kpmg impact of ifrs - banking

8/12/2019 KPMG Impact of IFRS - Banking

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IMPACT OF IFRS: BANKING | 1

KPMG INTERNATIONAL

Impact of IFRS:

Bankingkpmg.com/ifrs


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2 | IMPACT OF IFRS: BANKING

Contents

Overview of the International Financial Reporting

Standards (IFRS) conversion process 4

Accounting and reporting 5

Financial instruments classification, measurement,

recognition and derecognition 6

Financial instruments impairment 8

Hedge accounting 9

Consolidation and special purpose entities (SPEs) 10

Definition of debt versus equity 12

Presentation of financial statements and disclosures of

financial instruments 13

Leases 14

Insurance contracts 16

Post-employment benefits 17

IFRS 1 first-time adoption 18

Systems and processes 20

From accounting gaps to information sources 21

How to identify the impact on information systems 22

Banking accounting differences and respective

system issues 23

Parallel reporting timing the changeover from

local GAAP to IFRS reporting 24

Harmonisation of internal and external reporting 27

People 29

Business 30

Stakeholder analysis and communications 30

Audit Committee considerations 30

Monitoring peer group 30

Other areas of conversion risks to mitigate 31

Benefits of IFRS 31

KPMG: An Experienced Team, a Global Network 32

2011 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.


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Foreword

Given the significance of the financial crisis over the last few years, there is greater

political and regulatory will than ever before for a single set of converged, global

accounting standards. Transparency and comparability across the banking sector is in

the spotlight once again.

With many countries having converted to IFRS in 2005, conversion is imminent for

other countries such as Canada, South Korea and Mexico in 2011 and 2012; and with

the US debating the merits of conversion to IFRS, its clear that IFRS is high on the

accounting agenda across the globe.

Since the first major wave of adoption in Europe and Australia there is a mass of

information available for individuals to sift through over 699,000 hits for IFRS

in banks alone on some internet search engines. This publication is focused onassisting conversions to IFRS in the banking sector. Whether you are starting your

project or merely considering the impact, the broad overview of the topics listed

below will help you to better understand the implications of an IFRS conversion:

Overview of the IFRS conversion process . We look at how the conversion

management needs to take a holistic view of the different aspects of the

accounting under IFRS and its impact across the entity.

Top Ten IFRS banking accounting and reporting issues , giving guidance on

the key areas of focus that are likely to be the cornerstone of the project. Many

other accounting areas are not specifically banking related and are therefore

excluded from our discussions, but will need consideration.

Information technology and systems considerations . We discuss how the

banks will need to bridge the gap between IFRS reporting and the general ledger

and sub-ledger systems so as to deal with parallel reporting (i.e. local generally

accepted accounting principles and IFRS reporting at the same time) and internal

vs external reporting.

People knowledge transfer and change management . Ways to drive training

and knowledge management into the teams dealing with the changes required.

Business and reporting

. The issues around operational performance andmeasurement that needs to reflect the impact of IFRS and how to communicate

this to different groups of stakeholders.

While the main audience of this publication are those contemplating IFRS conversion

rather than those already converted, we hope there is something stimulating and

thought-provoking for all those dealing with IFRS, particularly given the forthcoming

changes in standards such as IFRS 9 Financial Instruments, which will have a

significant impact on banks.

Colin Martin

Head of UK Assurance Services, Banking



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How to link?

How to link?

How to link?

How to link?

PROG

RAMMANAGEMEN

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PROGRAMMANAGEME

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Overall Management

IFRS CONVERSION

Accounting and Reporting

Systems and Processes

Business

People

Overview of the International

Financial Reporting Standards (IFRS)conversion processAll IFRS conversions have consistent

themes and milestones to them. The

key is to tailor the conversion specifically

to your own issues, your management

style, the structure of your working

groups, the engagement of your

stakeholders and the requirements

of your corporate governance. Whilstbanks may be similar in many respects

there will always be differences in the

corporate DNA that makes this tailoring

of the project a necessary part of the

IFRS conversion.

The IFRS Conversion Management

Overview diagram below presentsa holistic approach to planning and

implementing an IFRS conversion

by ensuring that all linkages and

dependencies are established betweenaccounting and reporting, systems and

processes, people and the business.

The conversion needs to effectively

address the challenges and opportunities

of adopting IFRS to all aspects of your

business. This includes, for example,

consideration of the impact of IFRS

transition on the regulatory and tax

aspect of your operations, which may

vary depending on state, federal,product, reporting or competitive

requirements.



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Accounting and reporting

The first key area to tackle in the

holistic approach outlined above is the

accounting and reporting. It will involve

a diagnostic and in-depth analysis of the

differences between your local Generally

Accepted Accounting Principles (GAAP)

and IFRS, from which will flow all the

project requirements around which any

organisational change needs tobe managed.

Making sure that this upfront

assessment of the impact of IFRS and

the Gap analysis is accurate and

comprehensive is critical to a successful

conversion. It is essential that this is

undertaken for your specific entity, evenif the sector issues are deemed to

be similar.

Based on our firms experience of IFRS

conversions, we outline below the Top

Ten accounting issues for banks to

consider when converting to IFRS. This

list is not meant to be comprehensive;

indeed it does not cover many areas

that banks need to consider. There are

many other important accounting topics

such as share-based payments, tax, jointventures, and other areas of accounting

for financial instruments, to name a few,

that we have not considered in

this publication.

