It's time to look forward
With the new EU accounting requirements based on the IFRS 9 standards, it is no longer possible to look back, when losses are to be calculated. From 2018 the requirements will be increased as regards the banks' ability to write down expected future losses.
Why new rules in the field?
In the course of the financial crisis it was clear that the crisis was partly due to the fact that some of the major banks chose to postpone the amortization of losses on certain exposures even in cases where the loans were unlikely to be settled. This practice meant that the scale of the financial crisis was strengthened.
In order to avoid this happening again, the idea of changing accounting policies emerged, so that the future focus should also be on probable losses and not only losses incurred. This principle was described in March 2008 as a jount discussion elaborated by the International Accounting Standards Board (IASB) in collaboration with the Financial Accounting Standards Board (FASB). This cooperation became the foundation of the new International Financial Reporting Standards (IFRS) in the area of IFRS 9.
What is IFRS 9?
International Financial Reporting Standards (IFRS) are different sets of standards elaborated by IASB. These standards provide the basis for legislation in a wide range of countries worldwide - including throughout Europe.
A key element in IFRS 9 is the shift from rule-based loss calculations to principle-based calculations. This makes the calculations easier on the one hand, as the principle-based approach is easier to apply widely. On the other hand, the larger data base for calculations in the future will increase the requirements for system support.
The change in accounting principles from a reversed model based on incurred losses to a forward-looking model based on expected losses is described by, among others, PwC, as the biggest change in accounting principles and systems in recent times.
When does it come into force?
In November 2016, the EU formally decided to use the new IFRS 9 after a longer consultation process. The provisions will enter into force as of January 1st, 2018.
All banks in Europe must therefore ensure compliance before this date.
What does it mean for SDC's customers?
Statistical write-downs are typically not something that smaller banks have tried before - it's a new world, both technically and culturally.
Following the adoption of IFRS 9, many of the SDC banks have already started with the work to increase provisions for potential losses to mitigate the financial consequences when IFRS 9 enters into force.
What does SDC do?
In order to be ready for IFRS 9, SDC has in Q1 2016, launched a cross-nordic project to prepare the systems to support the new IFRS 9 principles. It is a large project that involves a large number of systems, which must take into account the different ways in which banks have made risk calculations so far.
Through close collaboration with the banking associations, LOPI in Denmark and Eika in Norway, SDC ensures a good basis that events and general changes in the markets are registered in the system and thus can be included in the calculations across all banks.
The first project delivery was completed in late March 2017, where the SDC calculator was updated with the most important functions to support registration and calculation of expected depreciations. The full solution with the remaining components and integrations, will be in place January 1, 2018.
Advantages of SDC
Since SDC covers many banks and countries, the base for statistical analysis will be significantly better than if the banks were to conduct the analyzes individually. SDC consult with supervisory authorities in both Denmark, Norway and Sweden and with external auditors, who all contribute to ensuring that the solution meets both the requirements and, in som cases, covers the various needs and requirements of small and medium-sized banks.
5 things you need to know about IFRS 9:
- IFRS 9 replaces the existing rules in this area - IAS 39
- With IFRS 9 is the first time a system is designed to look ahead
- All new loans and credits must be assessed on the basis of risk of loss the first 12 months
- Better insight into future credit risk provides the basis for better advices
- The project delivery in January 2018 is an indispensable deadline