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- nanc a nstrumentsReplacement of IAS 39
Mr. Manil Jayasingha
Partner
Ernst & Young
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DifferencesfromIAS39
Scope&objective Nochange
Initialmeasurement&Derecognition Nochange
ClassificationandMeasurement Assets Substantial
Change
ClassificationandMeasurementLiabilities Somechanges
29 August 201231/10/2008 Update to the FIWG Network Page 3
Presentationand
disclosures Some
changes
Classificationandmeasurementof
financialassets IFRS9 IAS39
Financial Assets
Fair valueAmortized cost
Availab le-for-sale(AFS))
Fair valuethrough profit
or loss(FVPL)
Held-to-maturity(HTM)
Loans andreceivable
s (L&R)
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Classificationandmeasurement
Financialassets OverviewIs the financial asset a DEBT instrument or an EQUITY investment?
DERIVATIVEDEBT EQUITY
Meets the Business model
test?
Fair value through OCI
option used?NO
Meets the Characteristics of
the financial asset test?
YES
NO
NO
Held for trading?
YESNO
Amort ised
costFair value
through OCI
Fair value through
profit or loss
YES
NO
YESFair Value Option (FVO) used?
IFRS 9: Financial instruments Page 5
Classificationandmeasurement
Financialassets
Amortized
cost
Amortised cost
e t nstrument s measure at amort ze cost on y ;
If business model is to hold instruments to collect contractual cash
flows (the business model test);AND
The contractual terms of the financial asset give rise, on specified
dates, to cash flows that are solely payments of principal and interest
IFRS 9: Financial instruments Page 6
(characteristics of the financial asset test)
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Classificationandmeasurement
Amortised costcriteria
BusinessmodeltestandCharacteristicsofthe
Applicationguidanceexamplestohelpexplaintheconcept
Bothprinciplesareequallyimportant but,asrecommendedbymanyrespondents,thestandarddiscussesthebusinessmodelfirst
IFRS 9: Financial instruments Page 7Page 7
Businessmodel
test
Tobeassessedonthebasisoftheobjectiveofanentity'sbusinessmodelasdeterminedby
' .
Doesnotdependonmanagement'sintentionsforanindividualinstrument
Appliedtoahigherlevelofaggregation.However,asingleentitymayhavemorethanonebusinessmodelformanagingitsfinancial
instruments.Therefore,
classification
need
notbedeterminedatthereportingentityleveleither.
IFRS 9: Financial instruments Page 8
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Page 9
Thebusiness
model
test
Theobjectiveoftheentitysbusinessmodelmustbetoholdinstrumentstocollectcontractualcashflows(ie principalandinterest)
Somesalesmaybepermitted,forexample:
Iftheassetnolongermeetsinvestmentpolicy(e.g.,declineincreditrating)
Theentityisaninsureranditadjustsitsinvestmentportfoliotomatchthedurationofitsliabilities
Iftheassetissoldtofundunexpectedcashoutflowsorlosses
Amortisedcostmaynotbeappropriateifmorethaninfrequentsalesoccur
Onderecognitionofamortisedcostassets,gainsorlossesaretobedisclosedonthefaceoftheincomestatement
Additionalqualitativedisclosuresofthereasonsforthesale
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Thebusinessmodeltest(cont.)Areasrequiringjudgement
EntityAwantstomaximisetheuseofamortisedcost,andisconsideringwhethertostratifyinvestmentsintosmallerportfolios
Entit Adefinestimebucketsforcurrentaccounts savin saccountsandtermdeposits,basedonexpectedrepayment
Thereare2buckets (i)3yearforCU100(ii)6yearforCU50
Assetsinvestedhavesimilarmaturityprofilesandvalues
Ifthesavingsaccountsbehaviourchanges,cantheassetmixbeadjusted(andnotfailthebusinessmodeltest)?
Analysis:
TheStandardisnotprescriptive thelevelatwhichthetestisappliedisdependsonfactsandcircumstances
AnalogisetoinsuranceexampleinB4.3(b)
Maynot
be
acceptable
ifindicators
suggest
fair
value
management
Page 11
Thebusiness
model
test
(cont.)Areasrequiringjudgement
Financialassetsaresoldduetoaninfrequentevent,would
thebusinessmodelstillqualifyforamortisedcost?