In our experience, these Top Ten issues

are significant to banks as:

they may result in significant

accounting policy decisions that

impact future results, for example

deciding whether to account for

certain financial instruments at

amortised cost or fair value, or

whether to apply hedge accounting;

they may require significant time and

cost to evaluate and implement, for

example review of special purpose

entities (SPEs) to decide whether

or not they should be consolidated,or review of contracts to determine

whether they meet the definition of

an insurance contract;

issues may have significant impact

on information systems and

accounting processes and internal

controls, for example, calculatingeffective yield or impairment of

financial instruments, or collecting

data for the additional disclosures

relating to financial instruments.

Top Ten issues

Financial instruments classification,

measurement, recognition and derecognition 1

Presentation

of financial statements and

disclosures of financial instruments

Leases

Insurance contracts

Post-employment benefits

IFRS 1 first-time adoption

Financial instruments impairment

Hedge accounting

Consolidation and special purposeentities (SPEs)

Definition of debt vs equity

6

72

83

94

105



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1


Financial instruments classification, measurement,recognition and derecognition

Financial Instruments make up the majority of most banks

assets and liabilities and IFRS requirements for accounting for

financial instruments are prescriptive. This often leads to majorimplementation challenges.

Financial instruments are initially

measured at fair value, which most

often, but not always, is the transaction

price. After initial recognition they aremeasured at fair value, amortised cost,

or cost. Amortised cost is a concept

similar to cost, but involves adjusting

the balance sheet amount for the

effect of calculating the yield on certain

financial instruments by spreading

fees, transaction costs and discounts/

premiums over the lives of

those instruments.

The types of financial assets that can be

accounted for under amortised cost are

mostly limited to debt instruments heldto maturity and those not quoted in an

active market. Financial assets that do

not meet the amortised cost criteria are

accounted for at fair value with gains and

losses recognised either in profit or loss

or in other comprehensive income.

Derivatives are generally accounted

for at fair value with gains and losses

generally recognised in profit or loss.

If derivatives are embedded in other

contracts (those contracts may or may

not be financial instruments) they mayhave to be separated and accounted for

separately from the host contract, at fair

value, with gains and losses recognised

in profit or loss.

Equity investments are generally

accounted for at fair value. There is alimited exemption for unlisted equity

investments when fair value cannot bereliably measured, which are accounted

for at cost less impairment.


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In November 2009 and October 2010

the IASB issued the first two parts

of a new standard on accounting for

financial instruments IFRS 9 FinancialInstruments. They cover classification

and measurement for financial assets

and financial liabilities and are effective

for accounting periods starting on or

after 1 January 2013, but can be adopted

early. The standard removes the cost

accounting category for investments

in equity instruments and introduces

new classification criteria. Under its

requirements, financial assets are eligible

for accounting at amortised cost only ifthey are held within a business model

whose objective is to collect contractual

cash flows and their contractual terms

give rise to cash flows that are solely

payments of principal and interest.

Financial assets that do not meet the

criteria for amortised cost accounting

are measured at fair value with gains

and losses recognised in profit or loss.For equity investments, an election

can be made to recognise gains and

losses in other comprehensive income.

Accounting for financial liabilities remains

similar to that in IAS 39 except that

the effect of changes in credit risk on

financial liabilities designated as at fair

value is generally recognised in other

comprehensive income.

Requirements relating to derecognition

of financial instruments are complex,

requiring a comprehensive analysis ofthe transaction. The requirements are

a mixture of risk and rewards and

control models.



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2


Financial instruments impairment

Impairment of financial assets is an area in which accounting,

regulatory and internal risk management requirements meet. Itis important that, on conversion to IFRS, any accounting solution

minimises the need for additional systems, process and internal

control changes and also ensures that differences between thoserequirements are well understood and managed.

The impairment of financial assets is

currently measured on an incurred loss

basis. This means that no impairmentallowance can be established at

initial recognition of a financial asset.

Impairment is recognised if objectiveevidence indicates that an asset is

impaired due to events occurring after

initial recognition.

An impairment loss is measured

differently for financial assets

accounted for at amortised cost thanthose accounted for at fair value

with gains and losses recognised in

other comprehensive income (thelatter measurement category is called

Available for Sale, or AFS). For financial

assets measured at amortised cost,

the impairment loss is measured as the

difference between an assets carrying

amount and the present value of theestimated future cash flows, discounted

at the assets original rate of return. For

AFS assets impairment is measured asthe difference between acquisition cost

and fair value.

The IASB is in the process of revising

the accounting for the impairment of

financial assets. In November 2009 the

IASB issued Exposure Draft FinancialInstruments: Amortised costand

Impairment, which proposes to replace

the incurred loss approach with anapproach based on expected losses

(i.e. expected cash flow approach).

Under this model the initial estimate of

credit losses would be spread over the

expected lives of the financial assets

as part of the recognition of returnfrom those assets. Any subsequent

changes to the initial estimate would be

recognised immediately in profit or loss.Extensive additional disclosures are also

proposed. The proposals are likely to be

very challenging for banks to implement.

However, current discussions by the

IASB indicate that significant changes

may be made to the proposals.

Unlike IAS 39, the new IFRS 9 will only

require an impairment assessment on

assets measured at amortised cost;therefore, the expected cash flow model

would become the single impairment

model for financial assets.


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3Hedge accounting

IFRS has strict rules on hedge accounting and it is not possible toapply hedge accounting until all documentation is complete. Care

should be taken to put such documentation in place by the first

day of the first IFRS comparative period presented to ensure thathedge accounting can be applied from that date.


Hedge accounting is often used tominimise profit or loss fluctuation arising

due to volatility in foreign exchange,

interest rates, and other changes in fair

values of certain financial instruments

and other non-financial items. As under

IFRS generally all derivatives have to be

accounted for at fair value, with gains

and losses recognised in profit or loss,

hedge accounting aims to mitigate profit

or loss impact in respect of the portion

of the hedge that is effective.

