Transcript Slide 1

THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA (ICAN)
IFRS 9 – Requirements, Transition and
Application
By
Jamiu Olakisan
B.Sc, ACS, ACA, FCCA
Content
 The accounting and financial reporting requirement of
IFRS 9
 From IAS 39 to IFRS 9: the major changes
 Managing the impact of IFRS 9 adoption
 Recommendations for parties in the financial reporting
supply chain
IFRS 9 Financial Instruments
2
Introduction – IASB issues IFRS 9
 On 24 July 2014, the International Accounting Standards
Board (IASB) issued the final version of IFRS 9, bringing
together all three phases of the financial instruments
project
 Classification and measurement
 Impairment (expected credit losses)
 Hedge accounting
Accounting for dynamic risk management (macro hedging) is not
included and forms a separate project
 IFRS 9 is effective for annual periods beginning on or
after 1 January 2018, with early application permitted
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IFRS 9 Financial Instruments
Classification and measurement
IFRS 9 classification and measurement model
– main changes from IAS 39
Financial instruments in the scope of IFRS 9
Financial assets
Financial liabilities
New classification criteria
New presentation: ‘own
credit’ related FV
changes in OCI (for
liabilities under the FVO)
New categories that use
OCI
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IFRS 9 Financial Instruments
The new classification and measurement
model for financial assets
Debt (including hybrid contracts)
Derivatives
Equity
‘Contractual cash flow characteristics’ test
(at instrument level)
Pass
Fail
Fail Fail
Held for
trading?
‘Business model’ test (at an aggregate level)
1
Hold-to-collect
contractual
cash flows
2
BM with objective that
3
results in collecting
contractual cash flows and
selling financial assets
Amortised
cost
Yes
No
Yes
Conditional fair value
option (FVO) elected?
No
Neither (1)
nor (2)
No
FVOCI option
elected ?
Yes
No
FVOCI
(with recycling)
FVTPL
FVOCI
(no recycling)
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IFRS 9 Financial Instruments
FVOCI measurement category
 Examples of business models likely to result in OCI
 Liquidity buffers subject to significant churning
 Liquidity buffers for everyday liquidity needs
 Assets to fund insurance liabilities
 FVOCI mechanics
 Fair value gains and losses of the asset are recorded in OCI
 Cumulative gains and losses recycled to P&L upon derecognition
 ECLs are derived using the same model as amortised cost
instruments and are recorded in P&L with offseting entry in OCI
 Interest income is calculated using effective interest method and
recorded in P&L
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IFRS 9 Financial Instruments
Expected credit losses (ECL)
Scope and variation of the expected credit
loss model
Scope of ECL requirements
General
approach
Simplified
approach
IFRS 9 Financial Instruments

Trade receivables that do not contain a significant
financing component
Trade receivables that contain a significant financing
component
Policy election at entity level
Other debt financial assets measured at AC or
at FVOCI

Loan commitments and financial guarantee
contracts not accounted for at FVPL

IFRS 15 Revenue from Contracts with Customers
Contract assets that do not contain a significant
financing component
Contract assets that contain a significant financing
component

Policy election at entity level
IAS 17 Leases
Lease receivables
Policy election at entity level
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IFRS 9 Financial Instruments
Expected credit loss model – general
approach
Stage 1
Loss
allowance
updated
at each
reporting
date
Lifetime
ECL
criterion
Stage 3
Stage 2
Lifetime ECL
12-month ECL
(credit losses that result from
default events that are possible
within the next 12-months)
Credit risk has increased significantly
since initial recognition
(whether on an individual or collective basis)
+
Credit-impaired
Interest
revenue
recognised
Effective Interest
Rate (EIR) on gross
carrying amount
EIR on gross
carrying amount
EIR on
amortised cost
(gross carrying amount
less loss allowance)
Change in credit risk since initial recognition
Improvement
Deterioration
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IFRS 9 Financial Instruments
General approach - simplifications and
presumptions for assessing deterioration
‘Low’ credit risk –
equivalent to
‘investment grade’
Assessing
significant
increases
in credit
risk
30 days past due
‘backstop’
Assessment on a
collective basis or at
counterparty level
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IFRS 9 Financial Instruments
Use change in
12-month risk as
approximation for change
in lifetime risk
Set transfer threshold by
determining maximum
initial credit risk
General approach – significant increase in
credit risk at portfolio level
►
Bottom-up approach
Common borrower
characteristics
►
►
►
Regions
LTV
Scoring
Sub-portfolios
Region A
Region B
LTV<50%
1
2
Region C
50%<LTV<80%
3
4
Region D
►
►
►
►
5
►
House prices (e.g. falling house prices)
Interest-rate (e.g. interest rate rise)
Unemployment
GDP
Top-down approach
No individual
identification
Marginal impact of
macroeconomic
changes?
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% of loans
IFRS 9 Financial Instruments
100%<LTV
80%<LTV<100%
Forward-looking information
►
Region E
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7
8
Simplified approach and purchased or
originated credit-impaired assets
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Simplified
approach
►
►
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Purchased or
originated
credit-impaired
assets
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►
Scope: contract assets, trade receivables and
lease receivables
Loss allowance based on lifetime ECL
No tracking of changes in credit risk
Scope: financial assets that are credit-impaired
on purchase or origination
ECL on initial recognition reflected in creditadjusted EIR (no ‘day one’ 12-month ECL)
Loss allowance based on subsequent changes
in lifetime ECL
IFRS 9 Financial Instruments
Measurement of expected credit losses
Numerator: Cash shortfalls
►
Expected credit
losses
Present value of all
cash shortfalls
over the remaining
life, discounted at
the original EIR
►
►
Denominator: Discount rate
►
►
►
Page 14
07 July 2015
The period over which to estimate ECL: maximum
contractual period (for revolving credit facilities, this
extends beyond contractual period)
Probability-weighted outcomes: possibility that a credit
loss occurs, no matter how low that possibility is
Reasonable and supportable information: reasonably
available information about the past, current and future
forecasts
Discounting period: from cash flows date to reporting
date
Assets: EIR or approximate (if credit-impaired on initial
recognition, then use credit-adjusted EIR)
Commitments and guarantees: EIR of resulting asset (if
not determinable, then use current rate representing risk
of the cash flows)
IFRS 9 Financial Instruments
Hedge accounting
Hedge accounting: snapshot of key
differences
Requirement
IAS 39
IFRS 9
Financial
items
All items
►
Risk component as eligible hedged item
►
80%-125% test

