Hot topics treasury seminar

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1 IFRS 9 Lessons learned from first implementations Discover and unlock your potential

2 Program Introduction and objectives Phase 1 Classification and measurement Phase 2 Impairments Phase 3 Hedge Accounting Transition 2

3 Introduction and objectives

4 Overview of the 3 phases of IFRS 9 4

5 IFRS 9 key milestones Nov 2009 Nov 2013 IASB develops the 3 phases of IFRS 9 Second half of 2016 (expected) Expected EU endorsement of IFRS 9, after which early adoption is possible 2018 Effective date (excluding Macro Hedging) July 2014 IASB publishes final IFRS 9 standard (TBD) Macro Hedging IASB publishes exposure draft TBD Effective date Macro Hedging 5

6 Overview transition The effective date will be for annual periods starting on or after 1 January Retrospective application is required (in accordance with IAS 8) except: - If transition application requires undue cost or effort, operational simplifications are provided. - No requirement to restate comparatives. If a company does not restate its comparatives, the opening balance of the retained earnings should be adjustment to reflect the first time application 6

7 Phase 1 Classification and measurement

8 Financial assets IAS 39 IFRS 9 Held to Maturity Amortised cost Loans and receivables P&L Available for Sale Fair Value Trading OCI 8

9 Decision tree 9

10 Phase 1 Classification and measurement Lessons learned from first implementations

11 Phase 1 Classification and measurement Step 1: Gap analysis Accounting analysis per FSLI to determine the classification and measurement according to IFRS 9. Challenges: Create homogeneous portfolios (per type, geographic area, etc.) of financial assets to perform the analysis; Detailed knowledge of the contracts is required and the information is sometimes only available locally; When performing the assessment for IFRS 9, discussions with respect to the IAS 39 classification might reopen (e.g. prefinancing contract). Outcome: Scoping of the relevant financial instruments assets for further procedures; For the straightforward assets (i.e. no risk on change of measurement), the classification and measurement were determined during this phase. 11

12 Phase 1 Classification and measurement Step 2: Business Model Assessment Determination of the classification for the debt instruments based on the business model assessment. Challenges: Translate accounting requirements and terminology to a tailor made questionnaire, understandable for people without an accounting background; Determine a sample of contracts to be tested per portfolio to determine the business model of the portfolio; For financial assets that do not belong to a portfolio, the assessment should be performed on an individual level. Please note that this is an exceptional case; Review of the questionnaire filled in by different persons and reach homogeneous conclusion. Outcome: The business model is assessed and documented per portfolio 12

13 Phase 1 Classification and measurement Step 3: SPPI test Determination of the classification for the debt instruments based on SPPI test. Challenges: Interpret the SPPI requirements and scope the relevant requirements. The requirements are extensive and can be difficult to assess; Design tailor made SPPI test understandable for people with no accounting background; Review of the questionnaire filled in by different persons and reach homogeneous conclusion. Outcome: The test was deemed to be irrelevant for the trade debtors with short maturity contracts; The SPPI test was performed and documented per portfolio. 13

14 Phase 2 Impairments

15 The IFRS impairment model now and then A comparison of IAS 39 and IFRS 9 Fundamental change of the impairment methodology for financial assets at amortized cost as well as eligible debt instruments at fair value through OCI IAS 39: IFRS 9: Incurred Loss Model: Indicator / trigger based (loss event) methodology Future losses are not included Mandatory reversal of an impairment if triggering event exists Expected Loss Model: Periodic reassessment of expected losses (without indicator) Future losses are taken into account Implicit reversal of impairment by periodic reassessment of expected losses 15

16 The IFRS impairment model now and then A comparison of IAS 39 and IFRS 9 IAS 39 Incurred Loss Model IFRS 9 Expected Loss Model Risk provision model depends on IAS 39 category: LAR/HTM: recoverable amount as reference for calculation of risk provision AFS: impairment based on fair value Loan commitments and financial guarantees in accordance with IAS 37 and IAS 18 No rules for purchased or originated credit-impaired financial assets (POCI) No exemptions for lease and trade receivables Generally one impairment model for: instruments at amortised cost fair value through OCI debt instruments loan commitments financial guarantees Special rules for purchased or originated credit-impaired financial assets (POCI) Simplified approach for lease and trade receivables 16

17 Expected credit losses Overview on the model of IFRS 9 General Approach Credit Deterioration Model 12-months expected credit loss (ECL) at initial recognition Lifetime-ECL if significant increase in credit risk (unless they have low credit risk at the reporting date) Approach for purchased or originated credit-impaired financial assets (POCI) No risk provision at initial recognition Recognition of a (positive or negative) risk provision in amount of the change of the Lifetime-ECL Simplified Approach Full Lifetime-ECL Model Lifetime ECL at initial recognition and subsequent measurement Financial Assets at Amortised Cost Financial Assets FVOCI Irrevocable loan commitments and financial guarantees (if not FVPL) Lease receivable (option) Trade receivable or contract asset that contain a significant financing component (option) Financial Assets at AC or FVOCI, that are credit-impaired at initial recognition (Impairment definition similar to IAS 39) Accounting policy choice Accounting policy choice Trade receivable or contract asset that do not contain a significant financing component (or when the practical expedient for contracts that are one year or less is applied) Lease receivable (option) Trade receivable or contract asset that contain a significant financing component (option) 17

