IFRS 9 Content, Challenges and Tools

IFRS 9 Content, Challenges and Tools

25th February 2015

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Murat AlsanPartnerHead of AuditHead of Financial Services

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Christoph Radermacher PartnerFinancial Services

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Dr. Jürgen RingschmidtDirector, Financial Services FRM, Head of Credit Analytics Team

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Jörg HashagenPartnerFinancial Services

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IFRS 9 Impairment Details and SolutionsIFRS 9 Impairment Details and Solutions

Agenda

A Brief Overview & Challenges & BRSA-IAS 39 A Brief Overview & Challenges & BRSA-IAS 39

IFRS 9 Impairment IntroductionIFRS 9 Impairment Introduction

WRAP UP WRAP UP


The new IFRS 9 standard also amends IFRS 7 „Financial Instruments: Disclosures“ due to newly imposed disclosure requirements (esp. for Impairment)

FASB is, in parallel to IASB, reworking their regime for the accounting of financial instruments.Attempts to converge accounting models in the area of impairment have finally been abandonedUsers will have to comply with two conceptually different accounting models

No US GAAP convergence

Entity shall apply IFRS 9 for annual periods beginning on or after January 1, 2018.Early application permitted but generally requires application of all entire standard at the same time (exception: FVtPL)No requirement regarding comparatives; Provision: requires availability of reliable dataEU endorsement of IFRS 9 outstanding –situation in Europe is also not finalized

Effective Date

■ Principle- instead of Rules-based Standard for the accounting of financial instruments■ IASB Feedback to KPMG indicates that there will not be as much Implementation

guidance as requested by practitioners

Version Content Carried over from IAS 39

IFRS 9 (2009)

IFRS 9 (2010)

IFRS 9 (2013)

New accounting rules for the Classification and Measurement of financial assets and financial liabilities

IFRS 9 (Complete Standard)

New rules for the use of Hedge Accounting

Amendments to the 2009/2010 draft regarding Classification and MeasurementIntroduction of new Expected Loss Model for recognition and measurement of loan loss allowances

Rules for recognition and derecognition of financial instruments; only minor amendments.

The bumpy path to the final standard:

A Brief Overview of IFRS 9IFRS 9 issued July 27th 2014


Significant level of judgment in the determination of the business model classification of

Classification at amortized cost is an explicit goal of the majority of banks

Amendments of IT-Systems and processes required to provide additional information product features as basis for Classification and Measurement

Efficient Classification through operationalization of processes and IT support (tools)

Ongoing subjects of discussion

Documentation requirements in the classification process

Systemic review of current features on loan agreements as well as their impact oriented evaluation for the future business

Review potential impact on pricing Higher P&L volatility as well as higher volatility in B/S

and Regulatory Capital levels as a result of broader Fair Value accounting.

Business Impacts

Debt Instruments

Business Model Holding

Business Model Mixed

Cash FlowCriterion

Fair ValueOption

Cash FlowCriterion

DerivativesEquity Instruments

Held for Trading

OCI Option

Fair ValueOption

Business ModelNon Holding

Fair Value Option

FVO

Fair Value through Other

Comprehensive Income

FVOCI

Amortized Cost

AC

Fair Value through Other

Comprehensive Income

FVOCI

Fair Value through

Profit and Loss

FV

OCI Option

yes

yes

no

no

no

no noyes

yes

yes

yes

Benchmark Test

Classification of Financial Instruments on the asset side

A Brief Overview of IFRS 9Phase 1: Classification and Measurement


Core ElementsCredit Deterioration Model / 3 Stage Approach

Stage 3EL

Lifetime

1yr

Significant increase in PD, non-investment

grade

Object evidence of impairment

Stage 2EL

Lifetime

1yr

Stage 1EL

Lifetime

1yr

Decision on design and possible areas of discretion in: Relative transfer criteria Lifetime EL parameters

Delineation of the use of the standard IFRS 9 model and separate rules for special cases (POCI)

Significant changes required for the existing IT systems in credit risk management

Extensive disclosure requirements require increased data quality and data availability

Retrospective initialization of the new model for existing business

Key Topics

Opportunity to synergize IFRS 9 with risk management processes, models and internal/external reporting processes

Increased provisioning levels reduce equity, which increased provisioning volatility and complicates capital planning

Implications for strategy including ideas for new business, new products, pricing and other steering mechanisms

Opportunity to actively manage the IFRS 9 initialization effects

Business Impacts

A Brief Overview of IFRS 9Phase 2: Impairment


More direct interaction between hedge accounting and risk management

Room for interpretation through the loss of hedge effectiveness bright lines and the option to rebalance

Increased universe of permissible hedging instruments and hedged items

Increased hedging options through the use of non-derivative instruments

Necessity for process and IT changes to fulfil new accounting and disclosure requirements

Key Topics

Review of existing and designation of new hedge relationships

Evaluation of new hedge accounting strategies for example by analyzing risk components of non-financial line items

Integration of risk management and accounting Implementation of the rebalancing requirements

Business Impacts

Hedge Accounting Model

Hedged items and hedging instruments

Disclosures

A Brief Overview of IFRS 9Phase 3: Hedge Accounting


BDDK ve UFRS Karşılık Uygulamaları

UFRS anlatıldığı şekilde ilke bazlı muhasebe uygulamalarına yöneldiği için, BDDK ve UFRS uygulamaları Banka finansal tabloları üzerinde farklı etkiler doğurmaktadır. Bu etkiler yandaki tabloda özetlenmiştir.

BDDK•Kural Bazlı•Kural bazlı olması sonucunda tüm Bankaların aynı muhasebe politikası uygulaması nedeniyle daha kolay karşılaştırılabilir finansal tablolar

•Detaylı kurallar geliştirme düzenleme sayısında fazlalığa ve düzenlemelerde karmaşıklığa yol açmaktadır

•Kural bazlı düzenlemeler daha şekle yönelik bir yapıdadır

•Kural bazlı uygulamalar esnek değildir•Kural bazlı uygulamalarda düzenleme boşluklarının doğma ihtimali daha azdır

UFRS• İlke bazlı• İlke bazlı olmanın sonucunda Bankadan

Bankaya değişecek olan muhasebe politikalarının da etkisiyle karşılaştırılabilirliğin daha zor sağlanması

• Anlaşılabilir, basit uygulamalar• Düzenlemelerin özü ön plandadır• İlkeler birbirinden farklı durumlara yanıt

verebilme ve esnek olabilme özelliğine sahiptir

• İlke bazlı düzenleme yaklaşımı doğası gereği bazı alanlarda düzenleme boşluklarının doğmasına neden olabilmektedir



Nakdi krediler için ayrılan karşılıklar

Kredileri beş grup altında sınıflamıştır: Birçok niteliksel koşulun yanında bu beş gruba girmesi gereken kredileri tahsilatın gecikme sürelerine göre belirlemiştir. Bu şekilde sınıflandırılan kredi ve alacakların; (teminat yapıları da dikkate alınarak) III. gruba alındığı tarihten itibaren en az yüzde yirmisi (%20), IV. gruba alındığı tarihten itibaren en az yüzde ellisi (%50), V. gruba alındığı tarihten itibaren yüzde yüzü (%100), oranında özel karşılık ayrılır.

