bdo uk financial services ifrs 9 insights
TRANSCRIPT
JANUARY 2019
IFRS 9 INSIGHTSBDO UK FINANCIAL SERVICES
2 BDO UK FINANCIAL SERVICES | IFRS 9 INSIGHTS
CHALLENGES FACED BY BANKS CLASSIFICATION AND MEASUREMENT
INTRODUCTION
Banks and building societies pursue different business models for their financial assets, which has sometimes required reclassification from one measurement basis to another. The main reclassification upon transition noted on the 15 financial institutions selected was from amortisedcost to FVTPL1.
The reclassifications from IAS 39 to IFRS 9 that were noted are as follows:
Amortised cost
Amortised cost
FVTOCI
FVTPL
FVTPL
IAS39
FVTPL
FVTOCI2
FVTPL
Amortised Cost
FVTOCI
IFRS 9
% of ECL transitional adjustments in relation to IAS 39 impairment balance
ECL MEASUREMENT
IFRS 9 Financial Instruments (“IFRS 9”) has been developed by the International Accounting Standards Board (“IASB”) to replace IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”).
The IASB completed IFRS 9 in July 2014, by issuing a final standard which incorporates the requirements of all three phases of the financial instruments projects, being Classification and Measurement, Impairment and Hedge Accounting.
We have conducted a study on the transition reports and interim financial statements of 15 top banks, mid-tier banks and building societies. The main areas of our study have been focused on the transitional impacts over Classification and Measurement, expected credit loss (“ECL”) estimation, stage allocation, critical accounting judgements and estimation uncertainty and associated disclosures.
32.8%
Average
76.3%
34.5%
16.1%
16.7%
-9.6%3
59.8%
156.9%
60.7%
Top banks
Challenger banks
Building societies
Governance changes
IFRS 9implementation
Developing policies
Business model assessments
Designing, building and implementing ECL model
Continuous reassessment of judgements and estimates
Disclosures
Internal system and processes changes
People, training and resources
1 – Fair Value Through Profit or Loss
2 – Fair Value Through Other Comprehensive Income
3 – This transitional adjustment represents a release of impairment provision on transition from IAS 39 to IFRS 9 for a building society.
A range of % of ECL transitional adjustments over opening Impairment balances per category of bank has been provided below.
Low Range High Range
3BDO UK FINANCIAL SERVICES| IFRS 9 INSIGHTS
TRANSITION DISCLOSURES
The banks selected have used different judgements, assumptions and estimates when developing their models.
Examples of judgements, assumptions and estimates included:
Significant Increase in Credit Risk (“SICR”) – Backstop of 30 days applied in the first instance
At least 3 forward-looking multiple economic scenarios used
Multiple macro-economic variables used (e.g. GDP growth, unemployment rate, Bank of England base rate, house prices)
Instances where cure rates used (e.g. 6 to 12 months for retail products in terms of moving from Stage 2 to Stage 1)
Management overlays used (e.g. post model adjustments to cater for certain forecast economic scenarios in light of current political uncertainty)
No restatement made to comparative figures
STAGE ALLOCATION DISTRIBUTION
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
Stage 3
Stage 2
Stage 1
Average gross carrying amount (%)
Top Banks Challenger banks Building Societies
0.0% 20.0% 40.0% 60.0% 80.0%
Stage 3
Stage 2
Stage 1
Average ECL (%)
Top Banks Challenger banks Building Societies
0.0% 10.0% 20.0% 30.0% 40.0%
Stage 3
Stage 2
Stage 1
% of ECL in relation to gross carrying amount
Top Banks Challenger banks Building Societies
Based on the banks selected, it can be noted that the gross carrying amount of loans fall mainly under Stage 1, whereas the ECL is spread more evenly over IFRS 9’s 3 stages.
ECL MODEL
The principal transition disclosures relate to:
Changes in accounting policies on Classification and Measurement and Impairment of financial assets
Accounting judgements and estimates:
– Definitions of SICR, stage allocation, Exposure at Default, Probability of Default and Loss Given Default
– Multiple economic scenarios used
Changes in Classification and Measurement with a comparison between IAS 39 and IFRS 9 by main class of assets
Reconciliation of opening balances of Balance Sheet items on transition from IAS 39 to IFRS 9 by carrying amount
Reconciliation of opening balance of Impairment provisions from IAS 39 to IFRS 9 by key area of change
Analysis of financial assets by Stage for gross carrying amount of financial assets and ECL
FOR MORE INFORMATION:
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1140
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Dan Taylor
Partner
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Mark Spencer
Accounting Advisory Leader
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Nathalie Cheong
Senior Manager
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