Response to consultation on Implementing Technical Standards on proposed amendments to FINREP IFRS due to IFRS 9
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In our review of consultation paper EBA/CP/2015/23, we have concerns on the proposed application date of 1 January 2018 (with a first reference date of 31 March 2018) as stated on page 5 of the consultation document. IFRS 9 is applicable for accounting periods “beginning on or after 1 January 2018” (section 7.7.1 of IFRS 9) , which in the case of CYBG, as a preparer with a 30 September accounting date, would be from 1 October 2018; some 9 months after the application date proposed in the consultation document.
The full text on page 5 of the consultation document says: “The first reporting reference date depends on the first application date of IFRS 9 in the EU. If the endorsed version of IFRS 9 has the same application date as the IFRS 9 issued by the IASB, the first application date will be 1st January 2018, with a first reference date of 31 March 2018.” The EBA’s interpretation of this would seem to suggest that all financial institutions within its scope will adopt IFRS 9 on the first application date of 1 January 2018 . The EBA's letter to EFRAG dated 26 June 2015 expressing views on the adoption of IFRS 9 shares this incorrect assessment that there is a single effective date for all EU banks of 1 January 2018" (page 9).
This is clearly not the case as financial institutions will adopt IFRS 9 in line with the first application date that is relevant to their financial year.
From a preparer’s perspective, the effort involved in successfully implementing new financial reporting standards can be substantial, involve long lead times and requires the support and close working of many different parts of the business. This is particularly so in relation to IFRS 9 which has been regularly described by industry commentators as the most significant change for banks since the adoption of IFRS. In respect of IFRS 9, the Finance, Risk and Technology functions are seen as the key areas in delivering the detailed requirements of the Standard.
CYBG is no different in this respect to all other financial institutions and has developed a detailed implementation plan, which requires the involvement of the key business functions in assessing and concluding on a number of significant judgements as well as the substantial amount of data gathering and detailed model provisioning work that is required to ensure we will be fully compliant with IFRS 9 by the time we formally need to adopt the new Standard on 1 October 2018. This is all set within a formal project framework that provides the necessary oversight and governance required to ensure IFRS 9 is delivered to the standard expected of a publically limited company.
All of the milestones we have set within the project are there to check its progress against our targeted “go-live” date of 1 October 2018. Given the extent of the changes introduced by IFRS 9, as acknowledged by the EBA in issuing a consultation document on its content fully two years before it becomes effective and before it is officially endorsed for use in the EU, work is already well underway to meet this deadline with no scope for this to be brought forward or accelerated to meet the proposed FINREP application date of 1 January 2018. We are now just under two years away from this date and the required effort and complexity of designing, building, testing and implementing a solution to IFRS 9 that is compliant to a high standard renders any change to our timetable impractical and unworkable.
Consequently, the prospect of being able to maintain any sort of “dual” ledger system (incorporating both IAS 39 and IFRS 9) for the period from 1 January 2018 to 30 September 2018 in order to solely accommodate the proposed FINREP requirements is also impractical and unworkable for non 31 December reporters including CYBG. The complexity of accounting for financial instruments in general, irrespective of whether this is under IAS 39 or IFRS 9, effectively rules this out as a viable option.
We therefore ask that the EBA re-evaluate the proposed implementation date of the new FINREP templates in relation to IFRS 9 and offer the following as credible alternatives for consideration:
1. A phased approach that allows financial institutions that are non 31 December reporters the flexibility to continue to submit FINREP templates on a basis consistent with their business model, management basis and statutory reporting requirements until such time as the financial institution is required to formally adopt IFRS 9 as intended by the IASB; at which point, the new templates would be used; or
2. Introduce a waiver system for non 31 December reporters that would result in the EBA not receiving FINREP templates from a financial institution until the first FINREP reporting date after the financial institution has formally adopted IFRS 9 in accordance with the IASB requirements.
We recognise that IFRS 9 is the first significant accounting standard that has been issued by the International Accounting Standards Board (“IASB”) since the introduction of the FINREP reporting regime and we would urge the EBA to fully consider the implications of how new accounting standards are interpreted and implemented under FINREP. The final approach taken by the EBA in relation to IFRS 9 will set a precedent for all future accounting standards (including IFRS 15 on revenue from contracts with customers and IFRS 16 on leasing) and this will pose the same types of challenges and difficulties for non 31 December reporters."
