International Financial Reporting Standards
Financial instruments—
IASB’s project to
replace IAS 39
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
Overview
2
• Direct response to the Financial Crisis
• Approached in phases
I. Classification and Measurement
I. Assets
II. Liabilities
II.Impairment
III.Hedge Accounting
I. General Hedge Model
II. Macro Hedge model
• Reopen Phase I
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Completed 2009
Completed 2010
Re-expose Q4 12
Review draft Q2 12
Discussion paper Q4 12
Expose changes H2 12
Reopening Phase I
• Limited modifications
• IFRS 9 is sound and operational
• Address specific application issues
• Consider interaction of IFRS 9 and insurance project
• Consider how to reduce differences with FASB’s
classification and measurement model
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
3
Effective date and transition
• IFRS 9 effective 1 January 2015
– early application permitted (phases)
– Required application date will be calibrated for all
completed phases
• Restatement of comparative financial statements not
required
– modified disclosures on transition
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
4
International Financial Reporting Standards
Phase I
Classification and Measurement
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
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
•…
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Fair Value
(No impairment)
Equities:
OCI presentation
available
(alternative)
Financial assets: possible changes
Business model test
Contractual cash flow
characteristics
Amortised cost
(one impairment
method)
FVOCI
(one impairment
method)
7
FVO for
accounting
mismatch
(option)
Reclassification required if business model changes
All other instruments:
• Equities
• Derivatives
• Some hybrid contracts
•…
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Fair Value
(No impairment)
Equities:
OCI presentation
available
(alternative)
Scope of possible changes
8
• Clarify contractual cash flow characteristics test
• To address interaction with the insurance project and align
with the FASB model, consider:
– introducing a third business model
– whether some debt instruments should be remeasured
through OCI
• Reconsider need for bifurcation of financial assets
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Cash flow characteristics assessment
9
• Tentative decision
• Minor change to IFRS 9
• Clarifies principle in IFRS 9
– confirmed if cash flows not solely principal and interest
(P&I) measured at FVPL
• If solely profit or loss, measurement depends on business
model
• Introduces notion of modified principal and interest
– determine by comparing with a benchmark instrument
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Amortised cost
– Contractual cash flow characteristics
Contractual cash flow
characteristics
Contractual terms that give rise to
solely payments of
Principal
Interest
Tentative decision:
‘Modified’ P&I satisfies test IF
• Compared with a benchmark
instrument
• Difference not more than
insignificant
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Interest =
Consideration for
•time value of money
•credit risk
10
Amortised cost
Business model
11
• 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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2012 IFRS
Foundation
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Bifurcation
• 3 primary options considered:
– current asymmetrical model
– bifurcation of both assets and liabilities
– no Bifurcation
• Decision to retain the current model
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12
Business model/strategy
13
• IFRS 9 business models
– held to collect contractual cash flows (amortised cost)
– other (FVTPL)
• FASB business strategy
– lending business (amortised cost)
– investing business (FVOCI with recycling and
impairment)
– trading business (FVTPL)
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Financial liabilities
14
• 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
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2012 IFRS
Foundation
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Convergence
• Both boards have mixed measurement models
• Similarities in classification criteria
– characteristics of instruments
– business model/strategy
• Seek to reduce key differences
– FASB have FVOCI for some debt instruments
– FASB retained bifurcation for financial assets
– FASB prohibit reclassification
• Joint redeliberation of key differences
• Separate exposure drafts
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
15
International Financial Reporting Standards
Phase II
Financial Instruments: Impairment
Three Bucket Approach
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
Impairment: General overview
17
Guiding principle: Reflect general pattern of deterioration and
improvement of credit quality of financial assets
• Expected loss (EL) model
• Responsive to changes in information that impact credit
expectations
• Deterioration in credit quality leads to recognition of lifetime
losses
• Robust disclosures to support principle and support
comparability
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
‘Three-bucket’ approach
18
Bucket 1: 12 months
expected loss allowance
All financial assets are initially
categorised in this bucket*
Bucket 2: Lifetime
expected loss allowance
Bucket 3: Lifetime
expected loss allowance
Evaluation performed on
groups of financial assets
Evaluation performed on
individual financial assets
• Move out of Bucket 1 when
– more than an insignificant deterioration in credit quality AND
– reasonably possible that all or some contractual cash flows
may not be collected.
• Completely symmetrical model
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Purchased credit-impaired assets
19
• Scope
– assets purchased with an ‘explicit expectation of credit
losses’
– same population as IAS 39 today (IASB)
• Always outside Bucket 1
• Use credit-adjusted effective interest rate
– no day 1 allowance balance
– no day 1 impairment loss recognised
• Allowance balance represents changes in lifetime loss
expectations
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Trade receivables
20
• Without a significant financing component (short term):
– measure receivable at invoice amount
– if expected loss model applies, always recognise lifetime
expected losses (ie categorise outside Bucket 1)
– provisioning matrix
• With a significant financing component (long term):
– policy election either:
– apply general ‘three-bucket’ model or
– always recognise lifetime expected losses
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Open topics and timeline
21
• Practical expedients – how to determine expected losses
• Lease receivables
• Discount rate
• Loan commitments, financial guarantee contracts, revolvers
• Disclosures
• Re-exposure draft in H2 2012
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
Phase III
Hedge Accounting (General)
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
© IFRS
2012 IFRS
Foundation
Foundation.
