ifrs update for financial services

IFRS Update for

Financial Services

7 May 2015

KPMG AG, Zurich

IFRS Update for

Financial

Services

IFRS 9 amends IFRS 7 Financial

Instruments: Disclosures

Negative Interest: Impact

IFRS 15 Revenue from Contracts with Customers

IFRS Update for

Financial

Services

IFRS 9 amends IFRS 7 Financial Instruments:

Disclosures



3© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG

International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks.

Verification of the business model and the cash flow criteria are the essential steps for classifying

financial assets in accordance with IFRS 9

No

No

Yes

Fair Value through Other Comprehensive Income (No Recycling)

FVOCI

Fair Value Option

FVO

Fair Value through Other Comprehensive

Income (with Recycling)

FVOCI

No

Business Model

Held to Collect

Business Model

Held to Collect and to Sell

SPPI

criteria

Fair Value

Option

Amortised Cost AC

SPPI

criteria

Held for Trading

OCI Option

Yes

No No

Yes

Fair Value

Option

Business Model

Trading

Fair Value through

Profit and Loss

FV

YesYes

Equity Instruments Derivatives Debt Instruments

IFRS 9 amends IFRS 7 Financial Instruments: Disclosures

Wrap-up Classification and Measurement of Financial Assets



Definition of "significant increase in credit risk" requires robust data analysis and judgement

Three Stage Approach

Transfer if significant increase in credit risk

STAGE 2

EL

Lifetime

1yr

STAGE 1

EL

Lifetime

1yr

IAS 39

Move back if transfer

criteria no longer met

Objective evidence

of impairment

Move back if transfer

criteria no longer met

STAGE 3

EL

Lifetime

1yr


Wrap-up Impairment



The classification of financial liabilities remains substantially unchanged in comparison to IAS 39

No

Yes

Amortised Cost (AC)

Fair Value through

Profit and Loss

(FV)

Fair Value Option

FVO

Yes

Yes

No

No

Derivative

Host

contract

(Bifurcation)

Held for Trading

Fair Value Option

Embedded Derivatives that

require bifurcation

DerivativesDebt Instruments


Wrap-up Impairment



■ Qualitative■ Quantitative

■ Statement of financial position■ Statement of comprehensive income■ Other disclosures (e.g. fair value)

Significance of financial instruments for financial position and performance

Nature and extent of risks arising from financial instruments


Overview of IFRS 7: Financial Instruments Disclosures (1/3)



IFRS 7 Contents – Extract Applicable under

IAS 39 IFRS 9

Statement of financial position X amended

Categories of financial assets and financial liabilities X amended

Financial assets or financial liabilities at FVTPL X amended

Effect of own credit risk New

Credit Exposure designated at FVTPL New

Equity instruments designated at FVOCI - New

Reclassification X amended

Offsetting financial assets and financial liabilities X X

Collateral X X

Allowance account for credit losses X amended

Reconciliations of amounts arising from expected credit losses New

Compound financial instruments with multiple embedded derivatives X X

Defaults and breaches X X





IFRS 7 Contents – Extract Applicable under

IAS 39 IFRS 9

Statement of comprehensive income X amended

Items of income, expense, gains or losses X amended

Separate line items in profit or loss New

Net gains/losses per category X X





Disclosures shall be sufficient to understand the effect of credit risk on the amount, timing, and

uncertainty of furture cash flows.

■ General principles

■ Expected credit loss calculations

Credit risk

management

practices

More extensive

disclosures

regarding

Amounts arising

from expected

credit losses

Credit risk

exposures


Credit Risk and Expected Credit Losses



Significant increase in credit risk Other

Definition of Default How instruments are grouped, if credit

losses are measured on a collective basis

Write-off policy

Basis

Inputs, assumptions estimation

techniques used

Forward-looking information

Expected credit loss calculation


Credit risk management practice




uncertainty of future cash flows.

■ Modifications

■ Collateral

■ Written-off assets

■ POCI assets

More extensive

disclosures

regarding

Amounts

arising from

expected credit

losses






uncertainty of future cash flows.

By credit risk rating grades

■ Gross carrying amount of financial

assets

■ Exposure to credit risk on loan

commitments

■ Financial guarantee contracts

More extensive

disclosures

regarding Credit risk

exposures





Consumer loan credit risk exposure by internal rating grades

Corporate loan risk profile by probability of default

1.

2.Corporate loan credit risk profile by external rating grades3.

But consider disclosure for each bucket


Credit Risk Exposure - by Rating Illustratives



Risk Management

Strategy

Amount, timing and

uncertainty of future cash

flows

Effects of hedge

accounting on financial position and performance


Hedge Accounting Disclosures



or ?


Information procurement



THE CHALLENGE

■ Difficulty in translating disclosure requirements into data

concepts and the underlying data and processes to produce

the IFRS 9 data.

■ Lack of comparison of data requirements under IFRS 7

versus IFRS 9.

THE BENEFITS

■ Catalogue of data items mapped to IFRS 9 disclosure

requirements.

■ Identification of disclosure requirements which require

interpretation and calculation and/or involve judgement.

■ Identification of data items that are currently not required for

provision of disclosures under IFRS 7 but are required under

new IFRS 9 rules.THE SOLUTION

■ The data taxonomy is a standalone tool which will help

organisations identify the data and data flows required to

produce IFRS 9 compliant quantitative disclosures.

