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Executive IFRS workshop for Regulators Diplomatic...
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The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
International Financial Reporting Standards
Accounting for Financial Instruments
(IFRS 9)
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Executive IFRS workshop for Regulators
Diplomatic Academy of Vienna
Darrel Scott, IASB member
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© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 39 and IFRS 9 1 January 2013
IAS 39 IFRS 9
Classification and Measurement
• Mandatory date: 2015
• Early adoption allowed
Hedge Accounting
Impairment
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© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS
39 IF
RS
9
Classification & Measurement IFRS 9 (2010) + ED of limited
amendments
Impairment Forthcoming ED
General Hedge accounting* Review draft
* Macro hedge accounting is separated from this project
IAS 39 and IFRS 9 1 January 2013 continued
Classification and measurement Financial assets
Fair Value
(No impairment)
Amortised cost
(one impairment method)
Contractual cash flow
characteristics
Business model test
FVO for
accounting
mismatch (option)
All other Instruments:
• Equities
• Derivatives
• Some hybrid contracts
Equities:
OCI presentation
available
(alternative)
Reclassification required when business model changes
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IFRS 9 Main changes from IAS 39
• Reduces complexity – single impairment model (only FIs 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
• ‘Own credit risk’ issue addressed
• Elimination of ‘tainting rules’ – that caused assets to be measured at fair value even if the
business model was to hold
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© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
Financial Assets At amortised cost 6
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
Financial Assets At amortised cost continued 7
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
Financial Assets Equity investments: OCI alternative 8
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Hybrid contracts
Financial host Non-financial host
IAS 39 guidance
retained
No separation –
part of classification
Financial Assets Embedded derivatives
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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
financial host
classified entirety
*Circumstances when FVO available is unchanged for financial liabilities
Financial Assets Fair Value Option (FVO)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
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Financial Assets Application guidance
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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IAS 39 IFRS 9
Classification Rules-based
categories each with
different measurement
methods
Principles-based,
classifications based on a
clear rationale
Measurement Irrevocable option at initial
recognition to present fair
value changes of some
equity investments in OCI
Impairment Different impairment
rules depending on
category and
instrument type
Only debt instruments at
amortised cost (or FVOCI,
as proposed) are tested for
impairment
Financial Assets Summary of Key Changes from IAS 39
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Financial Assets Summary of Key Changes continued
IAS 39 IFRS 9
Tainting Tainting rules for held to
maturity investments
No tainting rules
Reclass-
ification
Some reclassifications
permitted/required
Reclassifications required if
and only if business model
changes
Embedded
derivatives
Bifurcation of embedded
derivatives required in
some cases
No separation, same
classification approach (for
hybrid financial assets with
financial hosts)
FVO Available if specific
criteria are met
Available if eliminating or
significantly reducing an
accounting mismatch
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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
Illustration Equity Investment
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Held to collect contractual
cash flows
Amortised cost
(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
*could be FVOCI according to Limited Amendments ED
Illustration Debt Investment
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Hybrid contract (as a
whole) has P&I cash flows
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
*Limited Amendments ED proposes clarifications to the P&I test
which may result in more instruments at amortised cost
Illustration Debt Investment (embedded derivative)
Classification and measurement Financial liabilities
All financial
liabilities
Amortised
cost
FVO for
mismatch,
managed on
FV basis and
hybrids Except:
Held for trading
Fair value
through
P&L
Own credit
in OCI
• Hybrid financial liabilities are bifurcated
• No reclassification permitted
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Financial Liabilities FVO and own credit
• What is ‘own credit’?