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Objective
23
Risk management
objective:
Accounting
objective:
Seeks to link
risk management and
financial reporting
(top down)
Seeks to manage
timing of recognition
of gains or losses
(bottom up)
2012
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Hedged items
24
Qualifying
hedged item
Entire item
Component
Risk component
(separately identifiable and reliably
measurable)
2012
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Nominal component or
selected contractual CFs
Hedged items: risk components
IAS 39
New model
Fixed element
Fixed element
Variable
element
Variable
element
Benchmark
(eg interest
rate or
commodity
price)
25
Benchmark
(eg interest
rate or
commodity
price)
2012
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Benchmark
(eg interest
rate or
commodity
price)
Benchmark
(eg interest
rate or
commodity
price)
Hedging instruments
26
Qualifying hedging
instruments
Entire item
Partial designation
FX risk component
• Intrinsic value
• Spot element
2012
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Nominal component
(proportion)
Costs of hedging
27
Costs of hedging
Time value
of options
Transaction
related
hedged item
2012
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Time period
related hedged
item
Forward element
of forward
contract
Forward points… (the “funding swap”
issue)
28
Feedback on ED: accounting requirement for time value of
options and forward points should be consistently applied
Time value of
options
Forward points
(IAS 39)
Forward points
(decision in
redeliberations)
Transaction related
hedged item
Defer
Can ‘in substance’
defer**
N/A (current
requirements already
provide solution)
Time period related
hedged item
Amortise
Profit or loss
Amortise
** Can be deferred by the “forward rate method”
(other than for FX financial assets/liabilities)
2012
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Profit or loss
volatility
Hedge effectiveness
29
Hedge
effectiveness
Hedge effectiveness test:
1. Economic relationship
2. Effect of credit risk
3. Hedge ratio
Rebalancing
Measuring and recognising
hedge ineffectiveness
Discontinuation
2012
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Disclosures: scope
30
Total entity risk exposure
(no specific disclosure requirements)
Hedged exposure
(Exposure to
risks being
hedged)
IFRS 7
Disclosure
requirements
Significance of
financial instruments
for financial position
and performance
Nature and extent of
risks arising from
financial instruments
2012
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Entity’s exposure
attributable to the
hedged risk
Disclosures
31
Hedge accounting
disclosures
Risk
management
strategy
Amount, timing
and uncertainty
of future
cash flows
2012
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Effects of hedge
accounting on
the primary
financial
statements
Specific
disclosures for
dynamic
strategies and
credit risk
hedging
Alternatives to hedge accounting
32
Alternatives
‘Own use’ scope exception
in IAS 39
Eligible for FVO in IFRS 9
2012
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Credit derivatives
Elective FVTPL
• At initial recognition or subsequently
• At discontinuation: amortisation
Transition
33
• Prospective transition with limited exceptions
• retrospective application
• required for time value of options
• permitted for accounting for forward elements
• practical expedients
• allowed to consider the transition as a continuous process
• for rebalancing, starting point is the hedge ratio used under
IAS 39 (gains or losses recognised in profit or loss)
• hedging relationships that qualified under IAS 39 and
qualify under the new model will be treated as continuing
2012
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International Financial Reporting Standards
Phase III
Hedge Accounting (Macro)
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
© IFRS
2012 IFRS
Foundation
Foundation.
| 30 Cannon
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Status of the macro hedge accounting
project
Project status
35
Fact finding
Common themes
Common themes
Implications for
accounting model
Implications for
accounting model
Design of
accounting model
Design of
accounting model
Interest rate risk
Other risks
Sept 2011
Nov 2011
Feb 2012
2012
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Mechanics of the valuation approach
2012
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36
Discussion of interest rate risk using
11 Steps
Full fair value measurement – Step 1
Step 2 - Limit valuation to interest rate risk
Step 3 - Net margin as hedged risk
Step 4 - Valuation on the basis of a (closed) portfolio
Step 5 - Open portfolios as unit of account
Step 6 - Timing difference of cash flows (bucketing)
Interim Step: Summary of discussion
Step 7 - Multi-dimensional risk management objectives
Step 8 - Floating leg of derivatives
Step 9 - Counterparty risk
Step 10 - Internal derivatives
Step 11 - Risk limits
Risk Management
2012
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37
Accounting alternatives and financial
reporting objectives
Simple solutions
support
transparency when
not over-simplifying
Volatility provides
information - none
or too much lacks
transparency
Hedge
Accounting
Valuation
Accounting
Layer*
*Designation of a bottom layer of a gross
position (for accounting purposes) to address
the dynamics easier than with current hedge
accounting approach. The layer is derived from
the actual net risk position.
2012
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“Derivatives
at cost”
38
Macro Hedge Accounting—timetable
39
• After initial discussions in September/November 2010, the
Board’s deliberation began in September 2011
• The Board first develops a model for interest rate risk (H1
2012) and plans to address other risks thereafter
• Targeting issue of a due process document in H2 2012
2012
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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.
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40
41
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