Financial Instruments: Impairment

2 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Scope of Expected Credit Loss (CECL) Model Loans, held-to-maturity debt securities and trade receivables Receivables that result from revenue transactions Reinsurance receivables Lease receivables recognized by a lessor Loan commitments Financial guarantee contracts not accounted for as insurance or at fair value through net income Loans made by a not-for-profit entity to meet its mission (programmatic loans) Would apply to the following financial instruments Equity instruments Available-for-sale (AFS) debt securities Loans made to participants by defined contribution employee benefit plans Policy loan receivables of an insurance entity Promises to give (pledge receivables) of a not-for-profit entity Related party loans and receivables between entities under common control Would not apply to the following

3 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Expected Credit Loss Model Replaces multiple impairment models for debt instruments measured at amortized cost Simplifies accounting for purchased credit impaired (PCI) financial assets Uses single measurement objective for expected credit loss

4 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Recognizing Expected Credit Losses Estimate of all contractual cash flows not expected to be collectedNo recognition thresholdAllowance recognized at each reporting dateAllowance trued up by a provision in current period earnings

5 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Measuring Expected Credit Losses Historical average loss experience Reasonable and supportable forecasts Estimate of lifetime expected credit losses

6 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Purchased Credit-Impaired Assets Should include individual financial assets or groups of financial assets with shared-risk characteristics. Acquired financial assets that have experienced a more than insignificant deterioration in credit quality since origination, based on the assessment of the acquirer. Interest income would be based on expected cash flows at the date of acquisition (yield held constant). Expected credit losses at the acquisition date would be recognized as an allowance through a gross up to the balance sheet. The expected credit loss allowance would not be recognized in interest income. Subsequent increases or decreases in expected credit losses would be recognized immediately in earnings as a provision for credit losses. Credit impairment would follow same approach as originated assets.

7 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Purchased Credit-Impaired Assets (continued) Example – Purchased Credit Impaired Assets Entity E pays $750,000 for a debt instrument with a par amount of $1,000,000. The instrument is classified at amortized cost. At the time of purchase, the expected credit loss embedded in the purchase price is $175,000. The acquisition-date journal entry follows: Loan – par amount$1,000,000 Loan – noncredit discount $ 75,000 Allowance for credit losses 175,000 Cash 750,000

8 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Modified Debt Instruments New loan - non-troubled debt restructuring (TDR) modifications Expected credit losses would be based on the contractual cash flows post modification – discounted using the post-modification EIR TDR modifications EIR used for measuring expected credit losses would be the original (pre-modification) EIR Cost basis would be adjusted so the EIR post-modification would be the same as the original EIR, given the new series of cash flows Cost basis would be increased or decreased The cost basis adjustment = amortized cost basis prior to the TDR less PV of the modified contractual cash flows (discounted at the original EIR)

9 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Available-For-Sale Credit Loss Model Impairment recognized using an allowance approachReversals of credit losses may occur Length of time the fair value has been less than amortized cost is not considered

10 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Qualitative disclosures about how an entity estimates expected losses, including changes in techniques and credit loss expectations Rollforward of the allowance for expected credit losses for financial assets measured at amortized cost and FV-OCI Current credit quality indicators that are disclosed under current GAAP would be disaggregated by year of origination A discussion of the type of collateral and extent to which collateral secures an entity’s financial assets Reconciliation between the purchase price and the par value of PCI financial assets at the time of purchase Disclosures AFS debt securities Retain current disclosure requirements, updated for the general principles regarding disclosing credit risk

11 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Transition Other-than-temporarily impaired debt securities Prospectively Amounts in AOCI as of the date of adoption that relate to significant improvements in cash flow will continue to be accreted to interest income on a level-yield basis PCI financial assets All loans and debt securities acquired with deteriorated credit quality for which an entity applies Subtopic (including by analogy) will be classified as PCI at the date of adoption At the date of adoption, gross up the allowance for lifetime expected credit losses with a corresponding adjustment to the carrying value Interest income will be recognized based on the yield as of the date of adoption All other assets Cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period

