1. IFRS 9 Financial Instruments
FIA Technical Workshop
Saturday 24th June 2017
Korolevu, FIJI

2. Acknowledgements
This presentation is based on various documents including
IFRS 9, published by IASB
IFRS 9 Project Summary (July 2014) published by IASB
Get Ready for IFRS 9, Issue 1 and 2 published by Grant Thornton
For further information and queries, please contact

3. Objective
IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities that will
present relevant and useful information
to users of financial statements
for assessing an entity’s future cash flows in terms of
amounts
timing
uncertainty
IFRS is effective for reporting periods beginning on or after 1 January 2018

4. Background Replaces IAS 39 and previous versions of IFRS 9
Responds to GFC. Interested parties including G20 highlighted areas in need of consideration
timeliness of recognising expected credit losses
complexity of multiple impairment models
Accounting for own credit risk
Based on over 1,000 comment letters from stakeholders and hundreds of meetings with users, preparers and others
6 EDs, 1 supplementary document, 1 DP

5. Accompanying Videos
In this video, IASB member Sue Lloyd provides an overview of IFRS 9
9 minutes
In this video, Sylvia M explains the main features of IFRS 9
20 minutes

6. Presentation Summary Part Topic 1 Classification & Measurement 2
Impairment 3
Hedge Accounting

7. Classification and Measurement
Part 1
Classification and Measurement

8. Main Changes Classify financial assets on the basis of
the business model within which they are held; &
their contractual cash flow characteristics
New category of financial assets
Fair Value through Other Comprehensive Income (FVTOCI)
For financial liabilities
ignore effect of changes in credit risk
unless the liability is held for trading

9. Comparison of IAS 39 vs IFRS 9
Rule based
Principle based
Complex and difficult to apply
Classification based on business model and nature of cash flows
Multiple impairment models
One impairment model
For FVO liabilities, own credit gains and losses are recognised in profit or loss
For FVO liabilities, own credit gains and losses are presented in OCI
Complicated reclassification rules
Business-model driven re-classification

10. Classification of Financial Assets
IFRS 9 applies one classification approach for all types of financial assets
classified and measured according to two criteria
The entity’s business model for managing financial assets
The contractual cash flow characteristics of the financial asset
Does not depend on management’s intentions for an individual instrument
Should be based on a higher level of aggregation.

11. Business Model
How an entity manages its financial assets in order to generate cash flows by 1
Collecting contractual cash flows
e.g. trade receivables,
loans and debt securities held to maturity 2
Collecting contractual cash flows and selling financial assets
e.g. liquidity portfolio, assets held by an insurer to back insurance liabilities 3
Other
e.g. trading portfolios, assets managed on a fair value basis

12. Business Model
This is typically observed through the activities that an entity undertakes to achieve its business objectives.
Consider objective information such as
How performance is evaluated and reported to the entity’s KMP
How managers of the business are compensated e.g. fair value or contractual cash flows
The risks affecting performance of the business model and how those risks are managed
Amount and frequency of sales activity

13. Amortised Cost Measurement
Option 1
Amortised Cost Measurement
Objective of the business model
To collect contractual cash flows only
Consider past sales information and expectations about future sales activity
May include some sales activity
Infrequent and insignificant
Sales resulting from an increase in credit risk

14. FVTOCI Measurement Objective of the business model Achieved by both
Option 2
FVTOCI Measurement
Objective of the business model
Achieved by both
Collecting contractual cash flows; and
Selling financial assets
Involves greater frequency and volume of sales
Possible objectives of the business model
Manage liquidity
Maintain a particular interest yield profile
Match the duration of financial liabilities to the duration of the assets they are funding

15. Option 3
FVTPL Measurement
Any financial assets not held in either of the two previous business models
Measured at fair value through profit or loss
Residual category
However, at the time of initial recognition
an entity may elect to present these financial assets as FVTOCI
On grounds of relevance or to avoid an accounting mismatch

16. Reclassification of financial assets
Can only be reclassified when the entity’s business model for managing them changes.
Provide disclosure required under IFRS 7 Financial Instruments: Disclosures

17. Multiple Business Models
An entity can have more than one business model
Example
An entity holding a portfolio of mortgage loans may manage some of the loans to collect contractual cash flows while having an objective of selling other loans within the portfolio in the near term.
The portfolio would be sub-divided, with
part of it being accounted for under a hold to collect business model
while the other loans are accounted for at FVTPL

18. Contractual Cash Flows
Financial assets can only be measured at amortised cost or FVTOCI
if the contractual cash flows are solely payments of principal and interest (SPPI)
Interest can include a return for
Time value of money
Credit risk
Liquidity risk
Amounts to cover expenses
Profit margin

19. Classification Flowchart
Source
IFRS 9 Project Summary p 9

20. Measurement Summary Cash Flows Business Model Measurement
Solely payments for principal and interest
Collect contractual cash flows only
Amortised Cost
Collect contractual cash flows & sales proceeds
FVTOCI
For either of the above, the entity may choose …
FVTPL
Not SPPI
N.A.
For equity instruments not held for trading, the entity may choose

21. Reporting Summary Category Balance Sheet SOCI Amortised Cost
Amortised Cost less Impairment Allowance
Presented in P&L
Interest
Impairment Losses
FVTPL
Fair Value
Changes in FV presented in P&L

22. Reporting Summary Category B/Sheet SOCI Equity FVTOCI Fair Value
Changes in FV presented in OCI
Dividends recognised in P&L
No reclassification to P&L on disposal
FVTOCI
Presented in P&L
Interest
Impairment losses
FOREX gains and losses
Cumulative FV gains/losses reclassified to P&L on derecognition/reclassification

