Impact of Ifrs Banking Web

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Contents:
Overview of the International Financial Reporting
Standards (IFRS) conversion process
Accounting and reporting
Financial instruments classification, measurement,
recognition and derecognition
Financial instruments impairment
Hedge accounting
Consolidation and special purpose entities (SPEs)
Definition of debt versus equity
Presentation of financial statements and disclosures of
financial instruments
Leases
Insurance contracts
Post-employment benefits
IFRS 1 first-time adoption
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5
6
8
9
10
12
13
14
16
17
18
Systems and processes

From accounting gaps to information sources
How to identify the impact on information systems
Banking accounting differences and respective
system issues
Parallel reporting timing the changeover from
local GAAP to IFRS reporting
Harmonisation of internal and external reporting
20
21
22
People
29
Business
Stakeholder analysis and communications
Audit Committee considerations
Monitoring peer group
Other areas of conversion risks to mitigate
Benefits of IFRS
30
30
30
30
31
31
KPMG: An Experienced Team, a Global Network
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2011 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Foreword:
Given the significance of the financial crisis over the last few years, there is greater
political and regulatory will than ever before for a single set of converged, global
accounting standards. Transparency and comparability across the banking sector is in
the spotlight once again.
With many countries having converted to IFRS in 2005, conversion is imminent for
other countries such as Canada, South Korea and Mexico in 2011 and 2012; and with
the US debating the merits of conversion to IFRS, its clear that IFRS is high on the
accounting agenda across the globe.
Since the first major wave of adoption in Europe and Australia there is a mass of
information available for individuals to sift through over 699,000 hits for IFRS
in banks alone on some internet search engines. This publication is focused on
assisting conversions to IFRS in the banking sector. Whether you are starting your
project or merely considering the impact, the broad overview of the topics listed
below will help you to better understand the implications of an IFRS conversion:
Overview of the IFRS conversion process. We look at how the conversion
management needs to take a holistic view of the different aspects of the
accounting under IFRS and its impact across the entity.
Top Ten IFRS banking accounting and reporting issues, giving guidance on
the key areas of focus that are likely to be the cornerstone of the project. Many
other accounting areas are not specifically banking related and are therefore
excluded from our discussions, but will need consideration.
Information technology and systems considerations. We discuss how the
banks will need to bridge the gap between IFRS reporting and the general ledger
and sub-ledger systems so as to deal with parallel reporting (i.e. local generally
accepted accounting principles and IFRS reporting at the same time) and internal
vs external reporting.
People knowledge transfer and change management. Ways to drive training
and knowledge management into the teams dealing with the changes required.
Business and reporting. The issues around operational performance and
measurement that needs to reflect the impact of IFRS and how to communicate
this to different groups of stakeholders.
While the main audience of this publication are those contemplating IFRS conversion
rather than those already converted, we hope there is something stimulating and
thought-provoking for all those dealing with IFRS, particularly given the forthcoming
changes in standards such as IFRS 9 Financial Instruments, which will have a
significant impact on banks.
Colin Martin
Head of UK Assurance Services, Banking
Overview of the International

Financial Reporting Standards (IFRS)
conversion process:
all Ifrs conversionsAhave consistent
themes and milestones to them. the
key is to tailor the conversion specifically
to your own issues, your management
style, the structure of your working
groups, the engagement of your
stakeholders and the requirements
of your corporate governance. Whilst
banks may be similar in many respects
there will always be differences in the
corporate DNa that makes this tailoring
of the project a necessary part of the

Ifrs conversion.
the Ifrs conversion management
overview diagram below presents
a holistic approach to planning and
implementing an Ifrs conversion
by ensuring that all linkages and
dependencies are established between
accounting and reporting, systems and
processes, people and the business.
Accounting and Reporting

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ANDPROCEDURES
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s4AILORFINANCIALREPORTINGTEMPLATES
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Systems and Processes
How to link?
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s4EMPLATES
MANAGE
ME
RAM
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OG
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P
s)DENTIFYINFORMATIONhGAPSvFOR
CONVERSION
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How to link?
s#OMMUNICATION
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ISSUESSUCHASRISKMANAGEMENT
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theTconversion needs to effectively

address the challenges and opportunities
of adopting Ifrs to all aspects of your
business. this includes, for example,
consideration of the impact of Ifrs
transition on the regulatory and tax
aspect of your operations, which may
vary depending on state, federal,
product, reporting or competitive
requirements.
How to link?
s0ROCESSCHANGES
s4RAINING
PR
OG
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MANAGE
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IFRS CONVERSION
How to link?
s#HANGE
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Accounting and reporting:
The first key area to tackle in the

holistic approach outlined above is the
accounting and reporting. It will involve
a diagnostic and in-depth analysis of the
differences between your local Generally
Accepted Accounting Principles (GAAP)
and IFRS, from which will flow all the
project requirements around which any
organisational change needs to
be managed.
Making sure that this upfront
assessment of the impact of IFRS and
the Gap analysis is accurate and
comprehensive is critical to a successful
conversion. It is essential that this is
undertaken for your specific entity, even
if the sector issues are deemed to
be similar.
Based on our firms experience of IFRS

conversions, we outline below the Top
Ten accounting issues for banks to
consider when converting to IFRS. This
list is not meant to be comprehensive;
indeed it does not cover many areas
that banks need to consider. There are
many other important accounting topics
such as share-based payments, tax, joint
ventures, and other areas of accounting
for financial instruments, to name a few,
that we have not considered in
this publication.
In our experience, these Top Ten issues
are significant to banks as:
they may result in significant
accounting policy decisions that
impact future results, for example
deciding whether to account for
certain financial instruments at