Note:Theincidencemaybeinfrequent,buttheproportionofassets
soldmaybelargeie,morethansome foreg.,tofundcapital
expenditureoranacquisition
Analysis:
Considerpurposeoforiginallyacquiringtheassets
Ifreasonsforsalewerepreviouslynotanticipated,businessmodel
ma still ualif for amortised cost
Ifthesalewas previouslyanticipated,considerifmaturitiesoftheassetareconsistentwithexpectedtimingofsale
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Thebusinessmodeltest(cont.)Liquiditybufferexample
BankMholdsaliquiditybufferofhighgradevanillasecurities
Thebanksstrategyistoalwayshaveabuffer sotheoverallportfoliosize
Thetradersaremeasuredbasedonachievingabufferthatmeetsthe
predefinedcurrencyandmaturitycriteria
theyarenotcompensatedormeasuredonfairvaluebasis
Howevertheychurntheportfolio(i)Astheregulatorsrequireregularsales
toprovetheassetsareliquid,(ii)theywanttomaintainapresenceinthe
marketsoiftheyactuallyneedtosellinacrisisitwillnotlookunusual
The churn rate is about 20% er month. Portfolio is rou hl 6m duration
althoughitisanticipatedthatthegrossgainsandlosseswillbesubstantial
Doesthebusinessmodelqualifyforamortisedcost?
Page 13
Thebusiness
model
test
(cont.)Areasrequiringjudgement
Bank2purchasescertaindebtsecurities atinitialrecognition,theseassetsare
classifiedasheldfortrading
Theassetsdeteriorateovertimeandseveralareimpaired.Thebankreclassifies
t eseassetsasAvai a e orsa e usingt eOct2008amen mentstoIAS39
becausethereisnoactivemarket
Atthedateofinitialapplication(whenthebusinessmodeltesthastobe
applied),thereisnomarketfortheassetsandpracticallytheycannotbesold
Atthedateofinitialapplication,thebanksintentistoselltheassetsasand
whenitcanfindaprivatebuyerorifthegeneralmarketpicksupalthoughthis
couldtakeuptoseveralyears
Thebankbelievesthattheyholdassetstocollectcontractualcashflowsforthe
foreseeablefuture andthatsucha portfoliowillqualifyforamortisedcost.Doyouagree?Whyorwhynot?
Analysis:Wedonotbelievethatholdingfortheforeseeablefutureissufficient
toachieveamortisedcostclassification
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Thebusinessmodeltest(cont.)Areasrequiringjudgement
BankB
originates
loans,
holds
one
part
of
the
portfolio
to
maturity,andsellsorsubparticipatesanotherparttobanksCandD.
Arethelendingandsubparticipatingactivitiesseparateie.,doesBankBhaveonebusinessmodelortwo?
Analysis:Couldconsiderastwo assetsfromlendingmaytypicallyqualifyforamortisedcost
assetsfromsubparticipation,mayneedmeasuringatFVTPL
Whathappensifasubparticipationfails?
NOTatriggerforreclassification
Ifbusinessmodelcorrectlydeterminedatoutset,willneedtocontinue
measuring
at
FVTPL
Page 15
Thebusiness
model
test
(cont.)Areasrequiringjudgement
Abusinessmodelinitiallymeetsamortisedcost,but
subsequentsalesaremorethaninfrequent
Shouldtheportfoliocontinuetobeatamortisedcost?
Howareanynewlyacquiredassetsaccountedfor?
Analysis:
NOTatriggerforreclassification
Existingportfolioofassetscancontinueatamortisedcost
Butnew
assets
will
need
measuring
at
FVTPL
(ie,
they
are
consideredtohaveanewbusinessmodel)
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Thebusinessmodeltest(cont.)Furtherexamplesfordiscussion
1. Anentityhas2mainsegmentsAandB;certainfinancialassets
aretransferred/soldfromAtoB(internalsaleforthepurposeof
conso a e nanc a s . ou erec ass e asse s e
measuredbasedonBsbusinessmodel?
2. BankPisapproachedbyatelecomsclientforasignificantloan.
Thebankalreadyhasasignificantexposuretothatindustry,but
reallywantstoprovidetheloantomaintainclientrelationship.
Afterafewmonths,BankPreachesitsmaximumlimitstothe
telecomindustryanddecidestosellapartoftheloantoreduce
itsexposureandtobeabletoserveanimportantnewclientin
thesameindustry. Istheloaneligibleforamortisedcostatinitial
recognition?
