Gap Assesment, Business Models & SPPI test
No
Findings
Recommendation
Topic
When PSAK 71 become effective in 1 January 2020, The Bank
should revise its accounting policy for classification and
measurement of financial instrumentstobe in accordance
with PSAK 71.
The accounting policy for classification and measurement of
According to PSAK 71, the entity shall classify financial assets
1 financial instruments that The Bank currently has is based on
as subsequently measured at amortized cost, fair value
PSAK 55.
through other comprehensive income (FVOCI) or fair value
through profit or loss (FVTPL) on thebasis ofboth: (a) The
entity’s business model formanaging the financial assets,and
(b) The contractualcashflow characteristicsoffinancial assets
General
The Bank needs to create standard operating procedures
related to business model assessment for business unit
Currently, there is no definition of business model
managing the financial assets. In assessingthebusiness
assessment and SPPI test as part of internal The Bank policy model, The Bank needs topay attentionto: 1.
and procedures related to The Bank business activities
Performancemeasurementmethodology (KPIs) 2.
because PSAK 71 is not yet effective. When PSAK 71 is
Presentationofreporttoentity’s management 3. Major risk
effective, the entity shall classify financial assets as
factorsaffectingthe entity’sbusiness model 4. Risk
2 subsequently measured at amortized cost, fair value through management practices 5. Compensation schemes forits
other comprehensive income (FVOCI) or fair value
manager 6. Historical recordsofsales frequency,volume and
throughprofitor loss (FVTPL) on thebasis ofboth: (a) The
timing The Bank needs to create standard operating
entity’s business model for managing the financial
procedures related to SPPI test forthefinancial assetshold by
assets,and (b) The contractual cash flow characteristics of
The Bank when thefollowing event occurs: 1. Acquisition
financial assets.
ofnew financial assets(including marketablesecurities) 2.
New financial assetproductapproval 3. Modification
ofcontractualcashflows offinancial assetsheld.
General
The Bank shall consider to group the loan products based on
its contractual cash flows to be in line with SPPI assessment
into one of the categories below: 1. Homogeneous product
The group of financial assets which have identical
contractual cash flows. One sample will be selected for each
homogeneous group of financial asset product to conclude
Currently, The Bank groups its loan products based on the
the SPPI test for overall population of financial assetsin
3 internal policy so the SPPI testing process is not efficient (not
thiscategory. 2. Similar product The group of financial assets
PSAK 71 friendly).
which have similar contractual cash flows with each other. 3.
Bespoke product The group of financial asset which do not
have similar contractual cash flows with each
other,e.g.syndication loan, corporateobligation.
The grouping will make it easier for The Bank to perform
SPPI test for that group based on thecontractualcashflows.
General
The Bank should amend its CoA according to PSAK 71
requirements, which incorporate changes of accounts as a
result of new classification of financial assetsbased on
Business Model assessmentand SPPI test. The Bank shall
perform re-mapping of financial assets based on the result of
PSAK 71 classification between the transaction processing
system and theaccounting and reportingsystem.
General
The current CoA is still based on PSAK 55. As PSAK 71 will
4 change the classification and measurement of financial
instruments,thecurrentCoA will no longer appropriate.
Based on the completed business model assessment
checklist by some departments/divisions in The Bank, most
of the business model of those departments/divisions is to
collect the contractual cash flows of the financial assets held
(hold to collect). However, there are some
departments/divisions whose business models are not
separated, e.g. between business model to collect
contractual cash flows, business model to collect contractual
cash flows and sales, and other business model. Wenoted
5 that the following business units do notseparate its business
model: • Treasury Management Division’s business models
are to collect
contractualcashflowsandsalesandotherbusinessmodel. •
Export & Import Department’s business models are to collect
contractual cash flows, and to collect contractual cash flows
and sales. These conditions do not meet PSAK 71
requirement related to determination of financial asset
classification which one of the basis is
theentity’sbusinessmodelfor managingthefinancialassets.
