Transcript Day-5 outline

Day-5 outline
1
• 08:30—Accounting for financial instruments in accordance
with IFRSs issued at 1 January 2012, but not the IFRSs
they will replace
• IFRS 9 Financial Instruments
• IAS 39 FI Recognition and Measurement
• 10:30—IASB’s project to replace IAS 39
• 11:30—Quiz/discussion/case
• 13:30—IFRS 7 FI Disclosures
• 14:30—IFRS 4 Insurance Contracts
• 16:00—Quiz/discussion/case
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
International Financial Reporting Standards
Accounting for financial
instruments—
IFRS 9 and IAS 39
at 1 January 2012
Joint World Bank and IFRS Foundation ‘train the
trainers’ workshop hosted by the ECCB
30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction
3
• Replace IAS 39 Recognition and Measurement with IFRS
9 Financial Instruments in phases
• Phase I: Classification and measurement (completed)
• Phase II: Impairment (in progress)
• Phase III: Hedge accounting (in progress)
• Offsetting financial assets and financial liabilities
(completed)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
IFRS 9
Effective date and transition
• IFRS 9 effective 1 January 2015
– early application permitted
• Restatement of comparative financial statements not
required
– modified disclosures on transition
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
4
IFRS 9
Main changes from IAS 39
5
• Reduces complexity
– only two classification categories
– single impairment model (only FI’s at amortised cost)
– embedded derivatives no longer separated from financial
asset host contracts
• Aligns measurement of financial assets with entity’s
‘business model’ and contractual cash flow characteristics
of instruments
• ‘Own credit’ risk issue addressed
• Elimination of ‘tainting rules’
– that caused bonds to be measured at fair value even if the
business model was to hold
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Classification and measurement
Financial assets
6
Business model test
Amortised cost
(one impairment
method)
Contractual cash flow
characteristics
FVO for
accounting
mismatch
(option)
Reclassification required when business model changes
All other Instruments:
• Equities
• Derivatives
• Some hybrid
contracts
Fair Value
(No impairment)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Equities:
OCI presentation
available
(alternative)
Financial Assets
At amortised cost
7
Business model:
• objective of holding instruments is to collect contractual
cash flows rather than to sell prior to contractual maturity
to realise fair value changes
• not an instrument by instrument approach to classification
• assess contractual terms of instruments within such a
business model
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Assets
At amortised cost continued
Contractual cash flow characteristics
• Payments represent solely principal and interest
• Interest is consideration for time value of money and
credit risk
• Prepayment/extension options may qualify
No ‘tainting’ rules for assets at amortised cost
• gains or losses from derecognising such items to be
presented separately with additional disclosures
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
8
Financial Assets
Equity investments: OCI alternative
Alternative presentation of fair value changes in other
comprehensive income (OCI)
Scope
• investments in equity instruments not held for trading
Features
• alternative available instrument by instrument
• dividends recognised in P&L
• no recycling, impairment or change in presentation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
9
Financial Assets
Embedded derivatives
10
Hybrid contracts
Financial host
Non-financial host
No separation –
part of
classification
IAS 39 guidance
retained
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Assets
Fair Value Option (FVO)
11
Fair value option available, if…
Accounting
mismatch
Managed on
fair value basis
Not managed to
collect contractual
cash flows = FV
Embedded
derivative(s)
Hybrid contracts
with financial host
classified in
entirety
*Circumstances when FVO available is unchanged for financial
liabilities
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Assets
Application guidance
12
Unquoted equities and their derivatives
• Fair value measurement required
• Cost may be an appropriate estimate of fair value
– if more recent information not available or a wide
range of outcomes
• Does not apply to equities held by financial institutions
and investment funds
Contractually linked and non-recourse instruments
• Detailed application guidance
• ‘Look through’ approach
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Assets
Summary of Key Changes
IAS 39
13
IFRS 9
Classification Many categories
each with different
measurement
Measurement methods
Two measurement bases:
Amortised cost and Fair
Value
Impairment
Only debt instruments at
amortised cost are tested
for impairment
Different impairment
rules depending on
category and
instrument type
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Irrevocable option at initial
recognition to present fair
value changes of some
equity investments in OCI
Financial Assets
Summary of Key Changes
IAS 39
continued
14
IFRS 9
Tainting
Tainting rules for held
No tainting rules
to maturity investments
Reclassification
Some reclassifications
permitted/required
Embedded
derivatives
Bifurcation of
No separation, same
embedded derivatives classification approach
required in some cases (for hybrid financial assets
with financial hosts)
FVO
Available if specific
criteria are met
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Reclassifications required
if and only if business
model changes
Available if eliminating or
significantly reducing an
accounting mismatch
Example 1:
Equity investment
15
Held for trading
Fair value - with changes
recognised in profit or
loss
Not held for trading
Fair value – irrevocable
choice of recognising
changes in profit or loss
or OCI
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Example 2:
Debt investment (basic loan features)
16
Amortised cost
Held to collect
contractual cash flows
(FVO available if criteria are
met)
Not held to collect
contractual cash flows
Fair value through profit
or loss
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Example 3:
Debt investment (embedded derivative)
17
Hybrid contract (as a
whole) has basic loan
features and is Held to
collect contractual CFs
Whole instrument at
amortised cost
All other hybrid contracts
with financial hosts
Whole instrument at fair
value through profit or
loss
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Classification and measurement
Financial liabilities
All financial
liabilities
Amortise
d cost
Except:
Held for trading
18
FVO for
mismatch,
managed
on FV basis
and hybrids
Fair value
through
P&L
• Hybrid financial liabilities are bifurcated
• No reclassification permitted
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Own
credit in
OCI
Financial Liabilities
FVO and own credit
19
• What is ‘own credit’?
