IFRS 9: Insights into the Critical Aspects of the New Accounting Standard - Part II

The ways in which it is necessary to detect the possible deterioration in the creditworthiness of a financial instrument have significantly changed with IFRS 9.

The change in the creditworthiness must be detected and recognised in the balance sheet as early as possible (namely, before a trigger event occurs, as in the current IAS 39) by analysing the “probability” (PD) of this occurring over a period of 12 months.

Basically, stating that the deterioration is no longer connected to past events but it must be defined on the basis of information including historical data as well as current and forecast data (from incurred logic to expected logic).

This analysis over a period of 1 year determines the first model of impairment named STAGE 1, where the deterioration of an instrument which is still “performing” (investment grade) is detected and where the depreciation to be recorded on the income statement is assessed as a variation of its default probability (PD) over 12 months.

STAGES 2 and 3 represent a worsening of the situation previously described. If a financial instrument shows at a certain date of assessment an important increase of the credit risk compared to that observed at the time of its acquisition and this risk compromises, for example, the investment grade of the security, it is necessary to depreciate by simulating the current value of any failure to collect and pay related to the instrument throughout the entire life cycle of the financial activity (STAGE 2).

STAGE 3 refers to those instruments that represent objective elements of impairment.

IFRS9: insights into the critical aspects of the new accounting standard

Also with reference to the second pillar of the accounting standard IFRS 9 we can see, in my opinion more clearly, the impacts in terms of complexity of the required quantitative analysis, because the impairment is a principle based method and it lets the company define the measures and the methods to apply. IFRS 9 suggests various PD calculation approaches between 2 moments of assessment but, for example, the method by which the company weights historical, current and forecast data suggests that the company needs complex computing systems able to develop numerous simulations which are then adequately maintained, integrated and connected to the accounting systems.

The need to use and integrate forward looking elements into the estimates, makes it necessary to transform the information systems of the CFO by bringing them closer to the sophisticated ones typical of the Risk management departments.

Hedge Accounting

IFRS 9 aligns the accounting standard with the hedging logic typically used in the financial industry and widens the meaning of hedging instruments by asserting that any instrument classified as FVTPL can be designated as a hedging activity.

The assessment of the hedging instruments and the effectiveness of the hedging for a possible depreciation on the balance sheet must be performed over the long term and considering all implications on the systems and procedure described before resulting from the forward looking contamination of historical and actual criteria.

The financial statement - that will represent the disclosure on the effects for each company of the new IFRS 9 applied to the financial activities - is related to all three pillars of the IFRS 9 and it will change the approach to the organization and management of the most important information of the CFO’s information system.

What are the future challenges?

  • 1. Will the classification of the security follow its purchase or the purchase must be done on the basis of the prior classification of the security? How will the role of the CFO change in relation to the interrelationships with the other functions (Investments manager, back office, risk manager…) and which tools will the CFO need?
  • 2. How must the impacts on the procedures and system architectures be managed? Should we rely on In-house solutions or on the vendors in the hope that they could propose market solutions? For example, to manage the eligibility analysis known as SPPI test or to centrally manage (consider, for example, group of companies) the BM definition logics for homogenous groups of portfolios?
  • 3. What KPI systems should be defined to assess the performance?

Performance Management processes

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