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IAI - ICAEW IFRS 9 - 12 Aug 19
IAI - ICAEW IFRS 9 - 12 Aug 19
Page 2
Why the replacement
of IAS 39?
Benefits & criticism on IAS 39 include …
Benefits
Criticism
Complex & difficult to understand
Attention on pricing
► Substance over form?
► Otherwise may result in day-1 gain or
loss ► Bright lines or rule-based in many
instances
► Many exceptions to underlying
Governance principles
► Upfront or early analysis of financial
impact before any major transactions
Fair value determination rules
► Both for internal management, & for
customers in some cases ► Market-based approach
► Pro-cyclical
► Judgmental at times
Transparency
► More items measured at fair value,
e.g. all equity instruments & Impairment assessment
derivatives ► Different measurement models for
► Timing of recovery will affect different items
provisions for bad debts ► “Too little too late”
Page 4
IAS 39 replacement – IFRS 9
IFRS 9
Impairment – Expected credit losses
Page 5
IFRS 9 – Table of Contents
Derivatives overview
Derivatives Increased flexibility
and Hedging Better connection with risk management
Some positive changes
Page 6
Phase 1 - Classification and Measurement
Key aspects and overview
Classification of financial assets –
a new model
► Two assessments:
► Contractual cash flows give rise to solely payments of principal
and interest (also colloquially referred to as the ‘SPPI test’)
► Business model for managing the financial assets
► The outcome determines whether the investment is
accounted for:
► At fair value through profit or loss
► At fair value through other comprehensive income (OCI) (with or
without recycling)
► At amortised cost
► Classification requirements are applied to a financial
asset in its entirety without separating embedded
derivatives
Page 8
Classification of financial liabilities
Page 9
Synopsis of key aspects of the new model
for financial assets
Debt (including hybrid contracts) Derivatives Equity
Page 10
Solely payments of principal and interest cash
flows – the SPPI test
Page 11
Business model assessment –
factors to consider
Grouping of
assets in Impact of
portfolios sales on the
assessment
Page 12
Overall business model assessment –
defining factors
► Business model assessment refers to how an entity manages
its financial assets in order to generate cash flows
► Business model is a matter of fact and not merely an assertion
► Assessment based on reasonable expectations and not on
worst or stress case scenarios
► Typically observable through particular activities that are
undertaken to achieve the objectives of that business model
► Performance measurement
► Risks and risk management
► Compensation
► The expected frequency and value of sales are important
elements of the assessment. However, information about past
sales should not be considered in isolation
Page 13
Financial Liabilities
Limited changes to the classification andmeasurement
PSAK 55 PSAK 71
Amortized cost with separation of embedded
derivatives Remains the same
Fairvalue measurement only for trading, designation
(fair value option) and derivatives
change in FV recognized
portfolio) full change in fair value recognized in
-
through P&L
P&L
Page 14
Reclassifications of financial assets (1)
Page 15
Reclassifications of financial assets (2)
Original New
Accounting impact
category category
Amortised Cost FVTPL FV is measured at reclassification date. Difference with
carrying amount should be recognised in P&L.
FVTPL Amortised FV at the reclassification date becomes its new gross carrying
Cost amount*
Amortise FVOCI FV is measured at reclassification date. Difference with
d Cost amortised cost should be recognised in OCI. Effective interest
rate is not adjusted as a result of the reclassification.
FVOCI Amortise FV at the reclassification date becomes its new amortised cost
d Cost carrying amount. Cumulative gain or loss on OCI is adjusted
against the FV of the financial asset at reclassification date.
FVTPL FVOCI FV at reclassification date becomes its new carrying amount.*
FVOCI FVTPL FV at reclassification date becomes carrying amount.
Cumulative gain or loss on OCI is reclassified to P&L at
reclassification date.
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Impairment Assessment under
IFRS 9
Page 17
IFRS 9 Expected Credit Loss (ECL)
requirement
► There are many approaches that could be adopted for an IFRS 9 expected loss
impairment model, regardless of the approach adopted the requirements of IFRS 9
must be satisfied.
IFRS 9 5.5.17
Page 18
Key decisions for IFRS 9 impairment
Page 19
The 3-buckets approach for impairment
Start here Credit risk has increased significantly since initial recognition
(individual or collective basis)
Loss allowance 12-month expected credit Lifetime expected credit Lifetime expected credit
updated losses losses losses
at each
reporting date
Interest revenue
calculated based Effective interest rate on Effective interest rate on Effective interest rate on
on gross carrying amount gross carrying amount amortised cost
Page 20
ECL measurement
Page 21
IFRS 9 Expected Credit Loss
Expected Work Effort and Key Judgments
Based on our work with client, the following graph depicts the example of 7 key judgement areas of IFRS 9,
and where we have seen the most impact and work effort involved in defining and implementing the methodology.
