GLOBAL AUDIT LEARNING AND DEVELOPMENT IAS 32 ... 32 IAS 39 IFRS 7...IAS 32, IAS 39, IFRS 7 & IFRS 9...
Transcript of GLOBAL AUDIT LEARNING AND DEVELOPMENT IAS 32 ... 32 IAS 39 IFRS 7...IAS 32, IAS 39, IFRS 7 & IFRS 9...
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GLOBAL AUDIT LEARNING AND DEVELOPMENT
IAS 32, IAS 39, IFRS 7 & IFRS 9
AA 2013 - 2014
Università degli Studi di Bergamo
Anael Francillon
Ivan Lucci
Bergamo, 13 febbraio 2014
.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act
upon such information without appropriate professional advice after a thorough examination of the particular situation.
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
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Market trends as reflected in IAS 32 and 39
Key principles of the Standard
Increased complexity
Detailed disclosures
Use of fair values
Largely rules based
Harmonisation of markets
All derivatives are
measured at fair value
Many other financial
instruments measured
at fair value
Measurement of the hedging instrument
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
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Definition of financial instruments
Financial
asset
Cash
Equity instrument of another entity
Contractual right to receive cash or another financial asset (for example, loans and receivables) or to exchange financial assets or liabilities under potentially favourable conditions
Certain contracts settled in the entity’s own equity
Financial
liability Equity instrument
Contractual obligation to deliver cash (for example, accounts payable) or another financial asset or to exchange financial asset or liabilities under potentially unfavourable conditions
Certain contracts settled in the entity’s own equity
Except for certain puttable financial instruments and obligations arising only upon an entity's liquidation
Contract evidencing a residual interest in the assets of an entity after deducting all of its liabilities
A financial instrument is a contract that gives rise to:
a financial asset of one entity and
a financial liability or equity instrument of another entity
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
4
Categories of financial assets
4 categories of financial assets:
■ A financial asset at fair value through profit or loss
■ Held-to-maturity investments
■ Loans and receivables
■ Available-for-sale financial assets
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
5
Recognition
All financial assets and financial liabilities, including derivatives,
should be recognised in the statement of financial position when the
entity becomes party to the contractual provisions of the instrument
Financial assets
@
‘fair value less
transaction costs in
certain
circumstances’
Financial liabilities
@
‘fair value less
transaction costs in
certain
circumstances’
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
6
Categories of financial assets
Category Definition
Financial assets at fair value through profit or loss
■ Financial assets held for trading
■ Derivatives, unless accounted for as a hedging instrument
■ Financial asset designated to this category under the fair value option (must meet certain criteria)
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity that the entity has the positive intent and ability to hold to maturity
Available-for-sale financial assets
All financial assets that are not classified in another category are classified as available-for-sale
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
7
Categories of financial liabilities
Category Definition
Financial liabilities at fair value through profit or loss
■ Financial liabilities held for trading
■ Financial liability designated as at fair value through profit or loss on initial recognition (fair value option)
■ Derivatives unless accounted for as hedging instruments in a cash flow hedge
Other financial liabilities – at amortised cost
All financial liabilities that are not classified at fair value through profit or loss
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
8
Initial measurement
■ Measured at fair value on initial recognition
■ Transaction costs are included in the initial measurement of financial
instruments that are not measured at fair value through profit or loss
■ Transaction price is presumed to be the best evidence of fair value at initial
recognition, unless another amount is determined by reference to
observable current market transactions or by using valuation techniques
that use only data from observable markets
■ Applies to all financial instruments – whether or not negotiated on an arm’s
length basis (e.g., interest-free loans from a shareholder or government)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
9
Subsequent measurement of financial instruments
Instrument Measurement Value changes
P&L
Not relevant
(unless impaired)
P&L
P&L