18 Impairment of financial assets General model Change in credit quality since initial recognition Stage 1 Stage 2 Stage 3 Performing (Initial recognition*) Underperforming (Assets with significant increase in credit risk since initial recognition* ) Non-performing (Credit impaired assets) Recognition of ECL 12 month ECL Lifetime ECL Lifetime ECL Interest revenue Effective interest on gross carrying amount Effective interest on gross carrying amount Effective interest on amortised cost carrying amount (i.e. net of credit allowance) 18

19 Phase 2 Impairments Lessons learned from first implementations

20 Phase 2 Impairments Step 1: Scoping Define the scope of instruments for which an impairment analysis should be performed. Challenges: Timing issue: Phase 1 was not finished, therefore the scoping process was complicated. Ideally, phase 1 should be finished before phase 2 can be started. Outcome: Debt instruments recorded at amortized cost or fair value through OCI are in scope. Impairment analysis was to be performed for loan receivables and trade receivables. 20

21 Phase 2 Impairments Step 2a: Impairment of loan receivables Define how to implement phase 2 on loan receivables of corporates. Challenges: Limited policies and information regarding credit risk were available; Create groups based on shared credit risk characteristics (e.g. instrument, rating, term to maturity, etc.) Determine whether practical expedient for low credit risk assets can be applied; How to determine the PD and LGD without public information available. Outcome: The practical expedient was applied for performing assets, on an individual basis; A sensitivity analysis was performed to quantify fluctuations in PD and LGD; No significant credit risk was present at reporting date. 21

22 Phase 2 Impairments Step 2b: Impairment of trade receivables Define how to implement the phase 2 on trade receivables of corporates. Challenges: Limited policies and information regarding credit risk were available. No group policy was present for determining the provision related to the aging of debtors; Determine default rate based on historical data. Outcome: The use of the practical expedient resulted in the use of a provision matrix. Default rates per bucket of days past due the contractual payment date are defined. Refer to the following example: 22

23 Phase 3 Hedge accounting

24 IFRS 9 what has changed? Background: Hedge accounting under IAS 39 is complex and difficult to achieve Risk management activities cannot be understood by analysing hedge accounting in the financial statement Objective Allow companies to better reflect their risk management activities in the financial statements Help investors to understand the effect of hedging on the financial statements and on future cash flows Good news Challenges Hedging/hedged instruments: Allowed to hedge components of non-financial items Ability to hedge a net position, bottom layer and aggregated exposures Possible to defer changes in aligned time value of options in OCI Possible to recognise fair value changes of forward points in OCI Hedge effectiveness: Reduces administrative burden of testing effectiveness retrospectively Removal of arbitrary % bright line Rebalancing no need for de-designation Voluntary de-designation prohibited Hedge needs to reflect risk management strategy Risk policy has to be formalised IAS 39 can still be applied Cash flow hedges of net positions only allowed for FX risk Re-balancing mandatory TMS able to support all IFRS 9 requirements? 24

25 IFRS 9 what has NOT changed? Basic hedge accounting models retained (i.e. FVH, CFH & NIH) Hedge accounting is optional/ priviliged Detailed rules on eligible hedged items and hedging instruments Derivatives still at fair value (Classification) Documentation still needed Ineffectiveness recognised in P&L 25

26 Hedge accounting is a right, you need to work hard to earn it. An entity s risk management strategy is central to the objective of hedge accounting under IFRS 9. Hedge accounting is an exception to the normal accounting rules and so some restrictions are necessary to determine whether or not a proposed hedging relationship qualifies for hedge accounting. An entity is only allowed to apply hedge accounting if it meets the specified qualifying criteria. To qualify for hedge accounting all of the following three conditions should be met: Formal designation and hedge documentation on time Only eligible hedging instruments and eligible hedged items Meet the hedge effectiveness requirements 26

27 Phase 3 Hedge accounting Lessons learned from first implementations

28 Phase 3 Hedge accounting Step 1: Align existing hedge relationships with the IFRS 9 requirements. Challenges: Converting the IAS 39 hedge documentation to IFRS 9 compliant hedge documentation; Determining the required level of detail for the hedging strategy. Results: Hedge documentation is aligned with IFRS 9; IAS 39 hedge relationships can be continued when they are adjusted to qualify with hedge accounting requirements from IFRS 9. 28