Page 17
Thebusiness
model
test
(cont.)Furtherexamples
3. EntityXholdsaportfoliooffixedratedebtinstruments.The
entitydecidestosyntheticallyselltheportfoliothrougha
er va ve ra er anse ng easse se . ows ou e
portfoliobemeasured?
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Example
FactoringAnentityhasapastpracticeoffactoringits
receivables.Ifthesignificantrisksandrewardshave
ApplyingBusinessmodelinpractice
trans erred romt eentity,resu tingint eoriginareceivablebeingderecognised fromthebalancesheet,theentityisnotholdingthesereceivablestocollectitscashflowsbuttosellthem.
However,ifthesignificantrisksandrewardsofthesereceivablesarenottransferredfromtheentity,andthereceivablesdonottherefore ualif forderecognition,theclient'sbusinessobjectivemaystillbetoholdtheassetsinordertocollectthecontractualcash
flows.
IFRS 9: Financial instruments Page 19
Thebusinessmodeltest(cont.)
SummaryFactorsthatindicatethataportfolioisbeingheldtocollectcontractualcashflows:
Amandatetooptimiselongtermyield/switchingassetstolockinlongtermy e
Yieldoftheportfolioasbasisforremunerationoftheinvestmentmanager
Managementreportingbasedonyieldratherthanfairvalue
Management'sdocumentedstrategyanddefinedKPIspointtolongtermyieldratherthanfairvalue
Aportfoliothatdoesnotchangesignificantlyinsizeovertimeand
Expectedsaleswillnotresultinsignificantgains/losses
Considerallfactorstogether notonastandalonebasis cumulativeassessmentofallfactsandcircumstances
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Thebusinessmodeltest(cont.)
SummaryFactorsthatindicatethataportfolioisNOT beingheldtocollectcontractualcashflows:
Histor oflar e ainsrealisedfromthe ortfoliointhe ast
Amandatefortheinvestmentmanagertomaximisefairvaluegains
Managementreportingbasedonfairvalue
Remunerationofinvestmentmanagerbasedonfairvalueresults
Useofmarketrisk/investmentmanagementtechniques(eg.,VaR)
Portfolioswheredurationmanagementtechniquesarebeingactivelyused(suchasMacauley durationmeasure)
Portfoliosthathavebeenstrate icall earmarkedfordis osal butnotyetwithinscopeofIFRS5
Considerallfactorstogether notonastandalonebasis cumulativeassessmentofallfactsandcircumstances
Page 21
CHARACTERISTICSOFTHE
FINANCIALASSETTEST
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Characteristicsofthefinancialassettest
Contractualterms
of
the
financial
asset
give
rise,
on
specified
dates,tocashflowsthatsolelyrepresentprincipalandinterestpayments
creditriskassociatedwiththeprincipalamountoutstandingduringaparticularperiodoftime
Featuresthatwillstillqualifyforamortisedcost: Prepaymentoptions,extensionoptions
Fixed/variableinterestrates
Caps,floors,collars
Unleveragedinflationindexlinked
Leverage(options,forwardsandswaps)
Inversefloaters
Convertiblebonds,
constant
maturity
rate
bonds
Catastrophebonds
IFRS 9: Financial instruments Page 23
Characteristicsofthefinancialassettest
(continued)
Contractualcashflowcharacteristicthatintroducesleverage donothavethecharacteristicsofintereste.g.option,forwardandswapcontracts
Aninstrumentthatissubordinated tootherinstruments(e.g.togeneralcreditors)maystillhavecontractualcashflowsthatareprincipalandinterest
Whetheror
not
the
instrument
is
quoted
in
activemarketisnotrelevantforthemeasurementbasisunderIFRS9
IFRS 9: Financial instruments Page 24
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CharacteristicsofthefinancialassettestPrepayment,extensionoptionsandsimilarprovisions
Mayberecordedatamortisedcostonlyifseveral
conditionsaremet:
Theprovisionisnotcontingentonfutureevents,
otherthantermsthatprotect:
i. Theholderagainstcreditdeteriorationoftheissuer(e.g.,
defaults,creditdowngrades,loancovenantviolations),or
achangeincontroloftheissuer;or
ii. Theholderorissueragainstchangesinrelevanttaxation
orlaw;
(additionalcriteriaonnextslide)
IFRS 9: Financial instruments Page 25
Characteristics
of
the
financial
asset
testPrepayment,extensionoptionsandsimilarprovisions
Additionalcriteria
Prepaymentoptions
theprepaymentamountsubstantiallyrepresents
unpaidprincipalandinterest(mayincludeearly
terminationcompensation)
Extensionoptions
andinterestduringtheextensionperiod
IFRS 9: Financial instruments Page 26
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CharacteristicsofthefinancialassettestOthercontractualprovisions
Allothercontractualprovisionsthatcouldchange
thetimingoramountofpaymentsdonotresultin
contractualcashflowsthataresolelyprincipaland
interestunless avariableraterepresents
considerationforthetimevalueofmoneyandthe
creditriskassociatedwiththeprincipalamount
outstanding
IFRS 9: Financial instruments Page 27
Characteristicsofthefinancialassettest
ExamplesInstrumentsthatwillqualify InstrumentsthatwillNOT qualify
Abondwithastatedmaturity date.
