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UK Financial Services Practice
IFRS 9 – The Road to Success 2014
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Contents
| IFRS 9 – The Road to Success
01 IFRS 9 and the Regulatory Journey 2
02 More than an Accounting Programme 3
03 Where are the Major Challenges? 4
04 Guiding You to Success 7
05 Why Parker Fitzgerald 9
06 IFRS 9 Advisory and Delivery Team 10
A1 Impairment Methodology of IFRS 9 11
A2 Office Locations and Contact Details 12
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IFRS 9 and the Regulatory Journey
In July 2009, the International Accounting Standards Board
(IASB) made a move to simplify the accounting rules for
recognising and measuring financial instruments.
It wanted to reduce complexity, harmonise with US GAAP
and respond to the needs of the industry…
The step was part of efforts to address issues that arose
during the financial crisis, such as loan-loss provisioning.
The IASB decided to replace the International Accounting
Standard (IAS) 39 with the International Financial Reporting
Standard (IFRS) 9.
The final standard was published in July 2014 with an
effective date of 1 January 2018. However, it is likely that the
market will expect a certain level of disclosure of impairment
on an expected loss basis prior to the effective date.
Most banks and other financial institutions estimate they will
need three years to implement the standard, due to the
significant impact that IFRS 9 will have on existing business
processes, technology systems and infrastructure.
“The planning work has established that for
banks the complexity and cost of the IFRS
9 implementation is likely to be second only
to the Basel II implementation, and broadly
equivalent to the entire first time adoption of
IFRSs in 2005”.
“There are many reasons for this [3 year
implementation] period including the size
and complexity of the necessary changes to
systems and processes, the volume of data
required by the model, the limited pool of
skilled resources required for the
implementation available in the market, the
need for guidance to develop on the
interaction with regulatory capital
requirements and the need to inform market
expectations of the accounting, regulatory
capital and business impacts in advance of
the final standard coming into force”.
Parker Fitzgerald helps Financial
Institutions transition to the new standard
with advisors who possess in-depth
knowledge of the strategic and
operational challenges arising from
IFRS 9.
Our teams have years of experience
transforming the Risk and Finance
functions of the world’s leading Financial
Institutions and have an in-depth
understanding of the associated
business processes.
Our relevant experience, the calibre of
our consultants and our tailored IFRS 9
delivery methodology means we are
the delivery partner of choice.
| IFRS 9 – The Road to Success | Section One
This paper outlines the changes that will result from
the transition to IFRS 9 and how Parker Fitzgerald
can help you be successful with that journey…
British Banker’s Association letter to
the IASB on 5 November 2013
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More than an Accounting Programme
The implementation of IFRS 9
is taking place in three
phases:
1. Classification and Measurement
2. Impairment Methodology
3. Hedge Accounting
The deepening integration of the key
finance related functions, from
strategy and planning, through to
Risk, Finance and Treasury means
that IFRS 9 will have a widespread
impact across the business.
The primary impact on your overall
business model and financial
reporting functions will, however, arise
from the changes to the Impairment
Methodology.
Adoption of the IFRS 9 Impairment
Methodology is an area of
specialisation for our Risk
Practice – and where we believe
we can help you change to become
more successful.
Adopting IFRS 9 requires banks to change the way they offset assets and liabilities,
calculate impairments and account for hedging.
The International Accounting Standards Board (IASB) released a new standard for financial instruments, IFRS 9,
replacing IAS 39. Coupled with the two existing, relevant standards for the financial instruments (IFRS 7 and IAS
32), these standards now fulfil all aspects of accounting requirements for financial instruments.
| IFRS 9 – The Road to Success | Section Two
Classification and
Measurement
Based on the business model
and supported by the cash flow
characteristics, financial
instruments are classified and
measured via amortized cost or
fair value.
Impairment
Methodology
Changes from an incurred loss
basis to forward looking
provisioning based on expected
losses (i.e. expected cash flow
assessment).
Hedge
Accounting
Alignment between accounting
and risk department. Risk
strategy has to be adjusted to
the hedge accounting standard.
1 2 3In scope of proposition
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Where are the Major Challenges?
| IFRS 9 – The Road to Success | Section Three
Why Start Now?
Transitioning successfully from IAS
39 to IFRS9 will take a minimum of
24 months. More complex Financial
Institutions should allow for a
minimum of 36 months.
Whilst IFRS 9 remains in draft form,
the IASB has provided guidance on
most major areas of the new standard
and methodology.
