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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.

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Presentation on theme: "International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS."— Presentation transcript:

1 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. Financial instruments— IASB’s project to replace IAS 39 Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB, 30 April to 4 May 2012

2 Overview Direct response to the Financial Crisis Approached in phases I.Classification and Measurement I.AssetsCompleted 2009 II.LiabilitiesCompleted 2010 II.Impairment Re-expose Q4 12 III.Hedge Accounting I.General Hedge ModelReview draft Q2 12 II.Macro Hedge modelDiscussion paper Q4 12 Reopen Phase I Expose changes H © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

3 3 Reopening Phase I Limited modifications IFRS 9 is sound and operational Address specific application issues Consider interaction of IFRS 9 and insurance project Consider how to reduce differences with FASB’s classification and measurement model © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

4 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 comparative financial statements not required –modified disclosures on transition 4 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

5 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 I Classification and Measurement © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

6 6 Financial assets Fair Value (No impairment) Amortised cost (one impairment method) Contractual cash flow characteristics Business model test FVO for accounting mismatch (option) All other instruments: Equities Derivatives Some hybrid contracts … Equities: OCI presentation available (alternative) Reclassification required when business model changes © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

7 7 Financial assets: possible changes Fair Value (No impairment) Amortised cost (one impairment method) Contractual cash flow characteristics Business model test FVO for accounting mismatch (option) All other instruments: Equities Derivatives Some hybrid contracts … Equities: OCI presentation available (alternative) Reclassification required if business model changes FVOCI (one impairment method) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

8 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 bifurcation of financial assets 8 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

9 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 9 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

10 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 10 Amortised cost – Contractual cash flow characteristics Contractual terms that give rise to solely payments of Contractual cash flow characteristics Interest = Consideration for time value of money credit risk PrincipalInterest Tentative decision: ‘Modified’ P&I satisfies test IF Compared with a benchmark instrument Difference not more than insignificant © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

11 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Amortised cost Business 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 11 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

12 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. Bifurcation 3 primary options considered: –current asymmetrical model –bifurcation of both assets and liabilities –no Bifurcation Decision to retain the current model 12 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

13 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 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) 13 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

14 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 14 Financial liabilities Accounting as for IAS 39 except for financial liabilities under Fair Value Option these financial liabilities recorded on statement of financial position at full fair value changes in fair 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 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

15 Convergence Both boards have mixed measurement models Similarities in 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 15 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

16 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 II Financial Instruments: Impairment Three Bucket Approach © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

17 17 Impairment: General overview Expected loss (EL) model Responsive to changes in information that impact credit expectations Deterioration in credit quality leads to recognition of lifetime losses Robust disclosures to support principle and support comparability Guiding principle: Reflect general pattern of deterioration and improvement of credit quality of financial assets © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

18 18 ‘Three-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 groups of financial assets Evaluation performed on individual financial 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 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

19 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 changes in lifetime loss expectations 19 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

20 Trade receivables Without a 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 With a significant financing component (long term): –policy election either: –apply general ‘three-bucket’ model or –always recognise lifetime expected losses 20 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

21 Open topics and timeline Practical expedients – how to determine expected losses Lease receivables Discount rate Loan commitments, financial guarantee contracts, revolvers Disclosures Re-exposure draft in H © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

22 International Financial Reporting Standards © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. Phase III Hedge Accounting (General) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

23 2012 | IFRS Conference Kuala Lumpur 23 Objective Risk management objective: Seeks to link risk management and financial reporting (top down) Accounting objective: Seeks to manage timing of recognition of gains or losses (bottom up) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

24 2012 | IFRS Conference Kuala Lumpur 24 Hedged items Qualifying hedged item Entire itemComponent Risk component (separately identifiable and reliably measurable) Nominal component or selected contractual CFs © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

25 2012 | IFRS Conference Kuala Lumpur 25 Hedged items: risk components Benchmark (eg interest rate or commodity price) Benchmark (eg interest rate or commodity price) Variable element Fixed element Benchmark (eg interest rate or commodity price) Benchmark (eg interest rate or commodity price) Variable element Fixed element IAS 39New model © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

26 2012 | IFRS Conference Kuala Lumpur 26 Hedging instruments Qualifying hedging instruments Entire itemPartial designation FX risk component Nominal component (proportion) Intrinsic value Spot element © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

27 2012 | IFRS Conference Kuala Lumpur 27 Costs of hedging Time value of options Transaction related hedged item Time period related hedged item Costs of hedging Forward element of forward contract © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

28 2012 | IFRS Conference Kuala Lumpur Forward points… (the “funding swap” issue) Feedback on ED: accounting requirement for time value of options and forward points should be consistently applied 28 Time value of options Forward points (IAS 39) Forward points (decision in redeliberations) Transaction related hedged item DeferCan ‘in substance’ defer** N/A (current requirements already provide solution) Time period related hedged item AmortiseProfit or lossAmortise Profit or loss volatility ** Can be deferred by the “forward rate method” (other than for FX financial assets/liabilities) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

29 2012 | IFRS Conference Kuala Lumpur 29 Hedge effectiveness Hedge effectiveness Hedge effectiveness test: 1.Economic relationship 2.Effect of credit risk 3.Hedge ratio Measuring and recognising hedge ineffectiveness RebalancingDiscontinuation © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

30 2012 | IFRS Conference Kuala Lumpur 30 Total entity risk exposure (no specific disclosure requirements) Disclosures: scope Hedged exposure (Exposure to risks being hedged) IFRS 7 Disclosure requirements Significance of financial instruments for financial position and performance Nature and extent of risks arising from financial instruments Entity’s exposure attributable to the hedged risk © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

31 2012 | IFRS Conference Kuala Lumpur 31 Disclosures Hedge accounting disclosures Risk management strategy Amount, timing and uncertainty of future cash flows Effects of hedge accounting on the primary financial statements Specific disclosures for dynamic strategies and credit risk hedging © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

32 2012 | IFRS Conference Kuala Lumpur 32 Alternatives to hedge accounting Alternatives ‘Own use’ scope exception in IAS 39 Credit derivatives Elective FVTPL At initial recognition or subsequently At discontinuation: amortisation Eligible for FVO in IFRS 9 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

33 2012 | IFRS Conference Kuala Lumpur 33 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 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

34 International Financial Reporting Standards © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 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.

35 2012 | IFRS Conference Kuala Lumpur Status of the macro hedge accounting project 35 Fact finding Common themes Implications for accounting model Design of accounting model Common themes Implications for accounting model Design of accounting model Interest rate riskOther risks Project status Sept 2011 Nov 2011 Feb 2012 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

36 2012 | IFRS Conference Kuala Lumpur Mechanics of the valuation approach 36 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

37 2012 | IFRS Conference Kuala Lumpur Discussion of interest rate risk using 11 Steps 37 Full fair value measurement – Step 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 derivatives Step 11 - Risk limits Risk Management © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

38 2012 | IFRS Conference Kuala Lumpur Accounting alternatives and financial reporting objectives 38 Valuation Hedge Accounting Accounting Layer* “Derivatives at cost” Simple solutions support transparency when not over-simplifying Volatility provides information - none or too much lacks transparency *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.

39 2012 | IFRS Conference Kuala Lumpur Macro Hedge Accounting—timetable 39 After initial discussions in September/November 2010, the Board’s 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 H © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

40 © 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 40 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

41 41 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. 41 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.


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