Principalandinterestarelinkedtoan
inflation index that is not levera ed.
Aconvertiblebondthatisconvertible
intoequityinstrumentsoftheissuer.
Avariable interestrateloanwitha
statedmaturitydatethatpermitsthe
borrowertochangetheperiodofthe
marketinterestrateateachinterest
resetdateonanongoingbasis.
Aloan thatpaysaninversefloatingrate,
i.e.theinterestratehasaninverse
relationshiptothemarketinterestrates.
Abondwithastatedmaturity date
andpaysavariablemarketinterest
Aconstantmaturitybondwithafive
yearterm thatpaysavariableratethatis
IFRS 9: Financial instruments Page 28
ratewhich
is
capped. reset
periodically
but
always
reflects
a
fiveyearmaturity.Afullrecourseloansecuredby
collateral.
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Characteristicsofthefinancialasset
testFeatures
which
could
be
problematic
Amortgageisindexedto12monthEuribor and ,
monthlyorquarterly,however,therateresetsafter6months
AmortgageisindexedtoanaverageLiborrateoveraperiodoftime.Theinterestrateisequaltotheaverage2yearLiborrateoverthelast2years p usa xe sprea . eeconom crationaleistoallowborrowerstobenefitfrom
afloating
rate
but
with
an
averaging
mechanismtoprotectthemfromshorttermvolatility.
Page 29
Characteristicsofthefinancialasset
testFeatureswhichcouldbeproblematic
15yearfloatingrateGovernmentbonds,couponsareresetever 6monthsb referencin tothe10 earrate.SimilartoChinesebondswheretherateissetissettoatwoyearrate.
Loanagreementwithcovenant:spreadabovebenchmarkrateincreasesifborrowersEBITDAordebttoequityratiodeterioratesbyaspecifiedamountbyaspecifieddate.
ua
currency
on s
PrincipaldenominatedinJPYbutinterestinUSD
CouponisfixedinUSDatinception
Atmaturity,bondisredeemedinJPY
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Characteristicsofthefinancialasset
testFeatures
which
could
be
problematic
(continued)
InflationindexedEurobonds(e.g.Euro
enom na e on s u n exe o e a an
inflationrate)
Investmentsinunitsissuedbymoneymarket
ordebtfunds
Loanswithstepuprates
Productswithatimelaginsettinginterestrates (e.g.interestispaidmonthlyandisreferencedtotheone
monthratebutusinglastmonthsrateandnotthismonthsrate)
Page 31
Classificationandmeasurement
Financialassets
Fair
value
Fair value
FVTPL (fair value through profit or loss) all other instruments, exceptwhere FVTOCI option is used
FVTOCI (fair value through OCI) non trading equity investments (bychoice), but dividends through profit or loss
No cost exception for unquoted equity investments
IFRS 9: Financial instruments Page 32
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FairValueOption(FVO)forfinancial
assets*Fair value option available, if
Accounting
mismatch
Managed on
fair value basis
Embedded
derivative(s)
IFRS 9: Financial instruments Page 33
collect contractual
cash flows FV
with financial host
classified in entirety
*FVOunchanged forfinancialliabilitiesatthisstage
Mappingof
old
and
new
categories
Held to maturity Loans and receivables
Fair value
(through
profit or loss)
Amortized
costs
Fair value
(through
OCI)
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At fair value through
profit or loss Available for sale
Debt
instrument
Equity
instrument
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Embeddedderivatives
Bifurcationof
embedded
derivatives
is
eliminated
for
hostfinancialassetswithinthescopeofIAS39
Onlyoneclassificationapproach Dotheembeddedderivativestogetherwiththehostinstrumentmeetthecontractualcashflowcharacteristics test?
