IFRS Implementation and How the Banks should Approach It

1. IFRS Implementation and how the banks should approach it.
Though the final version of IFRS came up in 2014, the banks across the globe have
recently embarked the journey. Any new regulation requires significant effort to
revisit its existing governance, policies & processes, data and the systems and IFRS 9
is no different.
There have been multiple articles analyzing the scope and requirements covered under
IFRS in great detail. Hence, I would like to touch upon the requirements and scope of
IFRS implementation and set the context in this publication; I shall primarily share
my personal view as a risk practitioner on how the banks should approach it and be
able to meet the timeline of 2018.
Background & Scope:
IASB, in the form of its final version of IFRS published during July 2014, provides
with guidance to establish a single, uniform standard for classification and
measurement of financial assets based on the business model and cash-flow
characteristics. The primary objective is to align the bank’s risk management policies
with its accounting practice. The banks are expected to timely recognize expected
credit loss and factor that into provisions using forward-looking technique.
The scope of IFRS includes the instruments in scope for IAS 39. In addition to that, it
includes certain contracts that the banks categorize as ‘own-use’ and thereby book

2. gains through profit or loss in case of credit rating downgrade while measuring at fair
value.
A quick comparison with IAS 39 shows that the changes are primarily in the
following three aspects –
 Classification and Measurement of Financial Assets and Financial Liabilities
 Impairment Methodology
 Hedge Accounting
Approach to IFRS Implementation
I would suggest that a regulation like IFRS will have an organization-wide impact on
governance, policies and process, data and finally on the systems. Hence, like all other
major regulatory compliance engagements, it should be treated as a transformation
program and should be broken down into three distinct phases – Assess, Design and
Implement.
IFRS requires capabilities across multiple dimensions and hence multiple work
streams are to be developed.

3. Now, let us take a deeper look at the impacted areas at which the three different tracks
should focus on. This is not a comprehensive list rather an indicative one.
Governance
 Organization structure – This will require involvement of multiple teams. Especially
teams of CFO, CRO and CIO will have to align their work together. Initiative should
be driven from top and executed from bottom.
 Roles & Responsibilities – CFO and CRO teams will need to take responsibility to
reconcile finance and risk data related to exposure and loss. CRO team will own the
credit risk models and scorecards. CIO team will facilitate the system implementation
around these areas.
Policies and Methodology
Policies & Procedures
 Credit Policy including credit rating and collateral management & valuation
 Credit risk management policies including provisioning norms and recovery policy
 Liquidity risk policies especially for contractual cash flow aspect
 Accounting Policies

4.  Develop Business model for certain financial assets
Methodology
 Impairment model methodology
 Review methodology for PD models primarily to adjust from ‘Through-the-cycle’ PD
to ‘Point-in-time’ PD.
 Review LGD and EAD methodology
 Methodology to estimate Effective Interest Rate (EIR) to apply Time value of money
for ECL calculation
 Methodology for impairment forecasting & stress testing based on adverse economic
scenarios
Models
 Credit Risk Application and Behavioral Scorecards by business segments
 Pricing models
 Point-in-time PD model
 LGD / EAD models
 Behavioral life
Data
Data requirement will significantly increase both in terms of length and breadth.
While additional attributes and more granular information will be required for proper
classification of assets and credit quality, more historical data will be required to build
impairment models. Following is an indicative list of data set required for IFRS.

5. Challenges
IFRS implementation will not be too easy considering the steep timeline, wide
organizational impact, data requirements & data quality and the complexities
involved.
Timeline
The banks that embarked on the journey now or are planning to start might need to
plan extremely well to complete in time as most of the banks think that it takes at least
2.5 to 3 years to complete this.
Wide impact
Impact is extensively wide and much beyond impairment or P&L to all the factors
contributing to value of the entity such as market position, reputation etc.
Data requirements
Like any other regulation compliance, IFRS implementation is data intensive driven –
data governance and data quality will be the key.
Complexity
Lifetime expected loss impairment models will require significant change in modeling
methodology; complexity will also arise due to involvement of multiple stakeholders
and their conflicting priorities.
IFRS Changes Impacting Banks and Implementation Design

7. Concl
IFRS im
planning
the bank
drive it
initiativ
The peo
and Fina
will be t
A public
lusion
mplementat
g and effici
ks should im
from top an
es.
ople driving
ance domai
the skills th
cation by J
ion will de
ient execut
mmediately
nd CFO, C
g it will req
in expertise
hat would m
James Oka
finitely not
tion can stil
y start with
RO and CI
quire trainin
e with expe
make it a su
arimia
t be easy w
ll make it h
h right earn
IO will nee
ng and man
erience of D
uccessful p
within the ti
happen. The
nest. Senior
ed to align i
ndate to exe
Data Mana
program.
ime-frame –
ere is no tim
r manageme
in their effo
ecute it on
agement and
– but prope
me left, hen
ent will hav
orts and
ground - R
d Analytics
er
nce
ve to
Risk
s

8. Managing Partner at RM associates
Partners in Enterprise Risk Managements