Held-to-maturity investments
Amortised cost
(effective interest rate)
Not relevant
(unless impaired)
Amortised cost
(effective interest rate) Loans and receivables
Available-for-sale Fair value
Financial assets at fair value through profit or loss
Fair value
Derivatives Fair value
Financial liabilities at fair value through profit or loss
Fair value
Other liabilities Not relevant Amortised cost
Other comprehensive income (OCI) (unless impaired)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
10
Guidance on fair values
Active market: published price quotations
No active market: valuation techniques using as many market inputs as possible
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
11
Amortized cost and effective interest method
Amortised cost is calculated using the effective interest rate method
Initial recognition amount
Amortised cost
Cash received
Interest income / expense
Impairment
At the end of each reporting period apply the effective interest rate method to determine interest income and interest expense
= -/+ - -
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
12
Reclassifications from held-to-maturity category
And classification as AFS assets for two years
Change of intent or
ability
reclassify ALL instruments
‘Tainting’ leads to measurement at fair value
Sales before maturity (with certain exceptions)
reclassify ALL instruments
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
13
Reclassification of certain financial assets
■ Reclassification out of fair value through profit or loss is
– Permitted for any non-derivative financial asset, which was not designated as
fair value through profit or loss at initial recognition, subject to certain criteria
being met
■ Reclassification out of available for sale (‘AFS’)
– Permitted for a financial asset in the AFS category to the loans and receivable
category if certain criteria are met
■ Assessment for separation of embedded derivatives
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
14
Fair value definition
IAS 39.9
■ Value at which an asset can be obtained,
■ Or a liability settled
■ In a free transaction
■ Through knowledgeable parties
■ And available
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
15
Fair Value Hierarchy
Level 1 Fair values measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities
Level 2 Fair values measured using inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3 Fair values measured using inputs for the asset or liability that are
not based on observable market data (i.e. unobservable inputs)
Level 1 Fair values measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities
Level 2 Fair values measured using inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3 Fair values measured using inputs for the asset or liability that are
not based on observable market data (i.e. unobservable inputs)
Level 1 Fair values measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities
Level 2 Fair values measured using inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3 Fair values measured using inputs for the asset or liability that are
not based on observable market data (i.e. unobservable inputs)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
16
Impairment requirements
■ A financial asset or a group of financial assets is impaired if, and only if,
– there is objective evidence of impairment as a result of one or more events
that occurred after initial recognition; and
– the loss event has an impact on estimated future cash flows than can reliably
be measured
■ An impairment loss is measured as the difference between:
– the asset’s carrying amount and the present value of estimated future cash
flows - for loans and receivables or held-to-maturity investments; and
– the acquisition cost (net of any principal repayment and amortisation) and
current fair value, less any impairment losses previously recognised– for
available-for-sale financial assets
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
17
Objective evidence of impairment for financial
assets measured at amortized cost
■ Significant financial difficulty of the issuer
■ Payment defaults
■ Renegotiation of asset terms due to financial
difficulty of the borrower
■ Significant restructuring due to bankruptcy or
financial difficulty
■ Disappearance of an active market for the assets
concerned due to financial difficulties
■ Measurable decrease in the estimated future cash
flows of the financial asset(s) concerned
Examples of loss events that may provide objective evidence of impairment
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
18
Impairment assessment of financial assets
measured at amortized cost
Objective evidence of impairment of individually significant assets?
Evidence of impairment for group of financial assets (including those
individually assessed and not found impaired) with similar credit risk (i.e.
