Introduction to International Financial Reporting Standards (IFRS)

• The applications pass cash flows of the Financial Instruments to the cash flow engine to generate and store future cash flows.
• Based on the contractual cash flows of the contract, the system supports the calculation of Effective Interest Rate (EIR), Amortised cost (AMC), fair value of the contract.
• Delta Accounting, which is the difference between the book balance and the AMC is calculated and the accounting entries are effected through the IFRS accounting framework.

• The Provisioning (PV) module provides provisioning methodology and the classification is obtained based on the risk involved for the contract.
• The Rules Engine facilitates the overall functionality in assessing the risk and classifying the contracts.
• The impairment accounting is supported by IFRS9 (I9) module with the accounting rules based on the Expected Loss approach.
• The Expected Credit Loss Model (ECL) Model includes the Probability of Default (PD) and Loss given Default (LGD) values for calculating the expected cash flows from the contractual cash flows to arrive at the ECL.
• The system does not calculate the PD and LGD values but provides only the framework for uploading them - either from the PD and LGD modelling within Temenos Financial Risk Management or banks themselves can provide these values for ECL calculations.

• Hedge Accounting is optional under IFRS 9 and is supported by IH module.
• States the Hedge Types (Fair value/Cash flow/Investments).
• Documents the hedge relationship.
• Define Accounting rules based on types of Hedge.
• Framework for generating hedge accounting entries.

The IFRS9 solution is a combination of IA, PV and I9 modules as displayed below :

This application defines possible Classification indicating the level of risk.

• Record Id is any Alphanumeric Id.

The screenshots of PV.LOAN.CLASSIFICATION that can be defined for classification are shown below

This application defines the parameters and method for the appropriate provision calculation for each loan based upon the classification applicable for a contract.

The screenshot of PV.PROFILE is displayed below:

This application defines the frequency for Classification, Provision Calculation process, and selection of records to be processed.

A sample record of PV.MANAGEMENT for Arrangement Architecture (AA) loans is shown below

Read the documentation on PV module for more information.

This parameter table defines the rules for the regulation. The following screenshot displays the Parameter.

The following table explains the fields in the above screenshot.

This table refers to the classification of financial assets and liability according to the business model type as per IFRS regulation.

IFRS9 requires a strict classification of financial assets and liabilities according to their purpose.

The business model classification is extremely important as it defines various accounting and measurement rules to be applied. The IAS.CLASSIFICATION table is used to describe the business model.

The following records are released in Temenos Transact:

This is a COMPANY LEVEL table, which governs the rules for IFRS 9 regulation.

The PARAMETER table with the Stages and their corresponding Loan Classifications are shown below:

This stores the accounting methods to be applied for different kinds of contracts based on the classification of the assets and liabilities. This is maintained as a separate table allowing the users to configure based on their requirements.

The Id for this record can be any alpha-numeric free text.

Provision for Balance or Asset Types to be Excluded from Temenos Transact Balances

Field	Description
Bal to Exld	Defines the Balance or Asset types to be excluded from Temenos Transact balances. This functionality is available only for AC.BALANCE.TYPE records with Reporting Type set to VIRTUAL.
Hybrid Acct Type	Indicates the Hybrid method of IFRS accounting, where the contract is measured based on Fairvalue using the Market Key on the first day of a loan disbursement. On subsequent days the loan is measured using the amortised cost method.
Impair Int Bal Type	Defines the asset types under which accrual entries are raised for different applications. Allows a valid record from AC.BALANCE.TYPE with Reporting Type set to VIRTUAL.

The following screenshot displays the AC.BALANCE.TYPE.

In the following example, the accounting heads AMORTISED has the AC.BALANCE.TYPE record NEWVIRBAL entered into the Bal To Exld field . All normal accounting heads uniformly follow a single Temenos Transact balance.

The above screenshot shows the Bal To Exld field in the IFRS.ACCT.METHODS table.

• When the Bal To Exld field is populated for AMORTISED accounting head and left blank for other Acct Head Types, the system defaults the Bal To Exld field from AMORTISED to the other normal accounting heads.
• An error is displayed if an user inputs a different AC.BALANCE.TYPE record.

The Acct Head Types under AMC is shown in the table below:

IFRS.POSTING.DETAILS

This table stores the details relating to the way the accounting entries are generated in order to make the contracts compatible with IFRS9 requirements. This displays as a separate table so that the user can configure based on their requirements.

Id of the records is free text to link to the contracts at IAS.CLASSIFICATION or IFRS.SUBTYPE level.