amortised cost or fair value, or
whether to apply hedge accounting;
they may require significant time and
cost to evaluate and implement, for
example review of special purpose
entities (SPEs) to decide whether
or not they should be consolidated,
or review of contracts to determine
whether they meet the definition of
an insurance contract;
issues may have significant impact
on information systems and
accounting processes and internal
controls, for example, calculating
effective yield or impairment of
financial instruments, or collecting
data for the additional disclosures
relating to financial instruments.
Top Ten issues
Financial instruments classification,

measurement, recognition and derecognition
Presentation of financial statements and

disclosures of financial instruments
Financial instruments impairment
Leases
Hedge accounting
Insurance contracts
Consolidation and special purpose

entities (SPEs)
Post-employment benefits
Definition of debt vs equity
10
Financial instruments
classification, measurement,
recognition and derecognition:
financialFInstruments make up the majority of most banks

assets and liabilities and Ifrs requirements for accounting for
financial instruments are prescriptive. this often leads to major
implementation challenges.
Financial instruments are initially

measured at fair value, which most
often, but not always, is the transaction
price. After initial recognition they are
measured at fair value, amortised cost,
or cost. Amortised cost is a concept
similar to cost, but involves adjusting
the balance sheet amount for the
effect of calculating the yield on certain
financial instruments by spreading
fees, transaction costs and discounts/
premiums over the lives of
those instruments.
The types of financial assets that can be
accounted for under amortised cost are
mostly limited to debt instruments held
to maturity and those not quoted in an
active market. Financial assets that do
not meet the amortised cost criteria are
accounted for at fair value with gains and

losses recognised either in profit or loss
or in other comprehensive income.
Derivatives are generally accounted
for at fair value with gains and losses
generally recognised in profit or loss.
If derivatives are embedded in other
contracts (those contracts may or may
not be financial instruments) they may
have to be separated and accounted for
separately from the host contract, at fair
value, with gains and losses recognised
in profit or loss.
Equity investments are generally
accounted for at fair value. There is a
limited exemption for unlisted equity
investments when fair value cannot be
reliably measured, which are accounted
for at cost less impairment.
In November 2009 and october 2010

the IasB issued the first two parts
of a new standard on accounting for
financial instruments Ifrs 9 Financial
Instruments. they cover classification
and measurement for financial assets
and financial liabilities and are effective
for accounting periods starting on or
after 1 January 2013, but can be adopted
early. the standard removes the cost
accounting category for investments
in equity instruments and introduces
new classification criteria. Under its
requirements, financial assets are eligible
for accounting at amortised cost only if
they are held within a business model
whose objective is to collect contractual
cash flows and their contractual terms
give rise to cash flows that are solely
payments of principal and interest.
Financial assets that do not meet the

criteria for amortised cost accounting
are measured at fair value with gains
and losses recognised in profit or loss.
For equity investments, an election
can be made to recognise gains and
losses in other comprehensive income.
Accounting for financial liabilities remains
similar to that in IAS 39 except that
the effect of changes in credit risk on
financial liabilities designated as at fair
value is generally recognised in other
comprehensive income.
Requirements relating to derecognition
of financial instruments are complex,
requiring a comprehensive analysis of
the transaction. The requirements are
a mixture of risk and rewards and
control models.
Financial instruments
impairment:
Impairment of financial assets is an area in which accounting,

regulatory and internal risk management requirements meet. It
is important that, on conversion to Ifrs, any accounting solution
minimises the need for additional systems, process and internal
control changes and also ensures that differences between those
requirements are well understood and managed.
The impairment of financial assets is
currently measured on an incurred loss
basis. This means that no impairment
allowance can be established at
initial recognition of a financial asset.
Impairment is recognised if objective
evidence indicates that an asset is
impaired due to events occurring after
initial recognition.
An impairment loss is measured
differently for financial assets
accounted for at amortised cost than
those accounted for at fair value
with gains and losses recognised in
other comprehensive income (the
latter measurement category is called
Available for Sale, or AFS). For financial
assets measured at amortised cost,
the impairment loss is measured as the

difference between an assets carrying
amount and the present value of the
estimated future cash flows, discounted
at the assets original rate of return. For
AFS assets impairment is measured as
the difference between acquisition cost
and fair value.
The IASB is in the process of revising
the accounting for the impairment of
financial assets. In November 2009 the
IASB issued Exposure Draft Financial
Instruments: Amortised cost and
Impairment, which proposes to replace
the incurred loss approach with an
approach based on expected losses
(i.e. expected cash flow approach).
Under this model the initial estimate of
credit losses would be spread over the

expected lives of the financial assets
as part of the recognition of return
from those assets. Any subsequent
changes to the initial estimate would be
recognised immediately in profit or loss.
Extensive additional disclosures are also
proposed. The proposals are likely to be
very challenging for banks to implement.
However, current discussions by the
IASB indicate that significant changes
may be made to the proposals.
Unlike IAS 39, the new IFRS 9 will only
require an impairment assessment on
assets measured at amortised cost;
therefore, the expected cash flow model
would become the single impairment
model for financial assets.
Hedge accounting:
IFRS has strict rules on hedge accounting and it is not possible to

apply hedge accounting until all documentation is complete. Care
should be taken to put such documentation in place by the first
day of the first IFRS comparative period presented to ensure that
hedge accounting can be applied from that date.
Hedge accounting is often used to
minimise profit or loss fluctuation arising
due to volatility in foreign exchange,
interest rates, and other changes in fair
values of certain financial instruments
and other non-financial items. as under
Ifrs generally all derivatives have to be
accounted for at fair value, with gains
and losses recognised in profit or loss,
hedge accounting aims to mitigate profit
or loss impact in respect of the portion
of the hedge that is effective.
there are three types of hedging
relationships under Ias 39: fair value
hedges, cash flow hedges and hedges of
a net investment in a foreign operation.
accounting implications of each are
as follows:
for fair value hedges, the gains and
losses relating to both the hedged
item and the hedging instrument are
recognised in profit or loss.
For cash flows hedges and hedges

