IFRS 9 Impairment Principles and Approach: Building an Expected Loss Model

Tackling impairment, balancing IFRS 9 credit provisioning and maximizing profitability

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The Road to IFRS 9 Compliance White Paper provides an overview of the key considerations that all IFRS 9 project managers should take into account in planning their transition from IAS 39 to the new standard.

It provides an insight into the broad ramifications for banks of IFRS 9’s forward looking expected credit loss model for the calculation of provisions. It outlines the key differences between the IFRS 9 and IAS 39 accounting standards, and examines the implications for banks in five key areas:

  • Financial instrument classification
  • IFRS 9 impairment stage identification
  • Credit provisioning calculations
  • Credit modelling
  • Reporting

The white paper discusses the three areas where banks are currently lagging in, and where action is most pressing – risk modelling, technology systems, and the imperative to act to meet the deadline.

One of the most imposing requirements for banks aiming to achieve IFRS 9 compliance is that they need to build and calibrate a lifetime expected loss model. Doing this presents challenges on three fronts: i) modelling lifetime estimates of probability of default and loss-given-defaults; ii) banks now need to make highly granular cash flow calculations - at an instrument level; and iii) calculation of provisions using IFRS 9 methods requires managing large volumes of data emanating from multiple sources.

The paper proposes a solution that can not only help banks achieve this requirement, but also provide the following benefits:

  • Maximization of existing investments in risk and finance systems, allowing reutilization of data, business rules and technology infrastructure, reducing costs and time-to-market
  • Consolidation of technology and data repositories for risk and finance
  • Availability of a comprehensive, end-to-end solution to address IFRS 9, from data management to computations to accounting and reporting

Finally, the paper profiles a major international bank that is already IFRS 9 ready, years ahead of the deadline for compliance, using the approaches the white paper suggests. It covers the key factors that contributed to its accomplishment, and how it leveraged existing data, processes, and technology to achieve forward looking, forecasting-based approaches for provision calculations (a key requirement for IFRS 9), effectively replacing the incurred loss model.