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The majority of large European banks have now released their 2016 Annual Financial Statements which included certain disclosures around IFRS 9 implementation.

The European Securities and Markets Authority (ESMA) has previously issued a public statement outlining its expectations of preparers of financial statements in the lead-up to the implementation of IFRS 9.

ESMA’s expectations focus on the need for transparency regarding the impact to users of financial statements when implementing IFRS 9. ESMA expects the level of detail of disclosure from banks to increase in the 2017 calendar year with the level of disclosure being dependent upon the significance of the impact to the financial statements:

 

The expectations of ESMA

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2016 Financial Statements:
Provide a detailed description and explanation on how key IFRS 9 concepts will be implemented (e.g. approaches for classification of financial assets and modelling techniques and judgements).

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2017 Interim Financial Statements:
Issuers who expect a significant impact should provide reliable quantitative information on the impact as it becomes available, or as the issuer is able to provide significantly more information compared to previously available information.

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2017 Annual Financial Statements:
Provide the quantitative impact of the application of IFRS 9 and explain the changes to the amounts reported under IAS 39, disaggregated as appropriate.

 

What did we learn from the 2016 Annual Reports?

We analysed a sample of nineteen GSIB and DSIB banks, which were published before 28 February 2017 and found that limited additional information (which was previously unavailable in the public domain) has been disclosed in the 2016 annual reports results. Most banks provided a brief articulation of their IFRS 9 approaches with no quantification of the expected financial impacts on balance sheet, P&L and capital:

  • IFRS 9 impacts: Banks largely remain uncertain (or unwilling to disclose details) regarding the financial impact of IFRS 9, with only two banks in the sample, providing an unaudited estimate of the impact of IFRS 9 on impairment stocks, P&L movements or capital.
  • Judgements and modelling techniques: Very limited disclosure of the approaches to modelling Expected Credit Loss (ECL) under IFRS 9. The challenge for banks in the remainder of 2017 will be to prepare the external market sufficiently for their transition to IFRS 9; and
  • Capital Planning: The impact of IFRS 9 implementation on bank capital remains unanswered – no bank reviewed was able to provide clarity on the impact of IFRS 9 on their capital levels or capital planning with the finalisation of transitional capital treatments still requiring clarification (note: banks will be required to provide IFRS 9 numbers as part of stress testing submissions later in 2017).

With the go-live date for IFRS 9 approaching, the time remaining to finalise IFRS 9 approaches is short. Focus should be turning to the successful parallel-run across the end-to-end IFRS 9 processes developed. Clear articulation of the impact of IFRS 9 on internal and external stakeholders will be key:

 

Next steps for IFRS 9 implementers

 

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ESMA has been clear in their expectations that the quantitative impact of IFRS 9 should be made available in a banks’ 2017 Interim Financial Statements.
Banks parallel-run phases should include the preparation of the required IFRS 9 disclosures and narratives to ensure the approach to IFRS 9 compliance is clearly articulated and easily understood.

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Submissions to regulators are being made in the first half of 2017 (e.g. the second EBA quantitative impact study) with banks expected to have a clearer understanding of the financial impact of IFRS 9 across their portfolios.
Banks should soon be completing any remaining build and testing activities in order to provide accurate submissions to regulators.

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The scrutiny from internal and external stakeholders on the implementation of IFRS 9 will continue to increase as the IFRS 9 effective date approaches.
Banks should be managing the expectations of shareholders, analysts, boards and auditors to ensure the impact is well understood before the release of the 2017 Annual Financial Statements.

 

Conclusions

The market is yet to learn with any confidence what the impact of IFRS 9 will be on UK, European and international banks post adoption. The interim and annual disclosures of 2017 will be closely monitored by investors, industry bodies and prudential regulators, as one of the largest changes to financial reporting since the introduction of IFRSs in 2005, becomes effective. These stakeholders will continue applying pressure for more detail to be provided, although when banks will be able to do so remains uncertain.

Owen Thope

Owen Thorpe - Manager, Banking & Capital Markets

Owen is a Manager in Deloitte’s Banking & Capital Markets Group. He works closely with a number of financial institutions implementing IFRS 9, focusing on the practical business challenges posed by IFRS 9 implementation.

Owen has over 7 years’ experience in the Australian Banking sector where he worked in a number of Enterprise Risk roles, particularly focusing on risk appetite, risk governance and regulatory change. Prior to joining Deloitte, Owen worked for National Australia Bank where he was responsible for the oversight of the IFRS 9 loan loss provisioning process.

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Mark Rhys

Mark Rhys - Partner, Global IFRS for Banking Co-Leader

Mark has spent thirty years auditing banking and capital market clients. His experience encompasses retail, commercial and investment banking, securitisation, stock broking, derivatives structuring and commodity trading.

Mark is Deloitte’s global lead contact for interactions with the Financial Stability Board. As joint chair of the GPPC’s Bank Working Group, Mark leads regular discussions between the profession, the FSB and IFIAR (under the auspices of the SIE) regarding bank accounting and audit quality. Mark is also the firm’s representative on the Basel Auditing Subcommittee and the Accounting Experts Group. As the firm’s representative on the Enhanced Disclosure Task Force Mark led the credit disclosure working group.

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Andrew Spooner

Andrew Spooner - Partner, Global IFRS Financial Instruments Lead

Andrew is the lead IFRS financial instruments partner globally within Deloitte. As a member of the Global IFRS leadership team, Andrew provides technical advice on IFRS transition projects globally.

He has deep technical expertise with regard to financial instruments. Andrew leads liaison with the IASB on financial instruments as well as advising ESMA as a member of its Consultative Group on Financial Reporting. He is Deloitte’s global lead partner on financial instrument accounting, covering the latest developments and interpretations on impairment accounting.

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