■ It highlights the disclosures that require judgement

and/or data objects and the underlying processes which

are required to calculate the data items.

■ It will also highlight which data items and disclosure

requirements are new and are not being reported under

current IFRS 7 rules.

THE FUTURE

■ KPMG is currently working to expand the IFRS 9 Data

Taxonomy to cover all data points required, not only for

quantitative disclosure, but for expected credit loss

calculation.


KPMG Tools – Data Taxonomy

IFRS Update for

Financial

Services

IFRS 9 amends IFRS 7 Financial Instruments:

Disclosures





Remove inconsistencies and

weaknesses in existing requirements

Provide a more robust framework for

addressing revenue issues

Provide more useful information through

improved disclosure requirements

Simplify preparation of financial

statements by reducing the number of

requirements by having one revenue

framework

IFRS 15


Key Facts - Background



5

4

3

2

Identify the contract with a customer1

Identify the performance obligations2

Determine the transaction price3

Allocate the transaction price4

Recognise revenue5

1

Revenue

19


The Five Step Model Overview



Loan

Banking Services

Credit Cards Arrangements

Covered Services

IFRS 15 applies to fees and commissions in the Financial Services Sector

■ IFRS 15 does not apply to

– Lease contracts

– Insurance contracts

– Financial instruments and other contractual rights or obligations (e.g. derivatives, debt, receivables, debt

and equity securities)

– Guarantees other than product or service warranties

– Non-monetary exchanges between entities in the same line of business to facilitate sales to customers


Scope – Financial Services



An Asset Manager enters into a contract with a client to provide investment management

services. The entity receives 2% management fee based on the client's assets under

management at the end of each quarter. In addition, the entity receives a performance-based

incentive fee of 20% of the fund’s returns in excess to the benchmark

20% Performance Fee

2% Management Fee

Investment

■ Each service is a single performance obligation, because it is a series of distinct services

■ Management fee: at the end of each quarter, the uncertainty about the quarterly management fee is

resolved and it can be proceeded with the recognition of revenue

■ Performance fee: the fee depends on the development of the fund in comparison to the benchmark. If it is

not highly probable that a significant reversal of revenue recognized would not occur, the asset manager

cannot recognize a revenue for the estimate of performance fees

5

4

3

2

1

Revenue


Example: Asset Managers’ Performance Based Fees



5

4

3

2

1

Revenue

■ Initially estimate the transaction price using either of the

following methods

– The expected value (probability-weighted amount); or

– The most likely amount

Variable Consideration

■ Assess whether it is highly probable that a significant

reversal in the amount of cumulative revenue recognized will

not occur when the uncertainty associated with variable

consideration is subsequently resolved

Constraint on Variable

Consideration

■ The likelihood of a downward adjustment in the estimate of

variable consideration, and

■ The magnitude of the possible reversal when the uncertainty is

resolved

Assessment


Variable Consideraton and the Constraint




Potential impact of IFRS 15 on further revenues



Incremental costs to be capitalized if the entity expects the costs to be recoverable and

amortization period is more than 12 months

Commissions to agents for new contracts

Free services may meet the definition of

performance obligation


Example: Costs of Obtaining a Contract



Bundled products or services may integrate different services in a

single package or contract

Mortgage and unemployment protection insurance

policy. Mortgages and estate investment services

Services related to IPO such as arranging the

deal, underwriting and marketing activities


Example: Bundled Products or Services

Agenda IFRS 9 amends IFRS 7 Financial Instruments:

Disclosures





Swiss Franc Interest Rate Swap Curve is negative for more than 7 years

Source: www.six-swiss-exchange.com

Date: April 2015


Negative Interests



Interest

income/expenseCommission

income/expense


Disclosures



Loan/Mortgage

Interest 6-month Libor

(floored at zero) plus 3%


Separation of Embedded Derivatives



However …

A negative benchmark interest rate

may represent a fee of a financial

asset

Zero rate floor is closely related to

the host contract and not

separated

Loan/Mortgage

Interest 3-month Libor

(floored at zero) plus 3%

View 1

View 2

Derivative is in the money (not

closely related) and meets the

other separation criteria at inception

Separation of embedded derivative

and host contract


Separation of Embedded Derivatives



Hedge Item - loan receive 3-month LIBOR, floored at zero

Hedging Instrument - interest rate swap that pays LIBOR and receives fix

Note: the swap has no floor

■ Impact of negative interest rates

– LIBOR cash flows from the loan are zero

– Under the interest rate swap, fixed coupons are received from receive leg and variable

cash flows are received from the pay leg due to negative LIBOR

Prospective effectiveness test not in range of 80–120%

Note: the swap has no floor


Cash Flow Hedge Accounting



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KPMG AG

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Contact details

Patricia Bielmann

Partner

Financial Services

Accounting Advisory

KPMG AG

Badenerstrasse 172

8026 Zurich

Phone +41 58 249 41 88

Fax +41 58 249 48 64

[email protected]

Petrik Leutert

Manager

Financial Services

Accounting Advisory

KPMG AG

Badenerstrasse 172

8026 Zurich

+41 58 249 42 07

+41 58 249 48 64

[email protected]

mailto:[email protected]

mailto:[email protected]

© 2015 KPMG AG is a subsidiary of KPMG Holding

AG, which is a member of the KPMG network of

independent firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss legal

entity. All rights reserved.

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