IFRS 9 - Financial Fi i li instruments t t

Replacement of IAS 39

Mr. Manil Jayasingha Partner Ernst & Young

March 2012

IFRS 9

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DifferencesfromIAS39

Scope&objective Initialmeasurement&Derecognition ClassificationandMeasurement Assets Nochange Nochange Substantial Change Somechanges Somechanges

Classification andMeasurementLiabilities
Presentationanddisclosures

29 August 201231/10/2008

Update to the FIWG Network

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Classificationandmeasurementof financialassets
IFRS9
Financial Assets

IAS39
Financial Assets

Amortized cost

Fair value

Fair value through profit or loss (FVPL)

Held-tomaturity (HTM)

Loans and receivable s (L&R)

Availablefor-sale (AFS) )

29 August 201231/10/2008

Update to the FIWG Network

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Classificationandmeasurement Financialassets Overview

Is the financial asset a DEBT instrument or an EQUITY investment? DERIVATIVE DEBT
Meets the Business model test? YES Meets the Characteristics of the financial asset test? YES Fair Value Option (FVO) used? NO YES YES NO YES NO NO

EQUITY

Held for trading? NO Fair value through OCI option used?

Amortised cost

Fair value through profit or loss

IFRS 9: Financial instruments

Fair value through OCI

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Classificationandmeasurement FinancialassetsAmortizedcost
Amortised cost
A debt d b i instrument i is measured d at amortized i d cost only l ;

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 y payments p y of principal p p and interest (characteristics of the financial asset test)

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Classificationandmeasurement
Amortised costcriteria BusinessmodeltestandCharacteristicsofthe financialasset assettest Applicationguidanceexamplestohelpexplain theconcept Bothprinciplesareequallyimportant but,as recommendedbymanyrespondents,thestandard discussesthebusinessmodelfirst

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IFRS 9: Financial instruments

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Businessmodeltest
Tobeassessedonthebasisoftheobjectiveof anentity'sbusinessmodelasdeterminedby theentity entity's skeymanagementpersonnel personnel. Doesnotdependonmanagement's intentionsforanindividualinstrument Appliedtoahigherlevelofaggregation. However,asingleentitymayhavemorethan onebusinessmodelformanagingitsfinancial instruments.Therefore,classificationneed notbedeterminedatthereportingentity leveleither.
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THEBUSINESSMODELTEST

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Thebusinessmodeltest
Theobjectiveoftheentitysbusinessmodelmustbetoholdinstruments tocollectcontractualcashflows(ie principalandinterest) Somesalesmay bepermitted,forexample: Iftheassetnolongermeetsinvestmentpolicy(e.g.,declineincredit rating) Theentityisaninsureranditadjustsitsinvestmentportfoliotomatch thedurationofitsliabilities Iftheassetissoldtofundunexpectedcashoutflowsorlosses Amortisedcostmaynotbeappropriateifmorethaninfrequentsales occur Disclosuresrequired
Onderecognitionofamortisedcostassets,gainsorlossesaretobedisclosed onthefaceoftheincomestatement Additionalqualitativedisclosuresofthereasonsforthesale

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Thebusinessmodeltest(cont.)
Areasrequiringjudgement
EntityAwantstomaximisetheuseofamortisedcost,andisconsidering whethertostratifyinvestmentsintosmallerportfolios Entity yAdefinestimebucketsforcurrentaccounts, ,savings g accounts andtermdeposits,basedonexpectedrepayment Thereare2buckets (i)3yearforCU100(ii)6yearforCU50 Assetsinvestedhavesimilarmaturityprofilesandvalues Ifthesavingsaccountsbehaviourchanges,cantheassetmixbe adjusted(andnotfailthebusinessmodeltest)? Analysis: TheStandardisnotprescriptive thelevelatwhichthetestis appliedisdependsonfactsandcircumstances AnalogisetoinsuranceexampleinB4.3(b) Maynotbeacceptableifindicatorssuggestfairvaluemanagement

