IFRS 9 solution of the year: Moody’s Analytics

Asia Risk Awards 2022

Moody’s Analytics has won the IFRS 9 solution of the year for offering a modular, flexible and comprehensive enterprise-wide solution that has dramatically helped financial institutions to comply with the accounting standard amid the unprecedented market volatility in the past 12 months.

Risk models fell short by the onset of Covid-19, the Russia-Ukraine war, historic high inflation and interest rate hikes, as typical data sources became unreliable for effective decision-making amid fast-changing market conditions.

Moody’s Analytics continued to improve its services. It developed a comprehensive set of data and models, supporting the implementation of credit loss impairment calculation and easy integration with clients’ internal systems.

Moody’s Analytics Credit Loss and Impairment Analysis Suite, including the ImpairmentStudio solution, helps organisations address IFRS 9 and its US equivalent, the Current Expected Credit Loss (CECL). IFRS 9 is an accounting standard published by the International Accounting Standards Board covering the measurement of financial instruments, asset impairment and hedge accounting. Banks must predict the future loss of all assets at the point of origination or purchase and provision for these assets: the concept of expected credit loss (ECL).

The US-headquartered financial services company’s robust data sourcing and controls, models, trusted economic scenarios, expert advisory services, pre-configured disclosure and analytical reporting tools, plus an end-to-end software platform, form the foundation of a successful credit loss and impairment analysis programme.

Calculating expected credit losses involves modelling parameters such as the probability of default and exposure-at-default under different macroeconomic scenarios. The resulting loss forecasts are used to set loan-loss reserves that banks carry on their balance sheets.

Moody’s Analytics has enhanced its IFRS 9 calculation options by including parameters to control the volatility of probability of default better and expected credit loss metrics over time. The enhancements also include applying user-defined thresholds for the probability of default and loss-given default parameters through management overlays.

It has also introduced new thematic scenarios for issues such as the Russia-Ukraine conflict, the trade war and the coronavirus pandemic, while expanding its coverage of country-specific scenarios. This wealth of documentation provides clarity and auditability and creates an open-box feel and ease of use for clients.

The company takes pride in the completeness of its offerings, ranging from data, models, economic forecasts and scenarios, and advisory services integrated and automated into one platform, the ImpairmentStudio.

One of the features of this platform is cross-systems linkages with cashflow, risk and finance systems, allowing clients to see broader economies of scale and opportunities for multiple use cases.

Examples for the use cases include assessing earnings volatility while analysing the internal risk capital, conducting IFRS 9 forecasting and stress-testing, and asset liability management. Linking the solution to scenarios for other purposes, including the Internal Capital Adequacy Process and stress-testing, also promotes efficiency and consistency for the data and models being used.

In addition, the platform provides cloud-based, end-to-end orchestration, automation and an audit trail of expected credit loss calculations with continuous updates and expansion. A client is given the flexibility to choose Moody’s Analytics’ platform or calculation engine in different forms depending on its requirements for each country, whether on premises or cloud-based.

ECL calculations and reports generated from the platform will also cater to local jurisdiction methodologies and disclosure nuances.

The solution is not only linked to compliance with IFRS 9 or CECL, but also other segments such as insurers. It provides global organisations with the linkages required for different regional reporting needs and helps them become more consistent with the data, scenarios and models used for calculations.

Not only catering to big global firms, but Moody’s Analytics’ IFRS 9 solution is also suitable for financial institutions of all sizes. Its clients range from small firms with 20 names in their portfolios to Tier 1 firms.

In the past 12 months, the company has significantly improved the solution’s scalability and deployment process, switching reporting between cloud-based and on-premise installations.

Finally, Moody’s Analytics understands the growing importance of disclosures in today’s world, especially in the highly regulated financial industry. It now offers an increased level of disclosure reporting to create visibility into models and volatility and more understanding of the underlying changes.

New user interfaces and matrixes were created to support the monthly or quarterly changes in data and models and to determine the impact on different regions and coverage of exposures. The impact analysis feature allows clients to understand specific risks in their portfolio based on credit risk inputs, model updates and scenario forecasts.

Asia Risk is awarding Moody’s Analytics for the completeness of its IFRS 9 solutions and the upgrades it conducted over the past 12 months, including pandemic-related macroeconomic forecasts, which have proved to be relevant in the current market conditions.