High
1 Definition of significant deterioration (the transfer
criteria)
2 Definition of lifetime
Medium
3 Discounting 6
Low
5 7
6 Treatment of revolving products – (what is the
contractual life and is there a difference between the
12 month and lifetime PDs)
7 Use of practical expedients and rebuttable Medium High Very High
presumptions IFRS 9 ECL Impact
Page 22
Factors or indicators of change in the risk of
a default occurring
Operating Business,
Credit spread
results financial or
(e.g., credit
economic
default swap)
conditions
Credit rating
(internal or Regulatory,
external) Factors or indicators of economic or
change in the risk of a technological
default occurring environment
Rates or terms
(e.g., covenants,
collateral)
Collateral, guarantee
or financial support,
Credit risk if this impacts the
management Payment risk of a default
approach status and occurring
behaviour
Page 23
Loss rate approach
Page 24
From IAS 39 to IFRS 9
► Example:
Before After
IAS 39 IFRS 9
Rating
Non-bank Bank Expected credit loss
Good Book 12M EL Lifetime EL
Impairment Impairment
1
Incurred but allowance allowance
Good book
not reported
(No impairment) Mechanical
(IBNR) Exposures Exposures with
collective increased of without significant
provision impaired significant deterioration
exposures deterioration
‘Emergence
Fragile Significant deterioration
period’ length
exposures
8 ‘expected’ ► Key methodological analysis
loss, based on ► Choice of indicators
9 Collective
triggered ► Calibration
provision
events
10
11 Impaired Impaired
Specific allowances Specific allowances
No change
12
Lifetime EL under expected Lifetime EL
(PD = 100%) loss except for (PD = 100%)
forward looking
1 Lifetime
Performing loans 12-month
expected loss
expected loss Bucket
Incurred but not reported Under-
(IBNR) loss/collective Performing 1 &2
Increase in performing
impairment loans
2 loans
allowance
Significant increase in creditrisk
Expected credit loss is also applicable to consumer finance, marketable securities, government recap bonds, treasury notes and
other FVOCI financial assets.
Calculations
Methodologies
(Retail / Non Retail Portfolio) Portfolio Creation
ECL Computation Business Model & SPPI
(12M & Life Time) Methodology Assignment
Probability Weighted Impairment Stage Determination
PIT PD, PIT LGD Model &
Integration
Page 27
IFRS 9 Readiness and Implementation Challenges
Policies,
Accounting & Cross Functional
Judgements IFRS 9 Readiness
GL Collaboration
Consideration
Disclosures &
Processes & Reconciliation & Reporting Data
Controls Parallel Run Elements
Page 28
IFRS 9 Implementation Complexities: Firm-wide Impact
Page 29
Significant
deterioration
Overview
Considerations:
► What information is currently available and used in the credit risk
management processes ?
► The appropriate approach will vary depending on the level of sophistication of
entities, the financial instruments and the availability of data
► Use of simplifications and presumptions
Page 31
Transfer Criteria
Page 32
Disclosures
Roll-Forward Reconciliation Disclosure
Credit ► IFRS 7 para 35H requires
impaired entities to present a
12-month Lifetime Lifetime
financial
expected expected expected
assets
reconciliation from the opening
Mortgage loans-loss allowance credit credit losses credit losses
(lifetime balance to the closing balance
losses (collectively (individually
expected of the loss allowance (referred
assessed) assessed)
credit to as a ‘roll forward’
losses) reconciliation).
CU’000
► This reconciliation is required by
Loss allowance as at 1 January x x x x class of financial instrument
Changes due to financial and, for each class, by each of
x - (x) - stages 1, 2 and 3 and
instruments recognised as at 1 January:
purchased/ originated credit-
• Transfer to lifetime expected credit losses (x) x x - impaired assets. An illustrative
example in P SA K 7 1 of how
• Transfer to credit-impaired financial assets (x) - (x) x
such a disclosure might look for
• Transfer to 12-month expected credit mortgages, is reproduced
x (x) (x) - adjacently.
losses
• Financial assets that have been ► This reconciliation does not
(x) (x) (x) (x)
derecognised during the period include a number of items which
New financial assets originated or might be needed for mortgages
x - - - or other types of loans, either
purchased
as a separate row in the
Write-offs - - (x) (x) reconciliation or as supporting
Changes in models/risk parameters x x x x narrative disclosure.
Changes in time value (x) (x) (x) (x)
Foreign exchange and other
x x x x
Movements
Loss allowance as at 3 1 December x x x x
Page 33
Phase 3 – The New Hedge Accounting
Financial derivatives
Page 35
Purpose of entering into derivatives
► Possible purpose of entering into a derivative contracts:
Hedging Speculation
Page 36
Key differences: snapshot
Page 37
Risk management strategy and risk
management objective
Page 38
Risk management strategy and objective: a
closer look
Why do risk management strategy and objective matter?
► Link between risk management activity and accounting
Accounting for
Risk management
risk management
activity
activity
Page 39
The new hedge effectiveness assessment:
overview
1) Economic relationship
• Between hedged item and hedging instrument
• Systematic change (opposite direction) in response to
Hedge effectiveness test
3) Hedge ratio
• Consistent with actual ratio used by entity
• Different ratio only if accounting outcome would be
inconsistent with purpose of hedge accounting
Page 40
Discontinuation
Page 41
Transition
Transition Period and Effective Date of
IFRS 9/PSAK 71
Retrospective
Early adoption
IFRS PSAK
9 71
Page 43
Transition Requirements (Paragraph 7.2)
Jan 1, 20XX
Classification
Page 44
Transition Requirements (Paragraph 7.2)
Page 45
Transition Requirements (Paragraph 7.2)
The entity do not need to revise the previous year disclosure, the
entity recognized the difference between the previous year carrying
value with the carrying value at the beginning period of the annual
reporting
If the entity revised the previous period, the financial report which is
revised should disclose all of the requirement under this standard.
Page 46
Thank You