David Grüenberger, a leading IFRS9 expert in the regulatory area, and Head, Accounting & Regulatory Monitoring at Austrian FMA, discusses the key challenges for IFRS9 implementation. David will be exploring this further at RiskMinds International, Amsterdam, this year.
IFRS9 gets increasingly important from a supervisory perspective. ESMA is starting to publish recent IFRS-enforcement decisions on critical areas around stage transfers and loss definitions. EBA has conducted its second impact study and published the final IFRS9 implementation study. The new stress testing methodology just came out, now focusing on IFRS9 provisions.
Although many critical implementation issues have not been outspoken and challenged up to now, accounting enforcers and banking supervisory are now actively using and enforcing IFRS9.
The most striking and challenging advancement is probably the new stress testing methodology. EBA established a completely new concept of a forward-forward-looking simulation, where banks simulate how they would calculate forward looking ECLs as of future balance sheet dates. The probabilistic nature of stress tests will also make simulations of IFRS9 (eg the staging) probabilistic. In addition, the “perfect foresight assumption” aligns the specifications of the stress scenarios with the accounting scenarios.
Another key topic are the triggers used to determine stage transfers. A wide variety of approaches have appeared recently and many auditors remain hesitant to communicate where they plan to set the boundaries, although some new Big-4 commentaries try to define clear limits. Accounting enforcers have brought up some key topics, like the so-called “absolute triggers”, and organized EU-wide supervisory clearance on which triggers are be acceptable and which clearly not. A similar topic brought up for EU-supervisory clearance was the treatment of IBNR losses in the context of IFRS9, which were apparently neglected by some banks. Even though banks are now quite advanced in their implementation of IFRS9, they will need to check and perhaps update their approaches based on recent accounting enforcement decisions, especially if they had adopted very generous interpretations of IFRS9.