– fair value changes in liability arising from changes in the
liability’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
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To address ‘own credit risk’
• Retain IAS 39 measurement 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)
Financial Liabilities FVO and own credit continued
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Change in
FV
attributable
to all factors
except ‘own
credit risk’
Change in
FV
attributable
to ‘own
credit’
(not
recycled)
Profit or Loss
Profit XXX
Financial liability at FVO
on statement of financial position at (full) fair value
Statement of Comprehensive
Income
Other Comprehensive
Income
XXX
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Mandatory for all liabilities at FVO unless this would
create or enlarge an accounting mismatch
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Financial Liabilities FVO and own credit continued
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Reopening Phase I Classification and Measurement
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
22 Reopening Phase I
• Limited modifications
• IFRS 9 is sound and operational
• Address specific application issues
• Consider interaction of IFRS 9 and insurance project
• Seek to reduce key differences with the FASB’s
classification and measurement model – Both are mixed measurement models
– Both consider characteristics of the instrument and
business model
– Joint deliberations but separate exposure drafts
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Scope of possible changes
• Clarify the contractual cash flow characteristics and
business model tests
• Reconsider the need for bifurcation of financial assets
• To address interaction with the insurance project and
align with the FASB’s model, consider: – Introducing a third business model
– Whether some debt instruments should be remeasured
through OCI
• Knock on effects, eg interrelated issues for financial
liabilities, transition and disclosure
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification and measurement Financial assets
Fair Value
(No impairment)
Amortised cost
(one impairment method)
Contractual cash flow
characteristics
Business model test
FVO for
accounting
mismatch (option)
All other Instruments:
• Equities
• Derivatives
• Some hybrid contracts
Equities:
OCI presentation
available
(alternative)
Reclassification required when business model changes
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification and measurement Financial assets: possible changes
Fair Value
(No impairment)
Amortised cost
(one impairment method)
Contractual cash flow
characteristics
Business model test
FVO for
accounting
mismatch (option)
All other Instruments:
• Equities
• Derivatives
• Some hybrid contracts
Equities:
OCI presentation
available
(alternative)
Reclassification required when business model changes
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
FVOCI
(one impairment
method)
Cash flow characteristics assessment
• Affirms the principle in IFRS 9 – cash flows not solely principal and interest (P&I)
measured at FVPL
– cash flows solely P&I, measurement depends on the
business model
• Does not change the assessment for most instruments
• Clarifies the application of the principle when: – Interest rate is leveraged or
– There is an ‘interest rate mismatch’
• Requires cash flows on actual instrument be compared
with a benchmark instrument
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Amortised cost Contractual cash flow characteristics
Contractual terms that give rise to solely
payments of
Contractual cash flow
characteristics
Interest =
Consideration for
•time value of
money
•credit risk
Principal Interest
‘Modified’ P&I satisfies test IF
• Compared with a benchmark
instrument
• Difference not more than insignificant
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Amortised cost Business model
• Financial assets qualify for amortised cost if: – Objective of business model is to collect contractual
cash flows
• Clarify the term ‘hold to collect’ by providing additional
application guidance on: – Type of business activities
– Frequency and nature of ‘acceptable’ sales
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Bifurcation
• 3 primary options considered: – Current asymmetrical model in IFRS 9
– Bifurcation of both assets and liabilities
– No bifurcation
• Several bifurcation methods considered
• Decision to retain the current model
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Business model/strategy
• IFRS 9 business models – Held to collect contractual cash flows (amortised cost)
– Other (FVTPL)
• Introduced FVOCI: – Interest revenue: effective interest method
– Impairment: same as amortised cost
– Other gain/loss in OCI: recycle to P/L on derecognition
– P/L same as for amortised cost
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Business model/strategy continued 31
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Contractual
cash flow
characteristics
FVPL
Business model
Hold to collect
Both hold to
collect and sell
Amortised cost
FVOCI
Reclassification applies to all business models
Do not satisfy
32 32 Financial liabilities
• Accounting as for IAS 39 except for financial liabilities
under Fair Value Option
• These financial liabilities recorded on statement of
financial position at full fair value
• Changes in fair value attributable to ‘own credit’ recorded
in OCI (not recycled)
• All other changes recorded in Profit or loss
• Mandatory for all liabilities under the FVO unless this
would create or enlarge an accounting mismatch
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Convergence
• Both boards have mixed measurement models
• Similarities in classification criteria – Characteristics of instruments
– Business model/strategy
• Sought to reduce key differences – FASB had FVOCI for some debt instruments
– FASB retained bifurcation for financial assets
– FASB prohibited reclassification
• Joint redeliberation of key differences. Two proposed
models now largely aligned
• Separate exposure drafts
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The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 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.
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