2. plan to replace ias 39
TRANSCRIPT
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International Financial Reporting Standards
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 instrumentsIASBs project to
replace IAS 39Joint World Bank and IFRS Foundation train the
trainers workshop hosted by the ECCB,
30 April to 4 May 2012
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Overview
Direct response to the Financial Crisis Approached in phases
I. Classification and Measurement
I. Assets Completed 2009
II.Liabilities Completed 2010
II.Impairment Re-expose Q4 12
III.Hedge Accounting
I. General Hedge Model Review draft Q2 12
II.Macro Hedge model Discussion paper Q4 12
Reopen Phase I Expose changes H2 12
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3Reopening Phase I
Limited modifications IFRS 9 is sound and operational
Address specific applicationissues
Consider interaction of IFRS 9 and insurance project
Consider how to reduce differences with FASBsclassification and measurement model
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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 comparativefinancial statements notrequired
modified disclosures on transition
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Phase IClassification and Measurement
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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6Financial assets
Fair Value
(No impairment)
Amortised cost
(one impairment
method)Contractual cash flowcharacteristics
Business model testFVO for
accounting
mismatch
(option)
All other instruments:
Equities
Derivatives
Some hybrid contracts
Equities:
OCI presentation
available
(alternative)
Reclassification requiredwhen business model changes
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7Financial assets: possible changes
Fair Value
(No impairment)
Amortised cost
(one impairment
method)
Contractual cash flow
characteristics
Business model testFVO for
accounting
mismatch
(option)
All other instruments:
Equities
Derivatives
Some hybrid contracts
Equities:
OCI presentation
available
(alternative)
Reclassification requiredif business model changes
FVOCI
(one impairment
method)
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Scope of possible changes
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 bifurcationof financial assets
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Cash flow characteristics assessment
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
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2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Amortised costContractual cash flow characteristics
Contractual terms that give rise to
solely payments ofContractual cash flow
characteristics
Interest =Consideration for
time value of moneycredit risk
Principal Interest
Tentative decision:
Modified P&I satisfies test IF
Compared with a benchmark
instrument
Difference not more than
insignificant
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Amortised costBusiness model
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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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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Business model/strategy
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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1414Financialliabilities
Accounting as for IAS 39 except for financial liabilities underFair Value Option
these financial liabilities recorded on statement of
financial position at full fair value
changes infair 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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Convergence
Both boards have mixed measurement models Similaritiesin 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
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Phase IIFinancial Instruments: Impairment
Three Bucket Approach
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17Impairment: General overview
Expected loss (EL) model
Responsive to changes in information that impact creditexpectations
Deteriorationin credit quality leads to recognition of lifetime
losses
Robust disclosuresto support principle and support
comparability
Guiding principle: Reflect general pattern of deterioration andimprovement of credit quality of financial assets
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18Three-bucket approach
Bucket 1: 12 months
expected loss allowance
Bucket 2: Lifetime
expected loss allowance
Bucket 3: Lifetime
expected loss allowance
All financial assets are initially
categorised in this bucket*
Evaluation performed on
groupsof financial assets
Evaluation performed on
individualfinancial 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
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Purchased credit-impaired assets
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 changesin lifetime loss
expectations
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Trade receivables
Withouta 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
Witha significant financing component (long term):
policy election either:
apply general three-bucket model or
always recognise lifetime expected losses
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Open topics and timeline
Practical expedientshow to determine expected losses
Lease receivables
Discount rate
Loan commitments, financial guarantee contracts, revolvers
Disclosures Re-exposure draft in H2 2012
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International Financial Reporting Standards
2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
Phase IIIHedge Accounting (General)
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2012 | IFRS Conference Kuala Lumpur
23Objective
Risk management
objective:
Seeks to linkrisk management and
financial reporting
(top down)
Accounting
objective:
Seeks to managetiming of recognition
of gains or losses
(bottom up)
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24Hedged items
Qualifying
hedged item
Entire item Component
Risk component(separately identifiable and reliablymeasurable)
Nominal componentorselected contractual CFs
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25Hedged items: risk components
Benchmark
(eg interest
rateor
commodity
price)
Benchmark
(eg interest
rateor
commodity
price)
Variable
element
Fixed element
Benchmark
(eg interest
rateor
commodity
price)
Benchmark
(eg interest
rateor
commodity
price)
Variable
element
Fixed element
IAS 39 New model
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26Hedging instruments
Qualifying hedging
instruments
Entire item Partial designation
FX risk component Nominal component(proportion)
Intrinsic valueSpot element
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27Costs of hedging
Time value
of options
Transaction
relatedhedged item
Time period
related hedgeditem
Costs of hedging
Forward element
of forwardcontract
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Forward points (the funding swap
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p ( g pissue)
Feedback on ED: accounting requirement for time value of
options and forward points should be consistently applied
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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 Amor t ise
Profit or lossvolatility
** Can be deferred by the forward rate method(other than for FX financial assets/liabilities)
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29Hedge effectiveness
Hedge
effectiveness
Hedge effectiveness test:
1. Economic relationship
2. Effect of credit risk
3. Hedge ratio
Measuring and recognising
hedge ineffectiveness
Rebalancing Discontinuation
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Total entity risk exposure
(no specif ic disclo sure requirements)
Disclosures: scope
Hedged exposure
(Exposure torisks being
hedged)
IFRS 7
Disclosurerequirements
Significance of
financial instrumentsfor financial position
and performance
Nature and extent of
risks arising fromfinancial instruments
Entitys exposure
attributable to thehedged risk
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31Disclosures
Hedge accounting
disclosures
Risk
management
strategy
Amount, timing
and uncertainty
of futurecash flows
Effects of hedge
accounting on
the primary
financialstatements
Specific
disclosures for
dynamic
strategies andcredit risk
hedging
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32Alternatives to hedge accounting
Alternatives
Own use scope exceptionin IAS 39 Credit derivatives
Elective FVTPL At initial recognition or subsequently
At discontinuation: amortisation
Eligible for FVO in IFRS 9
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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
Transition
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International Financial Reporting Standards
2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
Phase III
Hedge Accounting (Macro)
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Status of the macro hedge accounting
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project 35
Fact finding
Common themes
Implications foraccounting model
Design of
accounting model
Common themes
Implications foraccounting model
Design of
accounting model
Interest rate risk Other risks
Project status
Sept 2011
Nov 2011
Feb 2012
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M h i f h l i h
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Mechanics of the valuation approach 36
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Discussion of interest rate risk using11 St
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11 Steps 37
Full fair value measurementStep 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 derivativesStep 11 - Risk limits
Risk Management IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Accounting alternatives and financialti bj ti
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reporting objectives 38
ValuationHedge
Accounting
Accounting
Layer*
Derivatives
at cost
Simple solutions
support
transparency whennot over-simplifying
Volatility provides
information - none
or too much lackstransparency
*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.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
M H d A ti ti t bl
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Macro Hedge Accountingtimetable 39
After initial discussions in September/November 2010, theBoards 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
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Q ti t ?
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40Questions or comments?
Expressions of individual views
by members of the IASB andits staff are encouraged. The
views expressed in this
presentation
are those of the presenter.
Official positions of the IASB on
accounting matters aredetermined only after extensive
due process and deliberation.
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The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1January 2012 with an effective date after 1 January 2012but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and thepublishers do not accept responsibility for loss caused toany person who acts or refrains from acting in reliance onthe material in this PowerPoint presentation, whether suchloss is caused by negligence or otherwise.
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