“collective assessment”)
Measure impairment collectively
No impairment
Measure impairment Yes
No
Yes
No
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
19
Loans and receivables - Evaluation of impairment
on a portfolio basis
■ Future cash flows
– Estimate cash flows,
– Based on historic loss experience,
– Adjusted for current conditions as
necessary
■ Discount rate
– Original effective interest rate
■ Losses incurred but not reported – At each year end the present value of the estimated cash flows is re-calculated
and impairment loss recognised for the difference between this amount and
the carrying value of the portfolio. The estimated cash flows take into account
incurred losses, not expected future losses
– When loans are identified as individually impaired they are removed from the portfolio (i.e. no longer part of collective impairment assessment)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
20
Loans and receivables – A possible approach to
measurement of incurred losses on a portfolio basis
■ Incurred loss defines impairment loss
■ Historic loss rate is determined using historical data, adjusted for economic conditions existing at the end of the reporting period
■ The emergence period is the average lag between incurrence of loss and confirmation of loss dates
■ Incurrence loss date is the date on which impairment loss is incurred on an individual asset basis
■ Confirmation loss date is the date on which objective evidence of impairment is identified on an individual asset basis
Incurred
loss
Historic
loss
rate
Emergence
period
Portfolio balance = x x
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
21
Impairment of available-for-sale equity securities
■ Additional indicators of impairment for equity securities
– Adverse effects of changes in technological, market, economic or legal
environment, in which the entity operates
– Significant or prolonged decline in the fair value of an investment below cost
Impairment loss cannot be reversed
through profit or loss as long as the
asset continues to be recognised
Equity
instruments
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
22
Impairment of available-for-sale debt securities
■ Indicators of impairment for debt securities (similar to those for financial assets
recognised at amortised cost)
– Significant financial difficulty of the issuer
– Bankruptcy or financial reorganisation of the issuer
– Disappearance of an active market for the bonds concerned
– Measurable decrease in the estimated future cash flows
Impairment loss reversed through profit or
loss if subsequently the fair value of the debt
instrument increases and the increase can
be objectively related to an event occurring
after the loss was recognised
Debt instruments
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
23
Derecognition of a financial asset
■ First, consolidate all subsidiaries (including all SPEs)
– Derecognition provisions are applied on a consolidated level
■ Then, consider the subject of the derecognition analysis (financial asset,
group of similar financial assets or a portion of a financial asset)
■ Then, apply derecognition rules:
Derecognise when contractual rights to cash flows expire or
– There is a ‘transfer’ of a financial asset and
– That transfer qualifies for derecognition
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
24
Derecognition of a financial asset (cont.)
■ ‘Transfer’ of a financial asset requires
– A transfer of the contractual rights to receive the cash flows; or
– Meeting the ‘pass-through requirements’ in IAS 39.19
■ If financial asset has been transferred, then assess whether transfer
qualifies for derecognition
– If substantially all risks and rewards are retained – retain the asset
– If substantially all risks and rewards are transferred - derecognise
– If some but not substantially all risks and rewards have been transferred:
■ Control -> Continuing involvement
■ No Control -> Derecognise
A very mixed model !
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
25
Derecognition of a financial liability
■ Financial liability (or part thereof) is removed from the statement of
financial position when it is extinguished, i.e. when the obligation is
discharged or cancelled or expires
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
26
Need for Hedging
Risk associated to financial assets or liabilities that might be subject to
hedging:
■ Interest rate risk
■ Currency exchange risk
■ Credit risk
■ Market price risk
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
27
Benefit of hedge accounting
0
1 2 Cum
Hedged item 0 -20 -20
Hedging instrument 20 20
20 -20 0
A
A Accelerate recognition of gain or loss on hedged item
B
B Defer recognition of gain or loss on hedging instrument
Reporting the effects in the same period to avoid a mismatch in
timing of gain and loss recognition:
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
28
Cash flow hedges
■ Hedge of exposure to variability in cash flows that is:
– attributable to a particular risk associated with a recognised asset or liability or a
highly probable forecast transaction (including inter-company transactions); and
– could affect profit or loss
Hedges of a net investment in a foreign operation
Hedge accounting models
Fair value hedges
■ Hedge of exposure to changes in fair value of:
– a recognised asset or liability; an unrecognised firm commitment; or an identified
portion of any of these two;
– that is attributable to a particular risk; and
– could affect profit or loss
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
29
Fair value hedge accounting model
Fair value