Field	Description
Position Type	Updates with value IF on validation of a record. User input is not allowed.
Posting Style	Specifies the posting style to be adopted. Accepted values are IO or ADJUST.
Acct Head Type	This field is part of a multi-value set of fields to specify the asset types. As a multi-value field, different values can be defined for each accounting head–AMORTISED, AMORTISED STAGE 1, AMORTISED STAGE 2, DISCLOSURE, IMPAIR AMORTISED and so on.
Acct Type	Specifies whether the posting is to happen to the CONTINGENT or NONCONTINGENT base.
Sub Acct Head Type	This field is part of the associated multi-value set of fields for Acct Head Type – Amortised. It can accept the AA properties for CHARGE.
Entry Type	Specifies the type of the entry. This can have different categories to post the Profit and Loss amounts. Has options Profit, Loss and Both.
Entry Target	Specifies whether the entry needs to be raised to Internal Accounts, PL categories or the CRF base. Has options ACCOUNT, PL and CRF.

• Users can define the category used for posting along with the transaction codes and reversal transaction codes used for generation of entries.

A sample record for the Category and transaction codes to be defined for every Acct Head Type field is displayed below:

A sample record of IFRS.POSTING.DETAILS for an AMC business model is displayed below:

IFRS.SUB.TYPE

This table contains the details relating to IFRS.ACCT.METHODS and IFRS.POSTING.DETAILS along with details relating to the amendments to the cash flows and EIR, if any.

Record Id is free text.

The following table details the fields and description.

Field	Description
Descrit	Defines the sub-type.
Accounting Method	Displays the ID of IFRS.ACCT.METHODS that stores the accounting methods to be applied on contracts based on the classification.
Posting Details	Displays the ID of IFRS.POSTING.DETAILS that stores the details relating to the generation of accounting entries.
Def Recalc Method	Defaults the recalculation method during cash flow changes for the contracts. Options allowed are either CARRY.COST, EIR or QUANTITAIVE TEST.
Event Type	Defines the IFRS.EVENT.TYPE.
Recalc Method	Defines the recalculation method opted for event wise. The options are CARRY.COST, EIR or QUANTITATIVE TEST.
Term	Indicates the option to determine EIR and AMC. The options are FULL – When this field is set to None or Full, the system calculates the EIR for the entire term of the contract. This is applicable mainly for fixed rate contracts. SHORT – The system calculates the EIR up to the next rate fixing date and income is amortised over this period. This applies for contract under a floating rate, with a periodic interest rate change. EXPECTED – Applies to contracts with an expected term. The difference between the SHORT and EXPECTED is that with Short, after the end of the period, the interest rate fixing generates another cashflow for the next rate fixing period and recalculate the EIR whereas with the option of ‘Expected’ life of the contract, after the end of the period the system stops IFRS9 processing.

An example IFRS.SUB.TYPE for AMC is shown below:

IFRS.ACCRUAL.PARAM

This application defines accounting frequency for subtypes of different companies.

Id is the Company name and under each company, for each IFRS Subtype, the accounting frequency can be defined.

The following table defines each field available in this application.

Field	Description
Ifrs Sub Type	Displays set of subtypes.
Acct Freq	Denotes the frequency at which the specified subtype is processed. Each subtype must have its own frequency setting. However, it can be different for different subtypes.
Upd Acct Dtls	Provides the option to update the system maintained table IFRS.ACCOUNTING.DETAILS. Options are Yes or No.
Split Delta	Provides the option to split the amortised amount with the respective fees and cost.

The below screenshot displays the IFRS.SUB.TYPE with its corresponding frequency set.

IFRS.EVENT.TYPE

This application stores various events that can occur over the life of a contract, which can amend the cash flows pertaining to it. The default list is as below:

The Probability of Default (PD) is defined as the Probability that the obligor will default within a given time horizon. Temenos Transact has two options for inputting PD values.

Option 1: Minimum 2 PDs – 12M PD and Lifetime PD

The multivalued field Prob of Deft is used to store the Probability of Default with minimum two PDs. The system uses the first PD as 12M PD for stage 1 contracts and the second PD as Lifetime PD for stage 2 or 3 contracts.

Option 2: Point-in-Time (PIT) PD

A multivalued field Prob of Deft is made available wherein yearly PDs are allowed to be input for a contract year wise till its maturity period. The system uses the PD defined for the corresponding periods and arrive at the ECL provisioning during IFRS processing. The PIT PD expect a marginal PD and our current PD/LGD modelling support cumulative PD and not marginal PD.

LGD is defined as the percentage loss incurred relative to the Exposure at Default.

It provides the loss that a bank is bound to incur when a default occurs. This normally is based on the type of Loan or Collateral and is worked out by the Credit Risk Department of a Financial Institution.

The PD/LGD values can be defined at various levels – through an API in the IFRS.PARAMETER, at contract level, at customer level and at product level. The system automatically picks up the appropriate PD/LGD values for the ECL calculations based on the order of priority.

Read the Reporting property class for more information.