Part 1 of 2
Read part 2 – A Look into Model Requirements for Accurate Reporting and Impairment Terminology
Ahead of the implementation of the new IFRS 9 accounting standards on 1st January, 2018, CFP have conducted research as to the progress of the industry and areas proving to be most challenging with implementation of the standard and meeting regulatory set deadlines.
Aside from the implementation of the 3 phases of IFRS 9, the sheer complexity of the requirements and how they fundamentally impact the future of risk management and accounting professionals is a key component moving towards IFRS 9 implementation. Understanding the requirements and how accounting professionals and risk managers can adopt the changes and incorporate them into their workload is an area yet to be determined. This report will focus on the first stage; the single classification and measurement approach for financial assets and how this is impacting business models and processes. A further two reports of CFP’s findings relating to Impairment and Hedge Accounting will be released ahead of CFP’s IFRS 9 Forum taking place on 3-4 November, 2015 in London.
Financial reporting under the current IAS 39 standard has proven to be complex, allowing room for multiple interpretations and further errors to occur. Classification of assets can appear substantially different across organisations in their current processes, making comparability across business almost impossible and invalid. The current classification is one of many areas within risk management put under close scrutiny after the 2007/8 financial crisis, alongside other areas under IFRS 9 including; expected credit losses and impairment models. IFRS 9 has moved towards a principle-based classification centred on business models and nature of cash flows, after IAS 39 rule based models were deemed too complex and difficult to apply.
CFP’s research has revealed that the Classification and Measurement phase appeared to be where most progress had been made, with early documents released outlining the requirement, many have adopted an understanding of what is expected and are looking towards implementing these into business models. This is where the challenges rest, although a general understanding of the phase appeared clear, developing necessary project approaches to implement the standard were not yet fully understood. Implementation challenges around developing the necessary accounting policies and practical guidelines to ensure compliance alongside adding value to the business is an area open for discussion, although many organisations are well on their way to understanding how this can be actioned, further clarity is needed around the interaction with other aspects of IFRS 9 alongside the transition from IAS 39 to all new phases under IFRS 9.
After concerns around general implementation of the financial asset classification and measurement logic under IFRS 9, are more specific systems requirements around understanding how to classify certain assets in practice and understanding classification of product groups. Current IAS 39 systems need significant updates under the new IFRS 9 Classification and Measurement approach; therefore an understanding of how to update these systems to incorporate the new requirements is needed. Many are asking the questions whether current models can be updated to incorporate the standard or whether to start again building new systems and processes to accommodate the requirements?
After the review of the definitions under IFRS 9 and an understanding of implementation into current or new systems, is a look towards the impact of implementation on the business. It is not necessarily clear until businesses are ready to perform parallel runs, the effect that the new classification standards will have on financial numbers, the effects across organisations can differ greatly depending on current business models, therefore quantifying the effects prior to parallel runs is difficult to understand. Current operating models and adapting them accordingly can be time and resources intensive, therefore ensuring that the business gains some value added from the process is vital. Finally, further understanding of the impact on the business is needed in terms of the effect the new standards and classification process will have on profit and loss and capital requirements. Organisations are yet to determine how the changes will impact on various aspects of the business lines, this is a key area of concern in order to ensure that capital requirements, profit and loss and financial numbers aren’t adversely effected, and the impact is kept to a minimum in order to move forward with the new standard.
Overall the classification and measurement phase appears to be the area with most progress, however many grey areas remain in terms of understanding of effects on areas across the business, systems and financial numbers. Businesses are looking to conduct parallel runs in 2017, ahead of the 2018 implementation to gain further clarity around moving forward with the standards implemented and any further requirements to models, systems and processes. Until then, further industry discussion is required to gain an understanding of best practice moving forward and understanding as to how organisations are adopting the approach in order to understand the changes.
CFP have compiled an intensive two-day IFRS 9 Forum centred around the challenges highlighted throughout the research into the effect of the move from IAS 39 to IFRS 9. Classification and measurement is an area featured to include presentations and panel discussions from thought leaders in the area. Interactive panel discussions allow for discussion between the audience and panelists for all to ask and answer questions around the implementation, as well as practical industry advise.
The event will also look into Impairment models and Hedge Accounting, look out for further research reports from CFP ahead of the event on 3-4 November, London. Visit http://www.cfp-events.com/forthcoming-events/ifrs-9-impairment-and-implementation/ for further information
