1. IFRS 9 – Financial Instruments

2. Classification & Measurement
IFRS 9 - Key Principles and Areas of Difference
Impact on the financial statements could be pervasive
Classification & Measurement
Hedge Accounting
Impairment

3. Financial Liabilities
Classification & Measurement - Financial Liabilities
Non-substantial modifications accounted for differently
Financial Liabilities
Amortized Cost
FVTPL
Held for trading
Fair Value Option
Not recycled
Measure at FVTPL (specific criteria)
Own credit risk: FV gains/losses in OCI
Other FV gains/losses presented in P/L

4. Classification & Measurement – Financial assets
Business Model
Held to Collect
Held to Collect and Sell
Other
Any (1-3)
Cash Flows
SPPI (Solely Payments of Principal and Interest)
Not SPPI
Classification
Amortized Cost
FVTOCI
with recycling
FVTPL
No longer separate non-closely related EDs
Equity instrument
Fair Value Option
FVTPL
FVTOCI
without recycling

5. VS IAS 39 IFRS 9 Classification & Measurement - Financial Liabilities
Accounting for the modification or exchange of debt that does not result in derecognition
IAS 39
No gain or loss recognized
IFRS 9
Gain or loss recognized VS
Effect of modified cash flows spread over remaining term by revising EIR
Amortized cost recalculated by discounting modified contractual cash flows at original EIR, revised for transaction costs only

6. Impairment – Expected Credit Loss Overview Scope
Financial assets in the scope of IFRS 9
Contract assets
(IFRS 15)
Lease receivables
(IFRS 16)
Certain financial guarantees
(unless at FVTPL)
Written loan commitments
(unless at FVTPL)
Subsequent measurement ………….
FVTPL / FVOCI Option for certain equity instruments AC
FVOCI
Outside the scope of the impairment model
Within the scope of the impairment model

7. Expected Credit Loss Overview Impairment – general model
Changes in credit risk since initial recognition
Significant increase in credit risk?
Objective evidence of impairment??
STAGE 1
STAGE 2
STAGE 3
12 month ECL
Lifetime ECL
Lifetime ECL
Loss allowance
Apply effective interest rate to ……..
Gross carrying amount
Gross carrying amount
Net carrying amount

8. 12-month expected losses Life time expected losses
Expected Credit Loss Overview Expected loss allowance : 12-month vs lifetime
Stage 2
Lifetime ECLs are the total expected cash shortfalls arising from all possible default events over the life of the loan
Assets migrate to this bucket if the credit risk has increased significantly since initial recognition (unless ‘low credit risk’)
Stage 1
12 month ECL reflects the cash shortfalls over the life of the loan arising from a default in the next 12 months
Most assets begin in this bucket
Effect of the entire credit loss on a financial instrument weighted by the probability that this loss will occur in the next 12 months
12-month expected losses
Life time expected losses
Examples
Loan of CU 10m
Expected 2% probability to default in next 12 months
Entire loss that would arise on default is 10%
12 month ECL = CU 20,000 (10m x 2% x 10%)
Loan of CU 10m
Expected 12% probability to default over lifetime
Entire loss that would arise on default is 15%
Lifetime ECL = CU 180,000 (10m x 12% x 15%)
Note: Discounting has been ignored in the simplified example

9. Significant increase in credit risk?
Expected Credit Loss Overview Transfer out of stage 1 – significant increases in credit risk
Significant increase in credit risk?
Stage 1
Stage 2
Relative model
Credit risk on initial recognition
Current credit risk
compare
Initial recognition
Reporting date

10. Expected Credit Loss Overview Transfer into Stage 3 – indicators that an instrument is credit impaired
Breach of contract
(e.g. past due or default)
Lenders grant a concession relating to the borrower’s financial difficulty
Significant financial difficulty of the borrower
Credit impaired
Probable bankruptcy or other financial reorganisation
Disappearance of an active market for the instrument

11. Hedge Accounting
Hedge accounting remains optional under IFRS 9. Entities may choose to apply hedge accounting in order to reduce volatility in the income statement or in OCI.
The three types of hedges remain the same under IFRS 9. However, some of the hedge accounting mechanics are different. In particular, IFRS 9 changes the mechanics applied when a hedge of a future transaction results in the recognition of a non-financial item.
The hedge effectiveness requirements are very different under IFRS 9 compared to IAS 39. Retrospective hedge effectiveness test no longer required. Prospective test required, but test is whether an “economic relationship” exists between hedged item and hedging instrument. (no longer an % numerical threshold to pass). In most cases economic relationship may be demonstrated qualitatively
This remains a key requirement under IFRS 9. Hedge accounting is applied prospectively from the point the qualifying criteria are satisfied, notably hedge documentation. Hedge documentation requirements are different under IFRS 9 compared to IAS 39.

12. Q & A