23. Financial Liabilities
Mostly measured at amortised cost
May elect to measure financial liabilities at FVTPL if particular criteria are met
e.g. an entity can choose to measure a structured financial liability at fair value in its entirety rather than being required to account for its component parts
Changes in fair value of an entity’s own credit risk are recognized in OCI (not PNL)

24. Part 2
Impairment

25. Impairment Methodology
Apply the same impairment model to all financial instruments
Provide more timely information about expected credit losses
No longer necessary for a credit event to have occurred before credits losses are recogonised
An entity always accounts for expected credit losses and changes in those expected losses
Amount of expected credit losses is updated at each reporting date

26. Three-stage Process
Source
Grant Thornton
Get ready for IFRS9 p8

27. 12 Month Expected Credit Losses
Stage 1
12 Month Expected Credit Losses
As soon as a financial instrument is originated or purchased,
12-month expected credit losses are recognised in profit or loss and a loss allowance is established.
Proxy for the initial expectation of credit losses.
For financial assets, calculate interest revenue on the gross carrying amount
i.e. no adjustment for expected credit losses

28. Measuring Expected Credit Losses
An entity should consider
The probability-weighted outcome
Expected credit losses should reflect the possibility that a credit loss occurs and the possibility that no loss occurs rather than a best or worst-cased scenario.
The time value of money
Expected credit losses should be discounted to the reporting date
Reasonable and supportable information that is available without undue cost or effort

29. Lifetime Expected Credit Losses
Stage 2
Lifetime Expected Credit Losses
If credit risk increases significantly and the resulting credit quality is NOT considered to be a low credit risk,
Recognise full lifetime expected credit losses.
For financial assets, calculate interest revenue on the gross carrying amount
i.e. no adjustment for expected credit losses
Rebuttal Presumption
Credit risk on a financial asset has increased significantly since initial recognition
when contractual payments are more than 30 days past due.

30. Low Credit Risk
If a financial instrument is determined to have low credit risk at reporting date
An entity may assume that the credit risk has not increased significantly since initial recognition.
Credit risk is considered low if
the financial instrument has a low risk of default
The borrower has a strong capacity to meet its contractual cash flow obligations in the near term &
Adverse changes in conditions in the longer term may, but will not necessarily reduce the ability of the borrower to fulfil its obligations

31. Lifetime Expected Credit Losses
Stage 3
Lifetime Expected Credit Losses
If credit risk increases to the point that the financial asset is considered credit-impaired,
Recognise full lifetime expected credit losses
For financial assets, calculate interest revenue on the amortised costs
i.e. gross carrying amount adjusted for the loss allowance
In general, financial assets in this stage will be individually assessed.

32. Evidence of Credit Impairment
The issuer or borrower faces significant financial difficulty
A breach of contract e.g. default of past due event
The lender(s), for economic or contractual reasons relating to the borrower’s financial difficulty, have granted to the borrower a concession(s) that the lender(s) would not other otherwise consider
It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation
The disappearance of an active market for the financial asset because of financial difficulties

33. Simplified Model Situation Simplification
Trade receivables and contract assets of < or = 1 year or which don’t contain a significant financing component
Always recognise a loss allowance equal to lifetime expected credit losses
Trade receivables and contract assets that contain a significant financing component (in acccordance with IFRS 15)
Entities are allowed to choose the above treatment
Lease receivables within the scope of IAS 17
Entities may similarly choose the above treatment

34. Impairment Disclosure
Provide information that explains the basis for their expected credit loss calculations and
how they measure expected credit losses and
assess changes in credit risk
Reconcile opening to closing allowance balances
for 12 month allowances
separately from lifetime loss allowance balances
Reconcile opening to closing balances of the related carrying amounts
of financial instruments subject to impairment

35. Impairment Disclosure
Provide reconciliations in a way that enables users of financial statements to understand the reason for changes in the allowance balances
e.g. whether it is caused by changes in credit risk or increased lending
Provide information about
credit risk of financial assets by rating grades and
financial assets on which contractual cash flows have been modified

36. Part 3
Hedge Accounting

37. Main Changes Align hedge accounting more closely with risk management
Phase 3
Main Changes
Align hedge accounting more closely with risk management
Establish a more principle-based approach to hedge accounting
Address inconsistencies and weaknesses in the IAS 39 hedge accounting model
Entities may continue to apply hedge accounting requirements of IAS 39
until IASB completes its project on accounting for macro hedging

38. Qualifying Items A hedged item can be A recognised asset or liability
An unrecognised firm commitment
A forecast transaction
Net Investment in a foreign operation
It can be a single item or a group of items
It must be readily measurable
It must be highly probable (applies to 2 & 3 above)
In general, it must involve an external third party

39. Qualifying Criteria
At the inception of the hedging relationship there is formal designation and documentation of
the hedging relationship and
the entity’s risk management objective and strategy for undertaking the hedge
Document must include identification of
the hedging instrument
the hedged item
the nature of the risk being hedged
how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements

40. Qualifying Criteria
The hedging relationship must meet all of the following hedge effectiveness requirements
There’s an economic relationship between the hedged item and the hedging instrument
The effect of credit risk does not dominate the value changes that result from that economic relationship
The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of he hedging instrument that the entity uses to hedge that quantity of hedged item

41. Types of Hedging Relationships
Fair value hedge a hedge of the exposure to changes in the fair value of a recognised asset or liability etc. that is attributable to a particular risk and could affect profit or loss
Cash flow hedge a hedge of the exposure to variabiilty in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (e.g. all or some future interest payments on variable-rate debt) or a highly probable forecast transaction , and could affect profit or loss
Hedge of a net investment in a foreign operation

42. IFRS 9 Financial Instruments
FIA Technical Workshop
Saturday 24th June 2017
Korolevu, FIJI