Önceki yıllarda gider yazılan fakat cari dönemde iptal edilen özel karşılıklar nedeniyle elde edilen gelirler, önceki yıllara ait gelirler hesabında muhasebeleştirilmektedir.

Teminat yapılarının dikkate alınmasında BDDK düzenlemeleri detaylı yönergeler barındırmaktadır. Teminat gruplarına göre, karşılık hesaplamasında dikkate alınma oranları farklılık göstermektedir.

Donuk alacak olarak kabul edilen kredi ve diğer alacaklar değerlemeye tabi tutulmaz ve bunlar için faiz tahakkuku ve reeskontu yapılmaz. Önceden yapılmış bulunanlar ise iptal edilir.

BDDK Her raporlama dönemi sonunda, krediler için değer düşüklüğüne uğradığına dair tarafsız göstergeler bulunup bulunmadığı değerlendirilir. Krediler değer düşüklüğüne uğradıklarına ilişkin tarafsız bir göstergenin bulunması durumunda, ilgili zararın tutarı, gelecekteki tahmini nakit akışlarının, kredinin orijinal faiz oranı üzerinden iskonto edilerek hesaplanan bugünkü değeri ile defter değeri arasındaki fark olarak ölçülür. Bu hesaplama yapılırken her bir kredi bireysel olarak değerlendirilir.

Önceki yıllarda gider yazılan fakat cari dönemde iptal edilen özel karşılıklar nedeniyle elde edilen gelirler, cari yıla ait karşılık giderleri hesabında net gösterilmek suretiyle muhasebeleştirilmektedirler.

Donuk alacaklardan elde edilen faiz gelirlerine, gelecekteki nakit akışlarının ilgili değer düşüklüğü zararının ölçülmesi amacıyla iskonto edilmelerinde kullanılan faiz oranı kullanılmak suretiyle muhasebeleştirilmesine izin verilmektedir.

Teminatın nakde çevrilmesinin muhtemel olup olmamasından bağımsız olarak, nakde çevirme eksi teminatı edinme ve satma maliyetlerinden kaynaklanan nakit akışlarını yansıtır. Kredi ve alacakları için yukarıda anlatılan değer düşüklüğü hesaplamalarında teminatlardan kaynaklanan bu nakit akışları da dahil edilmektedir

UMS 39

1 1

22

33

4 4



Gayri nakdi krediler için ayrılan karşılıklar

“Tasfiye Olunacak Alacaklar Hesabı”na aktarma zorunluluğu, gayrinakdi kredilerin tahsil edilmeyen, nakit krediye dönüşmüş ya da tazmin edilmiş bedelleri için de geçerlidir. Ancak, gayrinakdi kredinin nakde dönüştüğü andan itibaren, nakde dönüşen tutarın tamamı donuk alacak olarak dikkate alınır.

BDDK

UMS 39’da açık ve net olarak ifade edilmeyen gayrinakdi krediler için ayrılacak olan karşılıklarda nakdi krediler bölümünde ifade edildiği gibi tarafsız göstergelerin varlığı halinde, Bankaların şirketlerden olan nakdi ve gayrinakdi riskleri değer düşüklüğü için beraber değerlendirilmelidir.UMS 37 hükümleri gereği karşılık olarak finansal tablolara yansıtılacak tutara ilişkin belirsizlikler koşullara bağlı olarak farklı açılardan ele alınmaktadır. Değerleme konusu karşılığın çok sayıda kalemden oluştuğu durumda, ilgili yükümlülük her türlü getiriyi bunlara ilişkin olasılıklara göre ağırlıklandırmak suretiyle tahmin edilir. Bankalar bilanço dışı yükümlülükleri için karşılık ayırırken geçmiş tecrübelerine dayanarak “beklenen değer” metodunu kullanabilmektedirler.

UMS 39



Genel karşılıklar / Portföy karşılıkları

Bankalar BDDK tarafından belirlenmiş oranlarda standard ve yakın izlemedeki krediler için genel karşılık hesaplamaktadır.

BDDK

UFRS’de ise kredi ve alacaklar için Yönetmelikte belirtilen yönergeler ile hesaplanan bir genel karşılık bulunmamaktadır.UFRS’ye göre Banka, öncelikle, değer düşüklüğüne ilişkin tarafsız göstergenin bireysel olarak önemli olan kredi ve alacakları için bireysel bir şekilde, bireysel olarak önemli olmayan kredi ve alacaklar için ise bireysel veya toplu bir şekilde bulunup bulunmadığını değerlendirir.İki yöntem sıklıkla kullanılmaktadır. Bu yöntemlerden ilki tarihsel istatistik (Historic loss rate), ikincisi ise yaşlandırma (aging) metodudur.

UMS 39


Trade off between flexibility in business activities and the desired 'At Cost' Measurement

Increasing Full Fair Value Measurement requires management of increasing P&L volatility risks

Changes in bank steering, e.g. KPI, pricing models, treasury concepts, …

SPPI Test requires input parameters which are not yet captured in the loan systems

New Impairment rules require implementation of Lifetime Expected Loss Model

Development of new processes, organizational changes and adjustments of IT-functionalities

Integration of IFRS 9 in existing project portfolio

Consequences

First Time Adoption

Time Frame

Involvement

Implementation period of three years expected

IASB requires valuable and complete implementation

Adjustments concerning Accounting, Processes and IT required

Consideration of business model and product features in classification decisions

Reshaping Impairment calculation methods based on a 3-stage Expected Loss Model

Modification of Hedge Accounting framework and one-time exercising of accounting choices

Phase 1: C & M

Phase 2: Impairment

Phase 3: Hedge

Accounting

Final IFRS 9 standard in place Entities are required to apply IFRS

9 for annual periods beginning on or after the 1st of January 2018

IFRS 9 – Hot Topics

A Brief Overview of IFRS 9The challenges involve extensive technical requirements…


Operative Systems

Integration

Central Data Storage

Methods

Reporting Data

Reporting application

Division I Division nDivision II External data source

Client data(Insourcing)

DivisionalReporting

Analysis/ Planning/

Management

ExecutiveReporting

ExternalReporting/ Regulatory Reporting

…

Transfer,Conversion

Norm

Data Enrichment

QualityMgmt.

