KPMG’s CFO Financial Forum Webcast...Types of sales that could be consistent with the objective of...

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KPMG’s CFO Financial Forum Webcast

FASB Proposes Changes to Classification and Measurement of Financial Instruments

February 27, 2013

E i T j iEnrique Tejerina

Joe Santucci

Luba Liberman

Administrative

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2© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name,logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.

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Agenda

Classification and Measurement Project Overview

Initial Measurement

CMeasurement Categories

Cash Flow Characteristics of Financial Assets

Business Model Assessment for Financial Assets

Fair Value Option

Guidance for Specific Types of Financial Instruments

Presentation


Presentation

Disclosures

Effective Date and Transition

Significant Differences Between FASB and IASB Proposed Models

Polling Question 1

Please indicate your industry

A. Banking and Finance

B. Insurance

C. Consumer Markets

D. Energy and Natural Resources

E. Communications and Media

F. Other


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Classification and Measurement Project Overview

May 2010: FASB issued comprehensive ED on financial instruments

IASB i d IFRS 9 b t d id d t k li it dIASB issued IFRS 9, but decided to make limited amendments

FASB and IASB decided to reduce key differences between their classification and measurement models

IASB ED on limited amendments to IFRS 9 issued Q4 2012 (comments due March 28, 2013)


FASB issued proposed ASU, Financial Instruments –Overall, Recognition and Measurement of Financial Assets and Liabilities (comments due May 15, 2013)

Polling Question 2

Does your organization plan to comment on the FASB’s proposed classification and measurement model?

A. Yes

B. No

C. Not sure


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Initial Measurement

Initial measurement would depend on the psubsequent measurement of a financial instrument

• Financial instruments subsequently measured at FV-NI would be initially measured at FV

• Financial instruments subsequently measured at FV-OCI or amortized cost would be initially measured at transaction price


In certain circumstances, an entity would evaluate whether consideration given or received includes an element other than the financial instrument

Measurement Categories

Financial assets (based on both their cash flow characteristics and the business model)

• Amortized costAmortized cost• FV-OCI • FV-NI

Financial liabilities

• Amortized cost• FV-NI (required for short sales or when the entity’s business strategy is to

subsequently transact at fair value)


• Fair value option, with changes attributable to instrument-specific credit risk recognized in OCI and other changes recognized in net income

• When, by contract, an entire nonrecourse financial liability is required to be settled with only cash flows from related financial assets, an entity would measure the financial liability consistently with the measurement of the related financial assets.

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Knowledge Check 1

Which of the following is a true statement about the FASB’s classification and measurement decisions?

A. Most financial assets would be measured at fair value

B. FV-OCI would be the default category

C. Financial assets would be measured at FV-NI if they pass the characteristics test

D. Short sales would be measured at FV-NI


Knowledge Check 1 – Debrief

Answer D – Short sales would be measured at FV-NI.


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Cash Flows Characteristics of Financial Assets

Do the contractual terms of the financial asset give rise on specified dates to cash

flows that are solely principal and interest? p p

(SPPI test)

Yes No


Measure at FV-NI

(e.g., equity instruments)

Apply Business Model Assessment

* may include a premium for liquidity risk

Cash Flow Characteristics of Financial Assets (continued)

Modified Economic Relationship

Contingent Cash FlowsRelationship

Prepayment and Extension Options

Beneficial Interests


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Cash Flow Characteristics of Financial Assets (continued)

Equity instruments

Convertible bonds

Inverse floaters

C t t t it b dExamples of assets that Constant maturity bonds

Debt instruments indexed to the debtor’s net income or an equity index

Debt instruments with embedded derivatives

Examples of assets that may fail the SPPI test

Plain vanilla variable interest debt instruments

Plain vanilla fixed rate debt instruments

Zero coupon bondsExamples of assets that


p

Inflation-linked bonds

Interest-rate capped variable rate bonds

Collateralized full recourse loans

Examples of assets that may pass SPPI test

Knowledge Check 2

True or False: An entity would be required to measure financial assets that do not meet the SPPI test at FV-NI.

A. True

B. False


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Knowledge Check 2 Debrief

Answer: A (True). An entity would be required to measure financial assets that do not meet the SPPI test at FV-NI.


Business Model Assessment for Financial Assets

Only applies to financial assets that pass SPPI test

Assessment performed at initial recognition by key management

Based on business activities for managing assets rather than intent or ability

Evidenced by the way the business is managed and its performance evaluated by key management


its performance evaluated by key management

Assessment at higher level of aggregation (not individual asset level)

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Business Model Assessment for Financial Assets (continued)

Amortized Cost FV-OCI FV-NI

Held and managed within a business model whose objective is to hold assets to collect contractual cash flows

Held within a business model whose objective is both to hold the assets to collect contractual cash flows and to sell the assets

Residual category (i.e., all other assets and includes assets that do not meet the SPPI test as well as those that are held for sale)



Types of sales that could be consistent with the objective of the

conditions for amortized cost classification:

Types of sales that could be consistent with the objective of the conditions for FV-OCI classification:c ass cat o

• Sales due to significant deterioration in the issuer’s creditworthiness

• Sales for other than managing issuer credit risk that are very infrequent

• Sales that result from events other than significant deterioration in the issuer’s creditworthiness that are isolated, nonrecurring, unusual for the entity, and

