IFRS 9 Could see 30 Percent of Retained Earnings set Aside for Future Losses

Effectively aligning risks with finance data is critical in IFRS 9 implementations

In a recent survey of risk officers from leading APAC banks at the 2016 FICO CRO Forum, 88 percent of respondents anticipated that IFRS 9’s prescribed calculation of impairments could result in up to 30 percent of their retained earnings being set aside for future losses. Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the bank to be reinvested in its core business, or to pay debt.

IFRS 9 is the new International Financial Reporting Standard that will require banks to adopt a forward-looking loss model on either a one-year or lifetime horizon for all accounts. Its main purpose is to develop a common framework of reporting standards that will enable transparency across borders. Specifically, the regulation will focus on how banks classify and measure their impairment and hedging.

IFRS 9 will replace International Accounting Standard 39, which recognizes loan losses only when the credit loss has already happened. Under IFRS 9, credit losses will have to be estimated. Banks will need to accurately calculate how much they need to set aside to cover bad debts, so they don’t lose use of this capital for other business goals.

Ankit Khandelwal, analytic solutions lead and IFRS 9 expert for FICO in Asia Pacific said, “The implementation of IFRS 9 will change the way balance sheets and earnings are reported. Banks will need to perfect and validate a suite of models so that they can minimize the volatility and increase in provisions and also stand up to auditing. Banks will be looking for solutions that reduce complexity and investment, increase automation and leverage work done with previous models such as Baselimplementations. In addition, there will be an increased focus on refining decision strategies in the context of new provision levels.

Only 56 percent of respondents to the FICO survey believed banks in the region will meet the global deadline set for IFRS 9 implementation, January 1, 2018. Countries such as Singapore, Hong Kong, andAustralia have indicated clear intentions to meet the deadline and full implementation by 2018.

Moreover, despite pressure to meet the deadline, only 50 percent of respondents have implemented models that are compatible with the requirements of IFRS 9. The banks identified the most challenging part of IFRS implementation as the need to better align risk and finance data. In a separate study, Deloitte reported that banks require three years to implement IFRS 9, on average.

Dan McConaghy, president for FICO in Asia Pacific, said, “IFRS 9 is being brought in to right some of the accounting wrongs that helped to plunge global markets into meltdown almost a decade ago. The accounting practices of the day painted a broadly positive picture of the financial markets and failed to highlight the risks that lay ahead. The introduction of IFRS 9 is contentious because of the significant work and investment involved, but with the right analytic approach and solutions it becomes much easier and will yield valuable models that can improve the way impacted businesses operate.”

FICO surveyed 32 risk officers from 21 leading APAC banks at the 2016 FICO CRO Forum.

Author: Dylan Jones

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