CreationCash Flows Splitting Security

allocation

Raw and result data(appropriate for the receiver/ aggregated)

Accounting

HG

B

US

GA

AP

IFR

S

P&Lstatement

.

RA

RO

C,

RO

RA

C, e

tc

Internal models(Devel.,

Validation, Calibration)

Risk Controlling

Por

tfolio

-Mod

el

OP

Ris

k

Liqu

idity

Ris

k

Mar

ket p

rice

Ris

k

Cre

dit R

isk

DataHistory

MasterData

VariableData

CashFlows

BusinessPartner

StructureData

…

Costs

Risk results

Raw data &

derived Data

Securities

Exploitation

Measurem.

ExternalData

The planning approach is subject to the depth of the business and IT specifications

Phase 1: C & M

Phase 2: Impairment

Phase 3: Hedge

Accounting

Implementation of new holding categories in all level

Decision about automatic or manual implementation of business model and SPPI-Tests in IT

Decision about automatic or semi-automatic transfer of measurement data into the back office or general ledger

Examination whether current allowance engines can be expanded or used further

Examination of the possibility to integrate risk management data into accounting

IFRS 9-Implications for the IT-Implementation

A Brief Overview of IFRS 9…and implications for technical implementation


Implementation considerationsKey challenges

■ The current range of maturity within the industry is varied. However, the main key success criteria for more advanced firms seems to be an ability to collaborate cross functionally across traditional silos.

Strategy

Finance

IT

Risk

■ Most firms struggle with data and ensuring that they can identify the correct data from the correct source system and being able to replicate the information horizontally across different businesses.

?

Risk

Finance

FO

Cross-functional governance Focus on data standards Broadening control coverage

■ There are a range of processes which will come within the audit scope –granular credit rating systems, regulatory capital and economic forecasting may be particularly challenging.

Alignment to wider regulatory and control developments


IFRS 9 poses a strategic challenge that has far reaching implications beyond just accounting

The extensive impacts of IFRS 9 require a coordinated approach and proven solutions to minimize risks and maximize potential

Businessmanagement

Classification

Data feeds

ValidationFair Value/Credit management

Impairment

Accounting/Reporting/Governance

Trading/LendingBusiness

Business Processes

SystemsPeople

■ KPI setup/scorecard■ (Pre-)Pricing■ Validation business model■ Update portfolio structure

■ New Product Process■ Update/Harmonize product catalogue■ Monitoring individual agreements

■ Expand data model■ Adjust data transfer■ functional data harmonization (e.g. use of

Basel parameters for Impairment calculation)

■ Adjust methods & master data■ Expand data history■ Implement Fair Value measurement loans

■ SPPI test■ Documentation product features■ Adjust approval process

■ Capital allocation■ Fair Value management■ Credit treasury■ Adjust hedge accounting strategy

■ Expand calculation model■ Increase data history■ Validate basic parameter (e.g. lifetime

expected credit loss)

■ Expand ledger structure■ Update accounting policies and guidelines■ Adjust ICS processes■ Additional Capital Requirements expected■ Market communication

■ Business areas have to be involved up from the beginning■ Adjustment of product design and portfolio management in 2015 reduces effects in 2018■ Total effect on equity capital requires an integrated view in accounting & risk


■ Leverage Ratio (LR)o Implications on both input quantities

■ Net Stable Funding Ratio (NSFR)o Direct implications most possible

■ Liquidity Coverage Ratio (LCR)o No direct implications

■ Leverage Ratio (LR)o Implications on both input quantities

■ Net Stable Funding Ratio (NSFR)o Direct implications most possible

■ Liquidity Coverage Ratio (LCR)o No direct implications

■ Product pricingo Long-term business may tie up more capital depending on

product and client segmento Pricing scheme to be reviewed

o Check of strategic options for long-term business (like co-operation with insurance)

■ CRA Volatilityo requires more sophisticated planning

and steering methods/processes ■ Risk-taking capacity

o Basically reduced core capital

■ Product pricingo Long-term business may tie up more capital depending on

product and client segmento Pricing scheme to be reviewed

o Check of strategic options for long-term business (like co-operation with insurance)

■ CRA Volatilityo requires more sophisticated planning

and steering methods/processes ■ Risk-taking capacity

o Basically reduced core capital

■ FINREPo Adaption of formal FINREP

template structureo Interdependencies regarding

reporting frequency and processes■ CRR Disclosure

o Qualitative and quantitative modifications

■ Large loan exposure limitso will be reduced due to decrease in capital

■ FINREPo Adaption of formal FINREP

template structureo Interdependencies regarding

reporting frequency and processes■ CRR Disclosure

o Qualitative and quantitative modifications

■ Large loan exposure limitso will be reduced due to decrease in capital

■ Available regulatory capitalo Reduction of CET11 via decreased retained earningso IRBA EL/CRA2-comparison increase surplus or reduce

shortfall; gen. CRA in STA3 may increase Tier 2 capitalo Increase of Deferred Tax Assets due to mismatch

with tax B/S - DTA lead to increased earnings, but RW4 100% or 250% or capital deduction

■ Capital requirementso Reduced Exposure Value in STA by

specific CRA; no change in IRBA

■ Available regulatory capitalo Reduction of CET11 via decreased retained earningso IRBA EL/CRA2-comparison increase surplus or reduce

shortfall; gen. CRA in STA3 may increase Tier 2 capitalo Increase of Deferred Tax Assets due to mismatch

with tax B/S - DTA lead to increased earnings, but RW4 100% or 250% or capital deduction

■ Capital requirementso Reduced Exposure Value in STA by

specific CRA; no change in IRBA

In particular, IFRS 9 Impairment has many implications on regulatory areas

IFRS 9Impairment

1 Common Equity Tier 1 (regulatory „core capital“) 2Credit Risk Adjustments 3Stdandardized Approach 4 Risk Weight


Basel III Solvability

Reduction of CET1 via decreased retained earnings

Increase of Deferred Tax Assets due to mismatch with tax B/S

Additional CRA will increase expenses in accounting

This will immediately reduce retained earnings which are part of the CET1

Thus CET1 will decrease by the increase of CRA on introduction of IFRS 9 impairment

Higher earnings in tax accounting compared to IFRS will lead to (additional) deferred tax assets (DTA)

Economically, this would mean bank pays to much tax given that IFRS valuing is the “true” value, which will be most likely compensated on future realization of this “true” value

But with increased CRA due to IFRS 9, this would only be valid in crisis situations, because risk (CRA) in stage 2 will be overstated in non-crisis situations compared to fair value

Basically, DTA will increase retained earnings

However, DTA itself will be either part of RWA or be even deducted from CET1 depending on the classification of the DTA (reliance on future profitability, CRR Art. 38)

CRARetained earnings

CET1

IAS

39

CRA Retained earnings

CET1IFR

S 9 Add.