of a net investment in foreign
operation, the gains and losses on the
hedging item are recognised in other
comprehensive income.
In addition, IFRS specifically allows some
types of portfolio hedges in which many
derivatives can be used to hedge many
assets/liabilities in a single relationship.
This so-called macro-hedging can be
very useful in minimising documentation
requirements.
A hedging relationship only qualifies
for hedge accounting if certain criteria
are met, including formal designation
and documentation of the hedging
relationship at inception of the hedge.
It should also be demonstrated, both
at the outset and throughout the
existence that the hedge is expected to
be and has been highly effective, that
is remaining within 80 125 percent
range. The initial documentation and

subsequent effectiveness testing can
be time consuming and systems-based
solutions may be helpful in monitoring
the effectiveness of the hedging
relationships.
Hedge accounting requirements are
detailed and prescriptive. They define
the items that can be hedged (including
components and risks) and the allowed
hedging instruments. Care needs to be
taken to ensure that hedge relationships
are identified in a manner that meets
the requirements of the standard and,
in particular, that the effectiveness tests
are designed in a way that minimises the
risk of future hedge relationships failure.
The IASB is currently revising the hedge
accounting requirements and issued an
exposure draft in December 2010.
Consolidation of Special Purpose

Entities (SPEs):
Banks often use spEs, for example to securitise loan receivables,

design investment products for customers or effect certain
leasing transactions. some banks are party to many hundreds of
spEs that may not be consolidated under the local accounting
rules. the resulting structures can be complex and are likely to
require review of each individual transaction in order to determine
whether consolidation under Ifrs is appropriate.
consolidatedCfinancial statements should

include all subsidiaries of the parent
company. the definition of a subsidiary
focuses on the concept of control,
which is defined in Ias 27 Consolidated
and Separate Financial Statements as
the power to govern the financial and
operating policies of an entity so as to
obtain benefits from its activities.
Ifrs contains specific guidance on
the application of the control concept
to spEs, as many spEs have predetermined objectives and so it is more
difficult to determine who controls
them. an spE is defined as an entity
created to accomplish a narrow and welldefined objective (e.g. securitisation of
receivables). In practice, judgement is
often needed to conclude whether an
entity should be regarded as an spE.
sIc 12 Consolidation Special Purpose
Entities provides guidance on when an
spE should be consolidated and gives
the following indicators of control:
the spE conducts its activities to
meet the entitys specific needs;
the entity has decision-making
powers to obtain the majority of the
benefits of the SPEs activities, for

example through setting the autopilot mechanism through which its
activities are run;
the entity has a right to the majority of
the SPEs benefits; or
the entity has the majority of residual
interest in the SPE.
Significant judgment is often required
to determine whether the criteria for
consolidating an SPE are met.
The IASB is developing a new
consolidation standard to replace IAS 27
and SIC12. The objective of the project
is to develop a single definition of control
that can be applied to all investees
and to develop enhanced disclosure
requirements for entities involved with
structured entities. The IASB issued a
staff draft of the standard in September
2010 and intends to issue the standard in
the first quarter of 2011. A consolidation
exemption for investment companies
has been separated from the main
project and will be the subject of an
exposure draft scheduled for the second
quarter of 2011.
Definition of debt vs equity:
the definitionTof an instrument as debt or equity may have an

important impact on a banks results and equity. It may also affect
a banks regulatory capital and ratios.
Ias 32 Financial Instruments:
Presentation addresses the liability
or equity classification of financial
instruments. the classification is
dependent on the substance of the
contractual arrangements rather than its
legal form.
In general, an instrument is classified
as a financial liability if it contains a
contractual obligation to transfer cash
or another financial asset, or if it may
be settled in a variable number of the
entitys own equity instruments. an
obligation to transfer cash may arise
from a requirement to repay principal or
to pay interest or dividends. an equity
instrument is any contract that evidences
a residual interest in the assets of an
entity after deducting all of its liabilities.
an exception to the rules are puttable
instruments, which give the holder the
right to put the instruments back to the
issuer for cash or another financial asset
or instruments imposing an obligation

on an entity only in liquidation. If certain
criteria are met, then such instruments
are classified as equity.
Some contracts may contain both equity
and liability components, which may
have to be accounted for separately.
An example is a convertible bond that
comprises a debt instrument and an
equity conversion option. The equity
conversion option would require analysis
to determine whether it meets the
definition of equity.
This is an example of another area that
requires contract-by-contract analysis
during the IFRS conversion process.
The IASB started a project to review
its guidance on the definition of debt
vs equity, but has decided to postpone
deliberations until after June 2011 when
it expects to have more time available.
Presentation of financial
statements and disclosures of
financial instruments
IFRS is not prescriptive as to the format of the statement of

comprehensive income, the balance sheet or other primary
statements. However, this means that the format has to be
carefully developed to appropriately reflect the activities of
each entity. Disclosures in many areas, for example for financial
instruments, can be extensive.
Instead of being prescriptive, IAS 1
Presentation of Financial Statements
provides minimum requirements for the
presentation of financial statements,
including its content and guidelines for
their structure. As a result, variations on
presentation and disclosure may exist
across the banking sector.
A first-time adopter of IFRS is required to
present the opening balance sheet at the
start of its earliest comparative period.
Subsequent to the adoption of IFRS, this
third balance sheet is presented only in
certain circumstances.
Probably the most sensitive of the
financial statements is the statement
of comprehensive income. Here, IFRS
stipulates very few line items, but call
for management to select the method
of presentation that is most reliable
and relevant. The standard provides
entities the option to present an analysis
of expenditures either on the basis of
nature or based on function.
Ifrs 7 Financial Instruments:

Disclosures requires extensive qualitative
and quantitative information explaining
the significance of financial instruments
to an entitys financial statements, its
exposure to risk and how this exposure
is managed. the financial crisis has had a
significant impact on the banking sector,
and there is considerable demand from
financial statement users to improve
the quality of the disclosures, including
explanation of significant management
judgement and sensitivity analysis, a
move away from so-called Boiler plate
compliance with the standard. some
of the information required by Ifrs 7
may not be readily available and new
systems, processes and internal controls
may need to be put in place to collect it.
the IasB is working on a financial
statement presentation project which
may introduce changes to the existing
requirements, for example separate
presentation of items measured using
different bases. However, this project is
currently postponed and IasB expects to
resume its deliberations after June 2011.
Leases:
Banks commonly engage in leasing activities, particularly in

financing transactions that can take many legal forms. the
application of Ifrs may potentially result in many more leased
assets being recognised on-balance sheet.
Accounting for leases under IFRS
currently depends on whether a lease is
a finance or an operating lease. Finance
leases are accounted for by the lessor
as financing transactions. Operating
leases require the lessor to continue
to recognise the leased assets on its
balance sheet. Classification of a lease
does not depend on which party has
legal ownership of the leased asset, but
rather on which party has substantially all
of the risks and rewards of ownership.
Lease accounting under IFRS may affect
those banks that under local GAAP keep
assets off-balance sheet as operating
leases, when the substance of the
arrangement is that the bank obtains
substantially all of the risks and rewards
incidental to ownership of the asset.
As a result, many more leases could
be recognised on the balance sheet
upon conversion to IFRS. Determining
whether an arrangement constitutes an

operating or a finance lease may require
judgement.
In addition, an entity may enter into an
arrangement comprising a transaction
or a series of transactions that do
not take the legal form of a lease
but convey the right to use an asset.
Such arrangements would have to be
reviewed on conversion to IFRS to
determine whether they contain a lease
and therefore whether lease accounting
is appropriate.
The IASB is reviewing the accounting
for leases. The aim of the project is
to develop a new approach to lease
accounting for lessees and lessors. The
IASB published an exposure draft in
August 2010 and the revised standard is
expected in the second quarter of 2011.
Insurance contracts:
many banking groups undertake insurance business and some

that do not may still find that they have contracts that meet the
definition of an insurance contract under Ifrs. on conversion
to Ifrs, one of the significant work streams for an insurance
business is to determine which of its contracts meet the definition
of an insurance contract and which meet the definition of a
financial instrument.
Ifrs has minimal guidance on
accounting for insurance contracts.
Ifrs 4 Insurance Contracts only
provides minimum accounting criteria,
which in most cases allow companies
to continue using existing Gaap and
require some specific disclosures.
However, Ifrs 4 does define an
insurance contract and some contracts
entered into by an insurance business
may not meet the definition of an
insurance contract and instead may
have to be accounted for as a financial
instrument under Ias 39. an insurance
contract is defined as one under which

one party accepts significant insurance
risk from another party (policyholder)
by agreeing to compensate the
policyholder if a specified uncertain
future event adversely affects the
policyholder. for example, insurers
often offer what are substantially
investment products in which mortality
or other insurance risk is minimal or
non-existent. such instruments are
required to be accounted for as financial
instruments.
Post-employment benefits:
Banks that operate defined benefit pension plans may be

significantly impacted on conversion to Ifrs, especially if they
have large unfunded pension obligations. this in turn may affect
regulatory capital and ratios.
Many banks have in place defined
benefit pension plans and/or retirement
healthcare schemes for their employees.
Defined benefit plans are plans other
than those in which an employer pays a
fixed contribution and has no
other obligations.
Actuarial gains and losses may arise

as a result of estimation differences
from period to period. These may
be recognised immediately in other
comprehensive income or profit or loss,
or recognised in profit or loss over time,
using the so-called corridor method.
Under IAS 19 Employee Benefits, the

accounting for a defined benefit plan
involves applying actuarial techniques
to estimate the employers obligations.
The IASB is working on a project to

amend IAS 19 and issued an exposure
draft in April 2010. One of the main
proposed changes is to eliminate
the corridor method, which allows

companies to defer recognition of a
portion of the actuarial gains and losses.
This will result in the full actuarial gain/
loss being recognised immediately in
other comprehensive income rather than
being unrecognised until it is amortised
into profit or loss. A final standard is
scheduled for the first quarter of 2011.
The IASB is also considering undertaking
a more comprehensive review of
accounting in this area.
10

of IFRS:
Ifrs 1 is not industry-specific. Banks will

need to go through each of the available
options in Ifrs 1 and decide which are
the most appropriate for them based on
the corporate profile they have. We note
below a couple of issues to consider.
one of the most commonly used Ifrs 1
exemption by banks is the option not to
restate pre-Ifrs business combinations.
Here, acquisitive banks may not wish to

revisit previous acquisition accounting
under prior Gaap.
there is also an optional exemption in
Ifrs 1 that allows a first-time adopter
to designate at the date of transition
any financial asset (or where applicable,
liability) as at fair value through profit
or loss or available for sale provided
that the relevant criteria to qualify for

classification are met at that date. this
is regardless of the classification under
previous Gaap.
for a full understanding of the relief
available upon the adoption of Ifrs, we
recommend that you refer to KpmGs
publication IFRS Handbook: First-time
Adoption of IFRS.
Systems and processes:

A
in existence years after the conversion

project is finished.
much depends on factors such as:
whether the bank utilises enterprise
resource planning (Erp) systems all
major Erp systems are able to handle
parallel accounting
the volume and mixture of in-house
developed and vendor systems for
financial reporting processes
the level of customisation the more
customised the system, the more
effort and planning the conversion
process will take
the number of systems required for

financial reporting a greater number
of systems will require significant
updating for consolidation and
reconciliation purposes.
some entities take the opportunity of an
Ifrs conversion project to streamline the
existing systems and processes.
most banking operations have a
number of processes to deal with both
geographic and product reporting.
many of these processes will need to
be analysed and potentially redesigned
under Ifrs. the extent of differing
information systems within an
organisation and differing local reporting

requirements will complicate matters
further, especially if internal control
reporting is necessary. The silver lining
is that there may be an opportunity to
simplify and streamline processes and
controls and ultimately reduce the longterm costs of reporting.
Embedded accounting rules in frontoffice transactional systems need to

be identified, catalogued and modified
based on the revised accounting policy.
Subledgers that reside on the back end
of transactional systems may contain
posting rules that will change on the
basis of IFRS.
From accounting gaps to

information sources
The foundation of the project, as
described earlier, is to understand
the IFRS to local GAAP accounting
differences. That initial analysis needs to
be followed by determining the effect
of those accounting gaps on internal
processes, information systems and
internal controls. What banks need
to determine is which systems and
processes will need to change and
translate accounting differences into
technical system specifications.
Significant data cleansing and sourcing

exercises may be required to enhance
data quality and data sets designed
to support local GAAP reporting, as
this may not contain key data fields to
comply with IFRS. Some of this data
may well reside in end-user computing
applications that do not always have
the same level of rigour and robustness
over production, completeness and
accuracy as the mainstream systems.
Data warehouses will need to support
consolidated financial information
from multiple financial systems and
ledgers, and may require expansion and
modification to accept the greater level
of detail required.
One of the difficulties banks face in

creating technical specifications is to
understand the detailed end-to-end flow
of information from the source systems
to the general ledger and further to the
consolidation and reporting systems.
The simplified diagram below outlines a

process that organisations can adopt to
identify the impact of IFRS conversion on
information systems.
Process for identifying the information systems of IFRS
Accounting and Disclosure Gaps
Data
warehouse
General
ledger
s)DENTIFYTHEGENERALLEDGERACCOUNTS
TOWHICHTHEGAPSRELATE
Source
systems
s4RACETHEGENERALLEDGERTRANSACTIONS
BACKTOTHEIRSOURCE
nDIRECTLYTOSOURCESYSTEMSANDOR
nTHROUGHTHEDATAWAREHOUSES
Front-end
applications
s4RACETHETRANSACTIONSBACKTOTHE
FRONT ENDAPPLICATIONWHEREAPPROPRIATE
How to identify the impact on information systems

There are many ways information systems may be affected,
from the initiation of transactions through to the generation
of financial reports. The following table shows some areas in
which information systems change might be required under

IFRS depending upon facts and circumstances.
Change
Action
New data requirements

New accounting disclosure and recognition requirements
may result in more detailed information; new types
of data; new fields; and information may need to be
calculated on a different basis.
Modify the general ledger system and reporting system to

capture new or changed data.
Modify the work procedure documents.
Changes to the chart of accounts

There almost always will be a change to the chart of
accounts due to reclassifications and additional
reporting criteria.
Create new accounts and delete accounts that are no

longer required.
Reconfiguration of existing systems

Existing systems may have built-in capabilities for specific
IFRS changes, particularly the larger enterprise resource
planning (ERP) systems and high-end general
ledger packages.
Reconfigure existing software to enable accounting under

IFRS (and parallel local GAAP, if required).
Modifications to existing systems

New reports and calculations are required to
accommodate IFRS.
Spreadsheets and models used by management as an
integral part of the financial reporting process should be
included when considering the required
systems modifications.
Make amendments such as:

new or changed calculations
new or changed reports
new models.
New systems interface and mapping changes

When previous financial reporting standards did not
require the use of a system, or the existing system is
inadequate for IFRS reporting, it may be necessary to
implement new software.
When introducing new source systems and
decommissioning old systems, interfaces may need to
be changed or developed and there may be changes to
existing mapping tables to the financial system. When
separate reporting tools are used to generate the financial
statements, mapping these tools will require updates to
reflect changes in the chart of accounts.
Implement software in the form of a new software

development project or select a package solution. Interfaces
may be affected by:
modifications made to existing systems
the need to collect new data
the timing and frequency of data transfer requirements.
Change
Action
Consolidation of entities
Under IFRS, there potentially will be changes to the
number and type of entities that need to be included in
the group consolidated financial statements. For example,
the application of the concept of control may be
different under IFRS.
Update consolidation systems / models to account for

changes in consolidated entities.
Reporting packages
Reporting packages may need to be modified to:
(1) gather additional disclosures in the information from
branches or subsidiaries operating on a standard
general ledger package; or
(2) collect information from subsidiaries that use different
financial accounting packages.
Modify reporting packages and the accounting systems used

by subsidiaries and branches to provide financial information
Financial reporting tools

Reporting tools can be used to:
(1) perform the consolidation and the financial statements
based on data transferred from the general ledger; or
(2) prepare only the financial statements based on receipt
of consolidated information from the general ledger.
Modify:
reporting tools used by subsidiaries and branches to
provide financial information
mappings and interfaces from the general ledger
the consolidation systems used to report consolidated
financial statements based on additional reporting
requirements such as segment reporting.
Banking accounting differences and respective system issues

Each standard under IFRS will require different information system changes. An example of a standard that can have a major
impact on information systems is IAS 39. The following table outlines some of the requirements of IAS 39 and the possible
information systems impacts arising from these changes.
IFRS accounting treatment
Potential information systems impacts
Calculation of amortised cost/

effective yield from the loan book
For retail portfolios systems will need to be designed to incorporate prepayment

information, transaction costs, fees, steps in interest etc to arrive at an effective
yield from the portfolio. The systems will need to handle the re-estimation of
cash flows.
Hedge accounting
Hedge accounting systems may be required to perform hedge effectiveness

calculations at regular intervals.
Impairment of financial assets
Systems and/or process changes may be required to incorporate the data

required (timing of expected cash flows) and discount those cash flows using the
instruments effective interest rates.
Classification of financial assets as

held to maturity
A system/process will need to be developed to flag any disposals

