EY benchmarking survey for financial services. IFRS 15 Revenue from Contracts with Customers January 2017

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1 EY benchmarking survey for financial services IFRS Revenue from Contracts with Customers January 07

2 Executive summary The survey Participants profile In July, 06, the European Securities and Markets Authority (ESMA) issued a Public Statement ( Issues for consideration in implementing IFRS : Revenue from Contracts with Customers ) in order to promote consistent application of IFRS Revenue from Contracts with Customers in the European Union (EU). The Public Statement covers four broad topics: transparency on implementation and effects of IFRS ; specific considerations; illustrative timeline and good practices of disclosures; and next steps. ESMA expects the Public Statement to be taken into account in the 06 annual financial statements and beyond to enhance comparability of IFRS financial statements in the EU. In order to determine the consistency in the application of IFRS, EY conducted a benchmarking survey to understand what information financial institutions, and especially banks, are planning to disclose in their financial statements leading up to the implementation of the new standard, as well as the current status of their implementation projects. 7 financial institutions (6 banks and stock exchange) 6 participants in Europe and one in Japan which is implementing the project globally Revenues in scope: Less than bn: 4 participants bn bn: participants More than bn: 8 participants Overall state of readiness Participants expressed a preference for the modified retrospective transition method, although some have not yet selected a transition method. All, but one, of the participants plans to adopt IFRS for annual periods starting on or after January 08. One participant is considering early adoption in 07. Most participants do not expect to provide quantitative disclosures on the estimated impact of IFRS in their 06 annual financial statements as they do not expect the impact to be material. Business lines and products where the impact is expected to be more significant include: Wealth and asset management (performance fees) Trade execution / broker services (including trail commissions) Engagement and communication with the audit committee and external auditors has been only partial so far and EY is expecting it to increase as the effective date of the new standard approaches. Page EY IFRS benchmarking survey for financial services, January 07

3 Geographic representation of the survey participants Japan, Germany, France, Spain, UK, 0 Switzerland, Page EY IFRS benchmarking survey for financial services, January 07

4 Content Transition 4 Governance -8 Implementation 9-4 Disclosures - Page EY IFRS benchmarking survey for financial services, January 07

5 . Transition Adoption date and transition approach Adoption date of IFRS 6 Almost all participants plan to adopt IFRS as at the mandatory effective date All, but one, of the participants plans to adopt IFRS for annual periods beginning on or after January 08. One participant has not yet decided on the date of adoption, but is considering early adoption in 07. Annual period beginning on or after January, 08 Early adoption Not yet decided but considering early adoption 6 Transition method Modified retrospective Full retrospective Not decided yet 0 Participants are generally leaning towards use of the modified retrospective transition method Six participants have decided to apply the modified retrospective transition method. participants have yet to decide on the transition method. Many of those that are undecided are currently thinking of selecting the modified retrospective transition method. Some participants have indicated that one of the key elements delaying the selection of a transition method is to better understand the investors needs regarding comparative information. Page 4 EY IFRS benchmarking survey for financial services, January 07

6 . Governance Discussion with the audit committee and external auditors Discussion of implementation and impact of IFRS with the audit committee or external auditors Implementation of IFRS has not been widely discussed with internal and external stakeholders Participants are in the early stages of discussion with both the audit committee and external auditors. Most plan to discuss their implementation with the audit committee and external auditors by the end of the year. EY expects that the discussion with the audit committee and external auditors will play a key role in the implementation 4 The audit committee will provide necessary oversight and discuss complex accounting estimates and management judgements in the implementation of the new standard. Their inclusion early on in the project will provide clearer guidance to management and assist management in focusing on areas of concern. External auditors will be interested in understanding the transition and implementation plan set up by management to ensure compliance with the new accounting standard. Timely feedback from external auditors will help management determine the effort and resources required to implement the accounting changes and meet the disclosure requirements. Discussed with external auditors Discussed with Discussed with audit committee both Not planning to discuss in 06 Planning to discuss by the end of 06 Page EY IFRS benchmarking survey for financial services, January 07