An early understanding of impacts on
the portfolio is critical to ensuring the
right type of mitigating action e.g.
Credit and recovery strategy, is
adjusted before the standard
becomes effective.
There are several synergies between
IFRS 9 and other regulatory initiatives
such as CRD IV and EMIR that
should be considered to ensure the
investment and associated
technology strategy is appropriately
leveraged.
New Impairment
Methodology
is a significant departure
from IAS39, focussing on
a forward assessment of
asset quality and
changes to the
composition of impaired
assets over time.
Demanding and
additional disclosure
requirements are
aimed at increasing
transparency and
understanding drivers
for impaired assets.
Delivering IFRS 9
to the standard required
will be costly, complex,
and will impact all areas
of the Finance and Risk
reporting teams,
processes and
infrastructure in most
institutions.
Extensive period of
Impact Assessment and
Parallel Run (2 years) will
be needed to mitigate
implementation risk and
ensure adequate definition
and management of the
business impacts...and will
be costly.
Complexity, scale and
length of the
implementation are
significant challenges.
Maintaining momentum and
rigour is key for success.
Heavy IT/Technical
components should be
prioritised and front loaded
whenever possible to
mitigate potential future
delays due to competing
regulatory priorities. On-boarding
of skilled resources
required for
implementation will pose
a significant challenge
as there will be a limited
pool and high concurrent
demand from all
institutions.
IMPLEMENTATION FINANCIAL IMPACTS EXPLAIN
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Where are the Major Challenges?
| IFRS 9 – The Road to Success | Section Three
Product Design and Pricing
• Product managers need to ensure that
products are either redesigned and/or repriced
to remain viable post IFRS 9
Technology and Operations
• Consistent use of data sources across
business functions
• Further driver for process integration
Finance
• Reliable forecasts based on agreed
assumption which are back tested for margin
of error
• Greater need to reconcile pillar 3 and financial
disclosure
Risk Management
• Accounting and risk management functions
will further benefit from integration
• The modelling of EL (historic & prospective) is
the key unifying factor
Treasury
• The potential increase in P&L volatility
requires Treasury to manage capital and
liquidity dynamically
CAN YOU AFFORD IT?
Transition to IFRS 9 may result in a shortage
of capital. This would require pre-emptively
raising further Capital or reducing Risk
CAN YOU EXPLAIN IT?
IFRS 9 will lead to increasing P&L volatility
– in turn requiring clear explanation for
investors, ratings agency and the Board
CAN YOU DELIVER IT?
A proven approach, specialist modelling
skills, appropriate data and senior sponsorship
are required to deliver this complex
programme predictably
Governance and Disclosure
• Programme Sponsor (typically the CFO) will
need to explain the strategic impacts of IFRS
9 to the Board
• Need for further detailed disclosure in order
for investors to understand the P&L volatility
IFRS 9
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Where are the Major Challenges?
| IFRS 9 – The Road to Success | Section Three
Impact barometer
1. Scale: Barometer of magnitude of change expected as a result of the implementation of the new standard
2. Volatility: Barometer of current certainty around delivery and design assumptions
Description of high level impacts
B/S
Reporting
Data
Infrastructure
Models
Methodology
P&L
Volatility2Scale1
Key:
Low Medium High
IFRS 9 introduces greater volatility through the economic cycle, as the majority of losses through any downturn
are recognised upfront. Firms may see an increase in the impairment charge and provision requirement, which is also
recognised 1-2 years earlier in the cycle.
Significant changes to methodology moving from incurred to expected losses. Requirement to identify criterion
indicative of significant credit risk deterioration and reflecting changes in expected losses due to forward looking
economic, policy and regulatory changes.
Leveraging existing models will be complex. Basel II Advanced Internal Rating Based (AIRB) Banks will seek to
maximise the use of their existing models, governance and validation process, on the basis that adjustments will
be needed for IFRS 9.
Infrastructure will need to be provisioned and scaled to ensure it is able to run the existing IAS 39 and IFRS 9
models concurrently. This may require investment in technology capacity and partitioning to ensure model runs
perform in line with expectation from key user groups.
IFRS 9 introduces the need for additional data to support both methodology and disclosure requirements. Data
architectures will need to be adapted to include modified assets and other data to support life-time expected loss
and probability of default.