before maturity.
Parallel reporting timing the

changeover from local GAAP to
IFRS reporting
Conversion from local GAAP to IFRS
will require parallel accounting for a
certain period of time. At a minimum,
this will happen for one period as local
GAAP continues to be reported, but
IFRS comparatives are prepared prior
to the go-live date of IFRS. However,
in many cases this will be an on-going
requirement as data under local GAAP
may be required for, say, tax purposes.
The parallel reporting may be based
on real-time collection of information

through the accounting source systems
to the general ledger or on top-side
adjustments posted as an overlay to the
local GAAP reporting system.
The manner and timing of processing
information for the comparative periods
in real-time or through top-side
adjustments has to be selected. In
deciding the preferred method, the
following should be considered:
Parallel accounting option

in comparative year
Effect
Considerations
Parallel accounting
through top-side
adjustments:
No real-time adjustments to systems and

processes will be required for comparative period.
Local GAAP reporting will flow through subsystems to the general ledger (i.e. business
as usual).
Comparative period will need to be recast in
accordance with IFRS, but can be achieved off-line.
Migration of local GAAP to IFRS happens on
first day of the year in which IFRS reporting
commences.
Less risky for ongoing reporting

requirements in comparative year.
Available for all but more typical
when there are less volume of
transactions to consider.
More applicable to small/less
complex organisations or when few
changes are required.
Real-time parallel
accounting
Consideration needed for leading ledger in

comparative year being local GAAP or IFRS (i.e.
which GAAP will management use to run
the business).
If leading ledger is IFRS in comparative year,
conversion back to local standards is necessary
for the usual reporting timetable.
Changes to systems and information may
continue to be needed in the comparative year if
the IFRS accounting options have not been
fully established.
Migration to IFRS ledgers needed prior to first day
of the year in which IFRS reporting commences.
Real-time reporting of two GAAPs

in comparative year puts more
stress on the finance group.
Tracking two sets of numbers for
large volume of transactions will
make systemisation of comparative
year essential.
More applicable for large/complex
organisations with many changes.
Strict control on system changes
will need to be maintained over this
phased changeover process.
All major ERP systems (e.g. SAP, Oracle, Peoplesoft) are able
to handle parallel accounting. The two most implemented
solutions are the Account Solution or the Ledger Solution.
Account Solution
Depending on the release of the respective ERP systems one

or both options are available.
Ledger Solution
General Ledger
Only
IFRS
Only
Local
Common
Accounts
IFRS
/NLY)&23POSTING
)&23,OCAL'!!0
Local
GAAP
/NLY,OCAL'!!0
POSTINGS
Features
Features
s!CCOUNTINGGENERALLEDGERBALANCESWITHNO
DIFFERENCESBETWEEN)&23ANDLOCAL'!!0WILLBE
POSTEDONLYONCEONACOMMONACCOUNT
s/NECOMMONCHARTOFACCOUNTSFOR)&23AND
LOCAL'!!0
s$EFINEADDITIONALACCOUNTSFORONLY)&23ANDONLY
LOCAL'!!0WHERETHEREAREACCOUNTINGDIFFERENCES
s$IFFERENCESBETWEEN)&23ANDLOCAL'!!0WILLBE
POSTEDTOTHEDIFFERENTLEDGERSONTHESAME
ACCOUNTSPOSTINGSAND
s)&23ANDLOCAL'!!0WILLBEPOSTEDONDIFFERENT
ACCOUNTS
s$ELTADIFFERENCESBETWEEN)&23ANDLOCAL'!!0
ACCOUNTSORFULLRE POSTINGINTOBOTH)&23ANDLOCAL
'!!0WILLNEEDCONSIDERATION
s4WOSEPARATELEDGERS
s!CCOUNTINGPOSTINGSWITHNODIFFERENCESBETWEEN
)&23ANDLOCAL'!!0WILLBEPOSTEDONLYONCEAND
TRANSFERREDTOBOTHLEDGERSONTHESAMEACCOUNTS
POSTING
Harmonisation of internal and external reporting

Banks should consider carefully the impact of IFRS changes on
data warehouses and relevant aspects of internal and external
reporting. In many entities, internal reporting is performed on
a basis similar to external reporting, using the same data and
systems, which will therefore need to change to align with
IFRS. With potential multiple changes to the same information
systems being required, careful co-ordination and rigorous

change management and testing are key to success.
The following diagram represents the possible internal
reporting areas that may be affected by changing systems to
accommodate the new IFRS reporting requirements.
External reporting
Management reporting
IFRS
US GAAP
Stand-alone financial reporting per
local GAAP
Tax reporting
Regulatory reporting (i.e. Basel,
solvency)
Business key performance indicators

Business unit reporting
Product/service reporting
Cost accounting
Compliance
Performance
improvement
Shareholder value reporting
Planning and budgeting
Economic Value Added (EVA)
Annual budget
Cash value-added
Rolling forecast
Management incentives
Operational forecast
Stock compensation plans
Strategic plans
Closing preview forecast
The process of aligning internal and external reporting will

involve the following:
When mappings have changed from the source systems to
the general ledger, mappings to the management reporting
systems and the data warehouses also should be changed.
When data has been extracted from the source systems
and manipulated by models to create IFRS adjustments
that are processed manually through the general ledger, the