There are three types of hedging

relationships under IAS 39: fair value

hedges, cash flow hedges and hedges ofa net investment in a foreign operation.

Accounting implications of each are

as follows:

For fair value hedges, the gains and

losses relating to both the hedged

item and the hedging instrument are

recognised in profit or loss.

For cash flows hedges and hedgesof a net investment in foreign

operation, the gains and losses on the

hedging item are recognised in other

comprehensive income.

In addition, IFRS specifically allows some

types of portfolio hedges in which many

derivatives can be used to hedge manyassets/liabilities in a single relationship.

This so-called macro-hedging can be

very useful in minimising documentation

requirements.

A hedging relationship only qualifies

for hedge accounting if certain criteria

are met, including formal designationand documentation of the hedging

relationship at inception of the hedge.

It should also be demonstrated, both

at the outset and throughout the

existence that the hedge is expected to

be and has been highly effective, that

is remaining within 80 125 percent

range. The initial documentation andsubsequent effectiveness testing can

be time consuming and systems-based

solutions may be helpful in monitoring

the effectiveness of the hedging

relationships.

Hedge accounting requirements are

detailed and prescriptive. They definethe items that can be hedged (including

components and risks) and the allowed

hedging instruments. Care needs to be

taken to ensure that hedge relationships

are identified in a manner that meets

the requirements of the standard and,

in particular, that the effectiveness testsare designed in a way that minimises the

risk of future hedge relationships failure.

The IASB is currently revising the hedge

accounting requirements and issued an

exposure draft in December 2010.


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4

Consolidation of Special PurposeEntities (SPEs)


Banks often use SPEs, for example to securitise loan receivables,

design investment products for customers or effect certain

leasing transactions. Some banks are party to many hundreds ofSPEs that may not be consolidated under the local accounting

rules. The resulting structures can be complex and are likely torequire review of each individual transaction in order to determine

whether consolidation under IFRS is appropriate.

Consolidated financial statements should

include all subsidiaries of the parent

company. The definition of a subsidiary

focuses on the concept of control,

which is defined in IAS 27 Consolidated

and Separate Financial Statementsas

the power to govern the financial and

operating policies of an entity so as to

obtain benefits from its activities.

IFRS contains specific guidance on

the application of the control concept

to SPEs, as many SPEs have pre-

determined objectives and so it is more

difficult to determine who controls

them. An SPE is defined as an entitycreated to accomplish a narrow and well-

defined objective (e.g. securitisation of

receivables). In practice, judgement is

often needed to conclude whether an

entity should be regarded as an SPE.

SIC 12 Consolidation Special PurposeEntitiesprovides guidance on when an

SPE should be consolidated and givesthe following indicators of control:

the SPE conducts its activities to

meet the entitys specific needs;

the entity has decision-making

powers to obtain the majority of the

benefits of the SPEs activities, for

example through setting the auto-

pilot mechanism through which its

activities are run;

the entity has a right to the majority of

the SPEs benefits; or

the entity has the majority of residual

interest in the SPE.

Significant judgment is often required

to determine whether the criteria for

consolidating an SPE are met.The IASB is developing a new

consolidation standard to replace IAS 27

and SIC12. The objective of the projectis to develop a single definition of control

that can be applied to all investees

and to develop enhanced disclosure

requirements for entities involved with

structured entities. The IASB issued a

staff draft of the standard in September

2010 and intends to issue the standard in

the first quarter of 2011. A consolidation

exemption for investment companieshas been separated from the main

project and will be the subject of an

exposure draft scheduled for the secondquarter of 2011.


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5Definition of debt vs equity

The definition of an instrument as debt or equity may have an

important impact on a banks results and equity. It may also affect

a banks regulatory capital and ratios.


IAS 32 Financial Instruments:Presentation addresses the liabilityor equity classification of financial

instruments. The classification is

dependent on the substance of the

contractual arrangements rather than itslegal form.

In general, an instrument is classified

as a financial liability if it contains a

contractual obligation to transfer cash

or another financial asset, or if it may

be settled in a variable number of the

entitys own equity instruments. An

obligation to transfer cash may arise

from a requirement to repay principal or

to pay interest or dividends. An equity

instrument is any contract that evidences

a residual interest in the assets of anentity after deducting all of its liabilities.

An exception to the rules are puttable

instruments, which give the holder the

right to put the instruments back to the

issuer for cash or another financial asset

or instruments imposing an obligation

on an entity only in liquidation. If certaincriteria are met, then such instruments

are classified as equity.

Some contracts may contain both equity

and liability components, which may

have to be accounted for separately.

An example is a convertible bond thatcomprises a debt instrument and an

equity conversion option. The equity

conversion option would require analysis

to determine whether it meets the

definition of equity.

This is an example of another area that

requires contract-by-contract analysisduring the IFRS conversion process.

The IASB started a project to reviewits guidance on the definition of debt

vs equity, but has decided to postpone

deliberations until after June 2011 when

it expects to have more time available.


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6

Presentation of financialstatements and disclosures offinancial instruments

IFRS is not prescriptive as to the format of the statement ofcomprehensive income, the balance sheet or other primary

statements. However, this means that the format has to be

carefully developed to appropriately reflect the activities ofeach entity. Disclosures in many areas, for example for financial

instruments, can be extensive.


Instead of being prescriptive, IAS 1

Presentation of Financial Statementsprovides minimum requirements for the

presentation of financial statements,

including its content and guidelines for

their structure. As a result, variations on

presentation and disclosure may exist

across the banking sector.

