The majority of large European banks have now released their 2016 Annual Financial Statements which included certain disclosures around IFRS 9 implementation.
The European Securities and Markets Authority (ESMA) has previously issued a public statement outlining its expectations of preparers of financial statements in the lead-up to the implementation of IFRS 9.
ESMA’s expectations focus on the need for transparency regarding the impact to users of financial statements when implementing IFRS 9. ESMA expects the level of detail of disclosure from banks to increase in the 2017 calendar year with the level of disclosure being dependent upon the significance of the impact to the financial statements:
What did we learn from the 2016 Annual Reports?
We analysed a sample of nineteen GSIB and DSIB banks, which were published before 28 February 2017 and found that limited additional information (which was previously unavailable in the public domain) has been disclosed in the 2016 annual reports results. Most banks provided a brief articulation of their IFRS 9 approaches with no quantification of the expected financial impacts on balance sheet, P&L and capital:
- IFRS 9 impacts: Banks largely remain uncertain (or unwilling to disclose details) regarding the financial impact of IFRS 9, with only two banks in the sample, providing an unaudited estimate of the impact of IFRS 9 on impairment stocks, P&L movements or capital.
- Judgements and modelling techniques: Very limited disclosure of the approaches to modelling Expected Credit Loss (ECL) under IFRS 9. The challenge for banks in the remainder of 2017 will be to prepare the external market sufficiently for their transition to IFRS 9; and
- Capital Planning: The impact of IFRS 9 implementation on bank capital remains unanswered – no bank reviewed was able to provide clarity on the impact of IFRS 9 on their capital levels or capital planning with the finalisation of transitional capital treatments still requiring clarification (note: banks will be required to provide IFRS 9 numbers as part of stress testing submissions later in 2017).
With the go-live date for IFRS 9 approaching, the time remaining to finalise IFRS 9 approaches is short. Focus should be turning to the successful parallel-run across the end-to-end IFRS 9 processes developed. Clear articulation of the impact of IFRS 9 on internal and external stakeholders will be key:
The market is yet to learn with any confidence what the impact of IFRS will be on banks post adoption. Regulators in Switzerland and other countries may take same or similar measures like ESMA or EBA. Proactive management of stakeholder expectations will be key. The interim and annual disclosures of 2017 will be closely monitored by investors, industry bodies and prudential regulators, as one of the largest changes to financial reporting becomes effective. These stakeholders will keep demanding to receive more details, however when banks will be able to provide these remains uncertain.