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Thebusinessmodeltest(cont.)
Areasrequiringjudgement Financialassetsaresoldduetoaninfrequentevent,would thebusinessmodelstillqualifyforamortisedcost?
Note:Theincidencemaybeinfrequent,buttheproportionofassets soldmaybelargeie,morethansome foreg.,tofundcapital expenditureoranacquisition Considerpurposeoforiginallyacquiringtheassets Ifreasonsforsalewerepreviouslynot anticipated,businessmodel maystillqualifyforamortisedcost Ifthesalewas previouslyanticipated,considerifmaturitiesofthe assetareconsistentwithexpectedtimingofsale

Analysis:

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Thebusinessmodeltest(cont.)
Liquiditybufferexample
BankMholdsaliquiditybufferofhighgradevanillasecurities Thebanksstrategyistoalwayshaveabuffer sotheoverallportfoliosize remainsroughlystablewithinpredefinedcurrencyandmaturitybands Thetradersaremeasuredbasedonachievingabufferthatmeetsthe predefinedcurrencyandmaturitycriteria theyarenotcompensatedormeasuredonfairvaluebasis Howevertheychurntheportfolio(i)Astheregulatorsrequireregularsales toprovetheassetsareliquid,(ii)theywanttomaintainapresenceinthe marketsoiftheyactuallyneedtosellinacrisisitwillnotlookunusual Thechurnrateisabout20%permonth.Portfolioisroughly6mduration, althoughitisanticipatedthatthegrossgainsandlosseswillbesubstantial Doesthebusinessmodelqualifyforamortisedcost?

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Thebusinessmodeltest(cont.)

Areasrequiringjudgement
Bank2purchasescertaindebtsecurities atinitialrecognition,theseassetsare classifiedasheldfortrading Theassetsdeteriorateovertimeandseveralareimpaired.Thebankreclassifies these h assetsasAvailable A il bl for f sale l ( (using i the h O Oct2008amendments d toIAS39) becausethereisnoactivemarket Atthedateofinitialapplication(whenthebusinessmodeltesthastobe applied),thereisnomarketfortheassetsandpracticallytheycannotbesold Atthedateofinitialapplication,thebanksintentistoselltheassetsasand whenitcanfindaprivatebuyerorifthegeneralmarketpicksupalthoughthis couldtakeuptoseveralyears Thebankbelievesthattheyholdassetstocollectcontractualcashflowsforthe foreseeablefuture andthatsuchaportfoliowillqualifyforamortisedcost.Do youagree?Whyorwhynot? Analysis:Wedonotbelievethatholdingfortheforeseeablefutureissufficient toachieveamortisedcostclassification

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Thebusinessmodeltest(cont.)
Areasrequiringjudgement BankBoriginatesloans,holdsonepartoftheportfolioto maturity,andsellsorsubparticipatesanotherparttobanks CandD. Arethelendingandsubparticipatingactivitiesseparate ie.,doesBankBhaveonebusinessmodelortwo? Analysis:Couldconsiderastwo
assetsfromlendingmaytypicallyqualifyforamortisedcost assetsfromsubparticipation,mayneedmeasuringatFVTPL

Whathappensifasubparticipationfails?
NOTatriggerforreclassification Ifbusinessmodelcorrectlydeterminedatoutset,willneedto continuemeasuringatFVTPL

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Thebusinessmodeltest(cont.)
Areasrequiringjudgement

Abusinessmodelinitiallymeetsamortisedcost,but subsequentsalesaremorethaninfrequent
Shouldtheportfoliocontinuetobeatamortisedcost? Howareanynewlyacquiredassetsaccountedfor?

Analysis:
NOTatriggerforreclassification Existingportfolioofassetscancontinueatamortisedcost ButnewassetswillneedmeasuringatFVTPL(ie,theyare consideredtohaveanewbusinessmodel)

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Thebusinessmodeltest(cont.)
Furtherexamplesfordiscussion
1. Anentityhas2mainsegmentsAandB;certainfinancialassets aretransferred/soldfromAtoB(internalsaleforthepurposeof consolidatedfinancials) financials).Shouldthereclassifiedassetsbe measuredbasedonBsbusinessmodel? 2. BankPisapproachedbyatelecomsclientforasignificantloan. Thebankalreadyhasasignificantexposuretothatindustry,but reallywantstoprovidetheloantomaintainclientrelationship. Afterafewmonths,BankPreachesitsmaximumlimitstothe telecomindustryanddecidestosellapartoftheloantoreduce itsexposureandtobeabletoserveanimportantnewclientin thesameindustry.Istheloaneligibleforamortisedcostatinitial recognition?

