Considerations for Adopting IFRS 9

Transcription

1 Considerations for Adopting IFRS 9

2 Replacement for IAS 39, except Macro- Hedging rules Effective for fiscal years beginning after January 1, 2018 (OSFI is requesting adoption one year early) Effective date for FIs in Canada will be November 1, 2017, Fiscal 2018 Restatement of Retained Earnings, AOCI & Prior Year Comparatives are required for certain changes 2

3 Standard covers three main areas related to financial instruments: 1. Classification & Measurement 2. Impairment 3. Hedge Accounting 3

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9 Changes to the current classification of financial assets requires the following retrospective adjustments: 9

10 No change to classification categories for liabilities No business unit assessments required Embedded derivatives must still be assessed and bifurcated if not clearly & closely related FVO still available Now Own Credit Risk (DVA) needs to be assessed and reported in OCI Can be reported in PL if accounting mismatch created Option to early adopt this provision available 10

11 Change from FVTPL to Accrual or FVTOCI allows recapture of all gains/losses when sold Need to be able to determine amortized cost to move/reverse correct balances Can use current price as carrying value and amortize premium/discount Life-to-date MVA on Loans, HTM & AFS assets moved to a HTS unit will never get to be recognized to P&L These assets would need to be sold prior to implementation to capture life-to-date gains/losses Assets with bifurcated embedded derivatives may need to be measured at FVTPL Some assets with bifurcated calls/puts and extension options may now qualify for accrual accounting 11

12 Election of FVO can be re-assessed for existing assets & liabilities Life-to-date MVA on existing FVO changed to accrual gets reversed out of Retained Earnings. Life-to-date MVA on new FVO will never get recognized to P&L. Life-to-date DVA on FVO liabilities must be booked in AOCI MVA on Equity in AOCI will never be recognized in PL All MVA on Equities electing FVTOCI option remains in AOCI but cannot be captured on sale. Life-to-Date MVA on AFS Equities changing to FVTPL reclassed from AOCI to Retained Earnings Sell any equity with large gains in AOCI before implementation 12

13 Assess all business units & document Each type must meet criteria for unit type There is no default unit type Assess all individual instruments in each nontrading unit Each instrument must meet SPPI criteria to adopt measurement other than FVTPL Assess whether FVO is still needed or now needed for certain instruments in non-trading units If credit risk is managed with a credit derivative, FVO can be adopted Assess whether Equities held should remain as FVTOCI 13

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16 Now Debt Securities must also be assessed for ECL Need to expand current OTTI process All new assets must be assessed for 12 month ECL regardless of issuer Assessments begin Day 1 OSFI is making noise about no zero 12-month ECLs Government securities may need a nominal ECL provision booked. Consider looking at these types of securities as a portfolio 16

17 Any impairment provision booked against an instrument being hedged does not have an impact on the calculation of ineffectiveness However, if the provision is significant i.e. default imminent or significant change in credit quality, then hedge will need to be discontinued. This is not a change from current hedging requirements Very complex and a more comprehensive process is needed Get professional help if you do not have the proper resources to develop a process 17

18 Review existing Provision process Expand process to increase scope of instruments reviewed Identify indicators to determine changes to stage Identify & document any policy choices allowed under the Standard Assess impact of new provision requirements Assess all current holdings of financial assets Determine what stage should be applied Book life-to-date ECL to Retained Earnings AFS debt securities will be a reclass between AOCI & R/E 18

19 Standard has an election to delay implementation of Chapter 6 until a later date No limitations other than at start of future reporting period Macro-Hedging can continue under IAS39 rules Several changes which can be broken down into following categories: Categories Treatment 1. Changes to Current Relationships Retrospective 2. Designation Elections for Current Relationships Retrospective 3. New Designation Flexibilities Prospective 4. Changes in Qualification Requirements Prospective 5. Eligibility Changes Prospective 6. Changes to Disclosure Prospective 19

20 Only one change requiring retrospective application to existing relationships Impacts any FX strategy using Hypothetical Derivative method: Change FX Basis Risk now precluded component of FX Hypothetical Derivative Valuation Impact Impacts all CFHs and NIHs Only those using CCIRS and FX Forwards Cash Flows cannot be discounted using a curve which includes FX basis risk component o Must use swap curve Ineffectiveness may change Previous year s impact booked to Retained Earnings 20

