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Presentation by Denis Maluli

4 July 2019
Structure of Presentation

1. Background 3-6
2. Introduction 7-9
3. Key definitions 10-15
4. Recognition and derecognition 16-19
5. Classification 20-24
6. Measurement 25-31
7. Presentation(IPSAS 28) 32-33
8. Disclosures (IPSAS 30) 34-38
9. Key takeaways 39
IPSAS 41 - Summary

01 02
Recognition and derecognition Classification
Classification of financial assets
• Initial recognition Classification of financial liabilities
• Derecognition of financial assets Embedded derivatives
• Derecognition of financial liabilities Reclassification.
IPSAS 41 –
Financial
instruments
03
Measurement 04
Hedge accounting
• Initial measurement Hedge instruments
Hedged items
• Subsequent measurement of financial
Accounting for qualifying items
assets and liabilities
• Fair value consideration
• Amortized Measurement
• Impairment
Background

IPSAS 41 is based on International Financial

Reporting Standard (IFRS) 9, Financial
Instruments, developed by the International
Accounting Standards Board (IASB), but it
also includes public sector-specific guidance
and illustrative examples on:

• Financial guarantees issued through non-

exchange transactions;
• Concessionary loans, e.g Government
concessionary loans such as those from
developed countries to developing
Countries;
• Equity instruments arising from non-
exchange transactions; and
• Fair value measurement. July 2019
1
Background (continued)
Why change the financial instruments
standard?
The IPSASB's goal was to address stakeholder
concerns with IPSAS 29. In IPSAS 29,
requirements for reporting financial
instruments were found to be complex and the
information provided to users was insufficient.
Undertaking a project to update its financial
instruments guidance allowed the IPSASB to
maintain convergence with International
Financial Reporting Standards (IFRS) and to
improve existing IPSAS by making them more
principles-based and addressing issues with
the existing financial instruments standards.
What's Changed?
• Introduction of IPSAS
41, Financial Instruments
• Substantial modification of IPSAS
29, Financial Instruments:
Recognition and
Measurement (only hedge
accounting is maintained which
can be applied if an election is
made in IPSAS 41 if certain criteria
are met)
• Amendments to IPSAS
28, Financial Instruments:
Presentation, and IPSAS
30, Financial Instruments:
Disclosures
Background (continued)
What are the intended benefits?
Effective Date?
The standard was issued
in August 2018. The new The new financial instruments standard introduces:
financial instruments
• A principles-based classification model that allows
standard is effective for
periods beginning on or
stakeholders to move away from the existing rules-
after January 1, 2022 based approach;
however earlier • A single forward-looking expected credit loss
application of the
model that is applicable to all financial instruments
standard is encouraged.
subject to impairment testing and that provides
more relevant and faithfully representative
impairment information on a more timely basis for
users; and
• An improved hedge accounting model that
broadens the hedging arrangements in scope of the
[Client name]
guidance.
Introduction
Financial instrument

PwC
Financial Instrument (continued)

Any contract that gives rise to a financial asset to one entity

and a financial liability or equity instrument to another entity

Financial
instrument

Equity
Instrument

PwC
Definitions
 Definitions

Financial Assets

Contract to receive cash at a future

date

An equity instrument of another entity

Cash and bank

PwC
Definitions (continued)
Examples of financial assets

Cash

Debt securities E.g.

treasury bills & bonds

Account receivables
(less prepayments and
statutory receivables)

PwC
Definitions (continued)

Financial Liabilities

A contract obligation to
deliver cash or another
financial asset to another
entity

PwC
Definitions (continued)

Financial Liabilities

Borrowings
including bonds and
Bank overdraft Account payable
concessionary
loans

PROVISIONS

PwC
 Definitions (continued)

Equity
Represent an interest in the net assets
Instrument
of another entity. Equity instruments
are often common shares or other
types of investment in another entity.

