IFRS 9 is a challenging new standard which looks to dramatically alter industry practice and improve upon current requirements set out by IAS 39. With full implementation of IFRS 9 due to be in place by the 1st of January 2018, we have now entered the remaining 12-month phase in which industry experts will need to step up preparation and testing system readiness ahead of full implementation. This is now a critical time to consider how to convert months of discussion and planning into practical implementation, however with the deadline looming ever closer several questions have been left unanswered. At this vitally important stage of the project many financial institutions have questioned whether their methods of preparation and approach are sufficient and will meet the high expectations required by the regulators.
Speaking to several industry experts ahead of the 4th in the series IFRS 9: Impairment and Implementation summit revealed that one of the most critical challenges facing successful implementation of IFRS 9 is the parallel phase. This element of the project has the potential to seriously jeopardise the ability to implement the new standard. In the coming months many financial institutions will begin their parallel phase in which they will run their current system in unison with the new system. This will allow for a comprehensive report on the operations and effectiveness of the new system, many are concerned as to the outcome of this phase and the potential difficulties to be reconfigured ahead of January 2018. The parallel phase could potentially highlight serious issues once the project goes live, leaving little time to alter internal structures and models to satisfy regulatory requirements. The outlook is not all bleak, the phase could prove a fruitful exercise to confirm enough work has been done and systems are prepared for the changes. Possessing the ability to adjust and mitigate against these problems before full implementation will be the key to success. Within the coming 6-12 months we should expect to hear some of the results produced by various parallel runs within the industry, this will shine a light on which institutions may face potential setbacks and obstacles in the race to full implementation.
Another critical area which has left many industry experts questioning the regulators is the ability to successfully incorporate forward looking projections within their models. Predicting the future is something that is not historically incorporated into models, the challenge deepens with having to convert predictions into tangible data is another challenge all together. Experts agree that this approach could be used further within stress scenarios and allow for successful preventative approaches, however they also acknowledge that the system is flawed. The unforeseen events of the financial crisis were unpredictable by nature, no one could have imagined the large scale impact it caused on global financial institutions. Events such as this were once inconceivable, industry professionals are now expected to account for and predict these shocks as standard practice, increased market volatility makes this even more unpredictable. Questions surrounding the level and number of scenarios to incorporate into projections and how far to look into the future are still being debated, with full implementation looming ever closer questions such as these look to remain unanswered until things pan out further.
Another key obstacle is the lack of understanding on the disclosure requirements, once again a lack information on the subject has left many guessing what is required to satisfy the regulators. In particular there seems to be confusion between what should be disclosed and what is actually required to be disclosed. Disclosing too little runs the risk of not meeting the official implementation requirements, however on the other hand if you disclose too much information you are publishing unnecessary amounts of detail and opening up to industry scrutiny. With a lot of ambiguity surrounding the topic it could be a case of industry best practice in which financial institutions turn to one another to identify a common practice of disclosure. However within this critical point of the project it will be interesting to see who within the industry will step up and be the first to publish their disclosures, they could be setting the trend for others to follow or face criticism from within the industry. Future discussions and publications should allow for a deeper understanding of the required disclosures and what this will mean for full implementation. Many highlighted peer institutions keeping their cards close to their chest, however time is running out and a domino effect is expected once the first is out of the traps.
In the final push towards full implementation the issues discussed above do have the potential to hinder the successful implementation of IFRS 9 and cause setbacks. It could be argued that a vast majority of these challenges have been caused by a lack of input from the regulators and ambiguous guidelines. It brings into question whether the industry is prepared for full implementation and can tackle some of the outstanding challenges so close to the final deadline. Being aware of and planning for such problems could have an impact on final implementation. Arguably as we move through these final stages of the project, more publications may become available and allow for industry comparison, this will be an exciting and interesting time to identify the variations in approaches and results. IFRS 9 is an evolving and engaging new standard which will undoubtedly continue to create stimulating debate between now and full implementation.
The 4th in Series IFRS 9: Impairment and Implementation summit (1-2 March), looks to address the above challenges ahead of implementation plus many other topics as highlighted by industry experts. The summit provides a platform to begin industry discussions and open up a dialogue between organisations in the same shoes ahead of implementation, it offers a chance to share possible best practice across the industry and share ideas on what the coming year holds.