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Thebusinessmodeltest(cont.)
Furtherexamples 3. EntityXholdsaportfoliooffixedratedebtinstruments.The entitydecidestosyntheticallyselltheportfoliothrougha d i ti (rather derivative ( th than th selling lli the th asset titself). it lf) How H should h ldthe th portfoliobemeasured?

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ApplyingBusinessmodelinpractice
Example Factoring Anentityhasapastpracticeoffactoringits receivables.Ifthesignificantrisksandrewardshave transferred f df fromthe h entity, i resulting l i i inthe h original i i l receivablebeingderecognised fromthebalancesheet, theentityisnotholdingthesereceivablestocollectits cashflowsbuttosellthem. However,ifthesignificantrisksandrewardsofthese receivablesarenottransferredfromtheentity,and thereceivablesdonotthereforeq qualify yfor derecognition,theclient'sbusinessobjectivemaystill betoholdtheassetsinordertocollectthecontractual cashflows.
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Thebusinessmodeltest(cont.) Summary
Factorsthatindicatethataportfolioisbeingheldtocollectcontractualcash flows: Amandatetooptimiselongtermyield/switchingassetstolockinlong termyield i ld Yieldoftheportfolioasbasisforremunerationoftheinvestment manager Managementreportingbasedonyieldratherthanfairvalue Management'sdocumentedstrategyanddefinedKPIspointtolongterm yieldratherthanfairvalue Aportfoliothatdoesnotchangesignificantlyinsizeovertimeand includesapproximatelythesametypeofinvestments Expectedsaleswillnotresultinsignificantgains/losses Considerallfactorstogether notonastandalonebasis cumulative assessmentofallfactsandcircumstances

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Thebusinessmodeltest(cont.) Summary
FactorsthatindicatethataportfolioisNOT beingheldtocollectcontractual cashflows: History yoflarge g gains g realisedfromthep portfoliointhepast p Amandatefortheinvestmentmanagertomaximisefairvaluegains Managementreportingbasedonfairvalue Remunerationofinvestmentmanagerbasedonfairvalueresults Useofmarketrisk/investmentmanagementtechniques(eg.,VaR) Portfolioswheredurationmanagementtechniquesarebeingactively used(suchasMacauley durationmeasure) Portfoliosthathavebeenstrategically g yearmarkedfordisposal, p ,butnot yetwithinscopeofIFRS5 Considerallfactorstogether notonastandalonebasis cumulative assessmentofallfactsandcircumstances

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CHARACTERISTICSOFTHE FINANCIALASSETTEST

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Characteristicsofthefinancialassettest
Contractualtermsofthefinancialassetgiverise,onspecified dates,tocashflowsthatsolelyrepresentprincipalandinterest payments Interest Interest isconsiderationforthetimevalueofmoneyandthe creditriskassociatedwiththeprincipalamountoutstanding duringaparticularperiodoftime Featuresthatwillstillqualifyforamortisedcost:
Prepaymentoptions,extensionoptions Fixed/variableinterestrates Caps,floors,collars Unleveragedinflationindexlinked Leverage(options,forwardsandswaps) Inversefloaters Convertiblebonds,constantmaturityratebonds Catastrophebonds

Features/assetsthatwillnotqualify:

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Characteristicsofthefinancialassettest (continued)
Contractualcashflowcharacteristicthat introducesleverage donothavethe characteristics h of fintereste.g.option,f forward d andswapcontracts Aninstrumentthatissubordinated toother instruments(e.g.togeneralcreditors)maystill havecontractualcashflowsthatareprincipal andinterest Whetherornottheinstrumentisquotedin activemarketisnotrelevantforthe measurementbasisunderIFRS9
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Characteristicsofthefinancialassettest
Prepayment,extensionoptionsandsimilarprovisions

Mayberecordedatamortisedcostonlyifseveral conditionsaremet: Theprovisionisnotcontingentonfutureevents, otherthantermsthatprotect:

i. Theholderagainstcreditdeteriorationoftheissuer(e.g., defaults,creditdowngrades,loancovenantviolations),or achangeincontroloftheissuer;or ii. Theholderorissueragainstchangesinrelevanttaxation orlaw;
(additionalcriteriaonnextslide)

