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Don’t Let “Averages” Mess Up Your IFRS 9 Impact Forecasts

Blog: Enterprise Decision Management Blog

IFRS 9 as digital clock display

The clock is ticking on IFRS 9 compliance. Preparing for Day 1 IFRS 9 impacts before models are fully built, tested and validated is a bit like preparing for a scheduled car crash: You know the event is going to happen and you know it will be expensive and painful, but you don’t yet know the exact amount of damage.

It is tempting to seek comfort in averages from industry benchmarks or surveys. But just as you would never apply the brakes of your car during heavy rain based on the average stopping distance of an average car in average weather conditions, neither should you plan for your business’s IFRS 9 impacts based on average industry impacts alone.

Don’t Go by Published Numbers

A few widely published, well-intended surveys have attempted to prepare affected organisations for this event by providing estimated ranges and averages in respect of key impact measures. For example, the EBA’s initial IFRS 9 impact assessment report from November 2016 revealed that the “estimated increase of provisions compared to the current levels of provisions under IAS 39 is 18% on average and up to 30% for 86% (75th percentile) of respondents.” One in seven Deloitte survey respondents were preparing for provision increases of 50% or more.

Once shared widely, such numbers set an expectation that may leave certain entities under-prepared. To better plan for the challenges ahead, spend some time thinking about factors that may specifically affect your portfolio.

Key drivers of impact include:

All of these considerations emphasise the need for swift, accurate model development, testing and validation, as well as ongoing stakeholder management. High-level impact assessments can be created relatively early in the process based on readily available data and management reporting, combined with high-level assumptions about model methodology.

Any impacts should be presented as a range and be heavily caveated and clearly explained. As key components become clearer, the range can be narrowed and the caveats removed one by one. For some portfolios, IFRS 9 provisions will be more appropriately expressed as a multiple of IAS 39 provisions rather than as a percentage increase.

Setting reasonable and specific expectations of IFRS 9 impairment impacts by considering all of the points above will help you prepare your organisation’s key decision makers for the impacts that lie ahead. FICO has a structured approach for helping you work through the IFRS planning and compliance stages, including post-compliance. Instead of driving blind, you’ll have a clear view of the road ahead — however bumpy it may be.

The post Don’t Let “Averages” Mess Up Your IFRS 9 Impact Forecasts appeared first on FICO.

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