– fair value changes in liability arising from changes in the
issuer’s credit quality
• How is it measured?
– often measured as change in margin over a benchmark
interest rate
• What is the concern?
– Gain when credit quality deteriorates, loss when credit
quality improves
– Reporting such gains and losses is not useful
– Board’s Request for Information on measurement of
liabilities
– ED on classification and measurement
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Liabilities
FVO and own credit continued
20
To address ‘own credit risk’
• Retain IAS 39 measurement requirements for financial
liabilities:
–
–
–
–
held for trading  fair value through P&L
hybrid liabilities  bifurcation requirements in IAS 39
‘vanilla’ liabilities  amortised cost
maintain FVO (with current eligibility conditions)
BUT
• Separate out ‘own credit risk’ for FVO
• ‘Own credit risk’ portion would be separated in a
manner similar to that previously used in IFRS 7 for
disclosure (IFRS 7 B4)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Financial Liabilities
FVO and own credit continued
21
Financial liability at FVO
on statement of financial position at (full) fair value
Change in
FV
attributable
to all
factors
except ‘own
credit risk’
Change in
FV
attributable
to ‘own
credit’
(not
recycled)
Profit or Loss
Profit
Statement of Comprehensive
Income
XXX
Other Comprehensive
Income
Mandatory for all liabilities at FVO unless this would create
or enlarge an accounting mismatch
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
XXX
Impairment
IAS 39 requirements:
• Incurred loss approach for financial assets
• Impairment loss only recognised when:
– trigger (loss) event occurs
– impact can be reliably estimated
• More than one model depending on classification
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
22
Impairment continued
23
Criticisms of the incurred loss approach:
• Expected losses not recognised before trigger events
– overstates/front-loads interest revenue
– results in ‘too little, too late’ recognition of loan losses
– triggers inconsistently applied
• Does not reflect the underlying economics of the
transaction
• Need to improve usefulness of financial statements and
timing of recognition of losses
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Hedging
24
• ‘Hedging’ and ‘hedge accounting’ are two different
things
• What is hedging?
– managing risks by using one financial instrument
(‘hedging instrument’) purposely to offset the
variability in FV or cash flows of a recognised asset
or liability, firm commitment, or future cash flows
(‘hedged item’)
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Example:
Hedging
25
• On 1/12/X1 a jeweler purchased 1,000 ounces of gold for
$1,500 per ounce to manufacture jewelry whose selling
price fluctuates with changes in the gold price
• Jeweler is concerned the gold price will decline.
– buys an option (settled net in cash) to sell 1,000 ounces of
gold at $1,500 anytime in the next two months. The option
is measured at FVTPL.
– at 31/12/X1 gold price is $1,400
– the $100,000 gain on the option is recognised in profit or
loss in 20X1– but the ‘loss’ attributable to the reduced
selling price will affect profit or loss in the future (ie when
the sale is recognised).
• Accounting ‘mismatch’
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
What is hedge accounting?
26
• Matching the change in FV of the hedging instrument and
the hedged item in profit or loss for the same period
• Hedge accounting is only an issue when normal
accounting would put the two fair value changes in
different periods—sometimes referred to as an
‘accounting mismatch’
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Hedge accounting
IAS 39 requirements
27
• Hedge accounting recognises the offsetting effects of
changes in the fair values or the cash flows of the
hedging instrument and the hedged item.