A first-time adopter of IFRS is required to

present the opening balance sheet at the

start of its earliest comparative period.

Subsequent to the adoption of IFRS, this

third balance sheet is presented only in

certain circumstances.

Probably the most sensitive of the

financial statements is the statement

of comprehensive income. Here, IFRS

stipulates very few line items, but call

for management to select the method

of presentation that is most reliable

and relevant. The standard provides

entities the option to present an analysis

of expenditures either on the basis ofnature or based on function.

IFRS 7 Financial Instruments:

Disclosures requires extensive qualitativeand quantitative information explaining

the significance of financial instruments

to an entitys financial statements, its

exposure to risk and how this exposure

is managed. The financial crisis has had a

significant impact on the banking sector,

and there is considerable demand from

financial statement users to improvethe quality of the disclosures, including

explanation of significant management

judgement and sensitivity analysis, a

move away from so-called Boiler Plate

compliance with the standard. Someof the information required by IFRS 7

may not be readily available and new

systems, processes and internal controls

may need to be put in place to collect it.

The IASB is working on a financial

statement presentation project which

may introduce changes to the existing

requirements, for example separate

presentation of items measured using

different bases. However, this project is

currently postponed and IASB expects to

resume its deliberations after June 2011.


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7Leases

Banks commonly engage in leasing activities, particularly in

financing transactions that can take many legal forms. The

application of IFRS may potentially result in many more leasedassets being recognised on-balance sheet.


Accounting for leases under IFRS

currently depends on whether a lease is

a finance or an operating lease. Finance

leases are accounted for by the lessor

as financing transactions. Operatingleases require the lessor to continue

to recognise the leased assets on its

balance sheet. Classification of a leasedoes not depend on which party has

legal ownership of the leased asset, but

rather on which party has substantially all

of the risks and rewards of ownership.

Lease accounting under IFRS may affect

those banks that under local GAAP keep

assets off-balance sheet as operating

leases, when the substance of the

arrangement is that the bank obtainssubstantially all of the risks and rewards

incidental to ownership of the asset.

As a result, many more leases couldbe recognised on the balance sheet

upon conversion to IFRS. Determining

whether an arrangement constitutes an

operating or a finance lease may require

judgement.

In addition, an entity may enter into anarrangement comprising a transaction

or a series of transactions that do

not take the legal form of a lease

but convey the right to use an asset.

Such arrangements would have to be

reviewed on conversion to IFRS to

determine whether they contain a lease

and therefore whether lease accounting

is appropriate.

The IASB is reviewing the accounting

for leases. The aim of the project is

to develop a new approach to leaseaccounting for lessees and lessors. The

IASB published an exposure draft in

August 2010 and the revised standard is

expected in the second quarter of 2011.


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8 Insurance contractsMany banking groups undertake insurance business and some

that do not may still find that they have contracts that meet thedefinition of an insurance contract under IFRS. On conversion

to IFRS, one of the significant work streams for an insurance

business is to determine which of its contracts meet the definitionof an insurance contract and which meet the definition of a

financial instrument.

IFRS has minimal guidance on

accounting for insurance contracts.IFRS 4 Insurance Contracts only

provides minimum accounting criteria,

which in most cases allow companies

to continue using existing GAAP and

require some specific disclosures.

However, IFRS 4 does define an

insurance contract and some contracts

entered into by an insurance business

may not meet the definition of an

insurance contract and instead mayhave to be accounted for as a financial

instrument under IAS 39. An insurance

contract is defined as one under which

one party accepts significant insurancerisk from another party (policyholder)

by agreeing to compensate the

policyholder if a specified uncertain

future event adversely affects the

policyholder. For example, insurers

often offer what are substantially

investment products in which mortality

or other insurance risk is minimal or

non-existent. Such instruments are

required to be accounted for as financial

instruments.

The IASB issued an exposure draft

in July 2010, which proposes acomprehensive measurement model for

all types of insurance contracts issued

by entities. The measurement model

is based on a principle that insurance

contracts create a bundle of rights and

obligations that work together to create

a package of cash inflows (premiums)

and outflows (benefits, claims and

costs). A revised standard is expected in

the second quarter of 2011.


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9Post-employment benefits

Banks that operate defined benefit pension plans may besignificantly impacted on conversion to IFRS, especially if they

have large unfunded pension obligations. This in turn may affect

regulatory capital and ratios.


Many banks have in place defined

benefit pension plans and/or retirement

healthcare schemes for their employees.

Defined benefit plans are plans other

than those in which an employer pays afixed contribution and has no

other obligations.

Under IAS 19 Employee Benefits, the

accounting for a defined benefit plan

involves applying actuarial techniques

to estimate the employers obligations.

Actuarial gains and losses may arise

as a result of estimation differences

from period to period. These may

be recognised immediately in other

comprehensive income or profit or loss,or recognised in profit or loss over time,

using the so-called corridor method.

The IASB is working on a project to

amend IAS 19 and issued an exposure

draft in April 2010. One of the main

proposed changes is to eliminate

the corridor method, which allows

companies to defer recognition of a

portion of the actuarial gains and losses.

This will result in the full actuarial gain/

loss being recognised immediately inother comprehensive income rather thanbeing unrecognised until it is amortised

into profit or loss. A final standard is

scheduled for the first quarter of 2011.

The IASB is also considering undertaking

a more comprehensive review of

accounting in this area.


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10

IFRS 1 first-time adoptionof IFRS

An early understanding of the numerous mandatory and optional

exemptions from the retrospective application of IFRS that

are available to first-time adopters of IFRS is paramount for asuccessful and cost-effective implementation of IFRS.