21 New election that can be applied to existing relationships: Change Exclusion of FX Basis Risk component of FX derivative from ineffectiveness Impact Aligns valuation of hedging derivative with valuation of underlying when calculating ineffectiveness Impacts CCIRS and FX Forwards Will improve ineffectiveness of FVHs since FXBR not included in valuation of HI Retrospective application if elected on Implementation Date Eliminates impact of required change to Hypothetical valuation No P&L volatility resulting from excluded component OCI accounting for changes in value up to value of HI component Amortization of Day 1 value 21

22 New election that can be applied to existing relationships: Change Hypothetical Derivatives for FVHs Impact Hedged Item can be represented by a Hypo for all types of hedges Same approach as CFH can be applied to FVH Allowed retrospective treatment for existing relationships if elected on Implementation Date Still required to match critical terms of HI & calibrated to hedged price/rate level e.g. nil value on designation date for swaps or forwards New rule around Hypo creation Cannot include any features not inherent in the value of the HI Will improve ineffectiveness of FVHs Removes math affect HI included PV of principal while HD included PV of floating cash flows Bond from Yield value no longer used for debt securities Since principal no longer PV d, then partial term FVHs will work 22

23 Two Existing Elections more attractive. new accounting applies to existing relationships: Changes Exclusion of Forward Points component of FX Forwards from ineffectiveness Exclusion of Time Value component of Options from ineffectiveness Not new concept but new accounting for excluded component makes it attractive Retrospective application if elected on Implementation Date Removes a source of ineffectiveness when the cash flow date of the HI does not match the maturity date of the hedging FX forward Will improve ineffectiveness of some CFHs and NIHs No P&L volatility resulting from excluded component OCI accounting for changes in value up to value of HI component Amortization of Day 1 Value 23

24 Changes to two aspects related to how designations can be accomplished: Changes Horizontal Approach as allowable Proportional designation Designation of any Risk Component Impact Hedged item can be split into horizontal layers Now available for FVHs IAS39 allowed for CFHs (i.e. First Cash Flows approach) Applies to both specific and portfolio hedges Designate lowest layers first to avoid problems with volatile balances or partial unwinds Instruments with prepayment options not eligible Expanded from IAS39 Risk components separately identifiable and reliably measurable Can be designated as Hedged Items e.g. LATAM countries with distinct currency reflecting Inflation can now hedge component associated with inflation risk 24

25 One main aspects related to the Maintenance & Monitoring of all hedging relationships: Change Removal of Optional De-Designations Impact De-designation allowed only if: Hedged Item no longer eligible Instrument in relationship is fully unwound Risk management objectives change Qualitative effectiveness no longer exists 25

26 Other aspects related to the Maintenance & Monitoring of all hedging relationships To compensate for no de-designations: Changes Impact Rebalancing Relationships Partial Unwind of Instruments in Relationships Hedge ratio on instruments can be adjusted to minimize ineffectiveness Only when there is change in the relationship between the HI & HD Changes in the hedge ratio are prospective Ineffectiveness on relationship is measured and recorded prior to rebalancing Changes in hedge ratio trigger amortization FVH amortize portion of FVA CFH amortize portion of OCI balances deferred De-designation not allowed if partial unwind of any instrument occurs If Hedged Item partially unwound: Only impacts relationships using top layers of Hedged Item Write-off portion of FVA and Amortization If Hedging Derivative partially unwound: Reduce hedge ratio of Hedged Item Begin amortization of portion no longer in relationship Hedge ratio on other instrument may need to be adjusted accordingly 26

27 Additional Changes These have a prospective application: Changes Removal of the Hedge Effectiveness Testing Thresholds Removal of Similarity Testing for Portfolios of Specified Instruments 27

28 Changes to several aspects related to eligible instruments: Changes Non-derivatives & derivatives combined as Hedged Items Hedged item with MVA dominated by credit risk is no longer eligible Portfolios of Specific Instruments-including net portfolios FVTOCI Equity Instruments as Hedged items One-Sided Hedging Non-Derivatives classified as FVTPL as Hedging Instruments FVTPL non-derivatives & derivatives combined as Hedging Instruments 28

