The IFRS 9 capital transitional arrangements and capital planning


On 1 January this year, IFRS 9 became effective for banks and building societies. The capital impact of the changes introduced by IFRS 9 may be significant both on the IFRS 9 application date and on an ongoing basis. As a result, a five year transitional arrangement has been agreed and fast tracked into European law, allowing firms to “phase in” the Day 1 capital impact.

How will the transitional arrangement function in practice?

The proposed transition period is five years long and during that time, percentages of ‘new’ impairment provisions recognised as a result of IFRS 9 adoption will be added back to CET1 capital.

The finalised rules were published on 1 December 20171 and the adoption of the transitional arrangements will be at the discretion of institutions (as communicated by the PRA’s Dear CEO letter) on the assumption that they inform the local competent authority. Institutions that adopt the transition will have to disclose their own funds, capital and leverage ratios both with and without the transitional arrangement to maintain comparability.

How are the transitional adjustments to capital calculated?

The additional capital to be added back to CET1 is calculated in accordance with the below formulas, and varies according to whether the exposure is risk-weighted under the Standardised Approach (SA) or the Internal Ratings - Based (IRB) approach. The formulas are formulated under a dynamic approach, providing a capital relief for the day 1 impact (i.e. A_SA 1 and A_IRB 1) and any potential subsequent increase in IFRS 9 expected credit loss provisions due to an unexpected deterioration of the macroeconomic outlook (i.e. A_SA 2 and A_IRB 2)∶


Standardised Approach

 ABSA = (ASA 1 + ASA 2 - t) X f

IRB Approach

ABIRB = (AIRB 1 + AIRB 2 - t) X f 


  • AB is the capital added to CET1 due to exposures risk weighted under the SA or IRB
  • ASA 1 is the amount of the differences in exposures between treatment under IFRS 9 and IAS 39 at the application date
  • ASA 2 is the difference between loss allowances calculated under IFRS 9 at the reporting date and at the application date for non-impaired assets
  • AIRB 1 is the amount of the differences in exposures between treatment under IFRS 9 and IAS 39 at the application date, adjusted for the prior day’s expected losses under IRB approach.
  • AIRB 2 is the difference between loss allowances calculated under IFRS 9 at the reporting date and at the application date for non-impaired assets, adjusted for the expected losses under IRB approach
  • f is a scaling factor
  • t= increase of Common Equity Tier 1 capital that is due to tax deductibility of the amounts ASA 1 , ASA 2 , AIRB 1 and AIRB 2

The scaling factor adjusts the magnitude of the effect of the transitional arrangements. This factor decays over time according to the below table:




 (Scalar Factor)

Reporting Date

Scalar Factor Value

01/01/18 – 31/12/18


01/01/19 – 31/12/19


01/01/20 – 31/12/20


01/01/21 – 31/12/21


01/01/22 – 31/12/22


The PRA’s guidance on IFRS 9 transitional arrangements

The PRA has encouraged firms to adopt the IFRS 9 transitional arrangements2 . The PRA supports the adoption of transitional arrangements on the basis that firms will not incur in significant cost for the implementation, the initial impact of expected credit losses on capital might be more volatile than initially estimated and the transitional arrangements will provide time for firms to mitigate the risk through the capital planning process. The Regulator expects that the supervision of firms during the transitional period would be based on the transitional adjusted capital resources, rather than the “fully loaded” figures, which incorporate the full day 1 impact of IFRS 9 adoption. The PRA recognises that during and after 2018 the quality of information will improve but anticipates that banks should have deployed reasonable efforts to prepare for the day-1 impact on capital.

The PRA has also released clarifications3 on how banks should incorporate the impact of IFRS 9 within their Internal Capital Adequacy Assessment Process (ICAAP) stress testing and capital planning. For ICAAPs based on accounts as at 31 December 2017 (or later), firms should consider the initial date of application of IFRS 9 as a starting point for their capital forecasts (base and stress test scenarios) as opposed to the closing IAS 39 balance sheet (in other words, firms with a December 2017 year-end should use 1 January 2018 as a starting point).

Firms will also need to provide an IAS 39 equivalent starting point in their ICAAPs to allow the PRA to understand the day 1 impact, and disclose both fully loaded and transitional capital forecasts for base and stress scenarios.

What should firms be considering now?

The transitional arrangements provide firms with an extended time period to absorb the day 1 capital impact of IFRS 9 adoption. However, Banks should engage in continued dialogue with the PRA in this area, and ensure that robust stress testing processes are in place, with results and analysis explained within their ICAAP documentation to explain the impact of IFRS 9 on forecast capital and business plans.

Learn more about the impacts of IFRS 9 on banking regulatory capital in the following link: The impact of IFRS 9 on capital and regulatory reporting





Mike Williams - Partner, Financial Services Banking and Capital Markets

Mike Williams is a Regulatory Partner specialising in leading Deloitte’s Banking and Capital Markets assignments in London, with 33 years’ experience and 19 years as a Partner working primarily with banking, investment banking, stockbroking, commodities and asset management clients across assurance, advisory, regulatory and consulting assignments.


Andrew Freeman

Andrew Freeman - Director, Financial Services

Andrew Freeman is a Director within the Prudential Regulation team in Deloitte’s Financial Services Industry (Banking and Capital Markets) practice. He has seventeen years assurance and advisory experience, specialising in regulatory reporting, risk policies and frameworks and stress testing.


German Ascue

German Ascue - Senior Manager, Financial Services

German Ascue is a Senior Manager within the Prudential Regulation team in our Banking and Capital Markets practice, providing advisory services to financial institutions. He is Chartered Accountant and Executive MBA with the ability to provide assistance on how institutions best meet their prudential regulation requirements. German specialises in regulatory reporting, stress testing and capital.

Email | LinkedIn

Kit Runnels-Moss

Kit Runnels-Moss - Manager, Financial Services

Kit Runnels-Moss is a Manager within the Banking & Capital Markets practice in Deloitte’s London office, where he provides advice to a range of UK and international banking groups on quantitative risk and regulatory capital. His past experience includes analysis and implementation of FRTB and IFRS 9 projects as well as regulatory capital compliance and advice.

Email | LinkedIn


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