Aptivaa is launching a series of blogs to explain key aspects of IFRS 9, an accounting standard that shifts from an incurred loss to a forward-looking expected loss approach for impairment assessment. Effective from January 1, 2018, successful implementation relies on collaboration between risk and finance teams and focuses heavily on impairment modeling due to its complexity. The upcoming discussions will cover various topics related to IFRS 9, including risk modeling, measurement categories, and hedge accounting.

1. In the backdrop of the buzz that IFRS 9 has generated in the banking industry, and to demystify IFRS 9
principles,Aptivaa is pleased to launch a series of blogs to apprise readers of some of the key aspects
related mostly to impairment modeling, for compliance with the new accounting standards, as well as
to have a conversation with the readers about the challenges that banks are facing in their
implementation efforts.
On 24 July 2014, IASB issued the fourth and final version of its new accounting standard – IFRS 9
Financial Instruments, which replaces most of the rule-based standards of IAS 39 with principle-
based guidance. IFRS 9 is built on a logical, single classification and measurement approach for
financial assets that reflects the business model in which they are managed and their cash flow
characteristics.
The fundamental shift from IAS 39 to IFRS 9 standards is “Incurred LossApproach” to “Forward-looking
Expected Loss Approach” for impairment assessment. In the past, accountants were not comfortable
with accounting based on “expected” outcome unless they have “sufficient proof” to believe so; due to
which loan loss provisioning was 'too little, too late'. The fundamental responsibility of accounting is to
ensure “True and accurate Representation” of accounts in P&L statement. Given this background, IFRS
9isafundamentalshiftinmindset.
The Standard also includes an improved hedge accounting model to improve the link between the
economics of risk management with its accounting treatment.
From IAS 39 to IFRS 9
ISSUE 01
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2. IFRS 9 principle comprises of three structured components:
Asuccessful implementation of IFRS 9 is predicated on the successful and the close coordination between Risk
and Finance teams within a bank and the proverbial 'breaking of the silos' is paramount. Banks that approach
an implementation in silos is likely to run into considerable problems at a later stage.
Many banks in emerging markets have asset allocations that are relatively non-complex and not subject to
dynamic changes. This simplifies identification of business models for Asset classification, but the same
reasons call for extensive credit risk modelling efforts for impairment calculations. Hence, Impairment modeling
is one of the core areas where banks need to focus.
IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, subject to endorsement in
certain territories; therefore considering the complexity of changes in systems, processes, and data
requirements, Banks would require minimum of two years of implementation and a parallel run to ensure the
readiness for 2018.
In the coming week, we will be discussing the Building blocks of impairment modeling. The post will aim to
broadly cover the understanding of core components of ECL measurement and challenges related to each
component in detail.
This space aims to answer your queries pertaining to IFRS 9 principles. In case, you have any queries
pertaining to IFRS 9 which you wish to discuss, do leave your comments.
As a part of IFRS 9 series, we will be touching upon the following topics in the coming weeks
Ÿ BCBS expectations of high quality implementation of IFRS 9 standards
Ÿ The loss rate approach and how is it different from a PD/LGD approach
Ÿ The master rating scale and its applicability
Ÿ Distinction between PD and historical default rate
Ÿ Distinction betweenTTC PD and PITPD
Ÿ Identifying different stages of impairment model
Ÿ PD calibration methodology and its significance in/for ECLmeasurement
Ÿ Characteristics of LGD parameter in Risk Models and its distinction from expected cash shortfall
Ÿ EAD and its use, and how is it different from ‘current outstanding’exposure
Ÿ Lifetime expected credit loss and why it is not a simple multiplication of lifetime PD and LGD
Ÿ Key requirements for validation and governance framework, and many other key areas related to impairment modeling
We expect that these discussions, with feedback from our clients and associates, will help our readers in demystifying various
principles of IFRS 9 impairment modeling.
Introduction of new measurement category:
‘Fair Value through other comprehensive
Income’(FVOCI)
‘Tainting rule’ has ceased to exist in IFRS 9 –
i.e., sales of ‘held to maturity’ assets under
IAS 39 before maturity jeopardize amortized
cost accounting for entire portfolio
Classificationofinstrumentsarenowbasedon-
Ÿ Entity’s Business Model
Ÿ Contractual Cash flow characteristics test
(SPPI)
Classification &
Measurement01
COMPONENT
ECL model is applicable for instruments
classified under Amortized Cost and FVOCI
(debt instruments) category
Recognizes 12-month loss allowance at initial
recognition and lifetime loss allowances on
significantincreaseincreditrisk
IFRS 9 replaces IAS 39 ‘Incurred Loss’Model
with new Forward looking Expected Credit
Loss (ECL) model
Requires incorporation of forward-looking
information in ECLestimates
Introduction of new hedge accounting model
The 80-125% hedge effectiveness testing
ratio range is replaced by an objectives-
based test that focuses on the economic
relationship
Simplified hedge accounting rules to reflect
moreaccuratelyhowanentitymanagesitsrisk
More designations of groups of items as the
hedged items are possible under new rules
Impairment
02
COMPONENT
Hedge Accounting
03
COMPONENT
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