Selecting accounting policies at the time

of preparing the opening balance sheet

under IFRS not only affects the first IFRSfinancial statements but also the financial

statements for subsequent periods,

including reported profits.

IFRS 1 First-time adoption of IFRS allows

an entity converting to IFRS a number

of reliefs from the requirements thatotherwise would apply if IFRS was

adopted as if the entity had always

applied IFRS. Without any relief, an entity

would be required to retrospectively

implement IFRS from the start of its

corporate history. The standard aimsto ensure that an entitys first IFRS

financial statements contain high-quality

information that is transparent for users

and comparable over periods presentedwhile also balancing the cost of

first-time adoption.


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IFRS 1 is not industry-specific. Banks will

need to go through each of the available

options in IFRS 1 and decide which arethe most appropriate for them based onthe corporate profile they have. We note

below a couple of issues to consider.

One of the most commonly used IFRS 1

exemption by banks is the option not to

restate pre-IFRS business combinations.

Here, acquisitive banks may not wish to

revisit previous acquisition accounting

under prior GAAP.

There is also an optional exemption in

IFRS 1 that allows a first-time adopter

to designate at the date of transition

any financial asset (or where applicable,

liability) as at fair value through profit

or loss or available for sale provided

that the relevant criteria to qualify for

classification are met at that date. This

is regardless of the classification underprevious GAAP.

For a full understanding of the relief

available upon the adoption of IFRS, we

recommend that you refer to KPMGs

publication IFRS Handbook: First-timeAdoption of IFRS.



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Systems and processes


A major effect of converting to IFRS

will be the increased effort required

throughout the banking entity to capture,

analyse and report new data to comply

with IFRS requirements. Making

strategic and tactical decisions relating

to information systems and supporting

processes early in the project helps limitunnecessary costs and risks arising from

possible duplication of effort or changes

in approach at a later stage. The more

new processes are automated, the less

they will disrupt day-to-day operations.

Temporary work-arounds introduced

at the time of conversion to IFRS canbe labour-intensive and often remain

in existence years after the conversion

project is finished.

Much depends on factors such as:

whether the bank utilises enterprise

resource planning (ERP) systems all

major ERP systems are able to handle

parallel accounting

the volume and mixture of in-house

developed and vendor systems for

financial reporting processes

the level of customisation the more

customised the system, the more

effort and planning the conversionprocess will take

the number of systems required for

financial reporting a greater number

of systems will require significant

updating for consolidation and

reconciliation purposes.

Some entities take the opportunity of an

IFRS conversion project to streamline the

existing systems and processes.

Most banking operations have a

number of processes to deal with both

geographic and product reporting.

Many of these processes will need to

be analysed and potentially redesigned

under IFRS. The extent of differinginformation systems within an


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organisation and differing local reporting

requirements will complicate matters

further, especially if internal controlreporting is necessary. The silver lining

is that there may be an opportunity tosimplify and streamline processes and

controls and ultimately reduce the long-

term costs of reporting.

From accounting gaps to

information sources

The foundation of the project, as

described earlier, is to understand

the IFRS to local GAAP accounting

differences. That initial analysis needs to

be followed by determining the effect

of those accounting gaps on internal

processes, information systems and

internal controls. What banks need

to determine is which systems and

processes will need to change and

translate accounting differences intotechnical system specifications.

One of the difficulties banks face in

creating technical specifications is to

understand the detailed end-to-end flow

of information from the source systemsto the general ledger and further to the

consolidation and reporting systems.

Embedded accounting rules in front-

office transactional systems need to

be identified, catalogued and modifiedbased on the revised accounting policy.

Subledgers that reside on the back endof transactional systems may contain

posting rules that will change on the

basis of IFRS.

Significant data cleansing and sourcing

exercises may be required to enhance

data quality and data sets designedto support local GAAP reporting, as

this may not contain key data fields to

comply with IFRS. Some of this data

may well reside in end-user computingapplications that do not always have

the same level of rigour and robustness

over production, completeness and

accuracy as the mainstream systems.

Data warehouses will need to support

consolidated financial information

from multiple financial systems andledgers, and may require expansion and

modification to accept the greater level

of detail required.

The simplified diagram below outlines a

process that organisations can adopt toidentify the impact of IFRS conversion on

information systems.

Process for identifying the information systems of IFRS

Datawarehouse

Generalledger

Sourcesystems

Front-end

applications

Accounting and Disclosure Gaps



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How to identify the impact on information systems

There are many ways information systems may be affected,

from the initiation of transactions through to the generationof financial reports. The following table shows some areas in

Change Action

New data requirements

New accounting disclosure and recognition requirements

may result in more detailed information; new types

of data; new fields; and information may need to be

calculated on a different basis.

Modify the general ledger system and reporting system to

capture new or changed data.

Modify the work procedure documents.

Changes to the chart of accounts

There almost always will be a change to the chart of

accounts due to reclassifications and additional

reporting criteria.

Create new accounts and delete accounts that are no

longer required.

Reconfiguration of existing systems

Existing systems may have built-in capabilities for specific

IFRS changes, particularly the larger enterprise resource

planning (ERP) systems and high-end generalledger packages.

Reconfigure existing software to enable accounting under

IFRS (and parallel local GAAP, if required).

Modifications to existing systems

New reports and calculations are required to

accommodate IFRS.

Spreadsheets and models used by management as anintegral part of the financial reporting process should be

included when considering the required

systems modifications.

Make amendments such as:

new or changed calculations

new or changed reports

new models.

