On 7 March 2013, the IASB published a final draft on the risk provisioning model for financial instruments – ED/2013/03 "Financial Instruments: Expected Credit Losses“.
The draft constitutes the second pillar of the IASB's IFRS 9 project and shall be applicable to financial years that begin on, or after 1 January 2018. It is expected that the standard will be finalised at the end of 2014.
The aim of the new standard is to establish rules for the recognition, measurement, presentation and disclosures in the notes for expected credit losses, which would provide users of (IFRS) financial statements with useful information for assessing the amount, timing and collectability of future cash flows.
In the course of this, a three-stage expected loss model will replace the current incurred loss model of IAS 39.
The new rules will result in a considerable need for adjustments both in terms of processes as well as on the IT side.
Furthermore, because of the new requirements, the institutions will have to make increased use of data from their risk areas (esp. PD/LGD/EAD). The parameters will have to be checked to determine whether or not they are IFRS compliant and, in many cases, adjusted.
The following diagram provides an overview of the basic methodology for the new impairment rules and presents the main relationships between the IFRS requirements and an institution's risk parameters.
IFRS 9 – Impairment overview
In the overview below, by way of example, we have presented the adjustments that would need to be made to an institution's internal systems and processes, including our assessment of the impact on the individual subareas:
In view of the changes to the methodology and to the focus of the impairment model on expected losses, it can be assumed that the changeover at the institutions will result in earlier and higher levels of realisation of impairment.
The following charts provide an overview of the main differences in the calculation of risk provisioning in accordance with IAS 39 and IFRS 9.
Calculation of impairment write-down; IFRS 9 vs. IAS 39:
Calculation of interest income; IFRS 9 vs. IAS 39
Implementation proposal and potential support that can be provided by SKS
SKS, with its content-related know-how and implementation expertise based on many years of consulting experience and expert knowledge in the areas of accounting, risk management, credit processes and regulatory law, is able to provide institutions with effective support for their business activities as well as for their implementation requirements.
In order to define overall targets for a project and to create concrete plans we recommend conducting a preliminary study to obtain greater transparency and clarity for decision-making.