Measurement of hedging instrument
Measurement of hedged item
Fair value with
respect to risk
being hedged (*)
Profit
or
loss
(*) This applies even if a hedged item is otherwise measured at cost
Changes in fair value
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
30
Cash flow hedge accounting model
Changes
in fair value
Effective Other
comprehensive
income (OCI)
Profit
or loss
(*)
(*) Based on timing of earnings impact of hedged item (e.g. cost of sales, depreciation, interest)
Measurement of hedging instrument
Fair value
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
31
Hedging instrument
■ The following can be designated as hedging instruments:
– derivatives with third parties
– non-derivatives for a hedge of foreign currency risk only
– combination of two or more derivatives or non-derivatives, except for net written options
– A proportion of a financial instrument (for example, 50% of the fair value changes of an
interest rate swap)
■ Hedging instrument may not be designated for a portion of its remaining period to
maturity
■ Derivatives should be designated as hedging instruments in their entirety. Two
exceptions to this rule:
– separating the intrinsic value and time value of an option and designating the intrinsic
value
– separating the interest element and spot price element in a forward and designating the
spot price element
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
32
Hedge accounting criteria
■ The hedge relationship is formally designated and documented at inception
of the hedge
■ The hedge is expected to be highly effective and effectiveness is reliably
measurable
■ The hedge is assessed on an ongoing basis and remains highly effective
during the entire period of the hedge designation
■ For a cash flow hedge of a forecast transaction, the forecast transaction is
highly probable
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
33
Hedge accounting criteria (continued)
■ Formal documentation is required at inception of the hedge and must
include:
– Identification of the hedging instrument and the hedged item
– The nature of the risk being hedged
– The risk management objective and strategy for undertaking the hedge
– How effectiveness will be assessed (prospective and retrospective)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
34
Assessment of hedge effectiveness
■ Prospective assessment – At inception and at a minimum at each
reporting date throughout the term of the hedge designation
– Highly effective in offsetting changes in fair value or cash flows
– Testing methods (e.g. statistical analysis, off-set methods, comparing all critical terms)
– Hedging results within the range of 80-125%
■ Retrospective assessment
– At a minimum at each reporting date
and throughout the term of the
hedge designation
– Testing methods (e.g. offset method,
statistical analysis, etc.)
– Hedging results within the range of
80-125%
Hedge accounting; ineffectiveness to profit or loss
125%
100%
80%
Hedge accounting; ineffectiveness to profit or loss
Discontinue hedge accounting
Discontinue hedge accounting
Hedge accounting; ineffectiveness to profit or loss
IFRSs do not prescribe the methods that should be used in measuring effectiveness
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
35
Hedges of a net investment
■ Must meet requirements for hedge accounting
■ A net investment hedge is a hedge of the foreign currency exposure on a
net investment in a foreign operation using a derivative, or a non-derivative
monetary item, as the hedging instrument
■ Effective portion of gain or loss on hedging instrument recorded in the
same manner as the foreign currency translation gain or loss i.e., in OCI
■ Ineffective portion of gain or loss on hedging instrument recognised in
profit or loss
■ Reclassified from OCI to profit or loss as a reclassification adjustment upon
disposal of net investment
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
36
Discontinuation of hedge accounting
Fair value hedges Cash flow hedges
Future changes in fair value of hedging instrument
a) Derivative b) Non-derivative (FX remeasurement)
Continue to be recognised in profit or loss
Continue to record FX remeasurement in profit or loss
Recognized immediately in profit or loss
Account for FX remeasurement in profit or loss
Future accounting for the hedged item Apply applicable IFRS principles for the items
Any hedging adjustments made previously to hedged item for which effective interest rate method is used are amortised to profit or loss by adjusting the effective interest rate
No change in accounting
Effective amounts previously recorded in OCI
for a forecast transaction not expected to
occur within the original time period or a
relatively short period thereafter
N/A Reclassify from OCI to profit or loss
immediately
Effective amounts previously recorded in OCI
for a forecast transaction that is no longer
probable but still expected to occur
N/A
Reclassify from OCI when the
transaction occurs and affects profit
and loss
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
37
Liability or equity?
■ Classification assessed at initial recognition and generally not subsequently revised
for changes in circumstances (except for puttable financial instruments and
obligations arising on liquidation)
■ However, subsequent change in terms and conditions of instrument may require
reclassification
■ Determine liability component
– fair value
– include embedded derivatives
■ Equity is residual
■ No gain or loss on separation
Yes
Liability
No
Equity
Part
Compound instrument
Is there a contractual obligation that the issuer cannot avoid?