New systems interface and mapping changes

When previous financial reporting standards did not

require the use of a system, or the existing system is

inadequate for IFRS reporting, it may be necessary to

implement new software.

When introducing new source systems and

decommissioning old systems, interfaces may need tobe changed or developed and there may be changes to

existing mapping tables to the financial system. When

separate reporting tools are used to generate the financial

statements, mapping these tools will require updates to

reflect changes in the chart of accounts.

Implement software in the form of a new software

development project or select a package solution. Interfaces

may be affected by:

modifications made to existing systems

the need to collect new data

the timing and frequency of data transfer requirements.

which information systems change might be required under

IFRS depending upon facts and circumstances.



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Change Action

Consolidation of entitiesUnder IFRS, there potentially will be changes to the

number and type of entities that need to be included in

the group consolidated financial statements. For example,

the application of the concept of control may be

different under IFRS.

Update consolidation systems / models to account forchanges in consolidated entities.

Reporting packages

Reporting packages may need to be modified to:

(1) gather additional disclosures in the information from

branches or subsidiaries operating on a standard

general ledger package; or

(2) collect information from subsidiaries that use different

financial accounting packages.

Modify reporting packages and the accounting systems used

by subsidiaries and branches to provide financial information

Financial reporting tools

Reporting tools can be used to:

(1) perform the consolidation and the financial statements

based on data transferred from the general ledger; or

(2) prepare only the financial statements based on receipt

of consolidated information from the general ledger.

Modify:

reporting tools used by subsidiaries and branches to

provide financial information

mappings and interfaces from the general ledger

the consolidation systems used to report consolidated

financial statements based on additional reporting

requirements such as segment reporting.

Banking accounting differences and respective system issues

Each standard under IFRS will require different information system changes. An example of a standard that can have a major

impact on information systems is IAS 39. The following table outlines some of the requirements of IAS 39 and the possible

information systems impacts arising from these changes.



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IFRS accounting treatment Potential information systems impacts

Calculation of amortised cost/effective yield from the loan book For retail portfolios systems will need to be designed to incorporate prepaymentinformation, transaction costs, fees, steps in interest etc to arrive at an effective

yield from the portfolio. The systems will need to handle the re-estimation of

cash flows.

Hedge accounting Hedge accounting systems may be required to perform hedge effectiveness

calculations at regular intervals.

Impairment of financial assets Systems and/or process changes may be required to incorporate the data

required (timing of expected cash flows) and discount those cash flows using the

instruments effective interest rates.

Classification of financial assets as

held to maturity

A system/process will need to be developed to flag any disposals

before maturity.

Parallel reporting timing the

changeover from local GAAP to

IFRS reporting

Conversion from local GAAP to IFRS

will require parallel accounting for a

certain period of time. At a minimum,

this will happen for one period as local

GAAP continues to be reported, but

IFRS comparatives are prepared prior

to the go-live date of IFRS. However,

in many cases this will be an on-going

requirement as data under local GAAPmay be required for, say, tax purposes.

The parallel reporting may be based

on real-time collection of information

through the accounting source systems

to the general ledger or on top-side

adjustments posted as an overlay to the

local GAAP reporting system.

The manner and timing of processing

information for the comparative periods

in real-time or through top-sideadjustments has to be selected. In

deciding the preferred method, the

following should be considered:



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Ledger SolutionAccount Solution

Features

Features

Common

Accounts

Only

Local

Only

IFRS

IFRS

Local

GAAP

General Ledger

Parallel accounting optionin comparative year

Effect Considerations

Parallel accounting

through top-side

adjustments:

No real-time adjustments to systems and

processes will be required for comparative period.

Local GAAP reporting will flow through sub-

systems to the general ledger (i.e. business

as usual).

Comparative period will need to be recast in

accordance with IFRS, but can be achieved off-line.

Migration of local GAAP to IFRS happens on

first day of the year in which IFRS reporting

commences.

Less risky for ongoing reporting

requirements in comparative year.

Available for all but more typical

when there are less volume of

transactions to consider.

More applicable to small/less

complex organisations or when few

changes are required.

Real-time parallel

accounting

Consideration needed for leading ledger in

comparative year being local GAAP or IFRS (i.e.which GAAP will management use to run

the business).

If leading ledger is IFRS in comparative year,

conversion back to local standards is necessary

for the usual reporting timetable.

Changes to systems and information may

continue to be needed in the comparative year if

the IFRS accounting options have not been

fully established.

Migration to IFRS ledgers needed prior to first day

of the year in which IFRS reporting commences.

Real-time reporting of two GAAPs

in comparative year puts morestress on the finance group.

Tracking two sets of numbers for

large volume of transactions will

make systemisation of comparative

year essential.

More applicable for large/complex

organisations with many changes.

Strict control on system changes

will need to be maintained over this

phased changeover process.

All major ERP systems (e.g. SAP, Oracle, Peoplesoft) are able

to handle parallel accounting. The two most implemented

solutions are the Account Solution or the Ledger Solution.

Depending on the release of the respective ERP systems one

or both options are available.



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External reporting

IFRS

US GAAP

Stand-alone nancial reporting perlocal GAAP

Tax reporting Regulatory reporting (i.e. Basel,

solvency)

Management reporting

Business key performance indicators

Business unit reporting

Product/service reporting

Cost accounting

Shareholder value reporting

Economic Value Added (EVA)

Cash value-added

Management incentives

Stock compensation plans

Planning and budgeting

Annual budget

Rolling forecast

Operational forecast

Strategic plans

Closing preview forecast

Compliance

Performanceimprovement

Harmonisation of internal and external reporting

Banks should consider carefully the impact of IFRS changes on

data warehouses and relevant aspects of internal and externalreporting. In many entities, internal reporting is performed on

a basis similar to external reporting, using the same data andsystems, which will therefore need to change to align with

IFRS. With potential multiple changes to the same information

systems being required, careful co-ordination and rigorous

change management and testing are key to success.