The Bank may need to separate its business models in
managing the financial assets
intothefollowingbusinessmodel: •
Businessmodelwhoseobjectiveis
tocollectcontractualcashflows, • Business model whose
objective is achieved by both collecting the contractual
cashflowsandsellingfinancialassets,and •
Otherbusinessmodel
Dependonthebusinessmodel,theclassificationoffinancialasset
smaychange: • Current accounts with BI, current accounts
with other banks, placement with BI and other banks and
reverse repo held by Treasury Management Division which
currently classified as Loans & Receivable (measured at
Business model
amortized cost) maybeclassifiedaseitherFVOCIorFVTPL. •
assessment
Marketable securities held by Treasury Management
Division which currently classified as HTM (measured at
amortized cost) will have different classification as either
FVOCI or FVTPL. While marketable securities held by
Treasury Management Division which currently classified as
AFS may be classified as FVTPL. • Marketable securities and
acceptance receivables held by Export & Import Department
which currently classified as Loans & Receivable (measured
at amortizedcost)may beclassifiedasFVOCI. Furthermore,
The Bank needs to prepare documentation related to the
result of business model assessment and perform tagging in
the business unit’s system to helpThe
Bankidentifiesthebusinessmodelofthefinancialassets.
Based on the discussion with Treasury Management
Division, The Bank groups its financial assets held by
Treasury Management Division based on type of product
(i.e. fixed income, money market and foreign exchange). This
6
grouping is then separated based on management’s
intention, i.e. loans & receivable, available for sales (AFS)
and held to maturity (HTM) in accordancewith PSAK 55
requirements.
The Bank needs to re-group/re-aggregate its financial asset
portfolios held based on business models
assessmentaccording toPSAK 71,which are: • Business model
Business model
whose objective is to collect contractual cash flows (hold
assessment
tocollect), • Business model whose objective is achieved by
both collecting the contractual cash flows and selling
financial assets (hold to collect & sales),and • Otherbusiness
model (others)
Considering the existence of different objectives in one
business unit, The Bank may consider separating Treasury
Management Division and Export & Import Department into
different business units according to the objectives in
managing the financial assets in order to meet each business
model objectives efficiently. Different objective may lead to
Based on the completed business model assessment
different business model and will also cause toa
checklist by some department/division in The Bank, the
differentclassification offinancial assets,i.e.: • Lending
following business units have more than one objective in
purpose falls into “hold to collect” business model, so the
managing the financial assets: • Treasury Management
classification of financial assets managed by the business
Division’s objective is for liquidity purpose, for regulatory
Business model
unit is amortizedcost. • Liquidity, regulatory requirement
7 requirement, and for yield enhancing purpose. • Export &
assessment
and short-termtrading gain purposefall into “hold to collect
Import Department’s objective is for lending purpose and
and sales” business model, so the classification of financial
forshort-termtradinggain purpose. Under PSAK 71, the
assets managed by the business unit is fair value through
business model for managing the financial assets will
determine the classification of financial assets portfoliosheld other comprehensive income (FVOCI). • Yield enhancing
purpose falls into “others” business model, so the
bythe business unit.
classification of financial assets managed by the business
unit is fair value throughprofitorloss (FVTPL). Furthermore,
The Bank also needs to align the key performance indicator
(“KPI”) of each business units according to its objective in
managing the financial assets.
The Bank offers consumptive loan (Kredit Pegawai/KUPEG)
with flat installment of principal and interest to the debtor,
e.g. Rp 1,000 for principal installment and Rp 100 for interest
installment fixed throughoutthecontractperiod. Based on the
contract sample, The Bank does not charge penalty when
8 there is early prepayment for this product. According to our
discussion with the management, there is also no further
charge to debtor related to the difference between the
outstanding principal and interest using flat and effective
(annuity) calculation when there is early prepayment. The
differenceis directlyrecognized in profitorloss.
Loan with fixed installment of principal and interest (flat)
without any additional charges amounted to the difference
between the flat and effective (annuity) calculation of
outstanding principal and interest when there is early
prepayment represent loan with stepped-up interest. This
condition does not meet contractual cash flows that are
SPPI. Therefore, thisloan shall be classified as fairvalue
throughprofitorloss.
SPPI Assessment
A recurring clause that is found in some type of loan
agreement is the fact that The Bank charges penalty fee if
the debtors make early prepayment. Based on the samples
of loan agreements that we have obtained, the penalty fee
charged varies amongst the products with maximum of 3%.
However, some contracts do not clearly disclose if the
9 penalty is applied on the outstanding loan at the time of the
early prepayment or total credit limit. Unclear explanation in
the agreement clause may lead to various interpretation.
Based on inquiries with the business departments, the
penalty is applied on the outstanding loan amount at the
time of the early prepayment calculated using
thecontractualrate.