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Characteristicsofthefinancialassettest
Prepayment,extensionoptionsandsimilarprovisions Additionalcriteria

Prepaymentoptions theprepaymentamountsubstantiallyrepresents unpaidprincipalandinterest(mayincludeearly terminationcompensation) Extensionoptions thetermscanonlyresultinpaymentsofprincipal andinterestduringtheextensionperiod

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Characteristicsofthefinancialassettest
Othercontractualprovisions

Allothercontractualprovisionsthatcouldchange thetimingoramountofpaymentsdonotresultin contractualcashflowsthataresolelyprincipaland interestunless avariableraterepresents considerationforthetimevalueofmoneyandthe creditriskassociatedwiththeprincipalamount outstanding

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Characteristicsofthefinancialassettest

Examples
Instrumentsthatwillqualify Abondwithastatedmaturity date. Principalandinterestarelinkedtoan inflationindexthatisnotleveraged. Avariable interestrateloanwitha statedmaturitydatethatpermitsthe borrowertochangetheperiodofthe marketinterestrateateachinterest resetdateonanongoingbasis. Abondwithastatedmaturity date andpaysavariablemarketinterest ratewhichiscapped. Afullrecourseloansecuredby collateral. InstrumentsthatwillNOT qualify Aconvertiblebondthatisconvertible intoequityinstrumentsoftheissuer. Aloan thatpaysaninversefloatingrate, i.e.theinterestratehasaninverse relationshiptothemarketinterestrates.

Aconstantmaturitybondwithafive yearterm thatpaysavariableratethatis resetperiodicallybutalwaysreflectsa fiveyearmaturity.

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Characteristicsofthefinancialasset test
Featureswhichcouldbeproblematic

Amortgageisindexedto12monthEuribor and theborrowerpaysthisratemonthly monthly,bi monthlyorquarterly,however,therateresets after6months AmortgageisindexedtoanaverageLiborrate overaperiodoftime.Theinterestrateisequal totheaverage2yearLiborrateoverthelast2 years(plus ( l afixed fi dspread). d) The Th economic i rationaleistoallowborrowerstobenefitfrom afloatingratebutwithanaveraging mechanismtoprotectthemfromshortterm volatility.
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Characteristicsofthefinancialasset test
Featureswhichcouldbeproblematic

15yearfloatingrateGovernmentbonds,couponsare resetevery y6monthsby yreferencing gtothe10y yearrate. SimilartoChinesebondswheretherateissetissettoa twoyearrate. Loanagreementwithcovenant:spreadabove benchmarkrateincreasesifborrowersEBITDAordebt toequityratiodeterioratesbyaspecifiedamountbya specifieddate. Dual D lcurrencybonds b d PrincipaldenominatedinJPYbutinterestinUSD

CouponisfixedinUSDatinception Atmaturity,bondisredeemedinJPY
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Characteristicsofthefinancialasset test
Featureswhichcouldbeproblematic(continued)

InflationindexedEurobonds(e.g.Euro denominatedbondsbutindexedtotheItalian inflationrate) Investmentsinunitsissuedbymoneymarket ordebtfunds Loanswithstepuprates Productswithatimelaginsettinginterestrates

(e.g.interestispaidmonthlyandisreferencedtotheone monthratebutusinglastmonthsrateandnotthismonths rate)
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Classificationandmeasurement Financialassets Fairvalue Fair value

FVTPL (fair value through profit or loss) all other instruments, except where FVTOCI option is used FVTOCI (fair value through OCI) non trading equity investments (by choice), but dividends through profit or loss

No cost exception for unquoted equity investments

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FairValueOption(FVO)forfinancial assets*
Fair value option available, if

Accounting mismatch

Managed on fair value basis

Embedded derivative(s)

Not managed to collect contractual cash flows FV

Hybrid contracts with financial host classified in entirety

*FVOunchanged forfinancialliabilitiesatthisstage
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Mappingofoldandnewcategories
Held to maturity Loans and receivables Fair value (through OCI)