PwC
 Recognition
and
derecognition
Recognition Derecognition

Derecognition of a financial asset

Initial recognition An asset is derecognised when, and

An entity shall recognise a financial
asset or a financial liability in its
statement of financial position,
when and only when, the entity
becomes party to the contractual
provisions of the instrument
Derecognition of a financial liability
only when:
• The contractual right to the cash
flows from the financial asset
expire or are waived; and
• Transfers the asset under certain
qualifying terms are made

An entity shall remove a financial liability

(or part of a financial liability) from its
statement of financial position when, and
only when, it is extinguished i.e when the
obligation specified in the contract is
discharged , waived, cancelled or expires
Derecognition

Financial Asset and Financial Liabilities

A financial asset is de-recognised

when, and only when:

1. the contractual rights to the cash

flows from the asset expire; or

2. the entity transfers substantially all A financial liability is de-recognised

the risks and rewards of ownership when the liability is extinguished or
of the asset; and expires

3. the entity transfers the asset, while

retaining some of the risks and
rewards of ownership, but no
longer has control of the asset (i.e.
the transferee has the ability to sell
the asset). The risks and rewards
retained are recognised as an asset.

PwC
Recognition (continued)
Recognition
A financial asset is
recognised when the entity
becomes party to the
instrument’s contractual
obligations.
Receivables and payables
Despite the requirement on initial
recognition, short-term
receivables and payables may be
measured at original invoice
amount if the effect of
discounting is immaterial.
PwC
Initial recognition
All financial assets or liabilities
are recognised at fair value
during inception.
Fair value
amount for which an asset could
be exchanged, or a liability
settled, between knowledgeable,
willing parties in an arm’s length
transaction.
Classification
 Classification
Financial Assets

An entity shall classify a financial asset as subsequently

measured at:
• Amortised cost
• Fair value through net assets/equity
• Fair value through surplus/deficit
Exception to the
classification rule:
Need to eliminate an accounting mismatch – An
entity hence irrevocably designates a financial
asset as measured at fair value through surplus or
deficit.

PwC
Subsequent measurement process check

Condition

1 2 3
1) Management model Objective- Hold Financial asset in
order to collect contractual cash flows
2) Contractual terms give rise on specified dates to cash flows
that are Solely Payment of Principle and Interest (SPPI test)

1) Management model Objective- Hold Financial asset in

order to collect contractual cash flows and sell the financial
asset
2) Contractual terms give rise on specified dates to cash flows
that are SPPI.

All other that do not fit in 1 and 2

1 Amortised cost

2 Fair value through Net Assets/Equity

3 Fair value through Surplus/Deficit
 Is the asset an equity instrument

Yes No – Debt instrument

Yes
Is instrument held Are contractual cash flow
for trading? solely principal and interest?
No Yes
Can the fair
Is the asset held to collect Yes
Is the asset held No value
to collect contractual cash flows only? designation be
contractual cash No applied?
flows only?
Is the asset held to collect
No contractual cash flows only
and for sale?
No
Yes
Yes
Yes Is the fair value option
elected?
No

Fair value through Fair value Fair value through Amortised

net asset/equity through Surplus net asset/equity cost
(equity or deficit (debt instrument)
instrument)
Yes
Financial Liabilities

An entity shall classify all financial liabilities as subsequently measured

at amortized cost.
Accounting mismatch also applies for financial liabilities at initial
recognition.
Measurement
 Initial measurement

Except for short term receivables and payables, at initial recognition,

an entity shall measure a financial asset or financial liability at its fair
value plus/minus transaction costs that are directly attributable to the
acquisition or issue of the financial asset or financial liability.

Fair value consideration

Quoted prices in an active

market
Valuation technique where
there is no active market
 Subsequent measurement

Amortised FV through FV through

Cost Net assets/ Surplus/
Equity Deficit

Entity’s Characteristics of the

management model contractual cash flows

 To earn returns  To earn returns and Not measured under

later selling fin. asset Amortised cost or of
 Interests receipts
at specified periods  Interest receipts at FV through Net
specified periods assets/Equity
PwC
Subsequent Measurement (continued)
Subsequent measurement – Amortised cost

Measure at amortised cost using the effective interest rate

Amortised Initial Accrued

= - Repayments + - Impairment
cost investment interest

Effective interest = rate that exactly discounts the

expected stream of future cash payments or receipts
through maturity to the net carrying amount at initial
recognition.

