2. Plan to Replace IAS 39

8/12/2019 2. Plan to Replace IAS 39

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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 Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Financial instrumentsIASBs project to

replace IAS 39Joint World Bank and IFRS Foundation train the

trainers workshop hosted by the ECCB,

30 April to 4 May 2012


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Overview

Direct response to the Financial Crisis Approached in phases

I. Classification and Measurement

I. Assets Completed 2009

II.Liabilities Completed 2010

II.Impairment Re-expose Q4 12

III.Hedge Accounting

I. General Hedge Model Review draft Q2 12

II.Macro Hedge model Discussion paper Q4 12

Reopen Phase I Expose changes H2 12

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3Reopening Phase I

Limited modifications IFRS 9 is sound and operational

Address specific applicationissues

Consider interaction of IFRS 9 and insurance project

Consider how to reduce differences with FASBsclassification and measurement model



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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 comparativefinancial statements notrequired

modified disclosures on transition

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not necessarily those of the IASB or IFRS Foundation

Phase IClassification and Measurement



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6Financial assets

Fair Value

(No impairment)

Amortised cost

(one impairment

method)Contractual cash flowcharacteristics

Business model testFVO for

accounting

mismatch

(option)

All other instruments:

Equities

Derivatives

Some hybrid contracts

Equities:

OCI presentation

available

(alternative)

Reclassification requiredwhen business model changes



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7Financial assets: possible changes

Fair Value

(No impairment)

Amortised cost

(one impairment

method)

Contractual cash flow

characteristics

Business model testFVO for

accounting

mismatch

(option)

All other instruments:

Equities

Derivatives

Some hybrid contracts

Equities:

OCI presentation

available

(alternative)

Reclassification requiredif business model changes

FVOCI

(one impairment

method)



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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 bifurcationof financial assets

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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

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2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10

Amortised costContractual cash flow characteristics

Contractual terms that give rise to

solely payments ofContractual cash flow

characteristics

Interest =Consideration for

time value of moneycredit risk

Principal Interest

Tentative decision:

Modified P&I satisfies test IF

Compared with a benchmark

instrument

Difference not more than

insignificant



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Amortised costBusiness 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

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Bifurcation

3 primary options considered: current asymmetrical model

bifurcation of both assets and liabilities

no Bifurcation

Decision to retain the current model

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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)

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1414Financialliabilities

Accounting as for IAS 39 except for financial liabilities underFair Value Option

these financial liabilities recorded on statement of

financial position at full fair value

changes infair 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



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Convergence

Both boards have mixed measurement models Similaritiesin 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

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not necessarily those of the IASB or IFRS Foundation

Phase IIFinancial Instruments: Impairment

Three Bucket Approach



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17Impairment: General overview

Expected loss (EL) model

Responsive to changes in information that impact creditexpectations

Deteriorationin credit quality leads to recognition of lifetime

losses

Robust disclosuresto support principle and support

comparability

Guiding principle: Reflect general pattern of deterioration andimprovement of credit quality of financial assets



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18Three-bucket approach

Bucket 1: 12 months

expected loss allowance

Bucket 2: Lifetime


Bucket 3: Lifetime


All financial assets are initially

categorised in this bucket*

Evaluation performed on

groupsof financial assets

Evaluation performed on

individualfinancial 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



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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 changesin lifetime loss

expectations

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Trade receivables

Withouta 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

Witha significant financing component (long term):

policy election either:

apply general three-bucket model or

always recognise lifetime expected losses

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Open topics and timeline

Practical expedientshow to determine expected losses

Lease receivables

Discount rate

Loan commitments, financial guarantee contracts, revolvers

Disclosures Re-exposure draft in H2 2012

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Phase IIIHedge Accounting (General)



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2012 | IFRS Conference Kuala Lumpur

23Objective

Risk management

objective:

Seeks to linkrisk management and

financial reporting

(top down)

Accounting

objective:

Seeks to managetiming of recognition

of gains or losses

(bottom up)