The following diagram represents the possible internal

reporting areas that may be affected by changing systems toaccommodate the new IFRS reporting requirements.

The process of aligning internal and external reporting will

involve the following:

When mappings have changed from the source systems to

the general ledger, mappings to the management reporting

systems and the data warehouses also should be changed.

When data has been extracted from the source systems

and manipulated by models to create IFRS adjustments

that are processed manually through the general ledger, the

impact of these adjustments on internal reporting should be

carefully considered.

Alterations to calculations and the addition of new data

in source systems as well as new timing of data feedscould have an effect on key ratios and percentages in

internal reports, which may need to be redeveloped to

accommodate them.



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People

When your Bank reports for the first time under IFRS, the

preparation of those financial statements will require IFRSknowledge to have been successfully transferred to the financial

reporting team. Timely and effective knowledge transfer is anessential part of a successful and efficient IFRS

conversion project.

People issues range from an accounts

payable clerk coding invoices differently

under IFRS to an Audit Committeeapproval of the internal controls over

IFRS reporting. There is a broad

spectrum of people and process related

issues, all of which require an estimationof the changes that are needed when

reporting under the IFRS.

The success of the project will depend

on the people involved. There needs to

be an emphasis on communications,

engagement, training, support, andsenior sponsorship, all of which are part

of change management.

Training should not be underestimated

and entities often dont fully appreciate

the levels of investment and resource

involved in training. Although most

conversions are driven by a centralteam, you ultimately need to ensure the

conversion project is not dependent on

key individuals and that the business-as-

usual operations can be performed when

the project ends. Distinguishing between

different audiences and the nature of thecontent is the key for successful training.

Some useful knowledge transfer pointers

are as follows:

Training tends to be more successful

when tailored to the specific needs

of the entity. Few entities claim

significant benefit from external non-

tailored training courses.

Geographically disparate companies

are considering web-based training as

a cost and time-efficient method ofdisseminating knowledge.

More complex areas such as

financial instrument classification and

measurement, hedge accounting

etc are best conveyed through

workshop training approaches in

which entity-specific issues can

be tackled.

Many entities manage their training

through a series of site visits

typically partnerships of one memberof the core central team along with

a second technical expert, often an

external advisor.

Some entities use training as an

opportunity to share their data

collection process at the same time.

Even with the best planning andtraining possible, it is critical that an

appropriate support structure is in place

so that the business units implement

the desired conversion plans properly.IFRS knowledge only really becomes

embedded in the business when the

stakeholders have the opportunity to

actually prepare and work with real

data on an IFRS basis. We recommend

building dry runs into the conversion

process at key milestones to test the

level of understanding amongfinance staff.



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Business

One of the challenges of IFRS adoption stems from the number

of stakeholders that have a vested interest in the financialperformance of the organisation. Your project will have to deal

with a large number of internal and external stakeholders so asto manage one fundamental issue the operational performance

stays the same but the scoreboard of the financial statements

gives a different result under IFRS.

Measurement of operational

performance cuts across all parts ofan organisation and effects the internal

business drivers and external perceptions

of the entity. The assessment of who

those affected groups are, and when is

the appropriate time for communications,

is a key component of an IFRS

conversion project.

Stakeholder analysis and

communications

A thorough review of the internal and

external stakeholders is an essentialfirst step. Certain less obvious internal

stakeholder groups may be engaged only

in the conversion process at a late stage

but the awareness of when to engage

those groups is necessary. For example,

banks have front office, middle officeand back office functions that will need

to be involved in certain system/reporting

changes. However, not all of these

groups will need to participate in detailed

accounting discussions earlier on in the

conversion process.In a similar context, external stakeholders

should be properly identified and

communicated with throughout the

IFRS conversion. Examples include

groups such as the tax authorities,

regulators, industry analysts and the

financial media. Every identified group

should be factored into the timing of

when and how to present changes

in operational performance because

of IFRS. Furthermore, project related

deliverables should be incorporated intokey stakeholder objectives to ensuretheir successful achievement.

Banks should actively consider the

communications strategy through whichthey will ensure that all key stakeholder

groups are fully informed of the projects

progress. At a minimum this includes

the quarterly and annual disclosures in

the financial reports, but may need a

much broader ranging communications

strategy. The format of communications

needs to be personalised to the nature

of the bank, but a clear and consistent

message should be given to those

directly but also those not directly

involved in the project.

Audit Committee considerations

Audit Committees and Board of

Directors (Board) need to be actively and

appropriately engaged in the conversionprocess. The project structure needs to

ensure that they receive relevant and

timely information while not becoming

a bottleneck for decisions. The most

successful conversion projects are

sponsored by a member of the Board

who is closely involved in the project.All IFRS conversions should ensure that

Board and Audit Committee meetings

are acknowledged on the project

plan as these meetings will drive keydeliverables and provide incentive for

timely delivery.

These senior management groups need

to have tailored and periodic training to

suit their knowledge requirements so as

to not overwhelm them with accountingtheory on IFRS.


Monitoring peer group

The banking community tends

to be close-knit and often uses

sector benchmarks and peer group

comparisons. As such, most banks ina given geography will want to knowwhat their peers are doing as it relates to

IFRS and what choices and options are

being taken by those groups. Investors

and analysts will also want to be able

to look across banks and be aware of

the differences, so as to factor those

differences into their various buy/sell/hold

recommendations.

