With IFRS 9 on the horizon, CROs and CFOs don’t have long left to gear up for the final stages of implementing the new standards. Ben O’Brien, managing director of Jaywing, explores the challenges firms are facing.
As most firms are aware, IFRS 9 will be a significant change to the financial reporting of all lenders.
Given the importance of UK lenders in global capital markets and the wider economy, the effective implementation of the new standard will benefit many stakeholders, including investors, regulators, analysts and auditors.
Conversely, a low-quality implementation based on approaches that are not fit for purpose has the risk of undermining confidence in the financial results, shining a spotlight over offending lending organisations.
Jaywing is working with organisations that have made significant headway towards IFRS 9 implementation. That’s given us a lot of insight on the current and perceived issues organisations face in achieving this transition.
Long range loss forecasting
The new standards require loss forecasts that are more sophisticated and predict further into the future than was needed previously.
Producing forecasts in a robust manner is a challenge and requires heavyweight analytical expertise to achieve.
Moreover, IFRS 9 models require constant updates to ensure they remain accurate, potentially creating a large ongoing resource overhead.
That’s why many firms are looking to adopt modelling software that encapsulates heavyweight analytical expertise as a more affordable option to meeting best practice standards.
Lack of data
Modelling the new requirements is data intensive, and this is a key challenge, particularly for lenders with low defaults or a lack of historical data.
One way to overcome this issue is by utilising a relevant industry-wide dataset to supplement your internal data. Through partnerships with IFRS 9 specialists, you can have an approach to creating IFRS 9 models even where data is thin.
Risk and finance working together
IFRS 9 requires credit risk modelling approaches and data to be applied when preparing your accounts, meaning that risk and finance teams will need to work more closely than ever before.
Those organisations that have the right structure, processes and systems to manage this, find compliance more straightforward.
Currently, much of the data required for producing IFRS 9 provision numbers is held in separate systems and often with different definitions from risk and finance teams.
The best approach to meeting the new standards is to have one centralised data store – a single version of the truth.
Some early adopters have already begun to put sophisticated data marts in place to manage and store data better.
This best practice approach will not only help them address the IFRS 9 requirements, but having a single source of data will make it far easier to address additional regulations and requirements now and in the future.
Controls and governance processes will be particularly critical for implementing IFRS 9. Lenders will need to make sure they are focusing on the right areas, with the right team behind them who have a clear focus on what needs to be done right now.
The impairment requirements for IFRS 9 show many practical challenges that will need to be addressed during project implementation.
The key to success includes: