Impact of Intangible Assets and Software Expenses on Financial Statements and Capital Ratios in the Financial Sector

In a world of digital technologies, software solutions become increasingly important for financial institutions and the amount of expenses for intangible assets are increasing. However, expenses for digital financial technologies are capitalized only if the requirements of the International Financial Reporting Standards (IFRS) are met. Even if the expenses for digital financial technologies are capitalized, for calculating Key Performance Indicators (KPIs) under the Capital Requirements Regulation (575/2013)(CRR), the capitalized intangible assets have to be deducted from the Common Equity Tier 1 (CET1) capital as a prudential filter. This deduction leads to a reduction of capital ratios and therefore to a disadvantage for financial institutions with investments in software solutions. In June 2019 the European Parliament amended the regulations of CRR so that in future the software capitalized as intangible assets will not be deducted from the CET1 capital as a regulatory adjustment. This paper examines the impact of this amendment on the capital ratios of German and Austrian other-systemically important institutions (O-SIIs). Therefore, this paper provides for European financial institutions and users of IFRS financial statements and CRR Pillar III reports, the first evidence of these expected effects and improves the discussion about existing accounting and prudential regulations.