29 One change in particular will help to compensate for no-designations: Change Non-derivatives & derivatives combined as Hedged Items Impact Instruments designated in an existing relationship can be modeled as the hedged item in new relationship Hedged Item represented by new exposure resulting from previous hedge e.g. De-designation of previous relationships required under IAS39 if IRR exposure change results in new swap transacted Liabilities and their bifurcated ED can now be Hedged Items Assets & Liabilities with interest related embedded derivative (ED) can still be Hedged Items Assets with non-interest related ED now FVTPL o Cannot be designated as Hedged Item 29

30 Now must disclose the following: Changes Risk Management Strategy and how it is applied to manage risks Hedging activities and how they could affect future cash flows The effect that hedge accounting has had on primary financial statements 30

31 Delaying implementation of Chapter 6 does not delay new disclosure requirements New disclosure must be applied to IAS39 hedges Hedge accounting can be continued for most existing relationships with only minor documentation amendments Hedge accounting must be discontinued for any HI that is reclassified to FVTPL or elects FVO Hedge accounting is prospective for any FVO instrument when election is not continued under IFRS 9 31

32 Determine if delaying implementation of Chapter 6 Assess impact of any retrospective requirement or elections Numerical impact to R/E & AOCI System impact Assess impact of prospective changes System impact Infrastructure changes required Develop & implement project plan to convert existing relationships Retrospective changes Prospective changes 32

33 Review changes needed to disclosure & Strategy documentation Source additional information required to report Ensure all strategy documentation updated prior to Implementation Date New Standard references Remove/Amend sections on Effectiveness Testing Sources of Ineffectiveness now required 33

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35 Additional Information-Hedging 35

36 Change Hedge Effectiveness Thresholds Removed Removal of Similarity Testing for Portfolios Impact No longer required to quantify effectiveness and meet numeric parameters. Qualitative assessment only Economic relationship exists, Hedge ratio on instruments is consistent Quantification of similarity is no longer required No longer required to meet numeric parameters related to change in individual instruments in comparison to change in total portfolio Relates to Portfolio FVHs 36

37 Change Hedged Item with MVA dominated by credit risk no longer eligible Portfolios of specific instrumentsincluding net portfolios FVTOCI Equity Instruments as Hedged items Impact When the market value of an instrument is dominated by credit risk: Cannot be designated in new relationship Must de-designate existing relationship Instruments, individually eligible, can be combined in a portfolio as Hedged Item Net portfolios can be designated Only if entity hedges on a net basis for risk management purposes Designate both the gross assets and gross liabilities that make up net Eligible as Hedged Items All hedge accounting booked in OCI Never recycled to P&L 37

38 Change One-sided hedging Non-Derivatives classified as FVTPL as Hedging Instruments FVTPL nonderivatives & derivatives can be combined as Hedging Instrument Impact Relates to using options as Hedging Instruments Risk designated can be isolated to in-the-money scenarios on the option The MTM changes on non-derivatives can be Hedging Instruments, Must include changes in credit risk o FVO Liabilities not eligible since credit risk is now booked in OCI o FV of Hedged Risk of non-derivative in a hedging relationship not eligible Not allowed if designation results in a mismatch that FVO was requested to reduce The MTM of a derivative & non-derivative combo can be Hedging Instruments does not include FV of Hedged Risk of non-derivative in a hedging relationship needs to include credit risk in value 38

39 Changes Risk Management Strategy and how it is applied to manage risks Hedging activities and how they could affect future cash flows The effect that hedge accounting has had on primary financial statements Impact How each risk arises How each risk is managed Extent of risk exposures managed Monetary amount to which the Bank is exposed to each risk Amount of the risk exposure being hedged Average rate hedged Quantitatively, how hedging changes the exposure The carrying amounts and notional amounts relating to hedging instruments, and Accumulated gains/losses on hedged items by risk category and hedge type (fair value, cash flow, net investment hedge) Forecasted Transactions not expected to occur Hedges of Net Positions Reconciliation of OCI related to CFH & NIH 39