7 . Governance Implementation project setup IFRS implementation project lead 9 Involvement of Accounting Policy personnel is important in project implementation Accounting Policy personnel are generally performing contract analyses and assessments, with significant inputs from Finance. Finance personnel are leading the work on the disclosure requirements and implementing changes to the reporting processes and information technology (IT). 6 The accounting change project will require the input of multiple stakeholders Accounting Policy and Finance are leading the implementation effort, but will require inputs from Operations and Product Control. Business Groups will need to provide details and explanatory guidance on contracts to ensure that the analysis is based on how the contracts are practically applied. Finance Accounting Policy Both Finance and Accounting Policy Other Not decided yet IT and infrastructure teams will need to provide insights into the level of recalibration of systems and data points required. Additional success factors in project implementation include the integration of interactions with other functional units, such as Operations, IT and affected business units. Page 6 EY IFRS benchmarking survey for financial services, January 07

8 . Governance Implementation project setup (continued) Structure of the IFRS project Other The structure of the implementation programme could indicate the level of effort and resources directed towards IFRS : Four out of five participants that selected other, while noting that there is no separate accounting change project, have indicated that the project is being run within Finance or Accounting Policy. Part of a broader accounting change management project with no dedicated project manager IFRS will have a broad impact on existing governance arrangements: Interactions between Finance, Accounting Policy, IT and Operations will need to be managed. A structured governance framework will allow for a stronger link between all stakeholders. Part of a broader accounting change management project with dedicated project manager Dedicated accounting change management programme 7 Page 7 EY IFRS benchmarking survey for financial services, January 07

9 . Governance Multiple locations Multiple locations Implementation approach Centralised implementation efforts Project governance is generally aligned with the geographical complexity of the organisation, with five participants applying a significantly centralised or exclusively centralised approach. Not applicable Five participants are expecting to implement a decentralised approach due to their complex regional operations and rely on established and mature Accounting Policy or Finance teams. Not decided yet Participants still expect to centrally provide and manage guidelines covering: Strong governance Other Centralised guidelines and coordination; decentralised implementation Centralised implementation with a few exceptions depending on revenue streams and systems 4 Standardised assessment of products and business units to ensure consistency of documentation and quality Controls, processes and IT system implementation Coordination with other stakeholders (e.g. IT and Operations, where applicable) Exclusively decentralised implementation 0 Exclusively centralised implementation Page 8 EY IFRS benchmarking survey for financial services, January 07

10 . Implementation Current status of project Current status of IFRS implementation project Set up governance 4 7 Scoping of revenue streams and high-level impact assessment: All participants have started and many have completed the scoping of revenue streams, but three have not yet set up governance. All participants but one have started the high-level impact assessment and nine participants have completed it. Scoping of revenue streams 6 8 Setting up governance and scoping will provide the required framework for implementation: High level impact assessment 4 9 Having clearly established governance will assist decision making on key approach steps and assumptions. Detailed impact assessment Contract reviews Policy decisions Implement IT changes Comprehensive scoping of revenue steams will be critical for an effective and efficient implementation and provide disclosures consistent with ESMA s guidance. Participants have focused less on data, systems, operating models and control frameworks: Most participants are still in the process of performing a detailed assessment of revenues and plan to focus on data and systems infrastructure requirements thereafter. Reporting & disclosures Not Started In process: early stages 6 In process: advanced stages 0 Completed Identifying additional data needed in order to comply with the new disclosure requirements will be an area of focus for most participants, even if they do not expect a significant impact on their financial statements. Page 9 EY IFRS benchmarking survey for financial services, January 07

