Investment accounting in the IFRS 9 and 17 era

From the Sofia User Network 2023 stage, Chiara Bassetti, Senior Manager Consulting Services at SimCorp Italiana, presented some reflections arising from the complexities introduced in accounting processes by IFRS 9 and 17.

In this interview Chiara tells us in what direction developments in Sofia are progressing to support clients in the new challenge they are facing.

Q - Where did the need for a change in the accounting process in Sofia come from?

A - The context in which our clients are working has changed. Recent regulatory changes, particularly IFRS 9 and IFRS 17, have introduced elements of complexity and interdependency in the management of assets and liabilities of insurance companies. At the same time, there has been a widespread need among our clients to significantly reduce the time needed to close securities and policies portfolios.

Q – What are the new challenges introduced by IFRS 9 and 17?

A - Until 2022, accounting valuations related to asset and technical provisions were parallel processes, converging only later when constructing the income statement, through shadow accounting processes.

With regards to asset management, IFRS 9 has introduced a further level of complexity compared to the past: the management of original purchase lots, which is necessary to assess the "significant risk variation since inception" that Italian companies were not used to.

For some of our clients there is an additional element of complexity. In fact, it has been preferred to import calculations of stage allocation and expected credit loss (ECL) carried out by external engines instead of implementing in Sofia the Group's calculation formulas, thus losing the advantage of having results available real time. The interface that exports from Sofia the basic calculation data (situation of the lots) and imports the results obtained (stage and ECL of each lot) introduces a batch process that lengthens the time to close the accounting period, whereas the expectation is that the overall process time will be reduced. 

Q - What was the process that led you to identify the solution in Sofia? What were the goals you set for yourselves?

A - As always, our starting point was to listen to clients, our essential interlocutors to discuss internally developed working hypotheses with. We learnt about their processes for managing accounting data and shared their objectives in terms of time and results, trying to find common ground. We also conducted a survey of the types of problems detected by our help desk during accounting closing periods to understand which aspects of the process needed strengthening.

Building on these external inputs, we asked ourselves how we could leverage Sofia's infrastructure and real time technology to support the macro goals of reducing processing time and mitigating operational risk.

Q - How is the solution built in Sofia? What tools are available?

A - The solution we have identified is built on a set of Sofia features, some already present, others under development. These are separate tools, which could also be used individually. The winning factor is the idea of linking them into a unified process management, so that each stage of the accounting data processing can benefit from actions taken upstream of it: for example, checks on closing operations are simplified if the price and exchange rate database used for their calculation has previously been formally validated.

The Securities, Corporate Action and Current Accounts Reconciliation modules ensure the timely alignment of Sofia's data with the outside world. The Data Quality solution allows daily completeness and consistency checks to be conducted on the database (assets data references and beyond).

The management of the Accounting Data, with the related closure of the day's operations, also allows the middle and back-office processes to converge to a daily pace, which is one of the key elements to mitigate the peak of operations normally concentrated on the end of the month.

As far as the actual closing of accounts activities are concerned, on the one hand, the Multiclosing functionalities allow for multiple "photographs" of the portfolio to be taken on the same accrual period (by value date or by transaction date), depending on the purpose and timing of each process. On the other hand, with the introduction of real time accounting, Sofia will be able to eliminate the batch production of the general ledger’s entries, which could be continuously extracted and searched both by the user and by data quality procedures.

The use of these tools will be guided by a control room - we call it "the Dashboard" - through which the user will govern the different stages of accounting data processing.

The data structure - composed of Civil, Tax, IAS-IFRS, Solvency II, and Insurance GAAP s- is the common denominator and the enabling infrastructure element of all the solutions just described. Accounting data will be synchronous at all levels and with respect to a certain reconciliation register. In this way, it will always be possible to reconstruct ex post the set of elements attributable to a given accounting period.

Q - What are the steps for adopting these solutions on Sofia and what are the expected benefits?

A - We have given the name "Fast close 2.0" to the integrated use of the tools previously mentioned. The activation of Fast close 2.0 involves an in-depth initial configuration phase that is customized based on the actual processes that the client has to manage at each reporting date. Then through a user-friendly interface, the Dashboard, it will be possible to direct these processes: at each step, Sofia will know exactly what instructions to execute at what time, without the need for further user input other than to click on the button that leads to the next step. The user will always be able to know at what step of the accounting process they are and find the information to reconstruct an elaborated processes ex post. 

Depending on how urgent and ambitious the goals of accelerating accounting processes are, the solutions described above can be adopted in progression.

Securing middle and back-office processes by means of the adoption of reconciliation and data quality solutions is a very important step in order to get to the beginning of the closing operations of the accounting period with "clean" and reconciled portfolios. These are very well-established and standardized solutions with rather simple integrations with custodians.

On the other hand, the adoption of the solutions supporting the accounting process - the "Dashboard", Multiclosing and real time accounting - requires a configuration phase of Sofia's modules and their parameterization, based on the specific characteristics of the accounting processes of each client.

The expected result of adopting these solutions is twofold. On the one hand, closing processes will be faster; on the other hand, the elimination of batches will become a factor in mitigating the impact resulting from unexpected events or exceptions to be managed.