12 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Effective Date and Transition Disclosures Effective Date To be decided after considering constituent feedback (most likely calendar 2018 or 2019) Transition disclosures would apply, including: Nature and reason for the change in accounting principle Method of applying adoption Effect of the adoption on line items on the statement of financial position, if material, as of the beginning of the first period for which the guidance is effective Cumulative effect of the change on retained earnings or other components of equity

13 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Impairment - Significant Differences Between FASB and IASB models Subject FASB ED and Tentative DecisionsIFRS 9 Measurement ObjectiveSingle measurement objective for measuring expected credit losses Dual-measurement objective Instruments Measured at FV-OCI Targeted amendments to current OTTI model No limit is provided MeasurementCurrent estimate of contractual cash flows not expected to be collected For assets in Stage 1, impairment would be measured as all shortfalls in cash flows over the life of the financial assets that are associated with the probability of a loss in the 12 months after the reporting date For assets in Stage 2 or 3, lifetime expected credit losses would be recognized

14 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Impairment - Significant Differences Between FASB and IASB models (continued) Subject FASB ED and Tentative DecisionsIFRS 9 PCI Financial Assets The purchase discount associated with expected credit losses would be recognized as an allowance at the acquisition date. Impairment would always reflect the entity’s current estimate of contractual cash flows that it does not expect to collect Expected credit losses at the acquisition date would be factored into the effective interest rate (and would not be recognized as an allowance). Therefore, impairment would be based on the change from initial expected credit losses Interest Income Recognition Does not include a similar provisionWould require interest income to be calculated on net carrying amount for financial assets that are ‘impaired’ (i.e. Stage 3)

Financial Instruments: Classification and Measurement

16 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Equity investmentsFinancial liabilities measured at fair value Assessment of a valuation allowance for a DTA related to an available-for-sale security Classification and Measurement - Accounting

17 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Classification and Measurement – Presentation and Disclosure Public business entities: present the fair value of financial assets and financial liabilities that are measured at amortized cost either parenthetically on the balance sheet or in the notes Disclose all financial assets and financial liabilities grouped by both measurement category and form of financial assets For financial instruments measured at amortized cost, disclosures about fair value will be limited to: Fair value amounts, disaggregated by major asset category and fair value hierarchy Level 1, 2, or 3 For equity investments without a readily determinable fair value disclose: carrying amount, amount of impairments, and the observable and unobservable adjustments, if any, for the annual period For bifurcated embedded derivatives: - Carrying amount; -Measurement attribute; and - B/S line item in which the bifurcated embedded derivatives and related host contracts are presented

18 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Final standard expected second half 2015 To be decided after considering constituent feedback (most likely calendar 2018 or 2019) Transition: Modified retrospective application Prospective for certain equity securities Classification and Measurement

19 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Classification and Measurement - Significant Differences Between FASB and IASB models SubjectFASBIFRS 9 Basis for Classification and Measurement Intent and ability on an asset- by-asset basis Based on cash flow characteristics and business model CategoriesTrading Available for Sale Held to Maturity (tainting notion) Loans Held for Sale (Lower of Cost or FV) Loans Held for Investment FV - P&L FV - OCI Amortized cost (no tainting) FVOUnconditionalConditional: Financial asset and/or financial liabilities Accounting mismatch Certain hybrid instruments Embedded DerivativesBifurcation guidance applies for financial assets and financial liabilities Bifurcation guidance does not apply for financial assets, but does for financial liabilities

Financial Instruments: Hedging

21 © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A. Financial Instruments Project – Hedging Targeted improvementsScope of project may include: Hedge effectiveness threshold. Hedging components of non-financial items. Elimination of shortcut and critical terms match methods. Board expected to begin deliberations