Expected loss model for impairment accounting: Real challenges in the journey towards compliance & beyond

Expected loss model for impairment accounting: Real challenges in the journey towards compliance & beyond

We interview Srinivasan Varadarajan, Global Head – Banking & Financial Services Practice at Tata Consultancy Services, ahead of the IFRS 9 Impairment & Implementation Summit where he will be joining us to review progress across the three phases as the industry moves towards parallel runs and implementation.

Can you tell the Risk Insights’ readers about yourself and your professional experiences?

Tata Consultancy Services (TCS) is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a
consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India’s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay
Stock Exchange in India.

TCS has been ranked #1 in the 2016 FinTech Rankings of Top 100 global technology providers to the
financial services industry, by IDC Financial Insights.

TCS has also been recognized as a ‘Leader’ in Banking Application Outsourcing for the sixth consecutive year in Everest Group’s 2016 PEAK Matrix report and was additionally positioned as a leader across all four lines of the banking business, which include credit cards, retail banking, lending, and commercial banking.

With over four decades of experience working with the world’s leading banks and financial institutions, TCS offers a comprehensive portfolio of domain-focused processes, frameworks, and solutions that empower organizations to respond to market changes quickly, manage customer relationships profitably, and stay ahead of competition. Our offerings combine customizable solution accelerators and expertise gained from engaging with global banks, regulatory and development institutions, and diversified and specialty financial institutions. TCS helps leading organizations achieve key operational and strategic objectives across retail and corporate banking, capital markets, market infrastructure, cards, risk management, and treasury.

TCS’ Banking and Financial Services Unit (BFS) has partnered with world’s leading banks and financial institutions and has delivered solutions covering various business segments like Retail Banking, Investment Banking, Cards and so on, and horizontals like Risk, Financial Reporting and Compliance. We provide end-to-end services in Consulting, Advisory Services to IT Development, and Business Process Outsourcing.

TCS has successfully established, executed, and managed multiple regulatory reporting engagements including IFRS Compliance Programs in multiple jurisdictions across the globe, within stringent timelines and tight budgets.

At the IFRS 9 Impairment & Implementation Summit you will be discussing the expected loss model for impairment accounting. Why do you believe this is a key talking point at the Summit?

The IFRS 9 Expected Credit Loss model for impairment accounting has introduced a new methodology for calculation, recognition and reporting of credit losses. It changes the way impairment was previously accounted for, under IAS 39, completely; this has created several challenges for banks and financial institutions in interpreting key concepts, the non-availability of IFRS 9 trained personnel, the limitations of the existing IT systems, inadequate data, high implementation costs and so on. A smooth compliance also necessitates close co-ordination and alignment between the Finance and Risk functions that have hitherto operated in silos. The new, Expected Loss model is also likely to have a major impact on banks’ profitability and other key KPIs. Many banks are still at the early stages of their compliance programs. We therefore believe that an exchange of experiences and ideas on this topic will help in providing key directions to the participating banks in accelerating their journey towards compliance.

You will look to review the transition from IAS 39 to IFRS 9. In your opinion how prepared do you feel banks are for this transition?

TCS is involved in the implementation of IFRS 9 for our customers spread across the globe. The preparedness for transition to IFRS 9 differs from bank to bank because of various factors such as management decision, budget constraints, availability of resources, and so on. There are banks that have progressed well into their IT system development and implementation phase, while there are many in their impact assessment phase.

The impact of the new requirements on banks also depends on the existing systems and processes and their asset profile. IFRS 9 implementation is complex because of various factors specific to each entity, occupying a major role in IFRS 9 compliance. There is no ’one-size-fits-all’ approach that can be applied across all entities for the transition from IAS 39 to IFRS 9. Factors like the existing systems for assessing credit quality, credit risk policies, asset profile and so on, have a bearing on how systems need to be designed for IFRS 9. Because of such factors, the ideal time required for a typical implementation was estimated to be three years.
Now, with just a little more than a year left to complete the transition and implementation, many banks are hard-pressed for time. In this kind of a scenario, it is pertinent that banks get their act together quickly.

Without giving too much away, would you advise financial institutions to use IFRS 9 impairment as an opportunity to overhaul their IT systems?

We observe that most banks today are constrained by their aging legacy systems. IFRS 9 would tremendously increase demands on IT in terms of additional information processing and reporting. Hence, IFRS 9 compliance could prove to be an opportunity to evaluate these systems and enhance them to overcome critical limitations. Overhauling the Finance & Risk IT systems could provide an elegant solution, helping banks comply with standards such as BCBS 239, while providing the right information and insights to management for decision-making and for improving efficiency in the financial closure processes.

How do you see the role of the accounting and credit risk expert changing over the next 6-12 months?

Finance and Risk functions have been working in silos. However, with standards like IFRS 9, an accountant will have to go deeper into Risk concepts, models etc.; the Credit Risk expert would need to go much beyond capital adequacy and also think about the impact of their decisions on other KPIs, such as profitability etc. Both functions will have to join hands and work towards an optimal risk-reward equation, with Finance experts having a role to play in the framing of the Risk policy and Risk experts will have to take into account implications on the capital and liquidity, and other KPIs of the bank. Thus, new roles would emerge, requiring the right blend of Finance and Risk expertise.