With increased risk and security issues in the financial industry and mounting number of frauds, Government of countries keep evolving and revising their regulatory and legislative compliances to ensure that the end consumers are safe and are aware.
Credit institutions faced significant changes both in their consolidated financial statements and in their regulatory reports.
First, IFR7 7, Financial instruments: disclosures came into force in 2007. It required new disclosures in notes, such as information on risk management (qualitative and quantitative), the fair value of financial instruments and management systems.
Second, Basel II Pillar 1 (establishment of regulatory capital ratios) required credit institutions to present a new ratio to the Banking Commission since 2008. Furthermore, regulatory bodies requested for the submission of reports under COREP (presentation of ratio) and FINREP (presentation of financial statements).
The objective of this brochure is to present the new requirements set forth by IFRS 7 and Basel II. It also discusses the practical issues for credit institutions relating to the implementation of both texts, such as the impact on information systems and the challenge to comply with two sets of reports.
Some of the major differences in IFRS and Basel II are:
- Intentions: The aim of Basel II is to determine capital charges to cover unexpected future losses and un-provisioned expected losses whereas the aim of IFRS is to ensure that loan loss provisions reflect adequately the current risk of losses
- Loss-related definitions: Basel II uses a borrower-oriented default definition for the transactions whereas IFRS uses a transaction-oriented and portfolio impairment definition
- Methods: Basel II uses a credit risk measurement method to forecast risks whereas IFRS uses historical provisioning evidence adjusted to economic circumstances at the time of reporting; IFRS uses the concept of discounted cash flows whereas Basel II does not explicitly
IFRS, Basel II and Solvency II represent a common front, which will broaden the scope of disclosure of risk and capital management and is likely to open companies up to ever greater market scrutiny. In particular, the ability to see how risk and capital are managed through the eyes of senior executives will provide valuable insight into the quality of risk management and decision making. Ensuring analysis and information are consistent is essential for maintaining market credibility. This will have important implications for data capture, modeling and investor relations. Companies will also need to look closely at how to make best use of the discretion and autonomy of this principle based approach. While clearly this is a challenge, it could help to optimize the valuable synergies between different projects. Clear and well supported descriptions of the risk profile and its management could also help a particular bank, insurer or bancassurer to stand out from its financial services peers. Ultimately, the best time to provide these insightful risk disclosures is now, beginning with the IFRS financial statements, not once Basel II and Solvency II are finalized.
We at CogniSoft understand the importance and various key elements that would make the transition of any such inclusions easy and smooth. Regulations and compliances keep changing with new regulatory or legislative judgments. To build a BI system that just does not address the issues at hand however also thinks well enough of how it might also get transformed or changed in due time. Hence our team of consultants think well through the requirements and create a solution that is scalable and has the window of opportunity for any future amendments as well.