CRA

CRA

DTA

additional CRA partly offset by DTA

mult. by tax rate


defaulted non-defaulted

Basel III Solvability (cont’d)

IRBA EL/CRA1-comparison increase surplus or reduce shortfall

General CRA in Standardized Approach may increase Tier 2 capital

Comparison is done separately for defaulted and non-defaulted assets (no compensation between them)

As CRA may increase in stage 1 (possibly due to LIP factor) and increases in stage 2 the comparison of non-defaulted assets will mainly change

In the most likely event of having a future surplus, additional CRA will transform into Tier 2 capital, but capped by 0.6 % of RWA

In Standardized Approach, only general CRA (or GLLP) will effect the capital site

Additional general CRA will increase Tier 2 capital, but capped at 1.25 % of RWA in Standardized Approach

CRASurp

lus

EL

CRAshor

tfall

EL

Main Focus of increase in stage 1 and 2 !

Basically, increases Tier 2

capital, but capped by 0.6 % of RWA!

Reduces CET1 deductions!

Reduced Exposure Value in STA by specific CRA

In Standardized Approach, specific CRA (or GLLP) will be deducted from the accounting value (and result into the so-called exposure value)

Additional CRA will decrease the exposure value and consequently also the associated RWA

In case of defaulted assets, additionally there would be also a reduction of RW (not of big relevance, because major changes in stage 1 and 2)

Cap


Basel III Ratios

Leverage Ratio (LR)

Net Stable Funding Ratio (NSFR)

Liquidity Coverage Ratio (LCR)

Leverage Ratio

NSFR

LCR

=

=

=

Tier 1 Capital

Exposure Value

Available stable funding

Required stable funding

Liquid high quality assets

Net liquidity outflow (30 days stress)

> 3 %

100 %

100 %

Exposure Value effect only for STA

Driven by negative effect of reduced capital on available funding


FINREP and CRR Disclosure

FINREP CRR Disclosure

Current FINREP reporting structure is based on IAS 39

The FINREP reporting structure will need for integration of IFRS 9 specific information

There may be interaction between the forborne status with rating and stage migration, especially with change of loan conditions

FINREP reporting frequency is quarterly and thus, CRA information is needed at least quarterly

Due to changed definitions with IFRS 9 compared to IAS 39, extensions and adjustments of the disclosure scheme more than likely

Higher volatility of CRA due to migration effects and consequential higher volatility of capital will require comprehensive explanation in disclosure report

Structural changes due to IFRS 9 possibly require adjustments of data supply

Depending on the reporting level, the relevant forms will be prescribed by the ECB

1 Balance sheet

2 Income statement

5 Classification of the loans

and borrowings

8 Classification financial liabilities

10 Derivatives - trade

11 Derivatives - hedge

accounting

18 Performing and non-

performing exposures

19 Forborne exposures

4 Classification financial assets

9 Loan commitments, financial guarantee and other commitments

12 Report on impairment of loans and equity capital instruments

14 FV hierarchy: Financial instruments on FV

6 Loans / borrowings pursuant to

NACE

13 Received securities and guarantees

16 Classification selected balance sheet / income statement items

17 Reconciliation accounting and

supervisory basis of consolidation

20 Geographic outline 40 Group structure

3 Statement of comprehensive income

7 Adjusted financial assets that are cancelled or impaired

15 Derecognition and liabilities connected to transferred assets

21 Tangible and intangible assets; assets within operating lease

30 Off-balance-sheet business: interest from non-consolidated struct. comp.

22 Asset management and other service functions

31 Affiliated companies 41 Fair Value 42 Tangible and intangible assets: carrying amount according to val. method 43 Provisions

44 Pension plan and social security payments 45 Classification of selected balance sheet and income statement items 46 Setup of changes in the equity capital

Setting up of the relevant reporting forms*Downgrade level

DataPoints

Over-Simplified

Simplified FINREP

Full FINREP


A most recent message from the Basel Committee on IFRS 9 Impairment

Guidance on accounting for expected credit losses

Completely revised issue (consultation document) of the “guidance on sound credit risk assessment and valuation for loans” (SCRAVL, 2006) which gave guidance to the implementation of IAS 39

Consultation period ends at 30th April 2015 Detailed provisions on how IFRS banks shall implement IFRS 9

impairment Specification of concrete dos and don’ts for banks especially in the

context that banks are leader in credit risk measurement and IFRS 9 is written for all industry segments

Structured in 11 principles with emphasis on responsibility of senior mgmt., need for validation, robust consideration of forward looking information and the following

Fundamental requirements and procedures, including appropriate tools to identify, assess and price credit risk appropriately, are to be met by the banks

Expectation that banks maximally use and leverage existing data, models and processes

No specific details or explicit hint on the calibration of the transfer criterion included, but change of credit risk over expected life of loan is to be considered

Expectation that more sophisticated banks shall not use definite simplifications in IFRS 9 Impairment, however a proportionality principle for banks is assumed

Document claims not to undermine and redefine accounting rules


Involvement of stakeholders of all Functional Building Blocks required

IFRS 9 is not only a pure accounting project in fact the involvement of stakeholders from all areas of the bank is required

No. Concept0 Design Framework1 Design Framework C&M2 Design BM & Portfolio Management

3 SPPI Test & NPP-Adjustments4 Fair Value Measurement 5 Reporting & Chart of Accounts6 Booking Engines & Posting Rules7 Internal Reporting8 Reclassification9 Initial Application & Migration10 Disclosure/Notes11 Fair Value & Performance Management12 Framework Impairment13 Bucket Allocation & Transfer Logic14 EL Methodology15 Credit-impaired Assets16 Interest Income Recognition17 First Time Adoption Impairment18 Disclosures / Notes Impairment

19Posting Rules & Reconciliation Impairment

20 Internal Reporting Impairment21 Hedge Accounting

22Disclosures / Notes for Hedge Accounting

23 Selective Topics/Professional Opinions24 Scenario Analysis25 Tax Implications26 Harmonisation of Methods27 Training & Communication28 Bank Management, Planning &

Budgeting29 GAAP Reconciliation

Functional Building Blocks

Own Issues Payment

Transactions

Trading Business Front Office

Interest-FX-Business

Market and Master Data for Trading Business

Equity/ FX Trade

Other Commercial

Business

Lendings Settlement and

Back Office

Settlement of Deposits

Banking Transactions

Settlement of Commission & Fee-earn-ing

Business

Settlement of Payment

Transactions

Group Internal Provider Management

Settlement of Interest-

earning Operations

Settlement of Security

Transactions

Settlement of other

Commercial Business

Banking Book Sub Ledger Trading Book Sub Ledger

General Ledger

Accounting Data Management

Business CommercialAccounting

Credit Risk Controlling

ALM

Int. and ext. Regulatory Reporting

Financial Controlling

Risk Controlling Data Management

Market Risk Determination

Tax

Controlling Operational

Risks

Credit Derivatives Business

Settlement of own Issues

Settlement of Credit

Derivatives business

General Bank Management

Controlling Other Risks

Commercial Business Front Office

LendingBusiness

Market and Master Data for Commercial Business

Deposit Banking Business

Commission and Fee-earning

Business

Fron

t-Offi

ceB

ack-

Offi

ceC

ontr

ollin

g Ac

coun

ting

Ris

k M

ngm

t.