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
38
Offsetting a financial asset and a financial liability
An intention to settle net or to realise the asset and settle the liability
simultaneously
& ■ Master netting agreements
■ Several instruments used to emulate a single instrument (synthetic
instrument)
■ Items with the same risk, but different counterparties
■ Financial assets pledged as collateral for non-recourse liabilities
■ Assets set aside in a trust to discharge a liability that have not been
accepted by the creditor (sinking fund arrangements)
■ Obligations as a result of losses recoverable via insurance
A legally enforceable right to offset
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
39
Nature and Extent of Risks Arising from Financial
Instruments
■ Qualitative disclosures
– For each type of risk (e.g., credit, liquidity and market) arising from financial
instruments, disclose:
■ The exposures to risk and how they arise
■ Objectives, policies and processes for managing the risk and methods used to
measure the risk
■ Any changes to the above from the previous period
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
40
Nature and Extent of Risks Arising from Financial
Instruments (continued)
■ Quantitative disclosures
– For each type of risk arising from financial instruments, disclose:
■ Summary quantitative data about the risk exposure as provided to key
management personnel
■ Detailed disclosures to the extent not disclosed already from the point above
■ Concentrations of risk if not included above
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
41
Nature and Extent of Risks Arising from Financial
Instruments (continued)
■ Quantitative disclosures (continued)
– Credit risk
by class of financial instruments:
■ Maximum credit exposure (without collateral or other credit enhancements)
– In respect of the above, description of collateral and other credit
enhancements
■ Information about credit quality of financial assets that are neither past due
nor impaired
■ Carrying amount of renegotiated financial assets
■ Analysis of financial assets past due or impaired
– In respect of above, description of collateral and other credit enhancements
and unless impracticable, an estimate of their fair value
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
42
IFRS 9
Background
Additions to IFRS 9
Fair Value Option
Effective date and transition
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
43
Background
Discussion Paper Reducing Complexity in Reporting Financial Instruments in
2008
ED/2009/7 Financial Instruments: Classification and Measurement
Discussion Paper Credit Risk in Liability Measurement (2009)
IFRS 9 Financial Instruments (2009)
■ Dealt only with financial assets
■ Concerns raised about recognising in profit or loss the effects of changes in the
credit risk of financial liabilities
ED/2010/4 Fair Value Option for Financial Liabilities
Disclosures – Transfers of Financial Assets (Amendments to IFRS 7)
(October 2010)
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
44
IFRS 9
Background
Additions to IFRS 9
Fair Value Option
Effective date and transition
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
45
Additions to IFRS 9
Additions to IFRS 9 Financial Instruments
Integration of the guidance in IAS 39 Financial Instruments: Recognition and Measurement on
■ Classification and measurement of financial liabilities
– Bifurcation of embedded derivatives (including IFRIC 9 Reassessment of Embedded Derivatives)
■ Derecognition of financial assets and financial liabilities
■ Fair value measurement [pending a new FVM standard]
■ Renumbering/restructuring, minor edits, Guidance on Implementing
Two changes to the guidance on classification and measurement of financial liabilities
■ Accounting for derivatives linked to unquoted equity instruments for which fair value is not reliably determinable
■ Application of the fair value option for financial liabilities
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
46
Deletion of exception
IAS 39: Exception from fair value measurement for unquoted equity
investments for which fair value is not reliably determinable and linked
derivatives
■ IFRS 9 (2009) eliminated exception for financial assets
■ IFRS 9 (2010) extends elimination to derivative liabilities
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
47
IFRS 9
Background
Additions to IFRS 9
Fair Value Option
Effective date and transition
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
48
Conditions for the application of the fair value
option
IFRS 9 (2010) retains the current conditions in IAS 39 for irrevocable
designation at initial recognition of a financial liability as fair value
through profit or loss:
elimination or significant reduction of an accounting mismatch,
management and performance evaluation of a group of financial liabilities or
financial assets and financial liabilities on a fair value basis, or
financial liability host contract with significant embedded derivative which may
have to be separated if the hybrid instrument is not accounted for at fair value
through profit or loss.
