IFRS Update for Financial Services

IFRS Update for Financial Services

24 October 2013

KPMG AG, Zurich

1 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Agenda

Overview IFRS developments

On the surface Insurance contracts Financial guarantees

Diving deeper – Expected credit loss

Close up – Near-term implementation issues

Emerging – Discussion


Timeline – change ahead

Final published:

ED/DP expected in 2013: *

Standard Inter-pretation

Potential projects

Status as of September 2013 Impact for companies with a

calendar year end

Consolidation – Investment

entities

Equity method

Non-financial liabilities

Common control

Foreign currency

translation

Conceptual framework

FI - equity Emission trading

To Be Determined 2014

IAS 32 Offsetting

Annual improvements (2011-2013)


?

Discount rates

IFRIC Levies

IAS 36 Recoverable amount discl.

IAS 39/IFRS 9 Novation and

hedging

IAS 19 Employee

contributions * IFRS 10/IAS 28 Asset sale or contribution

IFRS 9 – FI (IAS 39

replacement )

IAS 28 Other net assets changes *

IAS 27 Sep. FS: equity method *

Rate-regulated activities *

IAS 12 DTA recognition for unreal. losses *

Annual improvements (2012-2014) *

IFRS 11 Interest in joint

operations

Revenue

recognition

FI Macro-

hedging *

Insurance

Leases

IFRIC NCI

put options

Disclosure initiative

2015


Timeline – focus for financial institutions

Status as of September 2013 Impact for companies with a

calendar year end

Consolidation – Investment

entities

Equity method

Non-financial liabilities

Common control

Foreign currency

translation

Conceptual framework

FI - equity Emission trading

To Be Determined 2014

IAS 32 Offsetting



?

Discount rates

IFRIC Levies

IAS 36 Recoverable amount discl.

IAS 39/IFRS 9 Novation and

hedging

IAS 19 Employee

contributions * IFRS 10/IAS 28 Asset sale or contribution

IFRS 9 – FI (IAS 39

replacement )

IAS 28 Other net assets changes *

IAS 27 Sep. FS: equity method *

Rate-regulated activities *

IAS 12 DTA recognition for unreal. losses *

Annual improvements (2012-2014) *

IFRS 11 Interest in joint

operations

Revenue

recognition

FI Macro-

hedging *

Insurance

Leases

IFRIC NCI

put options

Disclosure initiative

2015

Final published:

ED/DP expected in 2013: *

Standard


Agenda







Insurance contracts project What has happened so far?

IASB exposure

draft

IASB targeted

re-exposure

draft

IASB final standard

?

Joint delibera

tions (FASB / IASB) R

edel

iber

atio

n

Prepare for

transition

START

Effective date?

1997 2010 2011 to 1Q 2013

2Q 2013 2H 2013 to 2013

2H 2014 2015 2016 2017

Jan 2015

Jan 2017

Jan 2018


Insurance contracts project Separating non-insurance components

The separation of certain components from an insurance contract (‘unbundling’) would be required. Unbundling prohibited if not required.

Distinct goods and

services

Embedded derivatives (not closely related)

Distinct investment

components

Non-distinct investment component

Insurance component

Insurance standard Insurance standard, but excluded from the aggregate premium Financial instrument Revenue recognition

Measured under


Insurance contracts project Building Blocks and Presentation

zero

Expected cash outflows

Risk adjustment

Discounting

Contractual service (or

single) margin Expected cash

inflows

Presentation of changes in profit or loss and OCI (# IASB only):

Initial recognition:

Building block 1 Building block 2 Building block 3 # Building block 4

Changes in risk adjustment: profit or loss #

Changes in cash flows unrelated to services: profit or loss

Changes in cash flows related to past and current services:

profit or loss

Release of margin: profit or loss

Offset changes related to future

services #

Unwind of locked-in discount rate: profit or loss

Changes in discount rate:

OCI

Changes in cash flows related to future services: Offset against the margin * #

Recognised in profit or loss if no

contractual service margin


Insurance contracts project Presentation - Statement of comprehensive income

Earned premium presentation (an example)

Insurance contract revenue 475

Claims and benefits incurred -320

Expenses incurred -60

Amortisation of acquisition costs -20

Changes in estimates of future cash flows (if not offset against the contractual service margin) -10

Unwind of previous changes in estimates 5

Underwriting result (Gross margin) 70

Investment income 60

Interest on insurance liability -54

Profit or loss 76

Other comprehensive income:

Change in insurance contract liability due to changes in discount rate 9

Fair value movements on FVOCI assets -10

Total comprehensive income 75

Earned premium approach for revenue

Premiums are allocated to periods in proportion to the value of coverage (and other services) by reference to the estimated pattern of expected claims and expenses.