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24Hedged items

Qualifying

hedged item

Entire item Component

Risk component(separately identifiable and reliablymeasurable)

Nominal componentorselected contractual CFs



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25Hedged items: risk components

Benchmark

(eg interest

rateor

commodity

price)

Benchmark

(eg interest

rateor

commodity

price)

Variable

element

Fixed element

Benchmark

(eg interest

rateor

commodity

price)

Benchmark

(eg interest

rateor

commodity

price)

Variable

element

Fixed element

IAS 39 New model



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26Hedging instruments

Qualifying hedging

instruments

Entire item Partial designation

FX risk component Nominal component(proportion)

Intrinsic valueSpot element



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27Costs of hedging

Time value

of options

Transaction

relatedhedged item

Time period

related hedgeditem

Costs of hedging

Forward element

of forwardcontract


Forward points (the funding swap


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p ( g pissue)

Feedback on ED: accounting requirement for time value of

options and forward points should be consistently applied

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Time value of

options

Forward points

(IAS 39)

Forward points

(decision in

redeliberations)

Transaction related

hedged item

Defer Can in substance

defer**

N/A (current

requirements already

provide solution)

Time period related

hedged item

Amortise Profit or loss Amor t ise

Profit or lossvolatility

** Can be deferred by the forward rate method(other than for FX financial assets/liabilities)



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29Hedge effectiveness

Hedge

effectiveness

Hedge effectiveness test:

1. Economic relationship

2. Effect of credit risk

3. Hedge ratio

Measuring and recognising

hedge ineffectiveness

Rebalancing Discontinuation



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30

Total entity risk exposure

(no specif ic disclo sure requirements)

Disclosures: scope

Hedged exposure

(Exposure torisks being

hedged)

IFRS 7

Disclosurerequirements

Significance of

financial instrumentsfor financial position

and performance

Nature and extent of

risks arising fromfinancial instruments

Entitys exposure

attributable to thehedged risk



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31Disclosures

Hedge accounting

disclosures

Risk

management

strategy

Amount, timing

and uncertainty

of futurecash flows

Effects of hedge

accounting on

the primary

financialstatements

Specific

disclosures for

dynamic

strategies andcredit risk

hedging



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32Alternatives to hedge accounting

Alternatives

Own use scope exceptionin IAS 39 Credit derivatives

Elective FVTPL At initial recognition or subsequently

At discontinuation: amortisation

Eligible for FVO in IFRS 9



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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



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Phase III

Hedge Accounting (Macro)


Status of the macro hedge accounting


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project 35

Fact finding

Common themes

Implications foraccounting model

Design of

accounting model

Common themes

Implications foraccounting model

Design of

accounting model

Interest rate risk Other risks

Project status

Sept 2011

Nov 2011

Feb 2012


M h i f h l i h


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Mechanics of the valuation approach 36


Discussion of interest rate risk using11 St


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11 Steps 37

Full fair value measurementStep 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 derivativesStep 11 - Risk limits

Risk Management IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Accounting alternatives and financialti bj ti


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reporting objectives 38

ValuationHedge

Accounting

Accounting

Layer*

Derivatives

at cost

Simple solutions

support

transparency whennot over-simplifying

Volatility provides

information - none

or too much lackstransparency

*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.


M H d A ti ti t bl


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Macro Hedge Accountingtimetable 39

After initial discussions in September/November 2010, theBoards 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 H2 2012


Q ti t ?


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40Questions or comments?

Expressions of individual views

by members of the IASB andits staff are encouraged. The

views expressed in this

presentation

are those of the presenter.

Official positions of the IASB on

accounting matters aredetermined only after extensive

due process and deliberation.



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The requirements are set out in International Financial

Reporting Standards (IFRSs), as issued by the IASB at 1January 2012 with an effective date after 1 January 2012but not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters and thepublishers do not accept responsibility for loss caused toany person who acts or refrains from acting in reliance onthe material in this PowerPoint presentation, whether suchloss is caused by negligence or otherwise.

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2. Plan to Replace IAS 39

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