IFRS 9 is here to say - PwC · 6/18/2015 · IFRS 9 is here to say 18 June 2015 ... slides phase 3...

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Hot topics treasury seminar

IFRS 9 is here to say

18 June 2015Discover and unlockyour potential…

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Program

Where are we: timelines Classification and measurement Hedge accounting Impairment Questions?

218 June 2015Hot topics treasury seminar

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Where are we: timelines

IFRS 9 is here to stay

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Overview | Three Phases of IFRS 9

Phase I

Classification and measurement

Phase II

Impairments: Expected credit losses

Phase III

Hedge accounting

IFRS 9: Financial instruments

“A logical, single classification approach driven by cash flow characteristics and how it’s managed”

“An urgently needed and strongly supported forward-looking ‘expected loss’ model”

“An improved and widely welcomed model that better aligns accounting with risk management”

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IAS

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Timelines of IFRS 9

2009 2010 2011 2012 2013 2014 2015 ff

Classification & Measurement

Impairment

General Hedge Accounting

Nov 2009

Standard (Assets)

Juli 2014

Standard

Juli 2014

Standard

Juli 2009

ExposureDraft (Assets)

Mai 2010

ExposureDraft (Liab.)

Nov 2012

ED LimitedAmendments

Nov 2013

Standard

Dez 2009

ExposureDraft

Jan 2011

Supplement Document

Sept 2012

Review Draft

März 2013

ExposureDraft

Dez 2010

ExposureDraft

Okt 2010

Standard

(Liabilities)

IASB Working Group on

IFRS 9


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IFRS 9 - current status

Having established an effective date for IFRS 9, corporates start taking stock on the impact of IFRS 9 and their approach to implementation

EU / EFRAG CorporateIASB

• IASB published IFRS 9 on 24 July 2014

• IFRS 9 is mandatory from 1 January 2018

• IFRS 9 needs to be applied in entirety, except for the OCI treatment of OCS of financial liabilities in FVO

• Early application is allowed (endorsement required in the EU)

• Endorsement process not yet started

• EFRAG/EU are currently constituting the respective bodies

• Endorsement might be expected in the second half of 2015

• Endorsement process of comprehensive standards such as IFRS 9 usually takes 12 months or longer

• Most corporate have closely followed the development of IFRS 9

• In Europe, most corporates did not conducted pre-studies on IFRS 9. Only a few corporates have started implementation projects

• The level of efforts in Europe has been mixed ranging from “wait and see” to full scope


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Timelines from IAS 39 to IFRS 9Implementation period of de facto two years

2014 2015 2016 2017 2018

Key milestones

Preparation for

transition phase

Impact assessment

Parallel run

IAS 39 &

IFRS 9

1 Jan 2017

Transition date IFRS 9

Q1 2018

First FS issued under IFRS 9

GO LIVE

Today


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Classification and measurement


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Classification and measurementFinancial assets – Debt instruments

Business model ‘hold to collect‘?

Solely payments of principal and interest?

Fair value option applied?

Amortised cost

FVPLFVOCI

(with recycling)

Business model “hold & sell“?

no

yes

yes

no

yes

yes

no

Debt instruments

no

no

yes

Caption: SPPI = Solely Payments of Principal & InterestFVOCI = Fair Value through Other Comprehensive IncomeFVPL = Fair Value through Profit & Loss

Scope for expected credit loss model - on balance, see slides phase 2

Need to defineBusiness Model & assess cash flows


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SPPI-criteriaAnalysis of contractual cashflows

2. Classification and measurement

The cash flows represent solely payments of principal and interest without hedging on the outstanding amount

Amortised cost orFair Value through OCI

Fair Value through P&L

yes no

Principle Principles-based analysis if the financial instrument is a basic lending arrangement

Definition principal:

Fair value of a financial asset at initial recognition (adj. for e.g. repayments ofprincipal)

Definition interest:

Compensation for the time value of money and credit risk. Also other basic lendingrisks (e.g. liquidity risk) and costs (e.g. servicing or administrative costs), as well asprofit margins.


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Classification and measurementFinancial assets – Derivatives & Equity Instruments

• Derivatives – no change between IAS 39 and IFRS 9 requirements

• Equity instruments:

- Held for trading: FVPL

- For instruments other than trading, possibility to elect the classification FVOCI. Election must be performed on instrument-per-instrument basis at inception. The classification is irrevocable.

Note that if an entity elects the classification FVOCI, the change in FV of the shares will be recorded in OCI while the dividend will be recorded in PL.

For impact of the election on FVH, see slides phase 3

FVPLFVOCI

(no recycling)

yes

yes

no

no

Trading?

FVOCI 0ption applied?

Derivatives Equity instruments

Caption: FVOCI = Fair Value through Other Comprehensive IncomeFVPL = Fair Value through Profit & Loss

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Classification and measurementFinancial liabilities


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Hedge accounting


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IFRS 9 Opportunity to reconsider use of derivatives and hedging at a time of “new” risks

Identifying and responding to key risks:

• FX fluctuations

• Volatility of commodity prices

• Low interest rate environment

• Elevated credit risk

Reflecting risk management in your financial reporting

IAS 39

IFRS 9

Alignment between risk and accounting provides opportunities to reconsider your risk management policies


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IFRS 9 – what has NOT changed?