The Bank needs to prepare assessment whether the early
prepayment penalty is significant compared to contractual
cash flows received by The Bank, hence theloan may
representcontractualcashflows thatare notSPPI. The Bank
should be able to demonstrate and document that the
prepayment amount substantially represents unpaid
principal and interest on principal outstanding calculated
using effective interest rate, plus reasonable compensation
for early termination charge (i.e. it is based on some
percentages of lost profits as well as administrative cost) in
order to meet theSPPI test.
SPPI Assessment
A standard clause that is found in the sample of loan
10 agreements is the fact that The Bank has the right to review
the charged interestrateatanytime.
The Bank needs to prepare documentation related to
process on how The Bank determine the interest rate
charged to debtor. The Bank shall assess the reason of the
interest rate changes whether its contractual cash flows of
thefinancial assetis still consistentwith basic lending
SPPI Assessment
agreement. As long as the interest is determined based on
market interest rate as the benchmark (i.e. JIBOR, etc), or
based on The Bank’s cost of fund plus margin, where the
margin represents the debtor’s credit risk, therefore the loan
may passSPPI.
The Bank needs to perform analysis on the asset risks and
judgment will be required in assessing whether the contract
can meet the SPPI criterion or not. The financial asset meets
the SPPI criterion, as long as The Bank can
identifythefollowing: • There is no case in which the financial
asset is intended to provide return on the performance of
specific asset or another variable which may not represent
Based on samples selected, The Bank holds investment in
Collective Investment Contract – Asset Collateralized Based exposure to and compensation for a basic lending
SPPI Assessment
11
agreement • The borrower’s obligation to pay cash
(KIK-EBA) Class A with underlying non-recourse asset of a
certainsourceoffutureincome,with waterfall payment scheme represents specific amounts of principal and interest but the
obligation in default is limited in a way that is in substance
consistent with the exposure to credit risk of a basic lending
agreement • Debtor’s non-payment is a breach of contract
and The Bank has a contractual right to unpaid amounts of
principal and interest, even in the event
ofdebtor’sbankruptcy.
Based on the selected samples of loan agreement, the
interest ratefor corporate loans is JIBOR/LIBOR 3-month plus
spread. A clause in the agreement states that the Bank
determine basic interest rate every month referring to the 3month JIBOR/LIBOR. This condition does not meet the PSAK
71 requirement where it introduces the concept of
“modified time value of money” which explaining that the
12
time value of money may be modified, i.e. the relationship
between the passage of time and the interest may be
imperfect. In this case, the frequency of the reset of loan’s
interest rate does not match the tenor of the interest rate,
i.e. interest rate resets every month to a 3-month rate. Such
mismatch may indicate that the interest charged may not be
reflective of the period’s time value ofmoney.
The Bank should performan internal assessment on whether
“the modified time value of money” relationship that is
created from a mismatch between the reset period and the
tenor of the benchmark interest rate would not be
significant compared to a situation where the time value of
SPPI Assessment
money element was not modified (e.g. no mismatch
occurred in the first place). This is to ensure that the SPPI
criterion is still met. The Bank needs to consider the effect of
the modified time value of money element in each reporting
period and cumulatively over thelifeofthe loan.
Currently, The Bank applies the recognition of interest
income based on PSAK 55 requirement and apply “stop
accrue” practice for financial assetwhich has BI collectability
of5. The interest income calculation using the effective
13
interest rate is maintained in the system, including the
financial asset with BI collectability of 5. However, the
accrued interest income for financial asset with BI
collectability of 5 are not recognized as interestrevenue.
Under PSAK 71, interest income is calculated using effective
interest rate which is applied to the gross carrying amount of
the financial asset (gross approach)which is similar with
PSAK 55 requirement,except for: • Financial asset that is
purchased or originated credit-impaired (POCI) on initial
recognition. The Bank shall apply credit-adjusted EIR to the
amortisedcostofthefinancial asset. • Financial asset that
become credit-impaired after initial recognition. The Bank
shall apply EIR to the amortised cost of the financial asset
(net approach). It implies that interest income still must be
recognized although the financial assetis credit-impaired.
The Bank needs to review whether current application of
effective interest rate and recognition of interest rate
already meet PSAK 71 requirement. The impact on the
system, including the core banking system also need to be
assessed.
Others
Under PSAK 71 PP5.2.3 (Application Guidance), all
investments in equity instruments and contract on those
instruments must be measured at fair value. However, in
limited circumstances, cost may be an appropriate estimate
of fair value. That may be the case if insufficient more recent
information is available to measure fair value, or if there is a
wide range of possible fair value measurements and cost
represent the best estimate of fair value within that range.