We would reiterate that accounting for financial instruments is a complex area, as proved by the time taken to publish a final version of IFRS 9 and the length of the ongoing EU deliberations on its proposed adoption by the EU. The Standard has significant and in some cases fundamental impacts on multiple systems and data sources in order to deliver the quality of implementation expected both by the new Standard and by Regulators who have published their expectations.
The effective date of accounting periods beginning on or after 1 January 2018 for IFRS 9 (which was published in its final form in July 2014 and is still to be formally adopted for use in the EU) was set by the IASB as recognition of the time financial institutions would need to gain a deep understanding of IFRS 9 and then develop the necessary changes that would be required to implement in order to be fully compliant with its extensive requirements and disclosures. The large banks and financial institutions in the UK have disclosed, in their 2015 annual reports, that despite having already spent a significant amount of time and resource on their IFRS 9 projects, they are still required to undertake a substantial amount of effort in order to complete and finalise the projects in time for their due applicable date.
The cost of compliance with IFRS 9 will be significant for us. With FINREP introducing template disclosures that are over and above those mandated by IFRS 7, these will add a significant amount of incremental costs associated with data gathering, as well as manual processes, which would be avoidable if FINREP kept to the same disclosure structure and requirements as IFRS 7.
For the avoidance of doubt we have not sought to estimate a cost of FINREP templates being adopted prior to the adoption of an IFRS Standard and the de facto creation of two differing financial reporting regimes. This is seen as utterly impractical. The costs of this would not just be financial but would undoubtedly be significant in terms of quality and risk as the business would likely operate and report on fundamentally different bases.
Q20. Do respondents find the proposed instructions clear? Are there specific parts where definitions or instructions should be clarified?
This response is provided by CYBG PLC (“CYBG”) in its capacity as the ultimate holding company for Clydesdale Bank PLC; which is the operating entity for 2 UK banking brands: Clydesdale Bank and Yorkshire Bank. CYBG is listed on the London Stock Exchange (“LSE”).In our review of consultation paper EBA/CP/2015/23, we have concerns on the proposed application date of 1 January 2018 (with a first reference date of 31 March 2018) as stated on page 5 of the consultation document. IFRS 9 is applicable for accounting periods “beginning on or after 1 January 2018” (section 7.7.1 of IFRS 9) , which in the case of CYBG, as a preparer with a 30 September accounting date, would be from 1 October 2018; some 9 months after the application date proposed in the consultation document.
The full text on page 5 of the consultation document says: “The first reporting reference date depends on the first application date of IFRS 9 in the EU. If the endorsed version of IFRS 9 has the same application date as the IFRS 9 issued by the IASB, the first application date will be 1st January 2018, with a first reference date of 31 March 2018.” The EBA’s interpretation of this would seem to suggest that all financial institutions within its scope will adopt IFRS 9 on the first application date of 1 January 2018 . The EBA's letter to EFRAG dated 26 June 2015 expressing views on the adoption of IFRS 9 shares this incorrect assessment that there is a single effective date for all EU banks of 1 January 2018" (page 9).
This is clearly not the case as financial institutions will adopt IFRS 9 in line with the first application date that is relevant to their financial year.
From a preparer’s perspective, the effort involved in successfully implementing new financial reporting standards can be substantial, involve long lead times and requires the support and close working of many different parts of the business. This is particularly so in relation to IFRS 9 which has been regularly described by industry commentators as the most significant change for banks since the adoption of IFRS. In respect of IFRS 9, the Finance, Risk and Technology functions are seen as the key areas in delivering the detailed requirements of the Standard.
CYBG is no different in this respect to all other financial institutions and has developed a detailed implementation plan, which requires the involvement of the key business functions in assessing and concluding on a number of significant judgements as well as the substantial amount of data gathering and detailed model provisioning work that is required to ensure we will be fully compliant with IFRS 9 by the time we formally need to adopt the new Standard on 1 October 2018. This is all set within a formal project framework that provides the necessary oversight and governance required to ensure IFRS 9 is delivered to the standard expected of a publically limited company.