Allocated premiums exclude the amounts to be paid to policyholders regardless of whether an insured event occurs (‘the investment component’).


Insurance contracts project Hot topics

Hot Topics

Contractual Service Margin

(CSM)

Discount rates

Presentation Interaction with IFRS 9

Clarity of proposals

Acquisition costs Mirroring “Confidence level” disclosure

Loss of volume information for key metrics Investment components excluded from

revenue

Unlocking Subsequent measurement for favourable changes Level of measurement

Determination of discount rate Changes recognised in OCI

Alignment of effective dates Redesignation of financial assets

Feedback :

Very complex High administrative efforts Accounting mismatches remain Does it really reflect the business?


Insurance contracts project Financial guarantees

In scope if: meets insurance contract definition, and not specifically scoped out

Financial guarantee contracts

that are currently accounted for as insurance contract

not currently accounted for as insurance contract

in scope

out of scope

IASB ED proposes:

FASB ED proposes:


Agenda







Expected credit loss project Overview

ECL allowance recognised (Balance Sheet)

12-month ECL (lifetime ECL adjusted for probability of default in the next 12 months)

Lifetime ECL Lifetime ECL

Interest revenue (Profit or loss)

Gross basis Gross basis Net basis

Stage 1 Performing

Stage 2 Underperforming

Stage 3 Non-performing

Change in credit risk since initial recognition

ECL - expected credit losses PD - probability of default LGD - loss, given default CRM - Credit Risk Management EIR - effective interest rate


Expected credit loss project Transfers under the Expected Credit Loss Model

Default Investment Grade Non Investment Grade

At0 At1

Dt0 Dt1

Et0

Et1

Ct0

Definition “Credit-impaired”

Ct1

Bt1

PD-Threshold (Non-investment grade)

Bt0

Ft1 Ft0

PD

“Assets with low credit risk”

Xt0

Xt1 Loan X at the end of the first period (t1)

Loan X at origination (t0)

Stage1

Stage 2

Stage 3

Lifetime EL Notion

1yr EL Notion

Significant deterioration

Insignificant deterioration


Expected credit loss project Hot topics

Hot Topics

Basel framework

Discount rates

Definition of default

Maturity

Transfer criteria

‘Default’ interpretations

Similarities: current CRM processes Differences: PD, LGD

Range of acceptable rates (from risk-free to EIR)

Contractual (vs. behavioural)

Triggers for transfer (using PD, watch list ?)

Feedback :

Majority support model Operational Agreement with scope Simplifications


Expected credit loss project Simplified for short-term receivables

In September 2013 board meeting IASB tentatively decided to include a rebuttable presumption that default does not occur later than 90 days past due

Type of financial assets Proposed measurement of ECL

Trade receivables with no significant financing component

Lifetime expected credit losses

Trade receivables with a significant financing component and lease receivables

Policy election to measure the loss allowance either in accordance with the general approach; or as lifetime expected credit losses.

Source: GAM Group, annual report 2012


Expected credit loss project What’s ahead?

Near-term actions: Assess scale of your firm’s effort Develop communications plan Implementation plan

IASB exposure

draft

IASB exposure

draft

IASB final standard

Prepare for transition

Red

elib

erat

ions

Effective date?

2009 2011 1Q 2013 2H 2013 2014 2015 2016 2017

Jan 2015

Jan 2017

Supple-mentary

document


Agenda







IFRS 13 Fair value considerations

IAS 32 Offsetting in the balance

sheet

Near-term implementation issues Overview

IFRS 7 Netting disclosures

IFRS 10 Consolidation


Near-term implementation issues IFRS 13 Fair Value Considerations

NAV

Mid-point price

Credit risk

Adjusted NAV

Exit price

Non-performance

risk


Near-term implementation issues Offsetting financial assets and financial liabilities

IAS 32 ‘clarified’ An entity currently has a legally

enforceable right to set-off if that right is: − Not contingent on a future event; and − Enforceable both in the normal course of

business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.