Trading Business Accounting IT

Accounting Standards and

Financial Accounting

InvestmentControlling

Retained Organisation External Provider Management

Spe

cial

Top

ic: F

raud

Pre

v. a

nd

Sec

urity

Spe

cial

Top

ic:

HR

Issu

es

Risk Strategy

Market Risk Controlling

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Business Management3

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PHASE 2:Detailed analysis and design

PHASE 1:Assess

PHASE 3:Implement

Q3-14: Initial insight on the potential impact, key focus areas and required resources

Q4 2014:■ Validate plan for

Phase 2 and secure resources■ Set up the PMO

and governance■ Mobilise resources

Q3-15: ■Establish BAU

governance structure■Final decision on

accounting policies and hedging strategy

Q2-15: ■Refresh of impact analysis

following finalised standard■Completion of impact

analysis■Initial design of models,

data flows and architecture completed

Q3-15: Implementation plan and senior stakeholder communication completed

Q2-15: ■Provide insight into both

the one-off and annual impact on financial reporting, regulatory requirements and tax■Mock-up disclosures

designed and accounting manuals updated

Q3-15:■Transfer criteria and risk parameters

signed-off■ Skills matrices detailing current and

required skill profiles developed■Existing credit policies reviewed and

enhancements to align with IFRS 9 made■Design specifications

for data sourcing, systems, models, controls and processes completed

Q1-15: ■Business model

documentation completed■Senior

stakeholder communication plan agreed

2014

Q2-15: Cash flow

characteristic tests

completed

Q1-15:Hedging feasibility study and review of existing hedging strategies completed

2015

Implementation considerationsOverview timeline


PHASE 3:Implement

PHASE 4:Sustain

Q1-18: First IFRS 9 compliant financial statements

Q4-15: Valuation solution built for fair value and amortised cost measurements

Q2-16: ■Solutions to

implement ECL model rolled out■Pro-forma

financial statements and disclosures drafted

Q2-16: Hedge

documentation and effectiveness testing templates

ready

Q2-16: System changes built and configured

Q3-16: System changes

tested

Q4-16: IFRS 9 tools, applications,

processes, controls, knowledge and

governance structure successfully implemented

2015 2016 2017 2018

Q1-17: Remainder of IFRS 9 handed over from programme to BAU

Q1- 17: Post implementation tests completed

Q3-15: ■ Resources secured for implementation■ System changes and timing agreed based on system specifications

Q1-16: Final credit

risk policies reviewed and

signed off

1 January 2018:IFRS 9 effective

date

1 January 2017:

IFRS 9 go-live (Parallel run

begins)

Implementation considerationsOverview timeline (continued)


Impairment –Quantitative Analysis

Impairment Calculator*

■ Quick availability of initial IFRS 9 impacts on loan impairment

■ Available for use in daily work after implementation project

Impairment –Qualitative Analysis

gCLAS**

■ Efficient determination of gaps between status quo and target scenario

■ Enables effective and correct project and resource planning

I Nr. Soll-Anforderung IFRS 9 Ist-Ausprägung Identifiziertes Gap Erfüllungsgrad 1 2 3 4 5 Erforderliche Anpassungen en /Betroe und A

1 ….. ….. ….. [auswählen]

2 ….. ….. ….. [auswählen]

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IT-Funktionalitäten

Kern

elem

ent 1

Methodik

Daten-verfügbarkeit

Prozesse

Perspektive

Gap-Analyse IFRS 9 Impairment

Classification Loan Portfolio

Lending Tool*

■ Rapid analysis of securities portfolio

■ Enlarged master data incl. KPMG add-ons

■ Complete documentation of classification decisions

■ Available for use during and after implementation project

■ For local and global use

ClassificationSecurities Portfolio

iRADAR*

■ Structured workflow for loan portfolio analysis

■ Documentation of classification decisions at deal level

■ Available for use during and after implementation project

Overview Toolkit

Scope

Your Value

Scenario tool to support the quantitative analysis regarding the changes in impairment processes and methods

KPMG template for an efficient definition of qualitative impairment requirements and documentation of status quo

KPMG Database with numerous market and product information. Enables KPMG iRADAR team to produce a classification suggestion of the securities portfolio with minimal effort

Automated decision trees & questionnaires to speed up the portfolio screening and the individual decision regarding the individual classification of loans

LENDING TOOL

Identification new disclosure requirements

Data Dictionary*

Standalone tool for identification of data and data flows required forIFRS 9 compliant

quantitative disclosures

■ Reporting and accounting data mapped to IFRS 9 disclosure requirements

■ Identification of disclosure requirements that need interpretation, calculation and /or judgment

*) Tools for IFRS 9 projects**) Software


Agenda


A Brief Overview & ChallengesA Brief Overview & Challenges


WRAP UP WRAP UP


Gross basis

■ No significant deterioration in credit quality

■ 12 month expected credit losses - The portion of lifetime expected credit losses that represent the ECLs that result from default events occurring within the 12 months after the reporting date, weighted by the probability of that default occurring.

Net basisInterest revenue

■ Significant increase in credit risk

■ Change relates to probability of default rather than changes in LGD

■ Rebuttable presumption that the criterion for lifetime expected credit losses is met if payment are more than 30 days past due (but cf. BCBS CAECL!)

■ Credit-impaired financial assets (includes purchased and originated credit-impaired assets)

■ Interest is calculated on amortised cost (i.e. net of loss allowance). Consistent with the amount IAS 39 requirement for all financial assets and financial liabilities

■ Interest is calculated by applying the EIR to the gross carrying amount (i.e. before the loss allowance)

Scope of changes

■ The proposed Expected Credit Losses (ECL) model uses a dual measurement approach depending on the extent of credit deterioration since initial recognition:

− Stage 1: ‘12 months’ expected credit losses’ if the credit risk has NOT increased significantly since initial recognition; and

− Stage 2/3: ‘Lifetime expected credit losses’ would be recognised if the credit risk has increased significantly since initial recognition

■ Extensive new disclosures – e.g. effects of deteriorations and improvements in credit quality and the critical judgments made in measuring the ECL accounts.

