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ICAAP: Accounting Practices

ICAAP Financial Reporting & Systems -Preparing for the new IFRS 9 Accounting Practices

The below outlines what some of the key items that should be considered and assessed within a Firm’s ICAAP.

ICAAP Financial Reporting & Systems -Preparing for the new IFRS 9 accounting standard

26th January 2017

The accounting framework a firm uses may be based upon either National or International accounting practices and standards.

The majority of firms we have encountered within the UK invariably use National GAAP, which relates to standard accounting practices within the UK (short for Generally Accepted Accounting Principles); however some firms may have chosen to base their accounting framework on International Financial Reporting Standards (IFRS).

Future changes to IFRS

International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board (the ‘IASB’). The current model for IFRS is set to be replaced soon by a new model referred to as IFRS 9.

IFRS 9 has taken several years to develop and is set to introduce new approaches, such as for the classification of financial assets amongst others, that will fundamentally re-write the accounting rules for financial instruments. For example, the current IFRS model uses an incurred loss impairment model, however IFRS 9 will replace this with a more forward-looking model that relates to expected loss.

The mandatory effective date for the new IFRS 9 standard is at the start of next year (1st January 2018), however firms that base their accounts on the IFRS model will have to take action much sooner than that. Firms using IFRS must start to evaluate the impact the new accounting model will have on them and prepare for any additional data analysis and the implementation of any changes to systems and controls that might be necessary.

Effect on ICAAP for 2017

In December 2016, the PRA issued clarification on IFRS 9 in relation to 2017 ICAAP stress testing and capital planning. (The announcement can be seen on the PRA’s stress test scenario webpage).  

The PRA’s clarification lays out the information on how firms should incorporate IFRS 9 into their stress testing and capital planning that is carried out as part of their Internal Capital Adequacy Assessment Process (ICAAP) for the new year (2017).

To clarify, the PRA informs that this is only applicable to:

This clarification looks to encourage firms that apply IFRS to their accounting practices reinforce the need to be prepared for the new accounting standard and to have - at a minimum - certain projected numbers for 2018 onwards based on IFRS 9. Forecasting for IFRS 9 will also help both firms and the PRA prepare and plan for the impact that IFRS 9 will have.

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