Certain types of gross settlement are equivalent to net settlement.

2014: Balance sheet offsetting 2013: Disclosures

IFRS 7 amended Minimum quantitative disclosures: − Disclose the (potential) effects of netting

arrangements Describe types and nature of rights of set-

off that do not qualify for offsetting; and Determine whether additional disclosures

are required.


Near-term implementation issues IFRS 7 disclosure: Impact on you?

Availability of input data?

Implementation complex and costly

Regulatory capital requirements

affected?


Near-term implementation issues IAS 32: Assess your master netting agreements!

Conclusion

Summary

23 different derivative products, cleared through 12 clearing houses (e.g. Eurex Clearing AG) in scope

only two (!) met IAS 32 offsetting criteria

Due to IAS 32 requirements, offsetting is limited under most clearing houses

New legal opinions are expected to clarify netting and offsetting, until now focus on enforceability of set off rights

Clearing houses are improving operational mechanics of clearing and settlement


Near-term implementation issues IFRS 10 Consolidation

Surprising quiet!

Seed capital

What has been your

experience??


Agenda







Streamlining financial reporting KPMG’s Spring 2013 IFRS Update

A disclosure framework is needed.

All disclosures need to be improved – not just financial information.

Materiality and principles based disclosure guidance?

There is a disclosure overload.

IFRS do not reflect the business model.

Reports are a central means of communication in building investor trust.

Accounts are overburdened by information which is not material, obscuring what is important and relevant.

More forward looking information is needed.

„There is a difference between what standard setters want and the real world.“ Joachim Schindler, KPMG, Global Head of Audit

Standard setters Users

Preparers Auditors

Joint effort to tackle

improvements in reporting and

disclosure


Streamlining financial reporting What happened since Spring? (1/2)

IASB: Disclosure Initiative

Short-term steps Long-term steps

Amendments to IAS 1

Materiality – assessment of

existing guidance

Review new EDs disclosure requirements

Research project – IAS 1, IAS 7 and IAS

8 – FSP project

Review of existing

standards

Clarifying that materiality applies within a standard.

Clarifying that the materiality assessment applies to the whole of the financial statements, including the notes.

Remove language that has been interpreted as prescribing the order of the notes.

2013 2014

Q3 – Q4 Q1 Q2 Q3 Q4 Final date of IFRS subject to deliberations, comments, etc. IASB deliberations Publish ED IFRS Ti

mel

ine

for

Amen

dmen

ts

to IA

S 1


Streamlining financial reporting What happened since Spring? (2/2)

Financial Stability Board (FSB)/EDTF Report issued October 2012

EDTF progress report issued July 2013

− Bank survey: self-assessment − User review: group of investors and analysts assessment

Implementation status by Geography:

Enhanced Disclosure Task Force


Agenda







Open discussion

Questions ?

Feedback?

Your views?

Publications

For KPMG’s Newsletter: https://www.kpmgnews.ch/en/index.htm For KPMG’s IFRS Publications: http://www.kpmg.com/global/en/topics/global-IFRS-institute

New on the Horizon: Insurance contracts

The IASB and FASB issued their targeted re-exposure drafts on

insurance contracts in June, marking a major step forward

towards implementing a common insurance reporting framework

across much of the world.

New on the Horizon: Financial Instruments- Expected credit losses

The IASB's revised proposals are a step change in accounting for

impairment, with big impacts likely for banks and similar financial

institutions.

Insights into IFRS 2013/14

KPMG’s updated publication explains the requirements of IFRS

and provides extensive interpretative and application guidance.

Save-the-Date IFRS Update for Financial Services Thursday, 03 April 2014 KPMG AG Save this date for our next Update!

Thank you!

Contact details

Patricia Bielmann Partner

IFRS Financial Services

KPMG AG Badenerstrasse 172

8026 Zurich

Phone +41 58 249 41 88 Fax +41 58 249 48 64

[email protected]

Lisa Busedu Director

IFRS Financial Services

KPMG AG Badenerstrasse 172

8026 Zurich

Phone +41 58 249 56 16 Fax +41 58 249 48 64

[email protected]

mailto:[email protected]

mailto:[email protected]

Disclaimer:

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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