Stage 1Performing

Stage 2Underperforming

Stage 3Non-performing

TransferIf the credit risk on the financial asset has increased significantly since initial recognition

Move backIf transfer conditions above is no

longer met

Change in credit risk since initial recognition

Expected Credit LossesApproach

New:Calculate Lifetime

Expected Losses in a new stage 2

New:Implement transfer criterion from stage 1 to 2 based on LtPD


Expected Credit LossesTechnical accounting/risk – Key issues and trends

Transfer criteria: What deterioration in credit quality is considered ‘significant’?

Selection of transfer criteria and indicators are required (e.g. types of downgrades and where the boundary of low risk lies).

Transfer criteria should incorporate current conditions and forecasts/forward looking information.

More than 30 days past due rebuttable presumption to serve as a backstop, to identify financial instruments that have experienced significant increase in credit risk, if no other forward looking, borrower-specific information available.

Assessment based on the change in the risk of a default occurring in the next 12 months permitted unless a lifetime assessment is necessary.

Assessment can be performed at counterparty level if the objectives of the expected loss model can be met.

Assessment of significant increase in credit risk on an individual vs. collective basis

Flexibility of using a variety of information. Assessment can also be based on a combination of a specific internal credit rating category; and qualitative factors that are not captured through the internal credit ratings process , if both information arerelevant.

For financial assets at FVOCI (e.g. treasury securities), the expected losses should reflect management’s expectations of credit losses. When considering ‘best available information’, the observable market information about credit risk should be considered.

Technical considerations

Expected loss drivers (e.g.

PD/ LGD)

Discount rates

Definition of default

Maturity

Transfer criteria

Most firms are considering the statement about undue cost and effort to justify their choices in

estimating expected credit losses.However, they are also conscious of the reaction from the regulators

and how they will explain any differences in approach.

Specific issues/trends

Some firms have opted a PD based threshold and downgrade criteria; others have opted to use a their watch list/ stressed process as a way to segregate the portfolio.

The retail method of calculating days in arrears is usually different from commercial exposures. Firms should consider whether a unified definition is appropriate or how to disclose differences in definitions across portfolios.

In light of the 30 days past due continues to be stressed as a backstop, a robust approach should be established to ensure earlier position will be picked up when recognising lifetime expected credit losses.


Expected Credit LossesTechnical accounting/risk – Key issues and trends

Low credit risk

Practical expedient - A financial instrument has not significantly increased in credit risk if it has low credit risk at the end of the reporting period.

The low credit risk notion is not a bright-line trigger for lifetime ECL

Not required to be externally rated, however, low credit risk equates to a global credit rating definition of ‘investment grade’, as an example.

Loss given default (LGD)

Similarly, LGD as defined by IFRS 9 and Basel III are different:

■ Point-in-time versus downturn LGDs


Most firms have applied a simplistic assumption for the assessment of expected credit losses by LGD segments which measure the economic loss incurred on a credit exposure in the event of default.


Most firms recognised the need to be as point in time PD estimates to quantify expected credit losses .This is more pronounced for treasury assets where in most cases market prices and rating agency views are the main source of information

Implementation and governance over forward looking measures will be challenging

Term structures for less sophisticated firms using standardised approach for assessment of regulatory capital are normally based on external data

Probability of default (PD)

There is a difference between expected losses as defined by IFRS 9 and Basel III for firms leveraging off Basel regulatory expected losses,:

■ Point-in-time versus through-the-cycle PDs

■ Forward-looking information would need to be considered in assessing lifetime expected losses



PD/ LGD)

Discount rates


Maturity

Transfer criteria


While this may offer some degree of operational simplification, firmsshould:

■ Establish a credit risk framework to define and justify their threshold of low credit risk;

■ Implement monitoring mechanismto track the credit risk movement of those low credit risk instruments.


Discount rate

The expected credit losses should be discounted at the effective interest rate (EIR) at initial recognition or an approximation thereof (current EIR for variable rate loans)

Applies to both drawn and undrawn balance of loan commitments, financial guarantee contracts and revolving credit facilities.


Rebuttable presumption that default does not occur later than 90 days past due.

Definition of default should be consistent with credit risk management practices.

Qualitative indicators of default should be considered when appropriate (e.g. covenants).

Specific issues/ TrendsSpecific issues/trends

Most firms have used behavioral maturity for revolving credit portfolios (e.g. credit cards) where this is more prudent, and contractual period for all other financial instruments.

Maturity

The maximum period for the measurement of ECL is the maximum contractual period (includingextension options) over which the entity is exposed to credit risk, except for revolving credit facilities where the measurement period is based on the behavioral life.



PD/ LGD)

Discount rates


Maturity

Transfer criteria


Some firms indicated the challenge in generating original EIR across all or some portfolios.

Expected Credit Losses Technical accounting/risk – Key issues and trends (cont.)


Varying definitions between portfolios (retail versus corporate books)

Most firms have opted to useregulatory definition of defaultconsistent with the Basel II definition of default that underpins their PD models. However, firms should re-assess their definition of default to take into account the 90 days past due rebuttable presumptions for default and other qualitative indicators.


Assets modification

The modification requirements apply to all modifications or renegotiations of contractual cash flows, regardless of the reason for the modification.

Modified financial assets are subject to the same assessment of significant increase in credit risk as unmodified financial instruments and the same ‘symmetrical’ treatment, i.e. could revert back to 12-month expected losses.

The credit risk on a financial asset would not automatically improve merely because the contractual cash flows have been modified.

To assess whether there has been a significant increase in the credit risk of a modified asset, compare the risk of default occurring at the reporting date based on the modified contractual terms and the risk of a default occurring at initial recognition based on the original, unmodified contractual terms.



PD/ LGD)

Discount rates


Maturity

Transfer criteria


Appropriate modification policy and monitoring mechanisms should be established, in particular setting specific conditions to assess whether the credit risk of the modified financial instruments has improved and whether the criteria for the recognition of lifetime expected credit losses are no longer met. Examples of conditions to consider are:

• an analysis of the financial condition of the borrower showing it no longer meet the criteria for recognition of lifetime expected credit losses.

• establish a minimum period to monitor whether the credit risk of the modified financial instrument has improved• regular payments of principal and interest amount have been made during the minimum period • none of the exposures to the borrower is more than 30 days past-due at the end of the minimum period.

Expected Credit LossesTechnical accounting/risk – Key issues and trends (cont.)


Financial reporting controls

Evaluating governance and framework of controls around the Credit Losses process (including all relevant data flows, modeling and appropriate documentation) to ensure they are robust for financial reporting purposes and SOX-compliant.

Governance over data

Ownership of data and quality issues are likely to emerge though the reconciliation of risk and finance data

Specific issues/ Trends

The issues and trends in this space seem to be bifurcated between firms that have a centralised data model versus firms that have a more federated approach.

By far the majority of issues lies with federated systems and their reconciliation horizontally across silos.