Reporting teams will face significant challenges primarily driven by the need to understand drivers of impaired
assets and risk measures at lower level of granularity to current standard IAS39. The increased volume and
granularity of disclosure requirements are likely to be a major cost driver.
.
The impact on regulatory capital will attract much attention. For many organisations, the introduction of IFRS 9
will lead to an increase in provisions that could reduce core tier 1 regulatory capital under Basel III.
.
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Guiding You to Success
Parker Fitzgerald – Specialist IFRS 9 Services
We have an experienced team of IFRS adoption, credit risk, and change practitioners that can assist clients assess the strategic and operational impacts of
IFRS 9 on their organisations and deliver the necessary change across the enterprise.
| IFRS 9 – The Road to Success | Section Four
SERVICE
OFFERING
Service Focus
• Initiation and structuring
of programme,
including definition of
governance and
articulation of overall
delivery strategy
• Establishment of
programme work
streams, deliverable
maps, supporting
delivery plans and
resourcing estimates
Service Focus
• Structured assessment
of business and
technology impacts
across the Risk,
Finance and
Technology functions
• Understanding of key
drivers and sensitivities
impacting impairment
forecasts and level of
provisions within the
portfolio
Service Focus
• Interpretation and
definition of impairment
methodology and
associated model build
activities, including
adaptation of existing
AIRB rating models
• Preparation of suitable
strategies for portfolios
where no models are
available
Service Focus
• Definition of strategic
architecture and
technology
requirements across
core Risk and Finance
platforms
• Identification and
implementation of
required changes to
underlying technology
infrastructure and
application architecture
Service Focus
• Re-definition of key
reporting processes
and controls to
accommodate new
basis for impairment
projections and
underlying assumptions
• Design and
development of
bespoke end-user
solutions to enable the
reporting process and
“Audit ready” control
framework
We have developed a
number of accelerators
to ensure maximum
control and
predictability throughout
each stage of the
IFRS 9 implementation.
Implementation Roadmap
Resource Estimation
Business Case Preparation
In-Flight Programme Review
Impairment Methodology
Financial Statements
Credit Strategy
Control Framework
Methodology Definition
Model Inventory Analysis
Model Augmentation
Model Validation
Architecture Definition
Vendor Selection
Application Integration
Test Execution
Reporting Requirements
Operating Model Design
EUC Remediation
Reconciliation
Reporting and
Disclosures
Programme
Mobilisation
Impact
Assessment
Model
Development
Technology
Delivery
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Guiding You to Success
IFRS 9 Implementation Roadmap
Plan highlights
2.5 year minimum implementation
window is required for standard IFRS
9 delivery (complex banks should
allow for 3 years).
Significant delivery effort and inter-
dependencies between Risk, Finance
and Technology. Programme
Governance models must reflect this
to ensure effective delivery.
Extensive impact assessment and
parallel run (or dry run) period
required in order to gain comfort with
IFRS 9 impacts as well as end-to-end
process change.
Onerous data provisioning and build
activities should be expedited where
there is a greater level of certainty
over end state design.
Close coordination amongst work
streams and BAU functions is key
due to significant inter-dependencies,
and programme construct could
change rapidly.
| IFRS 9 – The Road to Success | Section Four
2014 2015 2016 2017
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Key
Mile
sto
nes
Pro
gra
mm
e
Managem
ent
Meth
odolo
gy
Model
Build
Ris
kF
inance
IT
Standard Published
Refresh/Build ne Modelling logic
(tactical infrastructure)
IT Engagement
Strategy Defined
Gap Analysis
• Data
• Methodology
• Disclosure
requirements
Requirements
• General Ledger / COA
• Reporting & Disclosures
• Analysis
Build
• Chart of Accounts
• Disclosures
• SoX
Adoption o
fta
rget pro
cesses
and r
evis
ed r
esponsib
ilities
acro
ss r
isk a
nd fin
ance
Architecture Strategy
• Data Architecture
• Model Functionality
• Delivery Model
Data Provisioning
• Modelling
• Parallel Run
• Disclosure requirements
IT Mobilisation and
plan interlock
Build (Infrastructure
and EUC environment) System Testing
GO LIVE
Calibration of
Requirements
IMPACT ASSESSMENT
Model Integration• Strategic architecture • Model construction • Code deployment
Design • Reporting Architecture• Reporting Processes • Control Framework
Test
• Provisions
• Controls
• Disclosures
Model Validation • Model Calibration• Model Governance• Sign-off
Re-engineering of Business Processes & Operating Model
Audit Opinion
• Methodology
• Interpretation
Methodology Definition
• Transition Criteria
• Lifetime Expected Loss
• Forward Looking
Frequent instances of internal reporting
External Investor Awareness Senior Management Awareness
and Remediation
DRY RUN
Standard Adopted
(2016 B/S)
•Governance
•Delivery Strategy
•Implementation Roadmap
Programme
Mobilisation
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Why Parker Fitzgerald
| IFRS 9 – The Road to Success | Section Five
Why Parker
Fitzgerald?