Amortized costs
Fair value (through profit or loss)

At fair value through profit or loss

29 August 201231/10/2008 Update to the FIWG Network

Debt instrument

Equity instrument

Available for sale

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Embeddedderivatives
Bifurcationofembeddedderivativesiseliminatedfor hostfinancialassetswithinthescopeofIAS39 Only yoneclassificationapproach pp Dothe embeddedderivativestogetherwiththehost instrumentmeetthecontractualcashflow characteristicstest? Yes thehybridcontract(asawhole)qualifiesfor amortisedcostclassification No thehybridcontract(asawhole)ismeasured atfairvalue Embeddedderivativeswithnonfinancialhostsarenot addressedatthisstage existingrequirements maintained
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Nonrecourseloans
Somefinancialassetsmayhavecashflowsdescribedas principalandinterestbutmaynot,infact,represent suchpayments. payments Guidanceisnotclear, clear but
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?
Yes NO

Practicable to look through to underlying pool of instruments?

Yes

NO

Cash flows of underlying pool are solely principal and interest?

Yes

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

Credit risk of tranche < credit risk of the underlying pool?

Yes

NO

Amortised cost

Fair value
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Contractuallylinkedassets(cont.)
Calculatecomparativerisks,basedonconditionsatoriginal recognition
C id ti Considerations:

Whatwouldbetheeffectonthelookthroughtestforcontractually linkedinstrumentsiftheSPEbenefitsfromcreditenhancement throughthepurchaseofacreditdefaultswap? Whataboutwherethelinkageisinsubstanceratherthanby contract?

Practicaldifficultiesinapplyingthelookthroughfor:

SyntheticCDOs CDO squaredorcubed Blindpools

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EQUITIES

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Equities

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Equityinstruments
PresentationofFVchangesinOCI
Availableforallequityinstrumentsthatarenotheldfor trading Freechoiceforeachholdingofaninstrumentatinitial recognition Irrevocableforthatholding(noreclassification)

Dividendswillberecognisedinprofitorloss,ifreturn oninvestment(notreturnofinvestment) Norecyclingoffairvaluechangestoprofitorlosson impairment,disposalorinanyothercircumstances

Noimpairmenttestingrequired

Additionaldisclosures

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Unquotedequityinstruments
Nocostexemptionforunquotedequityinstruments allequitiesatfairvalue Costmaybeusedasaproxyforfairvalueincertain circumstances i t Indicatorsofwhencostmightnotrepresentfairvalue
Asignificantchangeintheperformanceoftheinvestee Changesinexpectationthattechnicalmilestoneswillbeachieved Asignificantchangeinthemarketfortheinvesteecompanyorits products Asignificantchangeintheglobaleconomyortheeconomicenvironment Asignificantchangeintheobservableperformanceofcomparable companies,orinthevaluationsimpliedbytheoverallmarket. Internalmatterssuchasfraud,commercialdisputes,orlitigation,or changesinmanagementorstrategy. Evidencefromexternaltransactionsintheinvesteesequity,eitherbythe investee(suchasafreshissueofequity),orbytransfersofequity instrumentsbetweenthirdparties.

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PracticalchallengesforFVTOCI equities Question(Ref:B5.12)

Howshouldanentitydeterminewhetheradividendrepresents arecoveryofpartofthecostoftheinvestment?
ScenarioA
AnentityinvestsinsharesatacostofCU2anddesignatestheseatFVTOCI.Thefair valuethenincreasestoCU22,resultinginanunrealisedgaininOCIofCU20.Theentity thenpaysaspecialdividendofCU20. Question:IsitappropriatetorecordthedividendofCU20inprofitorloss?

ScenarioB
WhatifthedividendreceivedwasCU21insteadofCU20? WouldthatmeanthatCU20couldbetakentoprofitorlosswhileCU1would representarecoveryoftheoriginalcostofinvestment?