• Sales for managing credit exposure due to concentration of credit risk

• Sales for managing exposure to interest rate risk

• Sales for maintaining certain yield profile

• Sales for liquidity management


g yresult from events that could not have been reasonably anticipated

• Sales that occur close to the maturity of the assets for proceeds that approximate the collection of the remaining cash flows

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No explicit tainting notionSales out of the amortized cost

category and related

Reclassifications between categories required when business model changes (expected to occur very

i f tl )

Reclassifications accounted for prospectively

Reclassifications on the last day of the reporting

period in which the change occurs

disclosures


infrequently)change occurs

Fair Value Option

Irrevocable fair value option at initial recognition only available for:

Certain hybrid financial and nonfinancial liabilities

Group of financial assets and liabilities managed on a fair value basis and internally

reported on a net

OR

Financial assets that would


reported on a net exposure basis

Changes in fair value attributable to instrument-specific credit risk presented separately in OCI for financial liabilities at FV-NI

Financial assets that would otherwise be measured at FV-

OCI

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Knowledge Check 3

How would an entity account for the reclassification of financial assets if the business model within which the assets are held and managed changes?

A. Prospectively

B. Retrospectively



Answer: A. An entity would be required to prospectively reclassify financial assets if the business model within which the assets are held and managed changes.


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Guidance for Specific Types of Financial Instruments

Hybrid Financial InstrumentsHybrid Financial Instruments

Loan Commitments, Revolving Lines of Credit, and Commercial Letters of Credit

Nonrecourse Financial Liabilities


Nonrecourse Financial Liabilities

Guidance for Specific Types of Financial Instruments (continued)

Equity investments - generally measured at FV-NI unless the investment qualifies for the equity method of accounting or results in consolidation

Practicability exception for equity investments without readily determinable fair values (not available for investment companies and broker-dealers)

Equity method investments

• Retain the “significant influence” criterion in current U.S. GAAP• Require FV – NI if the investment is held for sale at initial recognition


Impairment analysis

q g• Practicability exception available for equity investments that would qualify for

the equity method of accounting but are held for sale

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Presentation

Instrument Presentation on the Statement of Financial Position

Financial assets and liabilities Separately grouped by classification andFinancial assets and liabilities Separately, grouped by classification and measurement category

Financial assets and liabilities measured at amortized cost (except for receivables or payables due in less than one year and demand deposit liabilities)

Parenthetical fair value information (required for public entities only)

Financial assets at amortized cost that have been identified for sale

Separate line item with parenthetical information of either fair value or amortized cost, as applicable


Financial assets and liabilities measured at FV-NI

Fair value information

Own debt instruments at FV-NI Parenthetical amortized cost information

Equity method investments held for sale Separate line item

Presentation

Instrument Presentation on the Statement ofComprehensive Income

Financial instruments measured at amortized cost and FV-OCI

Separately within net income:• Interest income or expense• Changes in expected credit losses g p• Realized gains and losses• FX gains and losses (for financial instruments

measured at FV-OCI only)

Separate the total change in the FV of the instrument into: • A change in the price of the instrument in the

currency in which it is denominated• FX transaction gain or loss (separately present in


g ( p y pnet income)

Financial instruments measured at FV-NI

Separately, at a minimum, one aggregate amount for realized and unrealized gains or losses

Financial liabilities measured at FV-NI Separately the portion of the total change in the FV of liability due to change in the instrument-specific credit risk

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ASC 820 di l ld Oth di l i l di

Disclosures

Quantitative and qualitative information about sales out

of amortized cost

ASC 820 disclosures would apply to financial

instruments measured at amortized cost (applies to

public entities only)

Other disclosures, including information about equity

instruments without readily determinable fair values

and nonrecourse liabilities

Reclassification due to a Public entities would di l i f ti b t

Amount of change in FV due to instrument-specific

credit risk for liabilities


Reclassification due to a change in business model disclose information about

core deposit liabilities

credit risk for liabilities measured at FV-NI,

including how gains/losses were determined

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Effective Date and Transition

Allow early

FASB will decide on an effective

date after considering constituent feedback

Early adoption, with one

exception, would not be permitted

yadoption of

presentation requirement in

other comprehensive income of the changes in fair value due to changes in instrument-

specific credit risk for financial

li biliti

Cumulative-effect adjustment to the

statement of financial position

as of the beginning of the

first reporting period

Transition disclosures


liabilities designated under fair value option

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Knowledge Check 4

How would the FASB’s proposed classification and measurement model be applied?

A. Retrospectively

B. Prospectively

C. Through a cumulative-effect adjustment



Answer: C. The FASB’s proposed classification and measurement model would be applied through a cumulative-effect adjustment to beginning retained earnings (or other components of equity).


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Significant Differences Between FASB and IASB Proposed Models

Converged in principle, but likely differences in application

Business Model Assessment pp

IFRS would allow equity securities not held for trading to be measured at FV-OCI

IFRS does not have a practicability exception for equity securities measured at fair value

Equity Securities


Recycling of unrealized gains and losses in OCI would be required for all financial assets measured at FV-OCI; recycling is not allowed under IFRS for equity instruments held at FV-OCI

Recycling

Questions?

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Presenters’ Contact Details

Enrique TejerinaPartner, Department of Professional PracticePhone: 212-909-5530Email: etejerina@kpmg comEmail: [email protected]

Joe SantucciPartner, Department of Professional PracticePhone: 212-954-3216Email: [email protected]

Luba LibermanSenior Manager, Department of Professional PracticePhone: 212-954-3138Email: lliberman@kpmg com


Email: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. NDPPS 121788

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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