Engagement Model
Clients are able to draw-down from highly specialised resources
at each stage of the implementation lifecycle from one of the
largest and most experienced teams of risk and change
practitioners in the industry.
Our dynamic resourcing model minimises idle activity periods,
ensuring all resources are fully utilised throughout the end-to-
end delivery.
Delivery Track Record
Parker Fitzgerald are experts in the delivery of large scale and
complex risk programmes and have extensive experience in
assisting firms’ responses to the strategic and operational
challenges posed by IFRS 9.
The firm has developed a specific IFRS 9 delivery methodology
and a unique set of accelerators to increase predictability and
decrease execution risk.
Industry Insight
We have a unique understanding of the inter-relationship
between IFRS 9 and other major reporting challenges
facing the industry today (e.g. EMIR, COREP), in addition
to those posed by emerging regulation.
This allows us to consider the future impacts of new
financial regulation and emerging themes in risk
management on key design decisions helping minimise the
frequency firms augment their underlying architecture and
reduce the associated investment spend.
Expert Knowledge
Parker Fitzgerald are market leaders in all areas of financial
risk measurement and modelling. This includes credit risk,
loss forecasting, econometric and stochastic analysis.
The firm has extensive experience in the design, build and
validation of both capital and impairment models to support
Retail and Wholesale product sets.
Consulting Team Experience
Our consultants have an average of 15 years relevant industry
experience gained at the world's leading Financial Institutions. Their
experience, combined with an unparalleled understanding of the
transformation lifecycle, ensures the team is effective from Day 1.
Appreciating that every client is different, we do not believe in
standard industry answers but deliver solutions tailored to our
clients’ organisational profiles.
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Strategic Programme Delivery
Financial Services Partner specialising in the delivery of Risk and Finance Transformation initiatives for leading Banking and Insurance groups.
Significant expertise in the mobilisation and management of complex, multi-year, investment programmes in direct response to new regulation and International Financial Reporting Standards (IFRS), including the re-design of client operating models, and the leadership of firm-wide cultural reform across a variety of client organisations.
Deep insight into the strategic and operational challenges faced by firms as a result of IFRS 9 and the inter-relationship with other major reporting initiatives.
Risk Advisory Services
Senior Risk Director specialising in the development of risk exposure measurement for Retail and Commercial Banking clients, including Lifetime Expected Loss and Stage Transfer Criteria for IFRS9.
He is an experience practitioner in all aspects of credit risk and regulatory reporting with an unparelled insight into, and experience in, the production of risk management information, in particular those relating to RWA, large exposure, NPL and impairment forecasting.
Significant expertise in delivering the risk management infrastructure (policies, processes and data) to support advanced credit risk analysis.
Risk Technology Services
Financial Services Partner specialising in the development of technology strategy to create market leading risk management, measurement and reporting capabilities for complex Financial Institutions.
Experienced in all aspects of the risk transformation lifecycle, with particular expertise in design and delivery of capital and impairment engines, stress testing architectures and Basel II A-IRB ratings systems to support global banking groups and capital market clients.
Member of the firm’s UK innovation council focusing on key developments and evolving technology trends within Financial Services.
Risk Advisory Services
Senior Quantitative Analyst specialising in the design and development of advanced risk measurement techniques, predictive and econometric analytics.
Experienced in the design and development of Basel II PD PiT and TTC models for both Retail and Commercial Banking clients in addition to LGD and EAD models across a variety of asset classes and product types.
Extensive experience in scorecard model development, model validation, statistical analysis and assurance of derived outcomes; with particular expertise in Risk Weighted Asset (RWA) and impairment forecasting, deconstruction, trend analysis and back testing.
IFRS 9 Advisory and Delivery Team
| IFRS 9 – The Road to Success | Section Six
Dunia ReverterPartner
Simon WilsonDirector
Andrew CortisPartner
Olivier Baixas Senior Manager
Risk Advisory Services
Heidi is a Senior Risk Management Practitioner and Quantitative Analyst
with over 15 years’ experience working with leading financial institutions to
implement advanced credit risk measurement and management techniques
and strategies to achieve Basel II AIRB compliance.
