Navigating IFRS 9: strategies for effective implementation, and what comes next

A recent webinar focused on the Asia-Pacific (Apac) region, sponsored by SAS and Intel, explored the key challenges of implementing International Financial Reporting Standard (IFRS) 9, the insights gained from the process and what the next stages might involve. This article explores the main themes covered in the session

The panel

• Moderator: Lu Yin, Principal risk adviser, Asean, SAS
• Nicholas Lee, Solutions architect, risk business consulting, Apac, SAS
• Animesh Mandal, Executive director, head of IFRS 9 and stress-testing models, and expected credit loss analytics, Standard Chartered Bank 
• Balakerthy Punyakoti, Senior vice-president, head of Asia retail risk models and advanced analytics, HSBC
• Raj Kokil Singh, Deputy general manager, risk management, Central Bank of India  

The financial reporting landscape has undergone constant change – and continues to evolve at pace. IFRS 9 – which specifies how firms should classify and measure financial assets, liabilities and certain contracts to buy or sell non-financial items – has proven a critical component. But, with further change imminent, it is crucial for financial institutions to retain a forward-looking and flexible approach.

Implementation challenges and considerations  

IFRS 9 has not had the smoothest of paths to date. Since it was adopted in 2018, various geopolitical incidents have occurred, creating significant challenges for businesses and their operations.  

Reflecting on recent events, Standard Chartered’s Animesh Mandal said: “What we should remember is that the past five years have been a roller-coaster for us. First, we experienced the US/China trade war, then we were hit by the global [Covid-19] pandemic, followed by the war in Ukraine.”  

Mandal explained that, in his experience, collaboration and co‑ordination of teamwork between stakeholders within the risk, finance, business and IT functions are required for effective IFRS 9 implementation. Given the tumultuous events of the past few years, he believes adapting to change in the macroeconomic environment is also critical for successful implementation. Despite testing times, there have been positive outcomes: Mandal summarised IFRS 9 implementation to date as “progressive improvement”.  

HSBC’s Balakerthy Punyakoti also highlighted positive developments since the implementation of IFRS 9: “Understanding the drivers of ECL [expected credit loss] and our ability to explain the outcomes has significantly improved over the years. We have a better understanding of the limitations of the models and the methodology, and have been able to identify opportunities to simplify these.” 

With India in the initial phase of IFRS 9 adoption, Raj Kokil Singh of the Central Bank of India considered where challenges might lie and commented that data, systems and models were likely to be the predominant issues Indian banks will face during implementation. 

SAS’s Nicholas Lee noted that he had seen firms experience “insufficient internal controls and governance, the use of multiple data adjustments or management overlays, a lack of transparency in ECL calculations and problems in deriving portfolio insights”.

In addition to the speakers’ views, webinar viewers were invited to provide feedback on the three main challenges experienced in their current IFRS 9 processes. Most (70%) said model development – encompassing related data issues or choice of modelling approach – had been their primary difficulty. More than half (57%) of audience participants also said integration of IFRS 9 with the bank’s business and capital-planning processes was one of the hardest aspects to manage. The third main issue highlighted was integration between source data systems, cited by 43% of respondents.

Impairment modelling 

Lu Yin, SAS

Estimating impairment is one of the key components of IFRS 9, requiring banks to measure the potential credit loss in financial assets, using the ECL models. SAS’s Lu Yin highlighted that this is one of the most mathematically challenging aspects of IFRS 9 and may present difficulties.  

Reflecting on ECL model development and application, when estimating impairment under IFRS 9, HSBC’s Punyakoti highlighted significant considerations, including how to develop models for portfolios with low loss experience. He also drew attention to climate risk assessment, raising the question of how climate risk impacts can be incorporated within ECL models. 

Yin added that, while there is little historical experience of default caused by climate change, it is particularly important to look ahead and decide how best to integrate climate risk assessment when designing systems.    

The audience was also asked to share its insights on the changes that have taken place at their organisations since the initial implementation of ECL models. Just over two-thirds (68%) reported there had been recalibration of some of the models. Almost half (44%) said redevelopment of some of the models had taken place, for instance, by taking a different approach. Forty per cent reported that the number of scenarios has changed. Development and implementation of new models for new markets and products has also been required, according to respondents.

Maximising value

As some banks have integrated the IFRS 9 process with stress-testing, the panel examined the integration issues involved, and whether IFRS 9 can be used beyond regulatory compliance.  

Mandal commented that, while IFRS 9 models fulfil regulators’ stress-testing requirements, they may need tweaking. He also suggested that, before deciding whether models are fit for use for stress-testing, some other considerations should be explored – particularly with regulators in mind. These included having sufficient governance in place for stress-testing, a scenario-generation team in place for capital stress-testing, and a recovery plan and teams to challenge the merit and design of the scenarios.    

Looking at how banks might make use of IFRS 9 beyond regulatory compliance, Lee observed three main areas in which banks were making use of IFRS 9 for other purposes. As well as stress-testing, these included using the ECL results to detect early signs of credit deterioration and to integrate different risk practices and activities across all platforms.  

Punyakoti noted that ECL models are being used for risk management tasks, such as credit-limit management for unsecured revolving portfolios, exposure management and portfolio-profitability assessments. 

Mandal expressed the view that impairment methodology is a key area in which IFRS 9 could be applied, also referring to portfolio profitability assessment: “If you have the right level of analytics, you can figure out your ECL contribution from the different parts or buckets of your portfolio, identifying which portfolios are profitable and which are not.”  

From the perspective of Indian banks, Singh commented that the ECL aspect of IFRS 9 will be useful for provisioning, based on the probability of customer default and recovery. He also said it will help banks maintain strong balance sheets and remain prepared for losses: “It will help banks to have the proper levels of provision based on the risk involved in each account.”

Technological support 

Nicholas Lee, SAS

Given the range of potential teething problems that can arise in the process, the panel reviewed the ways technology can assist with IFRS 9 model development, implementation and monitoring from a model operations and model risk management perspective: 

“One of the main roadblocks in the model lifecycle – from development all the way to implementation – is the amount of time it takes to move the models from development to production. It can also be quite costly,” observed Lee. “But, with the help of technology, you can strip out inefficiencies and manual intervention.

“Most technologies provide workflow management capabilities to streamline the modelling lifecycle, which starts with data management and data preparation, and goes all the way through to model development, validation and then, finally, deployment and monitoring.

“This eases the burden from an IT support perspective and also speeds up the process between development and deployment, reducing some of the manual input required.”  

Singh shared the view that systems and data, as well as technology, would all be critical in helping banks develop their IFRS 9 models.

Conclusion  

The panel’s expert insights and experience of IFRS 9 implementation included a number of key takeaways, such as the importance of collaboration, the ability to adapt to macroeconomic upheaval and awareness of the difference that technological support can make. 

While the panel acknowledged improvements and progress made to date, the discussions also made it clear the IFRS 9 journey is not yet complete.

Yin concluded the session by noting the many and varied challenges that lie within the process of IFRS 9 implementation, such as a “lack of controls, black-box models, overreliance on manual adjustments and inability to perform in‑depth analysis”. 

However, she also proposed effectively addressing these by upgrading or modernising IFRS 9 platforms to increase transparency, flexibility and integration.
 

Learn more

Watch the SAS webinar, Navigating IFRS 9: strategies for effective implementation and moving beyond

Find out more about SAS risk modelling and decisioning and IFRS 9 solutions

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