Yes thehybridcontract(asawhole)qualifiesforamortisedcostclassification
No thehybridcontract(asawhole)ismeasured
Embeddedderivativeswithnonfinancialhostsarenot
addressedat
this
stage
existing
requirements
maintained
IFRS 9: Financial instruments Page 35
Nonrecourse
loans
Somefinancialassetsmayhavecashflowsdescribedas
principalandinterestbutmaynot,infact,represent
. ,
Anonrecourseinstrumentmaystillqualifyfor
amortisedcost,butholdermustlookthroughtothe
underlyingassetsorcashflows
Amortisedcostnotappropriateifcashflowsarelinked
totheperformanceofunderlyingassets/project,etc,
e.g.,interestbasedontrafficontollroad
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Contractuallylinkedassets
Cash flows of tranche are solely principal and interest?NO
Yes
Cash flows of underlying pool are solely principal and interest?
Practicable to look through to underlying pool of instruments?
NO
All other instruments in the underlying pool (i) reduce cash flow
variability or (ii) align with the cash flows of the tranches?
Yes
NO
Yes
Page 37
Yes
Credit risk of tranche < credit risk of the underlying pool?
Yes
NO
Amortised cost Fair value
Contractuallylinkedassets(cont.)
Calculatecomparativerisks,basedonconditionsatoriginal
recognition
ons era ons:
Whatwouldbetheeffectonthelookthroughtestforcontractually
linkedinstrumentsiftheSPEbenefitsfromcreditenhancement
throughthepurchaseofacreditdefaultswap?
Whataboutwherethelinkageisinsubstanceratherthanby
contract?
SyntheticCDOs
CDO squaredorcubed
Blindpools
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Page 39
Equities
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Equityinstruments Presentation
of
FV
changes
in
OCI
Availableforallequityinstrumentsthatarenotheldfortrading
Freechoiceforeachholdingofaninstrumentatinitialrecognition
Irrevocableforthatholding(noreclassification)
Dividendswillberecognisedinprofitorloss,ifreturnoninvestment(notreturnofinvestment)
Norecyclingoffairvaluechangestoprofitorlossonim airment dis osal or in an other circumstances
Noimpairmenttestingrequired
Additionaldisclosures
IFRS 9: Financial instruments Page 41
Unquotedequity
instruments
Nocostexemptionforunquotedequityinstrumentsallequitiesatfairvalue
Costmaybeusedasaproxyforfairvalueincertainc rcums ances
Indicatorsofwhencostmightnotrepresentfairvalue Asignificantchangeintheperformanceoftheinvestee
Changesinexpectationthattechnicalmilestoneswillbeachieved
Asignificantchangeinthemarketfortheinvesteecompanyoritsproducts
Asignificantchangeintheglobaleconomyortheeconomicenvironment
Asignificantchangeintheobservableperformanceofcomparablecompanies,orinthevaluationsimpliedbytheoverallmarket.
Internalmatters
such
as
fraud,
commercial
disputes,
or
litigation,
or
changesinmanagementorstrategy.
Evidencefromexternaltransactionsintheinvesteesequity,eitherbytheinvestee(suchasafreshissueofequity),orbytransfersofequityinstrumentsbetweenthirdparties.
IFRS 9: Financial instruments Page 42
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PracticalchallengesforFVTOCI
equities Question
(Ref:
B5.12)
Howshouldanentitydeterminewhetheradividendrepresentsarecoveryofpartofthecostoftheinvestment?
ScenarioA
AnentityinvestsinsharesatacostofCU2anddesignatestheseatFVTOCI.ThefairvaluethenincreasestoCU22,resultinginanunrealisedgaininOCIofCU20.TheentitythenpaysaspecialdividendofCU20.
Question:IsitappropriatetorecordthedividendofCU20inprofitorloss?
ScenarioB
WhatifthedividendreceivedwasCU21insteadofCU20? WouldthatmeanthatCU20couldbetakentoprofitorlosswhileCU1would
representarecoveryoftheoriginalcostofinvestment?