For firms more advanced in implementation, the focus has been on consistency with regulatory reporting


Relevant data flows are unknown or poorly mapped.

Data sources and systems have not been subject to the same amount of rigor as those used for financial reporting

Risk documentation for provisioning methodology is improving across the industry but is generally not at the level required for financial reporting


More advanced firms in this space have clear management buy-inbetween the CFO and CRO

Some firms have set up overarching program management to look over various change projects to leverage other projects

Credit risk and accounting teams have found it difficult to speak the same language and this potentially leads to multiple policy rewrites at one firm

The current range of maturity within the industry is varied.

However, the main key success criteria for more advanced firms

seems to be an ability to collaborate cross functionally

across traditional silos

Cross functional collaboration

IFRS 9 implementation demands skilled resources across the firm that are similar to other large scale change programme including Finance, Risk and IT collaboration.

Strategy

Finance

IT

RiskWhat is your track record for cross functional collaboration?

Expected Credit LossesOperational – Key issues and trends


Expected Credit LossesImplementation – Specific challenges and trends

Data quality and integrity

Data quality across the industry is a known issue and many firms are addressing these concerns through specific IT projects to manage and maintain a single customer view across secured and unsecured lending products.

Modeling choices

Most firms with IRB risk models embedded are leveraging these models in implementing IFRS9 primarily to evaluate migration across rating grades.


Some firms consider an integrated framework for capital and expected credit loss assessment which link but do not constrain migration across rating grades and defaults.

Most firms are planning to use a mixed methodology such as a combination of leveraging existing Basel expected loss model and building new models for more complex portfolios.

Models used for regulatory capital calculations often have conservatism embedded within them


Many firms encountered problems with unpacking top level portfolio adjustments into deal level adjustments

Data for most firms were sourced from a combination of risk, finance and front office systems. Many firms had issues with reconciliation between these systems

Challenges also exist in overcoming capability limitations such as data management problems and constraints imposed by legacy systems across the organisation

Portfolio coverage

Many firms have identified specific portfolios as a pilot before rolling implementation out more widely.

In terms of implementation, most firms struggle with data and ensuring that they can identify the

correct data from the correct source system and being able to

replicate the information horizontally across different

businesses

Most firms struggle with their internal data architecture and getting one version of the truth

?Risk

Finance

FO


Some firms have experienced difficulties in ensuring the completeness of population of loans within the entity.

Many firms encountered issues with portfolios where IRB models do not currently exist (e.g. standardised portfolios)


Agenda




WRAP UP WRAP UP


The basic idea of IFRS 9 Impairment explains some counter-intuitive behavior with respect to the transfer criterion

risk margin needed at origination given the rating at origination and the corresponding Lifetime EL

risk margin needed at reporting date Tx given the rating at Tx and the corresponding Lifetime EL

Consequences within IFRS 9 Impairment framework

However, the transfer criterion does not rely on LtEL but on Lifetime PD (“Significant increase in credit risk”), so a sole decrease in collateral value e.g. may not trigger a transfer from stage 1 to 2

Although this is the basic idea, the standard does not obey this idea comprehensively (e.g. revolving credit with right to increase price must be considered via behavioral life)

Comparison of LtPD must be done on matchable time frames:

Nota bene:

Book value minus LtEL is basically lower than the Fair Value because the latter allow for “offsetting” the increased EL for each period of lifetime with the original risk-adequate margin as part of the cash flows (only increase of LtEL effectively driving the decrease in FV)

T2T1T0

Dt0

Ct0 Ct1

Loan Dtransfered to stage 2

Obligor Rating BBB B CCCBB

Comparison of risk margins

Timeline

Dt1

Comparison of risk margins

Loan Eremains in stage 1

Case study as example

One obligor with 2 loans originated at different dates with different obligor ratings

Assumption: bank gets the needed risk margin for such an EL over lifetime of each loan via the adequate pricing at origination date

In case of significant deviation of currently needed LtEL from the LtEL originally calculated at origination, the bank does not even closely cover the currently anticipated LtEL via the original price

Comparison of forward cumulative PD at initial recognition with current LtPD

1,5 %

2,5 %t2t1t0

Cumulative PD


The transfer criterion has to be applied on Lifetime-PD level so that a quantile-based approach basically is most reasonable

x

x

x

x

x

x

t

LtPD

x Expected remaining LtPD at t=0Threshold at 75% quantile

Box plot Lifetime PD evolution

When implementing a LtPD-based transfer criteria, a threshold defined by a quantile of the distribution of

expected LtPDs at the reporting dates is a reasonable approach


Calculating and recognizing expected credit losses the most significant change compared to IAS 39

Transfer of individual assets when■ No longer Investment Grade and■ Significant increase in PD since origination

Transfer of individual assets from stage 2 to stage 3 when impairment triggers are observed

Transfer of individual assets back to stage 2 when asset has recovered from default*Transfer of individual assets back to stage 1 when

criteria above are no longer met (symmetric model)* Assets that are credit-impaired at acquisition or origination remain in stage 3 until maturity

Provisioning Cliff Effect1

Stage 1Status: not deterioratedProvision: 1 year ECL

2

Stage 2Status: deterioratedProvision: Lifetime ECL

3

Stage 3Status: credit impairedProvision: Lifetime ECL

The accounting treatment is decided by the IFRS 9 stage, which is a function of credit quality and deterioration

Source: KPMG's 2014 IFRS 9


Determining the IFRS 9 stage depends on a number of factors and can require significant amounts of historical data

DefaultInvestment Grade Non Investment Grade

Definition “Credit-impaired”

PD-Threshold(Non-investment grade)

PD

Dt0 Dt1

Et1

Xt0

Loan X at the end of the first period (t1)

Loan X at origination (t0)

Stage 1

Stage 2

Stage 3Lifetime ECL

1yr ECL

Ct0

Significant deterioration

Insignificant deterioration

Ct1

Bt1Bt0

Ft1Ft0“Assets with low credit risk”

At0 At1

Xt1

■ IFRS 9 requires different levels of provisioning for different assets depending on whether or not there has been significant deterioration in the past

■ Determining the correct stage requires knowledge of the current and original credit risk levels, which is information not readily available in typical front office and risk systems

Allocating the assets to stages and providing historical information for disclosures is a new challenge that is not possible in legacy systems and requires an extended data warehouse

Source: KPMG's 2014 IFRS 9

Et0


The idea of expected credit losses is nothing new, but the Basel environment is typically limited to a 12 month horizon

PD LGDx x=

■ Expected credit loss is a statistical measure used to reflect expectations of future losses based on historical data

■ The three primary components are derived based on observation, empirical evidence and expert judgment

■ The objective is to quantify loss expectations over a 12 month forecast

■ Probability of default for an asset or class of assets over the next year

■ PD represents an average expectation over the course of an entire business cycle (through-the-cycle) as opposed to specific current expectations (point-in-time)