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
49
Presentation of gains/losses on FVO liabilities
Presentation of fair value changes of FVO financial liabilities:
■ amount of change in the fair value of the financial liability that is attributable to
changes in its credit risk → OCI
■ remaining amount of change in the fair value → P&L
One-step approach
■ ED/2010/4 proposed two-step approach
No subsequent recycling from OCI to profit or loss
■ Transfer within equity possible
■ Amendment to IFRS 7: if a liability is derecognised during the period, the amount (if
any) presented in other comprehensive income that was realised at derecognition
is disclosed
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
50
Presentation of gains/losses on FVO liabilities
Exceptions from split presentation
■ If presenting credit risk changes in OCI would create or enlarge an accounting mismatch in profit or loss, then all fair value changes are presented in profit or loss
– Determination made at initial recognition and not reassessed
– Assess whether effects of change in credit risk of liability will be offset by change in FV of another financial instrument measured at FVTPL
– Assessment based on economic relationship between the characteristics of the instruments
– Board expects these circumstances to be “rare”
– Mismatch cannot arise solely from measurement method – e.g. failure to separate liquidity risk changes from credit risk changes
– Consistent methodology/ies for assessment – detailed description disclosed
■ All gains and losses on loan commitments and financial guarantee contracts that are designated as fair value through profit or loss are presented in profit or loss
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
51
Determining effects of credit risk changes
Reference to the definition of credit risk in IFRS 7 Financial Instruments: Disclosures
■ Risk that the issuer will fail to discharge an obligation
■ Relates to failure to perform on the particular liability
■ Does not necessarily relate to the creditworthiness of the issuer (e.g. where liability is collateralised)
■ Differentiation from unit-linking and asset-specific performance risk
The standard utilises the guidance in IFRS 7 on determining the amount of the change in fair value that is attributable to changes in the credit risk of the liability
■ “Default”: Amount of total change in fair value that is not attributable to changes in market conditions that give rise to market risk
■ Alternative method that the entity believes provides a more faithful representation
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© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
52
Agenda
Background
Additions to IFRS 9
Fair Value Option
Effective date and transition
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
53
Effective date
Effective date:
IFRS 9 (2010) is effective for annual periods beginning on or after 1 January
2013. Earlier application is permitted.
IFRS 9 (2010) supersedes IFRS 9 (2009) and IFRIC 9 Reassessment of
Embedded Derivatives.
For annual periods beginning before 1 January 2013, an entity may elect to
apply IFRS 9 (2009) rather than IFRS 9 (2010).
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
54
Transition
Transition
IFRS 9 (2010) generally is applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
■ Contains several exceptions from this principle, mainly based around the entity’s date of initial application of the standard. These exceptions are largely consistent with those in IFRS 9 (2009).
If an entity adopts IFRS 9 (2010) without having first adopted IFRS 9 (2009), then it has a single date of initial application for IFRS 9 (2010) in its entirety.
If an entity early adopts IFRS 9 (2009) and then later adopts IFRS 9 (2010), it is not permitted to reapply the transitional provisions of IFRS 9 (2009) when adopting IFRS 9 (2010).
IFRS 9 (2010) does not include any ability or requirement to designate or de-designate a liability as fair value through profit or loss at initial application in addition to those included in IFRS 9 (2009).
■ However, at the date of initial application of IFRS 9 (2010), an entity is required to determine whether including the effects of changes in credit risk on a liability already designated as fair value through profit or loss would create or enlarge an accounting mismatch based on facts and circumstances at that date.
-
© 2014 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. IAS 32, 39 & IFRS 7 - Accounting For Financial Instruments
55
Effective date
Project News:
19 November 2013: IASB completes important steps in reform of financial
instruments accounting and mandatory effective date.
1 August 2013: Project update: ‘Own credit’ and mandatory effective date of
IFRS 9
14 December 2012: IFRS 9—Limited Amendments, Significant Improvements
5 December 2012: Live webcast on Classification and Measurement: Limited
Amendments to IFRS 9
28 November 2012: The IASB issued an Exposure Draft Classification and
Measurement: Limited Amendments to IFRS 9 (Proposed amendments to
IFRS 9 (2010))
16 December 2011: IASB issued amendments to IFRS 9 Financial
Instruments
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Thank you
Anael Francillon
Senior Manager, Audit
KPMG S.p.A.
Via Rosa Zalivani, 2
31100 Treviso TV
Telephone +39 0422 576711
Ivan Lucci
Partner, Audit
KPMG S.p.A.
Via Camozzi, 5
24121 Bergamo BG
Telephone +39 035 240218
-
© 2014 KPMG S.p.A., an Italian limited liability
share capital company and a member firm of the
KPMG network of independent member firms
affiliated with KPMG International Cooperative
("KPMG International"), a Swiss entity. All rights
reserved.
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