Are you ready to address the challenges of IFRS 9?

IAS 39 has been openly criticized since the 2008 financial crisis due to its inadequacy in reflecting the reality of financial instrument management. The main objective of IFRS 9 is therefore to revise the principles of this international accounting standard.

The final version of IFRS 9 “Financial Instruments” was published on July 24, 2014, and will be applicable for financial years beginning on or after January 1^st, 2018 (subject to adoption by the European Commission). The market awaits the adoption of this standard by the European Commission with a strong possibility of deferral for insurance activities. Indeed, the application of IFRS 9 for European insurers remains uncertain, due to the required correspondence with the future IFRS 4 standard on insurance contracts.  

The standard consists of 3 distinct phases:

• Phase 1: Classification and measurement of financial assets and liabilities
• Phase 2: Replacement of the incurred loss model with an expected loss model
• Phase 3: Modification of hedge accounting principles

It is necessary to be able to estimate the various functional and application impacts of such a measure and to communicate them to the different stakeholders. Cooperation between departments is essential, because although the standard published by the IASB is accounting-based, companies must evolve their information systems to review the classification and measurement of financial assets in Phase 1 and adopt a new provisioning approach for Phase 2.

Phase 1

It introduces new analysis criteria for the classification and measurement of financial assets. Thus, to define which category a financial instrument falls into (fair value through profit or loss, fair value OCI, or amortized cost), it is necessary to test the basic/non-basic nature of the contract as well as the management intent. The basic nature indicates that it is solely a cash flow with repayment of principal and interest on the outstanding principal. It is the combination of these two criteria that will determine the assignment to one of the three categories.

The standard aims to refine the classification and measurement of financial assets through the business model in which they are managed, as well as their cash flows. Therefore, an analysis must be conducted to assess the implications of classifying financial assets under IFRS 9. All the improvements made (business model, cash flow characteristics) require institutions to develop an accounting diagnosis of their financial instrument portfolio.

Key tasks to be carried out in this phase:

• Review of the scope of assets measured solely at fair value,
• Analysis of reclassification from IAS 39 to IFRS 9,
• Analysis and documentation of classification principles based on business model analysis and cash flow characteristics,
• Study of impacts on the chart of accounts, data collection, and feeding of different systems.

Phase 2

The crisis highlighted problems in the accounting of losses by financial institutions. Before the crisis, it was impossible to make a provision without a payment default. The new IFRS 9 standard will allow the recording of a provision if there is a credit risk, to enable possible anticipation of losses. IFRS 9 introduces a new impairment recognition model for debt instruments (and loans), based on expected credit losses (IAS 39: incurred credit losses).

Key tasks to be carried out in this phase:

• Identification of assets eligible for Phase 2 on impairment provisions related to debt instruments that will not be classified at Fair Value through profit or loss,
• Determine a provisioning methodology,
• Study of impacts on IT systems to allow an asset to move between the different stages of Phase 2 of the IFRS 9 project (i.e., the evolution of the asset’s credit quality since initial recognition).

Phase 3

The section on Phase 3 concerning hedge accounting is not yet stable as it will be the subject of a dedicated project at the IASB level. The hedge accounting phase will be divided into 2 projects:

• A project on macro hedge accounting,
• A project on micro hedge accounting.

Accounting must be maintained according to IAS 39 pending the publication on this part. We will get back to you once this phase is published by the IASB.

And our role in all of this? Helping you establish a diagnosis of the impacts on your IT system.

Indeed, there are many challenges inherent in implementing IFRS 9; we have listed some of them where MeltOne can support you:

• Identify impacted applications from the IT system mapping,
• Conduct a business diagnosis across all products to distinguish assets whose classification does not change following the application of the standard (limited IT impacts) from those that will need to change classification (more significant IT impact),
• Address new needs for classification and valuation of financial instruments (Phase 1), also integrating provision accounts for assets subject to credit risk impairment calculation,
• Be able to list impacted assets in IT systems (number of contracts, outstanding amounts, etc.),
• Adapt the chart of accounts based on new reporting needs,
• Establish a correspondence between products and charts of accounts to facilitate the deployment of IFRS 9 Phase 1 changes in IT systems.

The implementation of IFRS 9 will significantly impact all business lines of financial institutions. The challenges are numerous and are not limited to a simple accounting evolution; the impacts on IT systems are not negligible. In this context, financial institutions must anticipate and immediately launch the necessary actions to be able to meet the milestones set by the regulator.

MeltOne Advisory has extensive experience with these types of issues, which, combined with our expertise in information systems, allows us to effectively support you through all phases of this project, from impact assessment to implementation in your IT system.

Would you like to know more? Please do not hesitate to contact us: the MeltOne team is at your disposal. jsaccona@meltone.com / bgrandjean@meltone.com