Amortised cost

(one impairment

method)Contractual cash flow

characteristics

Business model test

FVO for

accounting

mismatch

(option)

Fair Value

(No impairment)

characteristics

All other Instruments:

• Equities

• Derivatives

• Some hybrid

contracts

Equities:

OCI presentation

available

(alternative)

Reclassification required when business model changes

81

Business model:

� objective of holding instruments is to collect

contractual cash flows rather than to sell prior to

contractual maturity to realise fair value changescontractual maturity to realise fair value changes

� not an instrument by instrument approach to

classification

� assess contractual terms of instruments within such

a business model

82

Contractual cash flow characteristics

� Payments represent solely principal and interest

� Interest is consideration for time value of money and

credit risk

� Prepayment/extension options may qualify� Prepayment/extension options may qualify

No ‘tainting’ rules for assets at amortised cost

� gains or losses from derecognising such items to be

presented separately with additional disclosures

83

Alternative presentation of fair value changes in other

comprehensive income (OCI)

Scope

� investments in equity instruments not held for

tradingtrading

Features

� alternative available instrument by instrument

� dividends recognised in P&L

� no recycling, impairment or change in presentation

84

Hybrid contracts

Financial host Non-financial host

Financial AssetsEmbedded derivatives

85

Financial host Non-financial host

IAS 39 guidance

retained

No separation –

part of classification

Fair value option available, if…

Accounting

mismatch

Managed on

fair value basisEmbedded

derivative(s)

Financial AssetsFair Value Option (FVO)

86

Not managed to

collect contractual

cash flows = FV

Hybrid contracts

with financial host

classified in

entirety

*Circumstances when FVO available is unchanged for financial liabilities

Unquoted equities and their derivatives

� Fair value measurement required

� Cost may be an appropriate estimate of fair value

• if more recent information not available or a

wide range of outcomes

Financial AssetsApplication guidance

wide range of outcomes

� Does not apply to equities held by financial

institutions and investment funds

Contractually linked and non-recourse instruments

� Detailed application guidance

� ‘Look through’ approach

87

IAS 39 IFRS 9

Classification Many categories each

with different

measurement methods

Two measurement bases:

Amortised cost and Fair Value

Measurement Irrevocable option at initial

recognition to present fair

value changes of some equity

Financial AssetsSummary of Key Changes

value changes of some equity

investments in OCI

Impairment Different impairment

rules depending on

category and

instrument type

Only debt instruments at

amortised cost are tested for

impairment

88

Financial AssetsSummary of Key Changes continued

IAS 39 IFRS 9

Tainting Tainting rules for held to

maturity investments

No tainting rules

Reclass-

ification

Some reclassifications

permitted/required

Reclassifications required if

and only if business model

changes

89

changes

Embedded

derivatives

Bifurcation of embedded

derivatives required in

some cases

No separation, same

classification approach (for

hybrid financial assets with

financial hosts)

FVO Available if specific criteria

are met

Available if eliminating or

significantly reducing an

accounting mismatch

90

Held for tradingFair value - with changes

recognised in profit or loss

90

Not held for trading

Fair value – irrevocable

choice of recognising

changes in profit or loss or

OCI

91

Held to collect contractual

cash flowsAmortised cost

(FVO available if criteria are met)

91

Not held to collect

contractual cash flows

Fair value through

profit or loss

92

Hybrid contract (as a

whole) has basic loan

features and is Held to

collect contractual CFs

Whole instrument at

amortised cost

92

All other hybrid contracts

with financial hosts

Whole instrument at fair

value through profit or loss

All financial

liabilities

Amortised

cost

FVO for

mismatch,

managed on

FV basis and

hybridsExcept:

Own

credit in

OCI

93

Except:

Held for trading

Fair value

through

P&L

• Hybrid financial liabilities are bifurcated

• No reclassification permitted

� What is ‘own credit’?

• fair value changes in liability arising from changes in the

issuer’s credit quality

� How is it measured?

• often measured as change in margin over a benchmark

interest rate

94

interest rate

� What is the concern?

• Gain when credit quality deteriorates, loss when credit quality

improves

• Reporting such gains and losses is not useful

� Board’s Request for Information on measurement of liabilities

� ED on classification and measurement

To address ‘own credit risk’

� Retain IAS 39 measurement requirements for financial liabilities:• held for trading � fair value through P&L• hybrid liabilities � bifurcation requirements in IAS 39• ‘vanilla’ liabilities � amortised cost• maintain FVO (with current eligibility conditions)• maintain FVO (with current eligibility conditions)

BUT

� Separate out ‘own credit risk’ for FVO

� ‘Own credit risk’ portion would be separated in a manner similar to that previously used in IFRS 7 for disclosure

95

Change in FV

attributable

to all factors

except ‘own

credit risk’

Change in FV

attributable

to ‘own

credit’

(not recycled)

Financial liability at FVOon statement of financial position at (full) fair value

Profit or Loss

Profit XXX

96

Mandatory for all liabilities at FVO unless this would create or

enlarge an accounting mismatch

Statement of Comprehensive

Income

Other Comprehensive

Income

XXX

97