Financial Risk Management – A New
Accounting Perspective
Chay Yiowmin
Partner and Head of Financial Services
Moore Stephens LLP Singapore
DID: (65) 63292709 Fax: (65) 62213815
chayyiowmin@moorestephens.com.sg
Agenda
• Introduction
• Introduction to IFRS 9
• Question & Answer
Introduction
Introduction
• In a major project to replace IAS 39 in its
entirety by the end of 2010, the International
Accounting Standards Board issued
International Financial Reporting Standard
(IFRS) 9 in November 2009.
• IFRS 9 incorporates Phase 1 of the financial
instruments’ project to replace the
classification and measurement requirements
on financial assets in IAS 39 Financial
Instruments: Recognition and Measurement.
Introduction
• The new standard, when adopted in
Singapore, will have major implications for
reporting entities, auditors, analysts and
investors.
Introduction to IFRS 9
Introduction to IFRS 9
Introduction
• New classification and measurement requirements
for financial assets.
• New criteria for amortised cost measurement.
• New measurement category – fair value through
other comprehensive income.
• No more available-for-sale and held-to-maturity
assets.
Introduction to IFRS 9
Introduction (continued)
• No more embedded derivatives in financial assets.
• No more unquoted equity investments measured
at cost less impairment.
Introduction to IFRS 9
Effective Date
• Effective from 1 January 2013 with early adoption
permitted.
• Expected to be applied retrospectively.
• Entities adopting the new Standard, with an initial
application date before 1 January 2012, will be
exempt from the requirement to restate prior
periods.
Introduction to IFRS 9
Debt Instrument
• Conditions for measurement at amortised cost:
a) Business model test – Hold financial asset to collect contractual
cash flows, rather than to sell the asset prior to contractual
maturity; and
b) Cash flow characteristics tests – Contractual terms of financial
assets give rise on specified dates to cash flows that are solely
payment of principal and interest on the principal outstanding.
• All other debt instruments must be measured at
fair value through profit or loss (“FVTPL”).
Introduction to IFRS 9
Debt Instrument (continued)
• Examples that satisfy this criterion:
a) A variable rate loan with a stated maturity date that permits the
borrower to choose to pay three months LIBOR for a three month
term or one month LIBOR for a one month term
b) A fixed term variable market interest rate bond whereby the
variable interest rate is capped; and
c) A fixed term bond whereby the payments of principal and interest
are linked to an unleveraged inflation index of currency in which
the instrument is issued.
Introduction to IFRS 9
Debt Instrument (continued)
• Examples that do not satisfy this criterion:
a) A bond that is convertible into equity instruments of the issuer; and
b) A loan that pays an inverse floating interest rate (e.g. 8% minus
LIBOR).
• Available-for-Sale and Held-to-Maturity categories
excluded in IFRS 9.
Introduction to IFRS 9
Equity Instruments
• To be measured at fair value in the balance sheet.
• All fair value changes recognised in profit or loss.
• No “cost exception” for unquoted equities.
• If equity not held for trading, irrevocable election at
initial recognition to measure at fair value through
other comprehensive income (“FVTOCI”).
• Dividend income recognised in profit or loss.
Introduction to IFRS 9
Derivatives
• All derivatives, including those linked to unquoted
equity investments, are measured at fair value.
• Embedded derivatives, previously separately
accounted for at FVTPL under IAS 39, will no
longer be separately accounted for under IFRS 9.
• Instead contractual cash flows are assessed in
their entirety, and the financial asset is measured
at FVTPL as a whole if any cash flows do not
represent payments of principal and interest.
Introduction to IFRS 9
Impact of IFRS 9
• Ability to measure certain debt instruments (e.g.
Government and Corporate Bonds) at amortised
cost, which under IAS 39 would have been
measured at fair value, due such bonds quoted in
an active market.
• Hybrid financial assets with separated embedded
derivatives at FVTPL, will instead be measured at
FVTPL in their entirety.
Introduction to IFRS 9
Overall Summary
Financial
Asset
IAS 39
Classification
Impairment
Testing
Required?
IFRS 9
Classification
Impairment
Testing
Required?
Debt
Instrument
Available-forSale
Yes
Amortised Cost
Yes
Loan and
Receivable
Yes
FVTPL
No
Held-toMaturity
Yes
FVTPL
No
Introduction to IFRS 9
Overall Summary (continued)
Financial
Asset
IAS 39
Classification
Impairment
Testing
Required?
IFRS 9
Classification
Impairment
Testing
Required?
Equity
Investment
Available-forSale
Yes
FVTOCI
No
Cost less
Impairment
Yes
FVTPL
No
FVTPL
No
Introduction to IFRS 9
In the Pipeline
Phase 1 - Classification and Measurement
• IFRS 9 Financial Instruments for financial assets
was published in November 2009.
• The IASB is now addressing the classification and
measurement of financial liabilities.
• An exposure draft on the topic Fair Value Option
for Financial Liabilities was published in May 2010.
Introduction to IFRS 9
In the Pipeline (continued)
Phase 2 – Impairment Methodology
• The exposure draft Amortised Cost and
Impairment was published in November 2009,
awaiting for comments.
Introduction to IFRS 9
In the Pipeline (continued)
Phase 3 – Hedge Accounting
• IASB expects to publish an exposure draft in time
to allow for finalisation by the second quarter of
2011.
Question & Answer
Financial Risk Management – A New
Accounting Perspective
Chay Yiowmin
Partner and Head of Financial Services
Moore Stephens LLP Singapore
DID: (65) 63292709 Fax: (65) 62213815
chayyiowmin@moorestephens.com.sg