11 . Implementation Financial statement impact Significant impact of IFRS on financial statements None (do not expect a Other Retail banking Trade finance Advisory services Cash management and Trade execution/broker services Investment banking Wealth and asset management Credit Cards Yes No Not decided yet Significant areas of impact 0 Although a majority of the participants do not expect a significant impact overall, six participants have identified business lines or products that may be significantly affected by the new standard. Some of the participants noted that, even though there may be no material impact for group reporting, subsidiaries could be significantly affected. Business lines and products expected to be significantly affected include: Wealth and asset management (performance fees) Trade execution/broker services (including trail commissions) Participants are expending significant efforts to perform detailed analyses before disclosing whether or not IFRS will have a significant impact on the financial statements. Participants will have to assess if additional disclosure requirements will increase the operational complexity for financial reporting, considering IT, processes and systems challenges. Participants not expecting a significant impact will still need to analyse material revenues steams to demonstrate and document their conclusions. Page 0 EY IFRS benchmarking survey for financial services, January 07

12 . Implementation Processes, controls, and IT systems impact Significant impact of IFRS on processes, controls, and IT systems participants indicated that they do not expect IFRS to have a significant effect on their processes, controls, and IT systems. Seven participants have not determined if there will be a significant effect and expect there will be some impact related to specific business units or products. Participants noted potential impact to the following areas: Wealth and asset management 0 Yes No Not decided yet Significant areas of impact None (do not expect a significant Other Retail banking 0 8 Investment banking Trade execution and broker services Cash management and processing services Advisory services Participants who selected other areas of impact noted that the new disclosure requirements will have an effect. However, they have not completed a detailed assessment to determine the impact. Trade finance Advisory services Cash management and payment 0 Participants will have to reassess their processes and controls for data quality and data availability with respect to disclosures, in line with ESMA s expectations of providing relevant and transparent financial information to users. Trade execution/broker services Investment banking Wealth and asset management Credit Cards 0 Page EY IFRS benchmarking survey for financial services, January 07

13 4. Disclosures 06 Q or Q 07 Timing of disclosure of specific quantitative information Q annual report 8 08 Not decided yet Eight participants are undecided on the timing of public disclosure of quantitative information in their financial statements. Participants are still in the early stages of analysing the level of quantitative disclosure required based on the outcome of their detailed impact assessment. One of the drivers of the timing of the disclosures is the availability of resources, which may be concurrently busy with the preparation of the 06 annual report. The need to focus on other accounting changes, such as IFRS 9 Financial Instruments, is also a key factor. Participants that do not expect a significant impact from the adoption of IFRS will still have to provide disclosures based on the requirements of the standard. Participants may also need to consider local regulators expectations, such as the guidance from ESMA on providing relevant and transparent financial information to users. Page EY IFRS benchmarking survey for financial services, January 07

14 4. Disclosures (continued) ESMA good practice of disclosures - when expecting a significant impact for 06 annual reporting a. Detailed description and explanation on how key IFRS concepts will be implemented along the different revenue streams b. Explanation of the timeline for implementing IFRS, including expected use of any of the transition practical expedients (such as modified/full retrospective application and the practical expedient for completed contracts c. Quantification of the possible impact of the application of IFRS (if known or estimable) i. Total ii. Per revenue stream (segments/products/operations most impacted) Participants are still in the early stages of analysing the level of disclosures required in 06, including establishing the information they would expect to be useful to users. One of the drivers on the expected timing of disclosures is linked to the resources that will be available, which may also be involved in the current preparation of the 06 annual report, as well as other accounting change projects, such as IFRS 9. While participants are aware of ESMA s guidance on relevant disclosures to be made, starting in the 06 financial statements, a key driver of such disclosures is whether IFRS is expected to have a significant impact. Generally, participants are of the view that this accounting change would not have a significant impact. Therefore, they do not expect to make such disclosures in 06, although most participants have yet completed the impact assessment. Six participants are currently considering not to provide any qualitative information or quantitative information. However, It is expected that these participants will at least disclose that they do not expect IFRS to have a significant impact to their financial statements. d. When the quantitative information is not disclosed because it is unknown or not reasonably estimable, additional qualitative information enabling users to understand the magnitude of the expected impact on the financial statements of the issuer 6 9 To disclose Not to disclose Not decided yet Page EY IFRS benchmarking survey for financial services, January 07