Page 43
PracticalchallengesforFVTOCI
equities(continued) Question
WhereshouldtransactioncostsondisposalofFVTOCI
equ es erecor e or e ncome a emen
TensionbetweenPar5.1.1ofIFRS9andB5.4 5.1.1 Atinitialrecognition, anentityshallmeasureafinancialassetatitsfairvalue(see
paragraphs48,48AandAG69AG82ofIAS39)plus,inthecaseofafinancialassetnotat
fairvaluethroughprofitorloss,transactioncoststhataredirectlyattributabletothe
acquisitionofthefinancialasset.
B5.4 Thefollowingexampleillustratestheaccountingfortransactioncostson
the initialandsubsequentmeasurementofafinancialassetmeasuredatfairvaluewithchanges
throughothercomprehensive incomeinaccordance withparagraph5.4.4.Anentityacquires
anasset
for
CU100
plus
apurchase
commission
of
CU2.
Initially,
the
entity
recognises the
assetatCU102.Thereportingperiodendsonedaylater,whenthequotedmarketpriceof
theassetisCU100.Iftheassetweresold,acommissionofCU3wouldbepaid.Onthat date,the
entitymeasures theassetatCU100(withoutregardtothepossiblecommissionon sale)andrecognises a
lossofCU2inothercomprehensive income.
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DisclosuresforFVTOCIequities IFRS
7requirements
WhichinvestmentshavebeendesignatedatFVTOCIandthereasons
forusingthisapproach
Fairvaluesattheendofthereportingperiod
Dividendsrecognisedduringtheperiod,showingseparatelythose
relatedtoinvestmentsderecognisedduringthereportingperiodand
thoserelatedtoinvestmentsheldattheendofthereportingperiod
Anytransfersofthecumulativegainorlosswithinequityduringthe
periodincludingthereasonforsuchtransfers
If an entit dereco nised FVTOCI investments durin the re ortin
period,disclosethereasonsfordisposal,theirfairvalueatthe
derecognitiondateandthecumulativegainorlossondisposal.
Page 45
Reclassifications
(betweenamortisedcostandFVTPL) Reclassificationwillberequired whenanentity
changesitsbusinessmodel Prohibitedinallothercircumstances
AnyreclassificationistobeaccountedforprospectivelyfromtheReclassificationdate
Whichisthefirstdayofthefirstreportingperiodfollowingthechangeinbusinessmodelthatresultsinanentityreclassifyingfinancialassets
Reclassification fromamortised costtofairvaluemeasureinstrumentatfairvalueonthatdate;recognise differencebetween carryingamountandfairvalueinaseparatelinein
pro
or
oss Reclassification fromfairvaluetoamortised cost fairvalue
oftheinstrumentonthedateofreclassification becomesitsnewcarryingamount
Detaileddisclosureswillberequiredininterimreportsandannualfinancialstatements
IFRS 9: Financial instruments Page 46
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Reclassification
ExamplesfromapplicationguidanceReclassification r equired Reclassificationprohibited
Anentityhasaportfolio ofcommercialloans Achangeinintentionrelatedto
. ,
theentityacquiresacompanythatmanages
commercialloansandhasabusinessmodel
thatholdstheloanstocollectthecontractual
cashflows.
circumstances ofsignificantchanges
inmarketconditions)
Afinancial servicesfirmdecidestoshutdown
itsretailmortgagebusiness,andisnolonger
acceptingnewbusiness.Thefirmactively
Atemporary disappearanceofa
particularmarketforfinancialassets
IFRS 9: Financial instruments Page 47
.
Atransferoffinancialassetsbetween
existingbusinessmodels
Classificationandmeasurement
Mainchallenges Toqualifyforamortisedcost,entitiesneedtodemonstratethat
financialassetsareheldandmanagedwithinanappropriate
Entitiesneedtoassessinstrumentsimpactedduetothenew
measurementcriteriaandmakechangestoaccounting systems
Anumberofareaswillrequirejudgment andinterpretationby
preparersandauditors
InstrumentsreclassifiedusingtheOctober2008amendmenttoIAS
Classificationoftranchesofsecuritiseddebtwillbecomplex,as
theyaresubjecttolookthrough
IFRS 9: Financial instruments Page 48
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Classificationandmeasurement
Mainchallenges(continued) IfafinancialassetisreclassifiedfromFVTPLtoamortisedcost,itisnot
possibletoamendhedgeaccountingretrospectively
lossesonthoseassetshadbeenpreviouslybeenoffsetbythechangein
valueofderivatives
AdditionaltransitiondisclosureswillberequireduponadoptingIFRS9
Dependingonthechoicesexercised,therecouldbeachangeinthe
geography ofwherecertaingainsandlossesarerecognised
Entitiesneedtodetermineregulatory andtax consequences
,
consequentialimpactonthenetprofitorlossforthereportingperiod
As
financial
liabilities
and
hedge
accounting
have
been
scoped
out
of
thecurrentphase,theremaybesomedifficultiesinunderstandingthe
overallimplications
IFRS 9: Financial instruments Page 49
IFRS9CLASSIFICATIONAND
:
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Financialliabilities
Changestothefairvalueoption(FVO)Held-for-trading?
