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Transcript of Asset Accounting /IFRS 9 Financial Instruments · Asset Accounting /IFRS 9 Financial Instruments...
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 threeIFRS 9
• 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)
IAS 39
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
Assets measured at amortised costs
FVPL 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
IFRS 9 Financial Asset
• Business Model test
Amortised cost FVPL
Hold to collect
cash flowsOther business
modelsHold & Sell
FVOCI
FVPL Option – available only if it eliminates
or significantly reduces an accounting
mismatch
OR OR
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)
9
IFRS 9 Financial Liability
Trading
Designated at FVPL
Amortised cost Amortised cost
FVPL
FVPL but changes in
‘own credit risk’
recognised in OCI
IAS 39 IFRS 9
10
IFRS 9 Impairment
‘Day 1’ bad debt /
loan loss
provisions!
11
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 recognitionDeteriorating
12 month expected credit
lossesLifetime expected
credit losses
Lifetime expected
credit losses
IFRS 9 Impairment
Accelerated
recognition of
loss provision
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
Thank You