All of the milestones we have set within the project are there to check its progress against our targeted “go-live” date of 1 October 2018. Given the extent of the changes introduced by IFRS 9, as acknowledged by the EBA in issuing a consultation document on its content fully two years before it becomes effective and before it is officially endorsed for use in the EU, work is already well underway to meet this deadline with no scope for this to be brought forward or accelerated to meet the proposed FINREP application date of 1 January 2018. We are now just under two years away from this date and the required effort and complexity of designing, building, testing and implementing a solution to IFRS 9 that is compliant to a high standard renders any change to our timetable impractical and unworkable.
Consequently, the prospect of being able to maintain any sort of “dual” ledger system (incorporating both IAS 39 and IFRS 9) for the period from 1 January 2018 to 30 September 2018 in order to solely accommodate the proposed FINREP requirements is also impractical and unworkable for non 31 December reporters including CYBG. The complexity of accounting for financial instruments in general, irrespective of whether this is under IAS 39 or IFRS 9, effectively rules this out as a viable option.
We therefore ask that the EBA re-evaluate the proposed implementation date of the new FINREP templates in relation to IFRS 9 and offer the following as credible alternatives for consideration:
1. A phased approach that allows financial institutions that are non 31 December reporters the flexibility to continue to submit FINREP templates on a basis consistent with their business model, management basis and statutory reporting requirements until such time as the financial institution is required to formally adopt IFRS 9 as intended by the IASB; at which point, the new templates would be used; or
2. Introduce a waiver system for non 31 December reporters that would result in the EBA not receiving FINREP templates from a financial institution until the first FINREP reporting date after the financial institution has formally adopted IFRS 9 in accordance with the IASB requirements.
We recognise that IFRS 9 is the first significant accounting standard that has been issued by the International Accounting Standards Board (“IASB”) since the introduction of the FINREP reporting regime and we would urge the EBA to fully consider the implications of how new accounting standards are interpreted and implemented under FINREP. The final approach taken by the EBA in relation to IFRS 9 will set a precedent for all future accounting standards (including IFRS 15 on revenue from contracts with customers and IFRS 16 on leasing) and this will pose the same types of challenges and difficulties for non 31 December reporters."
Q21. What are the aspects, if any, of the revised FINREP proposal that trigger additional costs beyond the costs incurred to implement IFRS 9 and the revised IFRS 7, and the unavoidable costs from the difference in scope between FINREP and the financial statements?
In our response to question 20, we highlighted that the prospect of any sort of “dual” adoption approach for financial institutions that are non 31 December reporters is impractical and unworkable.We would reiterate that accounting for financial instruments is a complex area, as proved by the time taken to publish a final version of IFRS 9 and the length of the ongoing EU deliberations on its proposed adoption by the EU. The Standard has significant and in some cases fundamental impacts on multiple systems and data sources in order to deliver the quality of implementation expected both by the new Standard and by Regulators who have published their expectations.
The effective date of accounting periods beginning on or after 1 January 2018 for IFRS 9 (which was published in its final form in July 2014 and is still to be formally adopted for use in the EU) was set by the IASB as recognition of the time financial institutions would need to gain a deep understanding of IFRS 9 and then develop the necessary changes that would be required to implement in order to be fully compliant with its extensive requirements and disclosures. The large banks and financial institutions in the UK have disclosed, in their 2015 annual reports, that despite having already spent a significant amount of time and resource on their IFRS 9 projects, they are still required to undertake a substantial amount of effort in order to complete and finalise the projects in time for their due applicable date.
The cost of compliance with IFRS 9 will be significant for us. With FINREP introducing template disclosures that are over and above those mandated by IFRS 7, these will add a significant amount of incremental costs associated with data gathering, as well as manual processes, which would be avoidable if FINREP kept to the same disclosure structure and requirements as IFRS 7.
For the avoidance of doubt we have not sought to estimate a cost of FINREP templates being adopted prior to the adoption of an IFRS Standard and the de facto creation of two differing financial reporting regimes. This is seen as utterly impractical. The costs of this would not just be financial but would undoubtedly be significant in terms of quality and risk as the business would likely operate and report on fundamentally different bases.