■ Loss given default based on losses resulting from defaults over the next 12 months

■ Ideally the LGD will be separated for secured and unsecured portions of an exposure

■ LGD is a prudent parameter based on an assumed downturn in the economic conditions

■ Exposure at default represents the amount a bank stands to lose in the event of a default event

■ For a 12 month horizon, the EAD is defined as the current exposure without considering payments

■ Undrawn commitments are factored in using statistical probabilities of drawing

ECL EAD

Changes to existing models are necessary to comply with lifetime expected credit loss (LECL) requirements


Extensive extensions are required to the Basel parameters to extend to a lifetime expected credit loss

Extrapolating parameters and accurately forecasting cash flows are the main challenges of implementation for a financial institution of any size

IFRS 9 Require-ments

■ Use of best available (internal and external) information* for making forward-looking loss estimations that is reasonably available, including information about: past events current conditions reasonable and supportable

forecasts of future events and economic conditions

■ EL is defined as a probability-weighted expected value

■ EL includes losses on both, principal and interest on a discounted basis

■ Validation / backtesting required

Note

■ EL-estimations may consist of a combination of ■ short-term estimations and■ extrapolation of projections from

available, detailed information for periods far in the future

ttt

T

tt DEADLGDPDEL

1

■Marginal PDs over the remaining expected lifetime of the asset

■Consideration of cures/re-aging (after default)

■Point-in-time PD required

General requirements:■Consideration of macroeconomic forecasts

■Point-in-time analysis required (Through-the-cycle averages not adequate)■Consider correlations between the parameters PD, LGD and EAD

■All assumptions must be validated (conservative assumptions are not allowed)

■On b/s portion: Estimation of cash flow structure over the lifetime, based on IFRS Book Value

■Separate EL estimation for off b/s items:Estimation of usage behaviour over the lifetime of the loan commitment or financial guarantee

Discount factor:■On-b/s items: EIR■Off-b/s items: Current market rate

■Marginal LGD over the lifetime of the asset ■Point-in-time view required; no downturn scenario

* Cost-Benefit Consideration:Information (fulfilling the requirements above) should be used if it is available “without undue cost and effort”


How models should be extended or be built up in the most efficient way

From/To AAA AA A BBB BB B CCC/C DOne-yearAAA 90,23% 8,99% 0,56% 0,05% 0,08% 0,03% 0,05% 0,00%AA 0,56% 89,94% 8,71% 0,59% 0,06% 0,08% 0,02% 0,02%A 0,03% 1,95% 91,58% 5,80% 0,38% 0,16% 0,02% 0,07%BBB 0,01% 0,13% 3,78% 90,90% 4,14% 0,65% 0,15% 0,24%BB 0,02% 0,04% 0,17% 5,74% 84,31% 7,97% 0,80% 0,95%B 0,00% 0,03% 0,12% 0,26% 6,14% 83,61% 4,98% 4,85%CCC/C 0,00% 0,00% 0,19% 0,28% 0,85% 16,00% 51,30% 31,38%D 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 100,00%

Example: S&P Default Study

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Realized CPDs (dashed) vs. CPDs calculated by 1 yr. MMX (solid) per rating class

100 %

0 %

Lifetime parameters or all the other needed preliminaries for this may be already in the bank for several reasons

Lifetime models should maximally make use of existing data, models and parameters

Lifetime models should not have unnecessary ballast and must be robust under the necessary validation to be applied in future (migration matrices e.g. may not fulfill this requirement for definite business models)

It is most likely, that additional models will be needed in the bank for IFRS 9 purposes

Provided simplifications of IFRS 9 Impairment may not be usable for banks (cf. “Guidance on accounting for expected credit losses” by BCBS 2015, Feb.)


Overview on (lifetime) parameter estimation for IFRS 9 Impairment based on Advanced IRB Basel II parameters

Lt-PD

Lt-LGD

Lt-EAD

Transfer-criterion

Future economic conditions

Basel II/CRR What additionally is needed Where sources for this could be found

only 12 months PDs! Should be more like PIT for usage

without adjustment

only LGDs based on EAD of reporting date! For IFRS purposes need to use EIR,

excl. internal costs & downturn add-on!

marginal PDs for future periods needed (may be derived from forward/conditional PDs) not directly derivable from Basel II PD

re-calculation for future periods: e.g. with a structural model: include

expected change of collateral market value and exposure over time

Pre-calculation/pricing FV calculation (e.g. IFRS13) Migration Risk within CPM/CVaR-

calculation

no equivalent requirementmay be already integrated in models

via macro-eco. input-parameters

no equivalent requirementmust be basically grounded on lifetime-

PDs

only exposure at reporting date available

some adequate add-on (layer) for models to integrate future economic outlook for a couple of next years

historical data of loan origin with Lt-PD for incomplete data approximations

necessary e.g. transformation model Lifetime/12M

Roll-out cash flows, derive run-down EAD for each future period account for embedded options,

prolongation rights etc.

concept to deal with collateral market value fluctuations, econ. depreciations Extension of LGD model Pre-calc./Pricing/FV/CPM

Stress-testing bases cases research of economic department

data history of rating and pricing

Liquidity risk modelling Pre-calc./Pricing/FV/CPM

Lifetime no corresponding requirement (M in A-IRB is different)

lifetime basically implicitly by Lt-EADRevolving loans via behavioural Life

s. above


KPMG offers an efficient and value-added solution to the challenges posed by IFRS 9

The core functionality of the system includes:

Combine loan data directly from the core banking system and risk data into a central model

Create transition matrices based on rating information or delinquency data or import matrices based on external risk models

Roll out cash flows over the lifetime of individual assets including modeling of prepayments using industry-standard models and calculating effective interest rates

Measure expected credit losses based on predicted cash shortfalls on a one-year or remaining lifetime basis

Manage stage allocation based on user settings and generate journal vouchers to accommodate changes in provisioning levels over time

Generate journal vouchers for stage 3 accounting Extensive reporting and analytics capabilities including

all disclosure requirements

KPMG’s Global Credit Loss Accounting Solution (“gCLAS”) is a full service impairment accounting solution that functions as a modular add-on to existing accounting systems and processes. Our multi-phase delivery process provides for effective integration of the system within the business.

gCLAS provides a solution to the challenges posed by IFRS 9 impairment


Agenda




WRAP UP WRAP UP


WRAP Up

BDDK`nin karari ve aksiyon plani

IAS39 mu? IFRS9 mu?

Sayisal Etki

2 yil uyun bir süre mi?

Ön calisma

© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG, the logo and “cutting through complexity” are registered trademarks of KPMG International.

IFRS 9 Content, Challenges and Tools

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Transcript of IFRS 9 Content, Challenges and Tools