The 2008 financial crisis highlighted many weaknesses in the global financial system, particularly in regulatory reporting. The crisis made shortcomings in the old International Accounting Standard 39 (IAS 39) apparent, thereby putting pressure on the industry to make changes. The industry responded by rolling out a new accounting standard to be implemented globally by 2018.
According to industry experts, this new framework – the International Financial Reporting Standard 9 (IFRS 9) – is set to fundamentally change regulatory reporting.
“The main changes are such that we will change from the traditional view of reporting by looking at what happened in the past, to reporting based on what we believe could happen in the future,” says Matthias Coessens, vice president of market management finance and performance, Asia-Pacific, at Wolters Kluwer. “This is a fundamental change to financial reporting, which is now more in line with the way risk management works.”
In other words, instead of looking to past events to project the future, the new standard will take into account future changes to the macro-economic environment when doing calculations.
“Having financial institutions that won’t change provision numbers – even though the future macro-economic outlook looks completely different compared to the last couple of years – doesn’t make much sense,” Coessens says. “When thinking of things like the oil and gas crisis and Brexit, this should all be reflected in the provisions for expected loss.”
Aside from this change, the new standard will also look to do many other things at once. These include circumventing a “too little, too late” scenario as seen in efforts to mitigate the effects of the financial crisis, instilling a new level of corporate social responsibility, and levelling the playing field for financial institutions globally.
As part of the new standard, regulators will ask for more detailed information or even a full database from financial institutions, as well as require more insight into how numbers are being calculated with a full audit trail and reconciliation. Financial institutions will therefore have to invest in platforms that can accommodate these new expectations.
Coessens says that hopefully this will translate into a more even playing field for everyone if platforms are standardised. “In a way, with all these existing types of internal models, people can still massage numbers. So standardisation will make it a lot easier to compare apples to apples.”
Inevitably, a roll out of such mammoth proportions comes with major implications for financial institutions, especially related to the way in which reporting is done and how data is collected. As a result, financial institutions will require greater manpower and need to retrain their existing staff to deliver on these new standards.
“For banks, it is a difficult time and numerous other regulations are coming their way,” Coessens says. “They shouldn’t look at IFRS 9 in isolation, but rather take a holistic, helicopter view. Eventually it will be easier and they can start concentrating on being a bank again, rather than filling out millions of forms or regulations. Banking should be about how they treat customers.”
