The International Financial Reporting Standards (IFRS) Foundation is a non-profit standards committee that aims to set the bar for accounting and keeping financial information. IFRS’s standards can be adopted by financial institutions like banks, as well as companies listed in the public stock exchange. IFRS standards are meant to slowly replace the previous bars set by the International Accounting Standards (IAS) Board, the IFRS’ parent standard-setting body. One of the standards that banks should take note of is IFRS 9, or the standard that governs financial instruments.

Though understanding IFRS 9—let alone implementing the standard—can be a challenge especially for small and mid-sized banks, studying IFRS 9 and onboarding an IFRS 9 application may be worth it. Adhering to the standard may greatly improve a bank’s risk calculation and risk mitigation practices for its assets and, as a result, help it make the most of its current and future investments. If you are curious about what IFRS 9 is and how you can prepare your bank for full compliance and implementation, here’s a quick summary.

A Briefer on IFRS 9: What All Banks Need to Know

IFRS 9 is consistent with the other standards set by the organization in that it seeks to improve the quality of financial information that banks publish. There are several benefits to adopting more stringent standards for keeping financial information. For one, doing so will afford the bank greater efficiency in allocating capital through the use of a trustworthy, internationally comparable accounting standard. For another, it will allow investors and market participants alike to have clearer, more accurate views on economic decisions they will make involving the concerned bank.

In brief, the IFRS 9 standard governs the classification and measurement of financial assets, liabilities, and contracts for the sale or purchase of some non-financial items. Beginning January 1, 2018, a number of banks have begun the compliance journey for adherence to IFRS 9 instead of its predecessor, IAS 39 (Financial Instruments: Recognition and Measurement). Key changes that set the former apart from the latter include the following:

• A shift from the pro-cyclical approach to the counter-cyclical approach. In the finance sector, pro-cyclicality involves viewing the financial system and a country’s real economy as mutually reinforcing. IFRS demands that banks veer away from a predominantly pro-cyclical viewpoint and balance their sheets using a more counter-cyclical approach, thereby curbing imminent risks to their financial stability. 
   
• A specific system for classifying financial instruments. Financial instruments must be clearly classified as either amortized cost, fair value through comprehensive income (FVOCI), or fair value through profit and loss (FVTPL).
   
• A thorough survey and assignment of risk classifications to new accounts. The accounts in question must be tagged as either amortized cost or FVOCI, and banks must be able to indicate whether each new account is:    
  • (1) stable and not deteriorating,
  • (2) showing signs of deterioration in credit quality, or;
  • (3) showing clear evidence of impairment, such as the client’s difficulty making timely repayments.
     
• An IFRS-exclusive system of properly calculating financial items. The IFRS 9 system stipulates particular ways of calculating effective interest rate (EIR), effective interest spread (EIS), and expected credit loss (ECL), among others.
   
• Greater efforts directed towards credit modeling. Through IFRS, banks are enjoined to scale up their current modeling capabilities when it comes to calculating point-in-time probability default, or PD, and loss-given default, or LGD.
   
• Stronger reporting protocols. In line with the stringent and granular levels of calculation required for financial assets, IFRS 9 also calls for banks to improve the consistency and accuracy of their financial reporting.

What Approach Should Your Bank Take in Preparing for IFRS 9?

IFRS 9 will essentially require banks to revamp their traditional systems for calculating and assigning risk to their financial assets. The standard also calls for even greater synchrony between the bank’s finance and risk management teams. Given the challenges associated with such a major disruption, what can a bank do to sufficiently prepare and, ultimately, benefit from adopting IFRS 9?

Below are three quick tips for kickstarting your own bank’s compliance journey.

Transition into IFRS One Phase at a Time

You can break down your transition to full IFRS 9 compliance in three steps. They are, in the order of priority:

• Developing an IFRS-compliant system for classifying and measuring your current range of financial assets,
• Determining impairment, and;
• Examining your hedge accounting practices.

As with any big transition to a new system, it’s best for your bank to take it one step at a time.

Get Ready to Upgrade Your Bank’s Risk Modeling Capabilities

IFRS 9 aims to instill more risk-sensitive practices among banks that don’t simply rely on top-down and rules-based assumptions. In line with that, get ready to develop a more responsive, adaptable, and transparent risk management approach for your bank. You will need to rely on new models for calculating risk, inclusive of macroeconomic factors. 

Invest in a Solution That Will Make Your IFRS 9 Compliance Easier

One of the best things you could do to streamline your compliance journey is to onboard a software solution that’s specially built for keeping faithful to IFRS standards. This can help your IFRS 9 transition team with credit loss reconciliation, deferred balance amortization, and other granular accounting processes that are tied to the standard. It will also assist your organization in executing a counter-cyclical mindset after a long time of following pro-cyclical approaches. A good software solution will allow your bank to sift through large volumes of financial data representing each asset and consolidate your existing data and technology infrastructure, all for the purpose of complying with IFRS standards.

Admittedly, compliance to IFRS 9 will prove a challenge to banks. But full compliance also has its perks. It helps a financial institution of any size become more up-to-date, and therefore more responsive, when mitigating imminent risks. Thanks to IFRS 9, bank executives will also be empowered to practice sharper strategic decision-making. That, in turn, could help the organization make smarter investments, bolster relationships with investors, and cultivate an legacy of transparency with its finances.

Adopting IFRS could be one of the best long-term decisions you make for your organization. Be sure to read beyond this primer and learn what you can about succeeding in your IFRS compliance journey!