X
►
Retrospective effectiveness testing

X
►
Quantitative effectiveness test

Depends
►
Qualitative effectiveness test
X
Depends
►
Special accounting for ‘costs of hedging’
X

►
Rebalancing of hedge ratio
X

►
Dedesignation if ineffective, but risk
management objective unchanged

X
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07 July 2015
IFRS 9 Financial Instruments
How to achieve hedge accounting
Define risk management (RM) strategy and objective
Identify eligible hedged item(s) and eligible hedging
instrument(s)
No
1) Is there an economic relationship between
hedged item and hedging instrument?
Yes
Yes
2)
Does effect of credit risk dominate fair value
changes?
No
To avoid
ineffectiveness
the ratio may
need to differ
from the one
used in RM
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07 July 2015
Base hedge ratio on the actual quantities used for risk
management
Yes
3)
Does hedge ratio reflect an imbalance that
would create hedge ineffectiveness?
No
Formal designation and documentation
IFRS 9 Financial Instruments
Effective date and transition
Effective date and transition – early
application choices
Under IFRS 9 (2009, 2010, 2013)
Under IFRS 9 (2014)
IFRS 9 (2009)
Or
Final version of IFRS 9 (2014)
IFRS 9 (2009) and IFRS 9 (2010)
Or
Includes accounting policy choice to
apply IAS 39 for hedge accounting
IFRS 9 (2009), IFRS 9 (2010)
and IFRS 9 (2013)
Or
Or
Own credit requirements
►
►
►
Own credit requirements
IFRS 9 is effective for annual periods beginning on or after
1 January 2018, with early application permitted
Early application of previous versions of IFRS 9 (2009, 2010, 2013)
is permitted if date of initial application is before 1 February 2015
Retrospective application, but restatement of comparatives not required
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07 July 2015
IFRS 9 Financial Instruments
From IAS 39 to IFRS 9: Major changes
 Change in classification of financial assets
 IAS 39 classifications: HTM, FVTPL, L&R and AFS
 IFRS 9 measurement bases: FVTPL, Amortised Cost (AC), FVTOCI for equity
instrument without recycling and FVTOCI for debt instruments with recycling
 No tainting rule applicable to financial assets measured at amortised cost
similar to HTM under IAS 39
 Embedded derivatives – No requirement to separate embedded derivative
from financial instrument host under IFRS 9.
 IFRS 9 uses expected loss model instead of incurred loss model of IAS 39
for impairment of financial assets
 80%-125% test of effectiveness in hedge accounting removed under IFRS 9
 Retrospective effectiveness testing in hedge accounting removed under
IFRS 9.
IFRS 9 Financial Instruments
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Managing the impact of IFRS 9 adoption
 Mandatory application date of pushed to1 January 2018 to:
 Provide sufficient time for entities to develop systems and processes
 Gather historical data in order to make the calculations.
 Closer alignment of credit risk management systems and financial
reporting functions to IFRS 9 requirements
 Adopting the IFRS 9 Expected Credit Loss (ECL) requirements will require
significant effort and investment for many entities, in particular, banks and
insurers.
 Financial and non-financial institutions alike need to start planning an initial
assessment of the likely impact of the new IFRS 9 ECL requirements to
manage a successful transition and implementation.
 Financial institutions need to fully understand the complex interactions
between the IFRS 9 and regulatory capital requirements in relation to
credit losses.
 In many cases, it is expected that the new IFRS 9 ECL requirements will
result in a reduction in the regulatory capital of financial institutions.
IFRS 9 Financial Instruments
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Recommendations for parties in the
financial reporting supply chain




Knowledge is key
Be proactive
System changes
Process changes
IFRS 9 Financial Instruments
22
Thank You
Questions
??????
Contact
Jamiu Olakisan
jamiu.olakisan @ng.ey.com
08035621311