Ernst & Young et Associes

T: +33 1 46 93 63 58 E: [email protected]

Yolaine Kermarrec Partner, Ernst & Young LLP

T: +44 20 7951 3213 E: [email protected] @YolaineK

Andrew Beaumont Senior Manager, Ernst & Young LLP


EY | Assurance | Tax | Transactions | Advisory

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© 2017 EYGM Limited.All Rights Reserved.

EYG no. 04240-174GblED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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In addition to your normal contacts, see below a list of EY IFRS 9 professionals.

european ifrs banking conference (june 2017) - ey · pdf filecontents 1. introduction 2. iasb...

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