IFRS 9 Run

During the financial crisis, the delayed recognition of credit losses on loans and other financial instruments is considered a weakness because of the existing accounting standards. Specifically, the existing model in IAS 39, an incurred loss model delays the recognition of credit losses until there is evidence of a trigger event. Post the crisis, the International body for accounting standards (IASB) saw the need to be proactive in recognizing the losses. Hence, IASB has issued a fresh set of guidelines for Financial Instruments - IFRS 9 related to three areas. Impairment is one of the phases or areas covered by the IFRS 9 guidelines to handle expected credit losses.

The expected credit loss guidelines of IFRS 9 are more proactive and forward-looking in terms of loss recognition. To be compliant with the IFRS 9 guidelines, OFSAA has upgraded its existing Loan Loss Forecasting and Provisioning application.

The IFRS 9 Run includes the following processes:
  • Stage Determination
  • Manual Reassignment (Optional)
  • Expected Credit Loss Calculation
  • Segmentation Run: In LLFP, Segmentation Run refers to the process of grouping together accounts into a Portfolio for further processing. Financial institutions generally process accounts that have similar risk characteristics and profiles together as if they were a single block or record, such as many credit cards which show similar risk characteristics can be treated as a single Credit Card.
  • Transition Matrix Run: Through a sequence of UIs, the Transition matrix user can manually feed in Probability of Default (PD) values to be later consumed in the Run apart from the application's built-in capability to compute historical PD values based on Credit Rating or DPD transitions over a period of time.
  • Loss Rate Computation Run: This run computes the Loss rate based on Roll Rate Methodology built into the application.
  • Classification and Stage Determination Run: The Stage Determination Run starts with the data population to obtain the data required for Classification, Stage Determination, and ECL computation. The non-standard or external data formats are now reclassified to standard or internal data formats. The final subprocess is to assign a stage at an account level granularity, either through an individual or collective basis, based on the data provided and rules configured. After this, the reclassification subprocess is executed to convert non-standard or external data formats to standard or internal data formats. The next process is to conduct the Business model and Cash Flow Characteristics (SPPI) test to identify the classification for each instrument or account. The final stage is to evaluate the change in credit risk and macroeconomic factors to determine the stage at an account level granularity with the stage determination subprocess. Upon successful execution of the stage determination run, the application provides an option for the manual reclassification of the stages assigned to accounts, based on various parameters.
  • Manual Reassignment: This optional step enables the financial institutions to override the outcome of the Stage Determination Run and reassign the stage. This process goes through a Maker- Checker workflow with an audit trail. It caters to any judgmental or qualitative factors that need to be considered plus any reputable presumptions.
  • ECL Run: The ECL Calculation Run begins with the Methodology Selection subprocess to assign a specific calculation methodology for each of the accounts processed by the application. The selection of methods is based on specific factors that are taken into consideration by the application. Post methodology selection, the application then calculates the Expected Credit Loss, again at an account level granularity, either through an individual or collective basis, based on the approach as per the method selected. The ECL values are also calculated for off-balance-sheet accounts, undrawn portions, POCI accounts, and so on.
  • Interest Adjustment Run: IFRS9 requires interest income recognition at the Effective Interest Rate. Adjustment value will be posted after factoring in the contract interest amount.