PwC
Amortised cost measurement

Interest revenue shall be calculated using the effective interest method

by basically applying the effective interest rate to the gross carrying
amount of a financial asset except for:
- Originated credit impaired financial assets
- Financial assets that were not purchased at initially originated credit
impaired financial assets but have become credit impaired financial
assets.

Write off
An entity shall directly reduce the gross carrying amount of a financial
asset when the entity has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof. A write off constitutes
a derecognition event.
Impairment

An entity shall recognise a loss allowance for expected credit losses on a

financial asset that is measured.
There is a new requirement at each reporting date, an entity to measure
the loss allowance for a financial instrument at an amount equal to the
lifetime expected credit losses if the credit risk on that financial
instrument has increased significantly since initial recognition.
If at the reporting date, the credit risk on a financial instrument has
not increased significantly since initial recognition, an entity shall
measure the loss allowance for the financial instrument at an amount
equal to 12 month expected credit losses
 Expected Credit Loss Model – A probability
weighted estimate of credit losses
Bucket 1- 12 Month Expected
Credit Model
• Calculation of cash short falls
expected to occur on defaults
within the 12 months

Movement between bucket 1 & 2 is ECL is calculated using the

based on significant change in lifetime model however the
credit risk assessed by the effective interest rate is calculated
Expected Credit
probability of default at initial on the net amount of loan of the
recognition and reporting date
Loss Model gross amount

Bucket 2 – Lifetime Expected Bucket 3 – Non performing

Credit model loans (credit impaired assets)
• Calculation of cash short falls • Mispayments
expected to occur on all defaults • Industry downtime
of the contract period • Covenant violation
Presentation
 Presentation

EQUITY
ASSET LIABILITY INSTRUMENT

PwC
Disclosures
Disclosures
 Accounting policies;
 Financial assets used as collateral

The carrying amount of each category of financial

asset and liabilities must be disclosed in the
statement of financial position or the notes.

The methods and valuation techniques in

measuring the fair value of financial assets and
liabilities

There are also qualitative disclosure

requirements.

PwC
 Disclosure (continued)
IPSAS 30 requires disclosure of information about the nature
and extent of risks arising from financial instruments:
• Qualitative disclosures about exposures to
each class of risk and how those risks are
Qualitative disclosures about exposures to each class
managed;
of risk and how those risks are managed;

Quantitative disclosures about exposures to each

class of risk, separately for credit risk, liquidity risk,
and market risk;

Disclosures about liquidity risk include maturity

analyses for both non-derivative and derivative liabilities
such as issued financial guarantee contracts; and

Disclosures about market risk include sensitivity

analyses.

PwC
 Disclosure (continued)

Credit risk
Risk that counterparty may
default on obligation resulting Market risk
in financial loss.
 Interest rate risk
 Price risk
Liquidity risk  Foreign exchange
The risk that an entity will not risk
be able to settle obligations
associated with financial
liabilities

PwC
 Disclosure (continued)

Foreign exchange risk

The risk that the fair value or future
cash flows of a financial instrument
will fluctuate because of changes in
foreign exchange rates. Interest rate risk
The risk that the fair
value or future cash
Price risk flows of a financial
The risk that the fair value or instrument will
future cash flows of a fluctuate because of
financial instrument will changes in market
fluctuate because of changes interest rates.
in market prices.
PwC
 Entity Preparedness and
anticipated challenges

How Organisation can Anticipated challenges

prepare
• Training of governance and
management structure
• Gap/impact assessment – Data
requirement and expected changes
to impairment provisions.
• Engaging management experts on
model creation and assessment of
the model risk parameters- Default
definition, risk drivers etc.
• Updating business and accounting
processes to align with IPSAS 41
• Data availability and reliability
• Operational challenges such as
shortage of skills, inadequate
systems and quality data.
• Unbiasness - conservatism
• Difficulty associated with back
testing of forward looking
estimates.
• Reliability of data – Data that
has never been audited.
• Budgetary impact

PwC
Thank you

www.pwc.com

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