AASB 9 - Time to revisit your impairment provisioning process

This article covers some comments and observations on the Impairment on the credit risk exposure process under AASB9 (IFRS9). It seeks to put forward compelling regulatory reasons to review the process as compounding regulations have affected the calculation over time.

It is of particular interest that the changes in 2018 regarding impairment under AASB9 have now been in place for up to 3 years. In this time businesses who disclose this accounting note have witnessed COVID-19 modelling work revamp the estimated scenarios in provisions held in the accounts. These predictions, which are calculated on the banking/customer book, have been altered to try and meet the standards and impairment obligations imposed by the economic and health impacts from the COVID-19 pandemic which affects the business. In addition, it is noted that the regulatory changes in revenue recognition under AASB15 have impacted the way such a calculation for AASB9 is made, along with changes to the way organisations recognize lease arrangements in AASB16.

As the calculation for this provision has now required a number of changes since its inception, it would be prudent for auditors to (re)evaluate the process and structure of the calculation and its documentation to ensure the process is more mature.

Banks and non-Bank Financiers who are further regulated in more detail by the Australian government, have reasons to be concerned. In recent months, the regulator APRA has indicated that banking entities will require contract-level data sets reflecting the credit risk in the lending book to be available for APRA to review. That’s right, a data set. These entities would be highly impacted should the changes under APS220 - which prescribes enhanced controls for risk calculation data - be aligned with RPG702 , a finance guideline which outlines even more stringent data quality standards relating to the ability to explain data they report to the Prudential Supervisor, APRA. In this, controls and governance artefacts which explain the process in detail would - at the very least - be required. However, as so many changes have occurred in such a short time span, it would be worth reviewing the process holistically to ensure no complications across the entire process.

Uplifting the process to something more manageable for a number of these related processes would be a reasonable view. This is particularly important as a point for those who hold BEAR/FAR accountability and wish to minimize further disruption to project teams working with a growing complicated architecture design for these specific processes.

We believe now is a good time to uplift this process and we are witnessing that those who have implemented tactical solutions in 2018 or earlier have found that whilst the team fully understand the calculations and disclosures now intimately, the process could be much better and scalable with both other regulations but also their portfolio exposures over time.

So what is best practice in Credit Risk Impairment in 2021?

· A process that can be scalable for change, portfolio decline or growth

· A process which leverages the same data for other regulatory or business needs

· A process which self documents the changes or scenarios

· A process which allows for integration with other emerging technology architectures which will be commonplace during the 20’s onward

· A process that integrates Statutory compilation and Regulatory submission as part of its design

Our team can help work through these sensitive issues and help make quick wins over time with the budget at hand. There is definitely technological and viewpoint maturity which means now is the right time to review this process.