Management will need to assess its

peer group, but the manner in which this

is achieved may vary depending on theworking relationship with other banks.


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Past practice has seen sector groups

form that informally share updates on

the choices being reviewed and the

stage of completion of IFRS

conversion projects.

Other areas of conversion risk

to mitigate

A quality IFRS conversion should

successfully manage the risks of change

management. It is essential that abank does not miss deadlines, or issue

reports including errors. As such, the

risks are high when it comes to all IFRS

conversions and banks are no different

in this regard. There are a number of

areas to consider but two main ones are

around the use of the external auditorand the internal control certification

requirements.

The involvement of the banks auditors

should be an integral part of the IFRS

governance process of the project. There

needs to be explicit acknowledgement

on the part of the entity for frequentauditor involvement. Clear expectations

should be set around all key deliverables,

including timely IFRS technical partner

involvement. The Audit Committee also

needs to ensure the external audit teams

have reviewed changes to accounting

policies prior to approval by the

Audit Committee.

Proper planning for new and enhanced

internal controls and certification process

as part of your IFRS conversion should

be considered. Assessment of internalcontrol design for accounting policy

management as well as financial close

processes are integral and companies

need to be cognisant of the impact

of any manual work-arounds used.

Documentation of new policies,

procedures and the underlying internal

controls will all need to be reflected as

part of the IFRS process.

Benefits of IFRS

While the majority of this paper has

focused on the micro-based risks and

issues associated with IFRS and IFRS

conversions, senior management shouldnot lose sight of the wider benefits of

IFRS conversion. IFRS may offer more

global transparency and ease access to

foreign capital markets and investments,

and that may help facilitate cross-border

acquisitions, ventures and spin-offs. It is

important that these benefits be kept inmind throughout the project to provide

clear direction and obtainable goals for

all concerned.



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KPMG: An Experienced Team,

a Global Network


KPMGs Banking practice

KPMGs Banking practice is dedicated

to supporting Retail and Investment

banks globally in understanding industry

trends and business issues. Our firms

professionals offer skills, insights

and knowledge based on substantial

experience working with the banking

sector to understand the issues and

deliver the services needed to help

banks succeed wherever they competein the world.

We offer customised, industry-tailored

audit, tax and advisory services that can

lead to value-added assistance for your

most pressing business requirements.

KPMG, through its global network of

highly qualified professionals in the

Americas, Europe, the Middle East,

Africa and Asia Pacific, can help you

reduce costs, mitigate risk, improve

controls of a complex value chain,

protect intellectual property, and meet

the myriad challenges of thedigital economy.

For more information, visit http://www.

kpmg.com/Global/en/WhatWeDo/

Industries/Financial-Services/Pages/

default.aspx.

Your conversion to IFRS

As a global network of member firms

with experience in more than 1,500 IFRS

convergence projects around the world,

we can help ensure that the issues are

identified early, and can share leading

practices to help avoid the many pitfalls

of such projects. KPMG firms have

extensive experience and the capabilities

needed to support you through your

IFRS assessment and conversionprocess. Our global network of

specialists can advise you on your IFRS

conversion process, including training

company personnel and transitioning

financial reporting processes. We are

committed to providing a structured

approach with the aim of delivering

consistent, high-quality services for our

clients across geographies.

Our approach comprises four keywork-streams:

Accounting and reporting

Business impact

Systems, processes, and controls

People.


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IMPACT OF IFRS: BANKING | 33IMPACT OF IFRS: AUTOMOTIVE | 33



34/36


Contact usGlobal FS practice

Global FS, Chairman

Jeremy Anderson

Tel: +44 20 73115800

email: [email protected]

Global FS contacts

Brazil

Ricardo Anhesini

FS Line of Business Head

Tel: +55 11 21833141


Canada

Mark D. Smith


Tel: +1 416 777 3395


China

Simon Gleave


Tel: +86 10 8508 7007


France

Fabrice Odent


Tel: +33 1 5568 7227


Germany

Klaus Becker


Tel: +49 69 9587-3225


India

Abizer Diwanji


Tel: +91 (22) 3090 2380


Netherlands

Jeroen Van Nek


Tel: +31 20 656 7360


USA

Scott Marcello


Tel: +1 212 954 6960


mailto:[email protected]:[email protected]


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Acknowledgements

We would like to acknowledge the authors of this publication, including:

Ewa Bialkowska KPMG International Standards Group (part of KPMG IFRG Limited)

Colin Martin KPMG in the UK

Other KPMG publications

We have a range of IFRS publications that can assist you further, including:

Insights into IFRS

IFRS: An Overview

IFRS compared to US GAAP

IFRS Handbook: First-time adoption of IFRS

New on the Horizon publications that discuss exposure drafts. The following may be of particular relevance to the

banking sector:

New on the Horizon: ED/2009/12 Financial Instruments: Amortised Cost and Impairment;

New on the Horizon: Hedge Accounting;

New on the Horizon: Leases;

New on the Horizon: Insurance Contracts.

First Impressions publications that discuss new pronouncements. The following may be of particular relevance to thebanking sector:

First Impressions: IFRS 9 Financial Instruments;

First Impressions: Additions to IFRS 9

IFRS Practice Issues publication which discusses current issues, for example fair value disclosures

Illustrative financial statements for banks

Disclosure checklist.

Regular Briefing Sheets summarising current developments



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kpmg.com/ifrs

Global FS practice

Jeremy Anderson

Global FS, Chairman

T:+44 20 73115800

E:[email protected]

www.kpmg.com/ifrs

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual

or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is

accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

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