1. financial instruments

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2011 October IFRS Conference | Financial Instruments | C&M and Impairment

Day-5 outline

08!0"#ccountin$ for financial instruments in accordance%it IFRSs issued at 1 'anuar( 2012) but not te IFRSs

te( %ill replace

IFRS * Financial Instruments

I#S !* FI Reco$nition and Measurement

10!0"I#S+,s pro-ect to replace I#S !*

11!0".ui/discussioncase

1!!0"IFRS FI isclosures

13!0"IFRS 3 Insurance Contracts

1400".ui/discussioncase

11

5 IFRS Foundation | !0 Cannon Street | 6ondon 7C3M 49 | :;< %%%


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International Financial Reportin$ Standards

=e >ie%s e?pressed in tis presentation are tose of tepresenter) not necessaril( tose of te I#S+ or IFRS Foundatione 1 'anuar( 201G earl(applicationpermitted

Restatementof comparati>e financial statements notreHuired

G modified disclosures on transition

3



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IFRS 9Main changes from IAS 39

Reduces comple?it(G onl( t%oclassification cate$oriesG sin$le impairment model Donl( FI,s at amortised costEG embedded deri>ati>es no lon$er separated from financial

asset ost contracts

#li$ns measurement of financial assets %it entit(,sBbusiness model, and contractual cas flo% caracteristicsof instruments

BO%n credit, risA issue addressed 7limination of Btaintin$ rules,

G tat caused bonds to be measured at fair >alue e>en if tebusiness model %as to old



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Classification and measurementFinancial assets

Fair alue

DJo impairmentE

#mortised costDone impairment

metodEContractual cas flo%

caracteristics

+usiness model testFO for

accountin$mismatc

DoptionE

#ll oter Instruments7Huities

eri>ati>esSome (bridcontracts

7HuitiesOCI presentation

a>ailableDalternati>eE

Reclassification reHuired %en business model can$es

4



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Business model: ob-ecti>e of oldin$ instruments is to collect contractual

cas flo%srater tan to sell prior to contractual maturit(to realise fair >alue can$es

not an instrument b( instrument approac to classification assess contractual terms of instruments %itin suc a

business model

Financial AssetsAt amortised cost



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Contractual cash flow characteristics a(ments represent solel( principal and interest Interest is consideration for time >alue of mone( and

creditrisA

repa(mente?tension options ma( Hualif(

No taintin!" rules for assets at amortised cost

$ains or losses from dereco$nisin$ suc items to be

presented separatel( %it additional disclosures

8Financial AssetsAt amortised cost continued



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#lternati>e presentation of fair >alue can$es in otercompreensi>e income DOCIE

Sco#e

in>estments in eHuit( instruments not eld for tradin$

Features

alternati>e a>ailable instrument b( instrument

di>idends reco$nised in &6

no rec(clin$) impairment or can$e in presentation

*Financial AssetsEquity investments: OCI alternative



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10

$y%rid contracts

Financial host Non-financial host

IAS &9 !uidance

retained

No se#aration '

#art ofclassification

Financial AssetsEmedded derivatives



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11

Fair (alue o#tion a(aila%le) if*

Accountin!

mismatch

Mana$ed on

fair >alue basis

7mbedded

deri>ati>eDsE

Jot mana$ed to

collect contractualcas flo%s K F

9(brid contracts%it financial ost

classified inentiret(

LCircumstances %en FO a>ailable is uncan$ed for financialliabilities

Financial AssetsFair !alue O"tion #F!O$



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+n,uoted e,uities and their deri(ati(es Fair >alue measurement reHuired Cost ma( be an appropriate estimate of fair >alue

G if more recent information not a>ailable or a %ideran$e of outcomes

oes not appl( to eHuities eld b( financial institutionsand in>estment funds

Contractually lined and non-recourse instruments etailed application $uidance B6ooA trou$, approac

12

Financial AssetsA""lication guidance



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1!

IAS &9 IFRS 9

Classification Man( cate$ories eac %it different

measurement metods

=%o measurement bases #mortised cost

and Fair alue

.easurement Irre>ocable option at initial reco$nition to

present fair >alue can$es of some eHuit(

in>estments in OCI

Im#airment ifferent impairment rules

dependin$ on cate$or( and

instrument t(pe

Onl( debt instruments at amortised cost are

tested for impairment

Financial AssetsSummary of %ey Changes



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13

Financial AssetsSummary of %ey Changes continued

IAS &9 IFRS 9

/aintin! =aintin$ rules for eld to maturit(

in>estments

Jo taintin$ rules

Reclass-ification Some reclassifications

permittedreHuired

Reclassifications reHuired if and onl( if

business model can$es

0m%edded

deri(ati(es

+ifurcation of embedded deri>ati>es

reHuired in some cases

Jo separation) same classification approac

Dfor (brid financial assets %it financial

ostsE

F12 #>ailable if specific criteria are met #>ailable if eliminatin$ or si$nificantl(

reducin$ an accountin$ mismatc



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1

03am#le 4:Equity investment

9eld for tradin$Fair >alue %it can$es

reco$nised in profit orloss

Jot eld for tradin$

Fair >alue G irre>ocable

coice of reco$nisin$can$es in profit or loss

or OCI



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14

03am#le :&et investment #asic loan features$

9eld to collectcontractual cas flo%s

#mortised costDFO a>ailable if criteria are

metE

Jot eld to collectcontractual cas flo%s

Fair >alue trou$ profitor loss



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1

03am#le &:&et investment #emedded derivative$

9(brid contract Das a%oleE as basic loanfeatures and is 9eld to

collect contractual CFs

@ole instrument atamortised cost

#ll oter (brid contracts%it financial osts

@ole instrument at fair>alue trou$ profit or

loss



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Classification and measurementFinancial liailities