NoChanges due
to own credit, OCI
Yes
FVO used?
(three qualifying
criteria in IAS 39)
except mismatch
Other fair value
changesP&L
Yes
No
Separate embedded
derivative using IAS 39
Includes embedded
derivatives?
Yes
Page
51
Host debt
Amort ised
cost
Fair value through
profit or loss
Embedded
derivative
No
Amendmentstothemeasurementof
FairValueOptionliabilities AmendmentstoIFRS9releasedon28October2010,completesPhase1of
IFRS9,Classification andMeasurement
Forliabilities maintainIAS39 exce twhenFairValueO tionisused:
RecordeffectofchangesinowncreditriskinOCI,withoutrecycling
Otherfairvaluechangesinprofitorloss
Unlessanaccountingmismatchwouldbecreated,inwhichcase,FVchangesinrespectofowncreditwouldberecordedinprofitorlossaswell
Clarificationremeaningofcreditriskandhowtocomputeowncreditrisk
ThethreeeligibilitycriteriainIAS39willremainforFVO
Cannot
revo e
previous
esignations
or
ma e
new
ones,
except
w en
a opting
phase1(assets)ofIFRS9
Mandatoryapplication1January2015 Earlierapplicationpermitted,ifadoptingAssetsphase
TransitionsimilartoAssets
Page
52
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March 2012 IFRS 9 Page 27
Amendmentstothemeasurementof
FairValueOptionliabilities(continued) Determinationofaccountingmismatch
Example:
Danishmortgages
Whethertheeffectsofchangesintheliabilityscreditrisk
willbeoffsetinP&LbychangesintheFVofanasset
Basedonfactsandcircumstancesonthedateofinitial
application,nottheinitialrecognitionoftheliability
liabilities)
Page
53
Amendmentstothemeasurementof
FairValueOptionliabilities(continued) Clarificationsrewhatiscreditriskandhowtocomputeit
Distinctionmadebetweencreditriskandassetspecific
performancerisk
Examplesofassetspecificperformancerisk(SPEs&
liabilitywithaunitlinkingfeature)
IFRS7disclosureforbankswithconsolidatedSPEsmay
needtochange
To measure credit risk can use IFRS 7 methodolo with
clarificationthat
credit
risk
may
include
any
associated
liquiditypremiumOR
Appropriatealternativemethod
Example:SeeextractofUBS2009disclosurePage
54
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March 2012 IFRS 9 Page 28
Page 55
Flow Chart Steps
Setting the frame
Who is the entity?
What is the transferred asset?
-
RIGHTS
EXPIRED?
PART OR ALL?
CONSOLIDATE SPE?
Derecognize
TRANSFERRED
CASH FLOWS?
Yes
No
Have the contractual rights expired?
Is there a transfer of rights to receivepayments?
Is there a qualifying pass-through of cashflows?
Risks and rewards
Has the entity transferred substantially allrisks and rewards?
PASS-THROUGH?
TRANSFERRED ALL
RISKS/REWARDS?
No
No
Yes
Yes
NoYes
RETAINED ALL
RISKS/REWARDS?
Dont Derecognize
Derecognize
Dont Derecognize
Yes
Has the entity retained substantially all risksand rewards?
Control and continuing involvement
Has entity retained control of assets?
What is the continuing involvement?
RETAINED CONTROL?
DERECOGNIZE
EXCEPT FOR
CONTINUING INVOLVEMENT
No
Yes
Derecognize
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Transition&dateofinitialapplication
Mandatoryforaccountingperiodsbeginningonor
29 August 201231/10/2008 Page 57
THANK YOU
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