Basic hedge accounting models

retained(i.e. FVH, CFH & NIH)

Hedge accounting is optional

Detailed rules on eligible hedged items

and hedging instruments

Documentation still needed

Derivatives still at fair value

Ineffectiveness recognised in P&L


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IFRS 9 – what has changed?Hedging instruments

IAS 39 IFRS 9

Embedded derivatives allowed as hedging instruments

Embedded derivatives only allowed if embedded in financial liabilities and separated from the host contract

Non-derivatives only for FX risk Non-derivatives @FVTPL, also for other than FX risk

Options – changes in time value are recognised in P&L

Options – changes in aligned time value are deferred in OCI. Reclassification to P&L depends on the nature of the hedged item:• Transaction related• Time period related

Forwards - Two alternatives for recognising fairvalue changes of forward points

Forwards - Three alternatives for recognising fair value changes of forward points

Currency basis spreads – no specific accounting treatment. Currency basis spreads included in hedged item of a cash flow hedge but not in a fair value hedge

Currency basis spreads – similar accounting as to forward points.


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IFRS 9 – what has changed?Hedged items

IAS 39 IFRS 9 Only possible to hedge risk components of financial items

Possible to hedge risk components of both financial and non-financial items

Derivatives not allowed as hedged items Aggregated positions allowed

Net positions not allowed Net positions (including net nil positions) allowed as hedged item, in certain circumstances

Equity instruments through OCI cannot be hedged item

Equity instruments through OCI can be hedged items

Use of layers as hedged item relatively restricted. Layers only for cash flow hedges

Layers allowed for both cash flow hedges, fair value hedges and groups of items


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IFRS 9 – what has changed?Hedged items – risk components

Possible to hedge risk components of both financial and non-financial items if separate identifiable and reliably measurable.

Gas oil Fuel oilOther components

eg. transport charges

Natural gas

Hedged item

Example: Long-term supply contract for natural gas

Pricing of natural gas according to contractually specified formula:

Hedged item Hedged item


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IFRS 9 – what has changed?Hedge effectiveness and rebalancing

Key changes

• Omission of the quantitative bandwidth of 80-125% for assessing hedge effectiveness

• Only prospective proof (quantitative or qualitative) of effectiveness required

• No discontinuance of hedge accounting due to the results of the assessment of hedge effectiveness, but calculation infective portions and recognition in P&L still required

Rebalancing

• Adjustments in the designated quantities of the hedged item or the hedging instrument of an existing hedging relationship

• Purpose: maintaining a hedge ratio that complies with the hedge effectiveness requirements

• Ineffectiveness is determined and recognised immediately before adjusting the hedging relationship

• NOTE: If Risk Management objective has changed, then rebalancing does not apply. Hedge accounting should be discontinued


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Impairment


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General ApproachThe three stages of the credit deterioration model

Absolute credit quality Does the financial asset meet the definition of ‘low credit risk’ at the reporting date?

Credit-impaired

Does the financial asset meet the credit-impaired definition (same definition as in IAS 39)?

Performing

12-Months-EL (interest revenue on gross basis)

Significant increase of credit risk

EL over Lifetime (interest revenue on gross basis)

Credit-impaired

EL over Lifetime (interest revenue on net basis)

1 2 3

no

yes

yes

Relative credit quality

Has the credit risk increased significantly since initial recognition?

Assessment based on payment status:

If more than 30 days overdue yes (rebuttable presumption)

no

no yes

Change in credit quality since initial recognition


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General ApproachDefinitions of ‘(expected) credit losses’ in the IFRS 9 model

12-month expected credit losses

Are a portion of the lifetime expected credit losses and represent the amount of expected credit losses that result from default events that are possible within 12 months after the reporting date.

Lifetime expected credit losses

The expected credit losses that result from all possible default events over the life of the financial instrument.

Credit loss The difference between all principal and interest cash flows that are due to an entity in accordance with the contract and all the cash flows the entity expects to receive discounted at the original EIR.

Expected credit losses

The weighted average of credit losses. Expected loss (EL), as anticipated for such assets on a statistical basis. Standard risk cost compensate the expected loss.


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Assessment of a significant increase in credit riskBasis for stage transfer during the financial asset’s lifetime

Absolute probabilities are

not sufficientVariation between

reporting date and initial

recognition

Probability of Default(‘PD’)

12 months unless lifetime assessment is

necessary

Counterparty assessment

Maximumcredit risk for a

portfolio


PwC 2418 June 2015Hot topics treasury seminar

The Standard provides two operational simplifications:

• For trade receivables or contract assets that do not contain a significant financing component: Relief from calculating 12-month ECL and to assess when a significant increase in credit risk occurred. Lifetime ECL throughout the trade receivable’s life.

• For lease receivables and trade receivables or contract assets that contain a significant financing component: Accounting policy choice to apply simplified approach to measure loss allowance at lifetime ECL on initial recognition.

Accounting policy choice can be applied individually for:

• lease receivables

• trade receivables with significant financing component

• contract assets with significant financing component

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Questions…


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More information

Trainer:Name trainer: Kees-Jan de VriesPhone number: +31 88 792 4922E-mail: [email protected]

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mailto:[email protected]

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Thank you for your attention...

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IFRS 9 is here to say - PwC · 6/18/2015 · IFRS 9 is here to say 18 June 2015 ... slides phase 3...

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