29 Transition

30 Overview transition The effective date will be for annual periods starting on or after 1 January Restatement of the comparatives is not required but permitted if no use of hindsight If a company does not restate its comparatives, the opening balance of the retained earnings should be adjustment to reflect the first time application 30

31 Phase 1 Classification and measurement Transition requirements If a company does not restate its comparatives, the opening balance of the retained earnings should be adjustment to reflect the first time application (e.g. difference between previous carrying amount and the carrying amount at initial application) Management is required to perform: the Business Model test based on circumstances and facts that exist as at the date of initial application the Solely Payment of Principal and Interest (SPPI test) based on the facts and circumstances that exist on the date of the instrument s initial recognition Designation at fair value through P&L or OCI (equity investments) is performed at the date of initial application. Additional Disclosure requirements related to the transition 31

32 Phase 1 Classification and measurement Transition disclosures (1/4) Additional quantitative disclosures are required on transition Reconciliation between the original measurement categories under IAS 39 and the new measurement categories under IFRS 9. Additional qualitative information is required to be disclosed Additional disclosures for reclassifications between categories upon transition 32

33 Phase 1 Classification and measurement Transition disclosures (2/4) Example disclosures for Financial Assets at FVTPL / FVTOCI 33

34 Phase 1 Classification and measurement Transition disclosures (3/4) Example disclosures for Financial Assets reclassified from / to Amortised Cost 34

35 Phase 1 Classification and measurement Transition disclosures (4/4) Example disclosures for Financial Liabilities 35

36 Phase 2 Impairments Transition requirements At the date of initial application, an entity must determine whether there has been a significant increase in credit risk since initial recognition however an entity may apply: the low credit risk simplification for those financial instruments that are deemed to have a low credit risk at the date of initial application; The 30 days past due rebuttable presumption if, and only if, management identifies significant increases in credit risk since initial recognition. The entity approximates the credit risk on initial recognition by considering information that is reasonably available without undue cost or effort. The following source of information could be used: Information from internal reports and statistics Information about similar products Peer group experience for comparable financial instruments. 36

(expected loss model) Entity provide these disclosures by measurement category in accordance with IAS 39 and IFRS 9,

37 Phase 2 Impairments Transition disclosures (1/4) At the date of Initial Application Reconciliation of the ending allowances in accordance to IAS 39 (incurred loss model) and the opening loss allowance determined under IFRS 9 (expected loss model) Entity provide these disclosures by measurement category in accordance with IAS 39 and IFRS 9, showing separately the effect of changes in measurement category on the loss allowance at the Date of Initial Application. 37

38 Phase 2 Impairments Transition disclosures (2/4) Loss allowances provision for loan to customers Eur'M Perform ing Underperform ing Nonperform ing T otal Closing loss allowance as at 30 December 2017 (calculated under IAS 39) Amounts restated through the opening retained earnings Opening loss allowance as at 1 January 2018 (calculated under IAS 39) Indiv idual financial assets transferred to underperforming (lifetime ex pected credit losses) Indiv idual financial assets transferred to nonperforming (credit-impaired financial assets) New financial assets originated or purchased Write-offs Recov eries Other changes Closing loss allowance as at 31 Decem ber 2015 (calculated under IFRS 9) 38

39 Phase 2 Impairments Transition disclosures (3/4) Qualitative information related to loans to customers 39

40 Phase 2 Impairments Transition disclosures (4/4) Provision matrix Trade Receivables (IFRS 9.IE74-IE77) 40

41 Phase 3 Hedge accounting Transition requirements Accounting policy choice to apply IFRS 9 or IAS 39 Prospective application of IFRS 9 except in some specific situations (IFRS ) To apply IFRS 9 from the date of initial application, all IFRS 9 qualifying criteria must be met as at that date On initial application of the IFRS 9 hedge accounting requirements, an entity: may start to apply those requirements from the same point in time as it ceases to apply the hedge accounting requirements of IAS 39; and shall consider the hedge ratio in accordance with IAS 39 as the starting point for rebalancing the hedge ratio of a continuing hedging relationship, if applicable. Any gain or loss from such a rebalancing shall be recognised in profit or loss. Hedge documentation must be updated in accordance to IFRS 9 requirements No additional transition disclosures are required 41

42 Questions 42

43 More information Trainer: Kees-Jan de Vries Phone number: +31 (0) Trainer: Aliénor Fromont Phone number: +31 (0)

IFRS 9 Financial Instruments. IICPAK: The Financial Reporting Workshop 4 th and 5 th December 2014 Hilton Hotel, Nairobi

IFRS 9 Financial Instruments. IICPAK: The Financial Reporting Workshop 4 th and 5 th December 2014 Hilton Hotel, Nairobi IFRS 9 Financial Instruments IICPAK: The Financial Reporting Workshop 4 th and 5 th December 2014 Hilton Hotel, Nairobi Why are we discussing this topic? Why are we discussing this topic? Area that is