• Strict conditions must be met before hedge accounting
is possible:
– there must be formal designation and documentation
of a hedge, including the risk management strategy for
the hedge.
– the hedging instrument must be expected to be highly
effective in achieving offsetting changes in fair value or
cash flows of the hedged item that are attributable to the
hedged risk.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Types of hedge accounting
Fair value hedge accounting
28
• Hedge exposure to fair value changes of recognised
asset or liability or unrecognised firm commitment (or
portion of these attributable to a particular risk)
• Hedge of the foreign currency risk of a firm commitment
• Recognition of gains and losses on hedged item and
hedging instrument in profit and loss and adjust the
carrying amount of the hedged item (if not measured at
cost)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example:
Fair value hedge accounting
29
• Entity borrows 1,000, 3 years, 5% fixed rate, payable at
the end, measured at amortised cost
• Hedged with a derivative whose value is linked to an
interest rate index
• End of year 1, market rate = 6%. FV of 50 payable in 1
year at 6% + 1,050 payable 2 years at 6% = 50 x
.943396 + 1,050 x .889996 = 982, but this 18 ‘gain’ is not
recognised
• Value of the derivative declines to -20
• Note: there is small ineffectiveness = 2
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Example:
Fair value hedge accounting continued
Financial position when loan made:
Cash
1,000
Loan payable
1,000
Adjust loan end of year 1 to reflect rate change:
Loan payable (hedge acct)
18
P&L (18 gain – 20 loss)
2
Derivative (Liability)
20
Financial position end of year 1:
Cash
1,000
Derivative (Liability)
20
Loan payable
982
Equity
2
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
30
Types of hedge accounting
Cash flow hedge accounting
31
• Hedge of the exposure to variability in cash flows
attributable to a particular risk associated with
• a recognised asset or liability or
• a highly probable forecast transaction
• Hedge of the foreign currency risk of a firm commitment
• Portion of hedge deemed to be effective:
• gains and losses recognised in OCI
• Portion of hedge deemed to be ineffective:
• gains and losses recognised in profit or loss
• Treatment of cumulative gains or losses differs based on
what ‘type’ of asset or liability is subsequently recognised
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Example:
Cash flow hedge accounting
32
• Entity sells goods for 1,000 floating rate 3-year note
receivable
• Interest rate risk managed with a derivative (interest rate
swap)
• End of year 1 interest rates increase – PV of cumulative
cash flows increase by 100
• But FV of swap decreases by 105
• Note: Some hedge ineffectiveness
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Example:
Cash flow hedge accounting continued
Opening financial position:
Receivable
Equity
Ineffective portion of hedge:
P&L
OCI (Equity)
Derivative (Liability)
Closing financial position:
Receivable
Equity (OCI)
Derivative (Liability)
Equity
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
33
1,000
1,000
5
100
(ineffective portion of hedge)
105
1,000
100 (effective portion of hedge)
105
995
EC4M 6XH | UK | www.ifrs.org
Types of hedge accounting
Net investment in foreign operation
• Hedge of a net investment in a foreign operation
– as defined in IAS 21
– accounted for similarly to cash flow hedges
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
34
Example:
Net Investment in foreign operation
35
• Entity A has a wholly-owned subsidiary, Entity B. Entity
has a CU functional currency and Entity B has a FCU
functional currency. Entity A paid FCU100,000 for the
investment in net assets at fair value of FCU80,000.
Goodwill of FCU20,000 was recognised.
• At acquisition, Entity A loaned Entity CU15,000
(exchange rate was FCU2:CU1). Settlement is not
planned or expected in the near future.
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Example:
Net Investment in foreign operation continued 36
• At acquisition, Entity A designates the net investment in
Entity B as a hedged item in its consolidated financial
statements.
• The maximum amount that can be designated is
FCU130,000
• Net assets at FV:
FCU80,000
• Goodwill:
FCU20,000
• Loan:
FCU30,000
• If the loan was expected to be settled in the foreseeable
future, it would not form part of the net investment.
© IFRS
Foundation
| 30 Foundation
Cannon Street | London
6XH | Street
UK. www.ifrs.org
© 2011
IFRS
30 EC4M
Cannon
| London
EC4M 6XH | UK | www.ifrs.org
Questions or comments?
Expressions of individual
views by members of the
IASB and
its staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions
of the IASB on accounting
matters are determined only
after extensive due process
and deliberation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
37
38
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org