She began her career at Halifax, Bank of Scotland and has since worked at
Cheltenham & Gloucester and Lloyds Banking Group, where she was
senior advisor on the Secured Capital & Impairment programme within
Retail Credit Risk. Heidi has a deep understanding of retail banking with
particular expertise in retail mortgages and associated credit risk
management methodologies.
Heidi holds a doctorate in Applied Statistics & Maths Modelling from the
University of Salford.Heidi KharbhihSenior Advisor
Risk Advisory Services
Joao is a Senior Manager within Parker Fitzgerald’s Risk Advisory Services
practice. Joao has over 10 years experience as a credit risk modeller,
having developed and validated impairment, PD, LGD and EAD models for
major banks, including LBG and Barclays.
Joao has worked across a wide range of retail and wholesale portfolios,
including mortgages, private banking and corporates, and has significant
experience with regards to regulatory expectations around these topics.
He has provided credit risk consultancy to several leading institutions,
including Citibank, RBS and AIB.
Joao holds an MSc in Applied Statistics and Stochastic Modelling from
Birkbeck College and a BSc in Mathematics Applied to Economics and
Management from the Technical University of Lisbon.
João FigueiredoSenior Manager
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Impairment Methodology of IFRS 9
Phase II: Impairment Methodology
The standard introduces a forward-looking provisioning methodology based on
expected losses and seeks to ascribe the risk connected to the assets as accurately
as possible. It replaces the simple Incurred Loss Model used in IAS 39.
This paradigm shift in methodology will impact how Financial Institutions measure
risk provisions. The accounting function will more closely align with risk
management, due to a sea change in data requirements and a more complex profit
& loss management process.
A three-bucket approach will replace the current concept of a “good” and a “bad”
book. For Phase II, products must be classified into the three buckets, based on the
credit quality calculated at either account or portfolio level.
All assets whose credit risk has not significantly increased since origination (except
bank-acquired assets that were already impaired) are classified in Stage 1. These
assets will calculate impairment on a 12-month Expected Loss basis and interest will
be accounted for on a gross basis.
Where an asset’s credit quality has materially deteriorated relative to origination but
not defaulted, it will be moved into Stage 2. Stage 2 impairment is calculated on
lifetime expected losses and interest accounted for on a gross basis.
Where individual accounts have objective evidence of impairment, they will be
classified as Stage 3. The impairment will be calculated on lifetime expected losses
and interest accounted for on a net basis.
Once the credit assets have been allocated into Stages, Firms are then required to
look forward, using forecasts that include multiple realistic scenarios with a
combination of market and internal drivers, to model the impact these will have on
the allocation between stages and recalculate impairment accordingly.
Following public consultation, the final standard was published in July 2014 with an
effective date of 1 January 2018. However, it is likely that the market will expect a
certain level of disclosure of impairment on an expected loss basis prior to the
effective date.
The three-bucket approach of IFRS9
| IFRS 9 – The Road to Success | Appendix 1
Based on past and current information Based on forward looking information
Will the credit risk increase significantly
from initial recognition?
STAGE 1
• Portfolio/account based
• 12-month Expected Losses
• No observable deterioration in
credit quality
STAGE 2
• Portfolio/account based
• Remaining lifetime expected losses
• Account/portfolio credit quality has
deteriorated relative to origination
• Specific assets in danger of default
have not yet been identified
STAGE 3
• Credit risk has increased
significantly since initial recognition
and there is objective evidence of
impairment
• Single instruments based
• Remaining lifetime expected losses
Has the credit risk increased
significantly since initial recognition?
Yes
No
Yes
No
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Office Locations and Contact Details
| IFRS 9 – The Road to Success | Appendix 2 | v1.2
NEW YORKThe Seagram Building
375 Park Avenue
New York,
NY 10152, US
+1 212 634 7478
LONDONHeron Tower
110 Bishopsgate
LONDON
EC2N 4AY, UK
+44 207 100 7575
AMSTERDAMWTC Amsterdam
H / Tower
Zuidplein 36
1077 VX, Netherlands
+31 20 799 7969
SINGAPORELevel 30
Six Battery Road
049909
Singapore
+65 6725 6376
www.parkerfitzgerald.com
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