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Question

PracticalchallengesforFVTOCI equities(continued)

WhereshouldtransactioncostsondisposalofFVTOCI eq itiesberecorded?(OCIortheIncomeStatement) equities TensionbetweenPar5.1.1ofIFRS9andB5.4

5.1.1 Atinitialrecognition,anentityshallmeasureafinancialassetatitsfairvalue(see paragraphs48,48AandAG69AG82ofIAS39)plus,inthecaseofafinancialassetnotat fairvaluethroughprofitorloss,transactioncoststhataredirectlyattributabletothe acquisitionofthefinancialasset. the B5.4 Thefollowingexampleillustratestheaccountingfortransactioncostson initialandsubsequentmeasurementofafinancialassetmeasuredatfairvaluewithchanges throughothercomprehensiveincomeinaccordancewithparagraph5.4.4.Anentityacquires anassetforCU100plusapurchasecommissionofCU2.Initially,theentityrecognises the assetatCU102.Thereportingperiodendsonedaylater,whenthequotedmarketpriceof theassetisCU100.Iftheassetweresold,acommissionofCU3wouldbepaid.Onthat date,the entitymeasurestheassetatCU100(withoutregardtothepossiblecommissionon sale)andrecognises a lossofCU2inothercomprehensiveincome.

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DisclosuresforFVTOCIequities
IFRS7requirements
WhichinvestmentshavebeendesignatedatFVTOCIandthereasons forusingthisapproach Fairvaluesattheendofthereportingperiod Dividendsrecognisedduringtheperiod,showingseparatelythose relatedtoinvestmentsderecognisedduringthereportingperiodand thoserelatedtoinvestmentsheldattheendofthereportingperiod Anytransfersofthecumulativegainorlosswithinequityduringthe periodincludingthereasonforsuchtransfers IfanentityderecognisedFVTOCIinvestmentsduringthereporting period,disclosethereasonsfordisposal,theirfairvalueatthe derecognitiondateandthecumulativegainorlossondisposal.

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Reclassifications (betweenamortisedcostandFVTPL)
Reclassificationwillberequired whenanentity changesitsbusinessmodel
Prohibitedinallothercircumstances

Anyreclassificationistobeaccountedforprospectively fromtheReclassificationdate
Whichisthefirstdayofthefirstreportingperiodfollowing thechangeinbusinessmodelthatresultsinanentity reclassifyingfinancialassets Reclassificationfromamortised costtofairvalue measure instrumentatfairvalueonthatdate;recognise difference betweencarryingamountandfairvalueinaseparatelinein profit fitorl loss Reclassificationfromfairvaluetoamortised cost fairvalue oftheinstrumentonthedateofreclassificationbecomesits newcarryingamount

Detaileddisclosureswillberequiredininterimreports andannualfinancialstatements
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Reclassification Examplesfromapplicationguidance
Reclassification required Anentityhasaportfolio ofcommercialloans thatitheldtosellintheshortterm term.However However, theentityacquiresacompanythatmanages commercialloansandhasabusinessmodel thatholdstheloanstocollectthecontractual cashflows. Afinancial servicesfirmdecidestoshutdown itsretailmortgagebusiness,andisnolonger acceptingnewbusiness.Thefirmactively marketitsmortgageloanportfolioforsale sale. Reclassificationprohibited Achangeinintentionrelatedto specificfinancialassets(evenin circumstances ofsignificantchanges inmarketconditions)

Atemporary disappearanceofa particularmarketforfinancialassets

Atransferoffinancialassetsbetween existingbusinessmodels

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Classificationandmeasurement Mainchallenges
Toqualifyforamortisedcost,entitiesneedtodemonstratethat financialassetsareheldandmanagedwithinanappropriate businessmodel model (managementintentisnotsufficient) business Entitiesneedtoassessinstrumentsimpactedduetothenew measurementcriteriaandmakechangestoaccounting systems Anumberofareaswillrequirejudgment andinterpretationby preparersandauditors InstrumentsreclassifiedusingtheOctober2008amendmenttoIAS 39mayneedtobereclassifiedbacktofairvalue Classificationoftranchesofsecuritiseddebtwillbecomplex,as theyaresubjecttolookthrough

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Classificationandmeasurement Mainchallenges(continued)
IfafinancialassetisreclassifiedfromFVTPLtoamortisedcost,itisnot possibletoamendhedgeaccountingretrospectively
Restatedinformationmaybedifficulttoexplainiffairvaluegainsand lossesonthoseassetshadbeenpreviouslybeenoffsetbythechangein valueofderivatives

