1. Asset Accounting /IFRS 9 Financial Instruments
Insurance IFRS Seminar
December 1, 2016
Francesco Nagari
Session 12

2. IFRS 9 Financial Instruments
A new accounting standard on financial instruments which replaces IAS 39
New version of IFRS 9 issued in 24 July 2014
Effective date: 1 January 2018

3. Key Changes from IAS 39 Key changes Implication
Different asset classification criteria
Change in classification criteria and how financial assets are reported in the financial statements
New impairment approach
Early recognition of impairment loss

4. IFRS 9 Financial Asset
Number of classification category for investment asset is reduced from four to three
IFRS 9
IAS 39
Held-To-Maturity
Fair Value Through Profit or Loss (FVPL)
Held for Trading / Derivative
Fair Value Option
Available-For-Sale (AFS)
Loans and Receivables
Amortised Costs
Fair Value Through Profit or Loss (FVPL) (Including Fair Value Option)
Fair Value Through Other Comprehensive Income (FVOCI)

5. IFRS 9 Financial Asset Accounting treatment by asset classifications
* Realised gain / loss on disposal is treated differently between debts and equities under IFRS 9
IAS 39
IFRS 9
Accounting Treatment
Held-to-Maturity
Amortised Costs
Assets measured at amortised costs
Loans and Receivables
Category eliminated
FVPL
Assets measured at FV; changes in FV reported through P&L
AFS
FVOCI
Assets measured at FV; changes in FV reported through equity*

6. IFRS 9 Financial Asset
Classification and measurement – new assessment

7. IFRS 9 Financial Asset Contractual Cash Flows assessment
Are cash flows solely payments of principal and interest (SPPI)?
Yes – go to Business Model test
No – FVPL
Principal is the amount transferred by the current holder for the financial asset (i.e. taking into account discount / premium)
Interest generally represents returns for time value of money, credit risk, liquidity spread, etc. (e.g., cash flows from equity securities do not qualify as “interest”)

8. Hold to collect cash flows
IFRS 9 Financial Asset
Business Model test
Amortised cost
FVPL
Hold to collect cash flows
Other business models
Hold & Sell
Business model is to collect cash flows (e.g. bond coupons)
Business model is both to collect cash flows and to sell
Others (e.g. to realise fair value changes)
FVOCI OR OR
FVPL Option – available only if it eliminates or significantly reduces an accounting mismatch

9. IFRS 9 Financial Liability
IAS 39
IFRS 9
Amortised cost
Amortised cost
FVPL
Trading
FVPL but changes in ‘own credit risk’ recognised in OCI
Designated at FVPL

10. IFRS 9 Impairment
‘Day 1’ bad debt / loan loss provisions!

11. Accelerated recognition of loss provision
IFRS 9 Impairment
Accelerated recognition of loss provision
Assets with significant increase in credit risk since initial recognition*
Credit impaired assets – objective evidence as per IAS 39
Initial recognition*
Stage 1
Stage 2
Stage 3
* except for purchased or originated credit impaired assets
credit quality since
initial recognition
Deteriorating
12 month expected credit losses
Lifetime expected credit losses

12. Interaction between IFRS 9 and Insurance Contracts Phase II (IFRS 17)
Avoid accounting mismatches and volatility in reported profit
‘OCI Solution’ in IFRS 17: Impact from change in current discount rate reported through OCI based on a voluntary accounting policy choice on a portfolio by portfolio basis
IFRS 9 FVOCI debt securities: only applicable if solely ‘Principle and Interest’. Accounting mismatch could arise if not all assets backing the insurance liability qualify
Timing of IFRS 9 (2018) and IFRS 4 phase II (2021)  option to re-designate financial assets, overlay approach or deferral approach

13. To wrap up…
Financial assets classification is determined by the nature of their cash flows and how they are managed
IFRS 9 classification and impairment model of financial assets represent a change from the IAS 39 practice which affects the accounting treatment of the financial assets
how they are accounted for and measured in the financial statements
the reported results for the period
Consider the interaction between the accounting treatment for financial assets and insurance contract liabilities in performance reporting

14. Thank You