#ll financialliabilities

#mortisedcost

FO formismatc)mana$ed

on F basis

and (brids7?cept

9eld for tradin$

Fair >aluetrou$

&6

O%ncredit in

OCI

9(brid financial liabilities are bifurcated Jo reclassification permitted

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1*

Financial 6ia%ilitiesF!O and o'n credit

@at is Bo%n credit,NG fair >alue can$es in liabilit( arisin$ from can$es in te

issuer,s credit Hualit(

9o% is it measuredNG often measured as can$e in mar$in o>er a bencmarA

interest rate

@at is te concernNG ain %en credit Hualit( deteriorates) loss %en credit

Hualit( impro>es

G Reportin$suc $ains and losses is not usefulG +oard,s ReHuest for Information on measurement of

liabilitiesG 7 on classification and measurement



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20

=o address Bo%n credit risA, Retain I#S !* measurement reHuirements for financial

liabilitiesG eld for tradin$fair >alue trou$ &6G (brid liabilitiesbifurcation reHuirements in I#S !*G B>anilla, liabilitiesamortised costG maintain FO D%it current eli$ibilit( conditionsE

B+/

Separate out Bo%n credit risA, for FO

BO%n credit risA, portion %ould be separated in amanner similar to tat pre>iousl( used in IFRS fordisclosure DIFRS +3E

Financial 6ia%ilitiesF!O and o'n credit continued



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21

Financial 6ia%ilitiesF!O and o'n credit continued

Chan!e in

F1

attri%uta%le

to all

factors

e3ce#t owncredit ris"

Chan!e in

F1

attri%uta%le

to own

credit"

7not

recycled8

rofit or 6oss

rofit

Financial lia%ility at F12on statement of financial position at DfullE fair >alue

Mandator( for all liabilities at FO unless tis %ould createor enlar$e an accountin$ mismatc

Statement of Compreensi>e Income

Oter Compreensi>e Income



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Im#airment

IAS &9 re,uirements: Incurred loss approac for financial assets

Impairment loss onl( reco$nised %enG tri$$erDlossE e>entoccurs

G impact can be reliabl( estimated More tan one model dependin$ on classification

2222



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2!2!Im#airment continued

Criticisms of the incurred loss a##roach: 7?pected losses not reco$nised before tri$$er e>ents

G o>erstatesfrontloads interest re>enueG results in Btoo little) too late, reco$nition of loan losses

G tri$$ers inconsistentl( applied oes not reflect te underl(in$ economics of te

transaction

Jeed to impro>e usefulness of financial statements and

timin$ of reco$nition of losses

2!



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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%


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9ed$e accountin$ reco$nises te offsettin$ effects ofcan$es in te fair >aluesor te cas flo%s of teed$in$ instrument and te ed$ed itemin$ offsettin$ can$es in fair >alue orcas flo%s of te ed$ed item tat are attributable to teed$ed risAalue can$es of reco$nisedasset or liabilit( or unreco$nised firm commitment Dor

portion of tese attributable to a particular risAE

9ed$e of te forei$n currenc( risA of a firm commitment

Reco$nition of $ains and losses on ed$ed item and

ed$in$ instrument in profit and loss and ad-ust te

carr(in$ amount of te ed$ed item Dif not measured at

costE

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/y#es of hed!e accountin!Fair value hedge accounting



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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%e %ose >alue is linAed to aninterest rate inde?

7nd of (ear 1) marAet rate K 4Q< F of 0 pa(able in 1(ear at 4Q 1)00 pa(able 2 (ears at 4Q K 0 ? e declines to 20 Jote tere is small ineffecti>eness K 2



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/ f h d ti


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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%e $ains and losses reco$nised in OCI

ortion of ed$e deemed to be ineffecti>e $ains and losses reco$nised in profit or loss

=reatment of cumulati>e $ains or losses differs based on%at Bt(pe, of asset or liabilit( is subseHuentl( reco$nised

/y#es of hed!e accountin!Cash flo' hedge accounting



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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%ati>eDinterest rates%apE

7nd of (ear 1 interest rates increaseG of cumulati>ecas flo%s increase b( 100

+ut F of s%ap decreases b( 10

Jote Some ed$e ineffecti>eness

03am#le:Cash flo' hedge accounting



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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%e portion of ed$eEOCI D7Huit(E 100

eri>ati>e D6iabilit(E 10

Closin! financial #osition:

Recei>able 1)0007Huit( DOCIE 100 Deffecti>e portion of ed$eE

eri>ati>e D6iabilit(E 10

7Huit( **

03am#le:Cash flo' hedge accounting continued



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9ed$e of a net in>estment in a forei$n operationG as defined in I#S 21

G accounted for similarl( to cas flo% ed$es

!3

/y#es of hed!e accountin!)et investment in foreign o"eration



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5 2011 IFRS Foundation !0 Cannon Street | 6ondon 7C3M 49 | :; | %%%alue of FC:80)000ie%s b( members of teI#S+ andits staff are encoura$edie%s e?pressed in tis

presentation are tose of tepresenter< Official positions ofte I#S+ on accountin$matters are determined onl(after e?tensi>e due process

and deliberation

1. financial instruments

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