impact of these adjustments on internal reporting should be
carefully considered.
Alterations to calculations and the addition of new data
in source systems as well as new timing of data feeds
could have an effect on key ratios and percentages in
internal reports, which may need to be redeveloped to
accommodate them.
People:
When your Bank reports for the first time under Ifrs, the
preparation of those financial statements will require Ifrs
knowledge to have been successfully transferred to the financial
reporting team. timely and effective knowledge transfer is an
essential part of a successful and efficient Ifrs
conversion project.
People issues range from an accounts
payable clerk coding invoices differently
under IFRS to an Audit Committee
approval of the internal controls over
IFRS reporting. There is a broad
spectrum of people and process related
issues, all of which require an estimation
of the changes that are needed when
reporting under the IFRS.
The success of the project will depend
on the people involved. There needs to
be an emphasis on communications,
engagement, training, support, and
senior sponsorship, all of which are part
of change management.
Training should not be underestimated
and entities often dont fully appreciate
the levels of investment and resource
involved in training. Although most
conversions are driven by a central
team, you ultimately need to ensure the
conversion project is not dependent on
key individuals and that the business-asusual operations can be performed when
the project ends. Distinguishing between
different audiences and the nature of the
content is the key for successful training.
Some useful knowledge transfer pointers
are as follows:
Training tends to be more successful
when tailored to the specific needs
of the entity. Few entities claim
significant benefit from external nontailored training courses.
Geographically disparate companies

are considering web-based training as
a cost and time-efficient method of
disseminating knowledge.
More complex areas such as
financial instrument classification and
measurement, hedge accounting
etc are best conveyed through
workshop training approaches in
which entity-specific issues can
be tackled.
Many entities manage their training
through a series of site visits
typically partnerships of one member
of the core central team along with
a second technical expert, often an
external advisor.
Some entities use training as an
opportunity to share their data
collection process at the same time.
Even with the best planning and
training possible, it is critical that an
appropriate support structure is in place
so that the business units implement
the desired conversion plans properly.
IFRS knowledge only really becomes
embedded in the business when the
stakeholders have the opportunity to
actually prepare and work with real
data on an IFRS basis. We recommend
building dry runs into the conversion
process at key milestones to test the
level of understanding among
finance staff.
Business
One of the challenges of IFRS adoption stems from the number
of stakeholders that have a vested interest in the financial
performance of the organisation. Your project will have to deal
with a large number of internal and external stakeholders so as
to manage one fundamental issue the operational performance
stays the same but the scoreboard of the financial statements
gives a different result under IFRS.
Measurement of operational
performance cuts across all parts of
an organisation and effects the internal
business drivers and external perceptions
of the entity. The assessment of who
those affected groups are, and when is
the appropriate time for communications,
is a key component of an IFRS
conversion project.
Stakeholder analysis and
communications
A thorough review of the internal and
external stakeholders is an essential
first step. Certain less obvious internal
stakeholder groups may be engaged only
in the conversion process at a late stage
but the awareness of when to engage
those groups is necessary. For example,
banks have front office, middle office
and back office functions that will need
to be involved in certain system/reporting
changes. However, not all of these
groups will need to participate in detailed
accounting discussions earlier on in the
conversion process.
In a similar context, external stakeholders
should be properly identified and
communicated with throughout the
IFRS conversion. Examples include
groups such as the tax authorities,
regulators, industry analysts and the
financial media. Every identified group
should be factored into the timing of
when and how to present changes
in operational performance because
of IFRS. Furthermore, project related
deliverables should be incorporated into
key stakeholder objectives to ensure
their successful achievement.
Banks should actively consider the

communications strategy through which
they will ensure that all key stakeholder
groups are fully informed of the projects
progress. at a minimum this includes
the quarterly and annual disclosures in
the financial reports, but may need a
much broader ranging communications
strategy. the format of communications
needs to be personalised to the nature
of the bank, but a clear and consistent
message should be given to those
directly but also those not directly
involved in the project.
Audit Committee considerations
audit committees and Board of
Directors (Board) need to be actively and
appropriately engaged in the conversion
process. the project structure needs to
ensure that they receive relevant and
timely information while not becoming
a bottleneck for decisions. the most
successful conversion projects are
sponsored by a member of the Board
who is closely involved in the project.
all Ifrs conversions should ensure that
Board and audit committee meetings
are acknowledged on the project
plan as these meetings will drive key
deliverables and provide incentive for
timely delivery.
these senior management groups need
to have tailored and periodic training to
suit their knowledge requirements so as
to not overwhelm them with accounting
theory on Ifrs.
Monitoring peer group

The banking community tends
to be close-knit and often uses
sector benchmarks and peer group
comparisons. As such, most banks in
a given geography will want to know
what their peers are doing as it relates to
IFRS and what choices and options are
being taken by those groups. Investors
and analysts will also want to be able
to look across banks and be aware of
the differences, so as to factor those
differences into their various buy/sell/hold
recommendations.
Management will need to assess its
peer group, but the manner in which this
is achieved may vary depending on the
working relationship with other banks.
of any manual work-arounds used.

Documentation of new policies,
procedures and the underlying internal
controls will all need to be reflected as
part of the Ifrs process.
Benefits of IFRS
While the majority of this paper has
focused on the micro-based risks and
issues associated with Ifrs and Ifrs
conversions, senior management should
not lose sight of the wider benefits of
Ifrs conversion. Ifrs may offer more
global transparency and ease access to
foreign capital markets and investments,
and that may help facilitate cross-border
acquisitions, ventures and spin-offs. It is
important that these benefits be kept in
mind throughout the project to provide
clear direction and obtainable goals for
all concerned.
KPMG: An Experienced Team,

a Global Network:
KPMGs Banking practice
KPMGs Banking practice is dedicated
to supporting Retail and Investment
banks globally in understanding industry
trends and business issues. Our firms
professionals offer skills, insights
and knowledge based on substantial
experience working with the banking
sector to understand the issues and
deliver the services needed to help
banks succeed wherever they compete
in the world.
We offer customised, industry-tailored
audit, tax and advisory services that can
lead to value-added assistance for your
most pressing business requirements.
KPMG, through its global network of
highly qualified professionals in the
Americas, Europe, the Middle East,
Africa and Asia Pacific, can help you
reduce costs, mitigate risk, improve
controls of a complex value chain,
protect intellectual property, and meet
the myriad challenges of the
digital economy.
For more information, visit http://www.
kpmg.com/Global/en/WhatWeDo/
Industries/Financial-Services/Pages/
default.aspx.
Your conversion to IFRS

