For the first time, financial institutions will have to recognize not only credit losses that have already occurred but also losses that are expected in the future – is your financial institution prepared?
IFRS 9 Issues
The International Accounting Standards Board (IASB) has published a new International Financial Reporting Standard 9 (IFRS 9) as an improvement to the existing International Accounting Standard 39 (IAS39) Financial Instruments: Recognition and Measurement by mandating a new method for applying risk metrics to accounting relating to the Financial Instruments for all banks and insurance entities reporting according to IFRS. It will be effective for annual periods beginning on or after 01 Jan 2018 by replacing the existing IAS 39.
IFRS 9 - Financial Instruments is built on a logical, single classification and measurement approach. The classification reflects the business model in which they are managed and their cash flow characteristics.
IFRS 9 requires financial institutions to move from an incurred loss model to an expected loss model. For the first time, financial institutions will have to recognize not only credit losses that have already occurred but also losses that are expected in the future that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting.
IFRS 9 will also include an improved hedge accounting model to better link the economics of risk management with its accounting treatment.
How our solution helps
The current IFRS solution offered by Temenos is compliant with the rules of IAS 39. Our mission is to continue providing IFRS compliance for the Financial Instruments supported by Temenos products by replacing support for the IAS39 regulation with that of the new IFRS 9 regulation.
As part of IFRS 9, financial institutions will need to analyze the business model information and the cash flow characteristics of their financial assets to determine whether the assets should be measured at amortized cost or fair value. They will also need to calculate the expected credit loss for their assets over either a 12-month or lifetime period.
Temenos will provide a standardized solution with the capability to support all the three key areas and get the clients comply with IFRS 9 regulation:
Classification and Measurement
Classification of the financial instruments in to the following three buckets:
- Amortized Cost (AMC)
- Fair Value through Other Comprehensive Income (FVTOCI)
- Fair Value through Profit or Loss (FVPL)
New centralized impairment calculator will be developed in the system to move towards the Expected Loss Model and do the necessary Impairment Accounting by:
- Classifying the financial assets in to three buckets i.e. Stage 1, Stage 2 and Stage 3.
- Start recognizing the ECLs from the initial recognition.
- Calculate and account for the ECLs based on the stage of the asset.
Hedge Accounting (optional requirement)
The Hedge Accounting solution will offer:
- Ability to state the Hedge Types
- Ability to document the Hedge Relationships
- Ability to define the Accounting Rules based on the type of the Hedge
- Ability to raise the Hedge Accounting Entries
IFRS 9 solution availability in Temenos Core Banking
Temenos has rolled out the IFRS 9 solution, allowing enough time for clients to be compliant with the IFRS 9 effective from 01 Jan 2018 onwards.