AdditionaltransitiondisclosureswillberequireduponadoptingIFRS9 Dependingonthechoicesexercised,therecouldbeachangeinthe geography ofwherecertaingainsandlossesarerecognised Entitiesneedtodetermineregulatory andtax consequences

AdoptingIFRS9wouldmeanchangestothemeasurementmodel, model witha consequentialimpactonthenetprofitorlossforthereportingperiod

Asfinancialliabilitiesandhedgeaccountinghavebeenscopedoutof thecurrentphase,theremaybesomedifficultiesinunderstandingthe overallimplications

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IFRS9CLASSIFICATIONAND MEASUREMENT FINANCIALLIABILITIES MEASUREMENT:

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Financialliabilities Changestothefairvalueoption(FVO)
Held-for-trading?
No FVO used? (three qualifying criteria in IAS 39) No Includes embedded derivatives? No Yes Yes

Yes

Changes due to own credit, except mismatch Other fair value changes

OCI

P&L

Separate embedded derivative using IAS 39 Host debt Embedded derivative

Amortised cost
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Fair value through profit or loss

Amendmentstothemeasurementof FairValueOptionliabilities
AmendmentstoIFRS9releasedon28October2010,completesPhase1of IFRS9,ClassificationandMeasurement ,maintainIAS39, ,except p whenFairValueOption p isused: Forliabilities,
RecordeffectofchangesinowncreditriskinOCI,withoutrecycling Otherfairvaluechangesinprofitorloss

Unlessanaccountingmismatchwouldbecreated,inwhichcase,FV changesinrespectofowncreditwouldberecordedinprofitorloss aswell

Clarificationremeaningofcreditriskandhowtocomputeowncreditrisk C Cannot revoke k previous i d designations i i ormake k newones,exceptwhen h adopting d i phase1(assets)ofIFRS9 Earlierapplicationpermitted,ifadoptingAssetsphase

ThethreeeligibilitycriteriainIAS39willremainforFVO

Mandatoryapplication1January2015

TransitionsimilartoAssets
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Amendmentstothemeasurementof FairValueOptionliabilities(continued)
Determinationofaccountingmismatch Example:
Danishmortgages

Whethertheeffectsofchangesintheliabilityscreditrisk willbeoffsetinP&LbychangesintheFVofanasset Basedonfactsandcircumstancesonthedateofinitial application,nottheinitialrecognitionoftheliability Cannotbereassessedafterinitialrecognition(fornew liabilities)

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Amendmentstothemeasurementof FairValueOptionliabilities(continued)
Clarificationsrewhatiscreditriskandhowtocomputeit Distinctionmadebetweencreditriskandassetspecific performancerisk Examplesofassetspecificperformancerisk(SPEs& liabilitywithaunitlinkingfeature) IFRS7disclosureforbankswithconsolidatedSPEsmay needtochange Tomeasurecreditrisk,canuseIFRS7methodologywith clarificationthatcreditriskmayincludeanyassociated liquiditypremiumOR Appropriatealternativemethod Example:SeeextractofUBS2009disclosure
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DERECOGNITION OFFINANCIALASSETS

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CONSOLIDATE SPE? PART OR ALL? RIGHTS EXPIRED? No TRANSFERRED CASH FLOWS? Yes No No PASS-THROUGH? Yes TRANSFERRED ALL RISKS/REWARDS? No RETAINED ALL RISKS/REWARDS? No No RETAINED CONTROL? Yes DERECOGNIZE EXCEPT FOR CONTINUING INVOLVEMENT Derecognize Yes Derecognize Yes Dont Derecognize Dont Derecognize Yes

Flow Chart Steps

Derecognize

Setting the frame Who is the entity? What is the transferred asset? Transfer or pass-through pass through of cash flows Have the contractual rights expired? Is there a transfer of rights to receive payments? Is there a qualifying pass-through of cash flows? Risks and rewards Has the entity transferred substantially all risks and rewards? Has the entity retained substantially all risks and rewards? Control and continuing involvement Has entity retained control of assets? What is the continuing involvement?

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Transition&dateofinitialapplication
Mandatoryforaccountingperiodsbeginningonor after1January2015

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THANK YOU

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