Please refer to PSAK 71 PP5.2.4 for the
The Bank holds investment in equity instruments
indicatorsthatcostmight notbe representativeoffairvalue.
14 (investment in shares) that is classified as Available-For-Sale
The Bank needs to reclassify investment in equity
(AFS) and carriedatcostaccording toPSAK 55.
instruments (investment in shares) which previously
classified as AFS at cost, to be measured at fair value through
profit or loss (FVTPL) or fair value through other
comprehensive income (FVOCI) according toPSAK 71. The
Bank shall prepare internal modelling to assess the equity
instruments and re-measure the fair value regularly so The
Bank can recognize the changes in fair value in profit or loss
or other comprehensive income according to PSAK 68
“FairValue Measurement”.
Others
PSAK 71 allows write-off which relate to a portion of
financial asset (partial write-off) as set forth in paragraph
5.4.9 and PP3.2.16 (R). However, partial write-off is not in
15 line with the Bank Indonesia Regulation (PBI) No.
14/15/PBI/2012 regarding “Asset Quality Assessment for
Commercial Bank” because the regulation does notallow
partial write-off.
Others
The Bank shall pay attention to this matter in updating the
accounting policy for write-offoffinancial assets.
In the current practice, The Bank derecognizes the original
financial asset and recognizes new financial asset when
there are any modification and renegotiation which cause
changes in contractual cash flows of the original financial
16
asset since the system does not support the modification of
financial asset without derecognition. Therefore, any
modification will result to changes in
effectiveinterestrateofthe financial asset.
Basically, there are not many changes in PSAK 71
requirement related to derecognition of financial assets and
determination of effective interest rate from PSAK 55.
However, PSAK 71 states that, in some circumstances, the
renegotiation or modification of the contractual cash flows
of financial assets can lead to a derecognition of the existing
financial asset, e.g. ‘substantial modification’ ofa
distressedfinancial asset. When renegotiation or
modification does not result in the derecognition of the
financial asset (non-substantial modification), the entity shall
recalculate the gross carrying amount using the original
effective interest rate. On the other hand, when
renegotiation or modification result in a derecognition of the
financial asset (substantial modification), the entity shall
derecognized the existing financial asset and recognize new
financial assetwhich cause toa new effectiveinterestrate. The
Bank shall assess whether renegotiation and modification of
financial assets represent substantial modification or nonsubstantial modification and apply the accounting treatment
according to PSAK 71 requirements. The impacttothe
systemalso need tobe considered.
Others
When a debtor is in financial difficulties, The Bank and its
debtor may modify the terms stated in the contract
(restructuring). These can be through delaying the payment
of principal, amending the covenants, etc. The Bank
currently does not differentiate which restructuring loans
contains significant modification. PSAK 71 has different
accounting treatment between modification of loans that
17
are considered to be significant or not significant. For the
assets that are purchased or originated credit-impaired
(POCI), which is a new category under PSAK 71, interest is
now calculated by applying the credit-adjusted EIR to the
amortized cost, i.e. net of impairment allowance. The EIR is
calculated using expected cash flows inclusive of future
lifetime expected creditlosses.
New policy and process will be needed as a mechanism to
identify loan restructuring with significant modification, and
accordingly apply the appropriate accounting treatment as
PSAK 71 introduces new guidance on measuring the
amortized cost of modified financial assets and recognition
oftheresulting gains orlosses. The Bank may consider to
modify its system to have a capability to tag POCI assets as
well as to calculate the credit-adjusted EIR and interest
revenue ofPOCI assets.
Others
Based on discussion with The Bank, currently interest income
and outstanding loan calculated using effective interest rate
to meet PSAK 55 requirement are generated in MD 6100
system based on combination ofdatafrom2 systems: • WGSS
(loan amortizationschedule using contractualrate) • IFRS
system (amortization of acquisition cost at proportional
18 basis) However, the calculation of loan amortization using
effective interest rate in MD 6100 system is basically done
separately in 2 tables of calculation, i.e. 1 table of loan
amortization schedule using contractual rate, plus 1 table of
amortization of acquisition cost at proportional basis, which
at the end resulting to outstanding loan and interest income
calculated using effective interestrate.
To align with PSAK 55 and PSAK 71 requirement, The Bank
needs to ensure the calculation of loan and interest income
using effective interest rate in MD 6100 system will generate
the same output as if the calculation of loan amortization
schedule is directly done in 1 table using effective interest
rate.
Others