The overwhelming majority of Barclays’s software assets are classified as intangible assets. Consistent with the approach set out in IAS 38 (para. 4) Intangible Assets, software assets are classified as tangible assets only when they form an integral part of related hardware. In these circumstances they would be treated under IAS 16 Property, Plant and Equipment.
Barclays considers that the proposed approach, whereby the prudential value of the asset would be subject to risk weighting at 100% and any difference between the prudential value and the IFRS balance sheet value is deducted from CET1 capital, is a superior approach to the other methods considered in the consultation paper.
We consider this to be a simple and practical approach which will support the rapid implementation of this prudential treatment by the industry. This notwithstanding, we would encourage the EBA to view this proposal as an initial step which can be refined as more high quality industry data becomes available following the implementation of this approach. We would support further dialogue to work towards a greater degree of international consistency in the prudential treatment of software.
There are alternative ways in which the time horizon for the proposed approach could be calibrated which we have set out in more detail in our response to Question 3. However, in order to ensure a level playing field globally, we believe it is necessary for a collegiate approach between regulatory and legislative authorities to develop internationally agreed standards within the context of the Basel Committee for Banking Supervision.
The Covid-19 pandemic has highlighted the strategic necessity of software in the modern operating environment. The ability of banks, organisations and society in general to continue to function during the pandemic has been made possible due to the significant capabilities offered by a range of software and IT solutions which have emerged comparatively recently. We would expect this trend to continue with an increased focus of digital solutions to operational resilience and business continuity challenges as well as the ongoing need to ensure the highest standards of data quality, transparency and security.
In this changing landscape it is therefore critical that the prudential treatment of software is both suitably calibrated to reflect the ongoing strategic importance of software assets and is applied in an internationally consistent manner. We would note that there is currently significant difference between jurisdictions in this area, for example the 100% risk weighting of software assets applied in the US, and whilst the proposed approach begins to close this gap, further work will be required to ensure a suitably level playing field.
We would note that the current average amortisation of six years used for accounting purposes illustrates a meaningful divergence between the accounting treatment of software and the proposed prudential treatment using only a two year calibration of software. As noted above, software is an increasingly central component to the ability of a bank to continue business operations. This would continue to be the case in either a going concern or gone concern scenario. Even in the case where resolution was deemed the appropriate course of action, all activities of a bank would not cease overnight, with the resolution process playing out over time. During this period, internally developed software would continue to be used and be considered to hold value, and would be recognised as doing so under the accounting treatment in accordance with IFRS.
For these reasons we would propose that in its final draft the EBA recommends a review, following the adoption of the RTS, to consider the developing and applied treatments in other jurisdictions and to assess the effectiveness of the proposed two year calibration. We would suggest that two years of industry data which could be analysed following the adoption of the RTS would overcome some of the limitations highlighted by the EBA of the data provided through the QIS exercises. We would support broader discussions between regulatory colleges to achieve greater consistency in this area, working towards an internationally agreed standard which could be established by the BCBS.
Barclays considers option B to be the preferred option as all necessary data to calculate prudential amortisation is readily available which will support a rapid implementation of the regime. By contrast, option A would require additional data to record the capitalisation bookings for each software asset to identify the start date of prudential amortisation.
The proposed approach under option B will limit the operational burden on both banks and supervisors, however an approach enabling greater alignment between the use of accounting data and that used for prudential purposes is preferable in the longer term to further reduce this operational burden.
Barclays agrees with the results of the industry impact analysis examining a change to the Useful Economic Life calibration which has been prepared as part of the AFME response to Question 5.
Further to the impact that we have conducted on the proposals set out in your consultation paper, we believe that there is a mid-range single digit basis point difference in the impact on CET1 between options A and B when using a two year amortisation period. Of the two options presented Option A is expected to produce a more favourable outcome in terms of CET1 impact. We assess that the relative benefit of option A over option B would increase if the time horizon of the amortisation period were to be increased.
Notwithstanding the potential CET1 benefit of option A, we confirm that in our opinion option B is the preferable approach to be adopted for implementation for the operational reasons set out above.
To support a smooth implementation of the proposals set out in your consultation paper, Barclays feels that further detail could be provided in the final RTS with regards to the Day 1 treatment of software assets. It is currently unclear as to whether the revised approach should be applied to current stock recorded on Balance Sheet on either a prospective or retrospective basis. Barclays have made an interpretation assumption for the purposes of our quantitative assessment of the proposals and would look to implement the finalised RTS on the same basis, The provision of such guidance would ensure a uniformly consistent adoption of the proposals on implementation.