As a global network of member firms
with experience in more than 1,500 IFRS
convergence projects around the world,
we can help ensure that the issues are
identified early, and can share leading
practices to help avoid the many pitfalls
of such projects. KPMG firms have
extensive experience and the capabilities
needed to support you through your
IFRS assessment and conversion
process. Our global network of
specialists can advise you on your IFRS
conversion process, including training
company personnel and transitioning
financial reporting processes. We are
committed to providing a structured
approach with the aim of delivering
consistent, high-quality services for our
clients across geographies.
Our approach comprises four key
work-streams:
Accounting and reporting
Business impact
Systems, processes, and controls
People.
Impact of ifrs:
Impact of ifrs:
Automotive |
BANKING | 33
contact us:
Global FS practice
Global FS contacts
Global fs, chairman
Brazil
Germany
Jeremy Anderson
tel: +44 20 73115800
email: Jeremy.anderson@kpmg.co.uk
Ricardo Anhesini
fs Line of Business Head
Klaus Becker
tel: +55 11 21833141
tel: +49 69 9587-3225
email: rsouza@kpmg.com.br
email: kbecker@kpmg.com
canada
India
Mark D. Smith
Abizer Diwanji
tel: +1 416 777 3395
tel: +91 (22) 3090 2380
email: marklsmith@kpmg.ca
email: adiwanji@kpmg.com
china
Netherlands
Simon Gleave
Jeroen Van Nek

tel: +86 10 8508 7007
tel: +31 20 656 7360
email: simon.gleave@kpmg.com.cn
email: VanNek.Jeroen@kpmg.nl
france
Usa
Fabrice Odent
Scott Marcello
tel: +33 1 5568 7227
tel: +1 212 954 6960
email: fodent@kpmg.fr
email: smarcello@kpmg.com
Acknowledgements
We would like to acknowledge the authors of this publication, including:
Ewa Bialkowska
KpmG International standards Group (part of KpmG IfrG Limited)
Colin Martin
KpmG in the UK
Other KPMG publications

We have a range of Ifrs publications that can assist you further, including:
Insights into Ifrs
Ifrs: an overview
Ifrs compared to Us Gaap
Ifrs Handbook: first-time adoption of Ifrs
New on the Horizon publications that discuss exposure drafts. the following may be of particular relevance to the
banking sector:
New on the Horizon: ED/2009/12 financial Instruments: amortised cost and Impairment;
New on the Horizon: Hedge accounting;
New on the Horizon: Leases;
New on the Horizon: Insurance contracts.
first Impressions publications that discuss new pronouncements. the following may be of particular relevance to the
banking sector:
first Impressions: Ifrs 9 financial Instruments;
first Impressions: additions to Ifrs 9
Ifrs practice Issues publication which discusses current issues, for example fair value disclosures
Illustrative financial statements for banks
Disclosure checklist.
regular Briefing sheets summarising current developments
2011 KpmG International cooperative (KpmG International). KpmG International provides no client services and is a swiss entity with which the independent member firms of the KpmG network are affiliated.
kpmg.com/ifrs
Global FS practice
Jeremy Anderson
Global FS, Chairman
T: +44 20 73115800
E: Jeremy.Anderson@kpmg.co.uk
www.kpmg.com/ifrs
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent
firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to
obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such
authority to obligate or bind any member firm. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Designed by Evalueserve.
Publication name: Impact of IFRS: Banking
Publication number: 314593
Publication date: February 2011

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Impact of ifrs: BANKING | 1

2 | Impact of ifrs: BANKING

Systems and processes

KPMG: An Experienced Team, a Global Network

Impact of ifrs: BANKING | 3

4 | Impact of ifrs: BANKING

Overview of the International

of the project a necessary part of the

Accounting and Reporting

Systems and Processes

theTconversion needs to effectively

Impact of ifrs: BANKING | 5

Accounting and reporting:

The first key area to tackle in the

Based on our firms experience of IFRS

certain financial instruments at

Top Ten issues

Financial instruments classification,

Presentation of financial statements and

Financial instruments impairment

Consolidation and special purpose

Definition of debt vs equity

IFRS 1 first-time adoption

6 | Impact of ifrs: BANKING

financialFInstruments make up the majority of most banks

Financial instruments are initially

accounted for at fair value with gains and

Impact of ifrs: BANKING | 7

In November 2009 and october 2010

Financial assets that do not meet the

8 | Impact of ifrs: BANKING

Impairment of financial assets is an area in which accounting,

the impairment loss is measured as the

credit losses would be spread over the

Impact of ifrs: BANKING | 9

IFRS has strict rules on hedge accounting and it is not possible to

For cash flows hedges and hedges

range. The initial documentation and

10 | Impact of ifrs: BANKING

Consolidation of Special Purpose

Banks often use spEs, for example to securitise loan receivables,

consolidatedCfinancial statements should

benefits of the SPEs activities, for

Impact of ifrs: BANKING | 11

12 | Impact of ifrs: BANKING

Definition of debt vs equity:

the definitionTof an instrument as debt or equity may have an

or instruments imposing an obligation

Impact of ifrs: BANKING | 13

IFRS is not prescriptive as to the format of the statement of

Ifrs 7 Financial Instruments:

14 | Impact of ifrs: BANKING

Banks commonly engage in leasing activities, particularly in

whether an arrangement constitutes an

Impact of ifrs: BANKING | 15

16 | Impact of ifrs: BANKING

many banking groups undertake insurance business and some

contract is defined as one under which

Impact of ifrs: BANKING | 17

Banks that operate defined benefit pension plans may be

Actuarial gains and losses may arise

Under IAS 19 Employee Benefits, the

The IASB is working on a project to

the corridor method, which allows

Systems and processes

KPMG: An Experienced Team, a Global Network