15 4. Disclosures (continued) ESMA good practice of disclosures: when expecting a significant impact during 07 interim reporting a. Provide an update on information provided in the 06 annual financial statements (if applicable and if information provided in 06) b. Provide quantitative information on the impact of the transition to IFRS on interim financial statements, if: i. You expect a significant impact from IFRS but are unable to provide reliable information on it in the 06 annual report and reliable quantitative information on the impact becomes available before publication of the 07 interim financial statement ii. You are able to provide significantly more specific information in the 07 interim financial statements compared to the information provided previously c. Provide a statement that the adoption of the standard is not expected to have a significant impact Participants responses reflect the early stages of the implementation of the standard, as indicated in the previous section. Seven participants are expecting to provide, in their 07 interim financial statements, an update of the information provided in their 06 financial statements. We would expect that the other participants will re-evaluate the need to provide an update based on the progress and outcome of their implementation assessments. A majority of participants do not expect to provide any additional quantitative information because they do not expect IFRS to have a significant impact (eight participants) or have not established yet whether there will be an impact (eight participants). Six participants do not expect to even state that IFRS will not have a significant impact. Entities will need to consider whether such an approach is consistent with the requirements of paragraph 0 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Although the impact may not be significant for many participants, certain details related to the implementation (such as transition options and significant judgements) would be expected to be disclosed as participants reach decisions. To disclose Not to disclose Not decided yet Page 4 EY IFRS benchmarking survey for financial services, January 07

16 4. Disclosures (continued) ESMA good practice of disclosures: when expecting a significant impact during 07 annual reporting a. Provide a quantitative assessment of the impact of IFRS on their financial statements as of January 08 0 Participants responses reflect the early stages of the implementation of the standard, as indicated in the previous section. As for the 07 disclosures, participants generally are of the view that this accounting change will not have a significant impact and, therefore, do not expect a need to make such disclosures in 07, although most participants have yet to complete their impact assessments. Participants that do not expect a material impact will still have to disclose the information required by IAS 8. Participants may also need to consider local regulators expectations, such as the guidance from ESMA on providing relevant and transparent financial information to users. b. Provide the quantitative impact of the application of IFRS and explain the changes to the amounts reported under IAS and/or IAS 8, disaggregated as appropriate Despite any accounting impact, participants are expected to comply with quantitative and qualitative disclosure requirements of IFRS in the year of adoption and on an ongoing basis. c. Information provided in previous financial statements is further developed and elaborated taking into account the actual implementation of IFRS 4 8 To disclose Not to disclose Not decided yet Page EY IFRS benchmarking survey for financial services, January 07

17 EY survey contacts and EY regional contacts for IFRS for banking EY survey contacts Fabio Fabiani Mobile: Muzi Ghanchi Mobile: EY regional contacts France Sophie Ganter sophie.ganter@fr.ey.com United Kingdom Fabio Fabiani ffabiani@uk.ey.com Germany Jana Währisch jana.waehrisch@de.ey.com Belgium Emmanuel Villaire emmanuel.villaire@be.ey.com Netherlands Siobhan Tipping siobhan.tipping@nl.ey.com Italy Francesca Amatimaggio francesca.amatimaggio@it.ey.com Spain Randolf Niedermeyer randolf.niedermeyer@es.ey.com Japan Toyohiro Fukata fukata-tyhra@shinnihon.or.jp Switzerland Natalia Dembek-Slusarczynska natalia.dembek-slusarczynska@ch.ey.com Page 6 EY IFRS benchmarking survey for financial services, January 07

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