Accounting for Financial Instruments

Transcription

1 International Financial Reporting Standards Accounting for Financial Instruments (IFRS 9) Executive IFRS workshop for Regulators Diplomatic Academy of Vienna Darrel Scott, IASB member The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

2 IAS 39 and IFRS 9 1 January IAS 39 IFRS 9 Classification and Measurement Mandatory date: 2015 Early adoption allowed Hedge Accounting Impairment 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

3 IAS 39 IAS 39 and IFRS 9 1 January 2013 continued 3 Classification & Measurement IFRS 9 (2010) + ED of limited amendments General Hedge accounting* Review draft IFRS 9 Impairment Forthcoming ED * Macro hedge accounting is separated from this project 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

4 Classification and measurement Financial assets 4 Business model test Contractual cash flow characteristics Amortised cost (one impairment method) FVO for accounting mismatch (option) Reclassification required when business model changes All other Instruments: Equities Derivatives Some hybrid contracts Fair Value (No impairment) Equities: OCI presentation available (alternative)

5 IFRS 9 Main changes from IAS 39 5 Reduces complexity single impairment model (only FIs at amortised cost) embedded derivatives no longer separated from financial asset host contracts Aligns measurement of financial assets with entity s business model and contractual cash flow characteristics Own credit risk issue addressed Elimination of tainting rules that caused assets to be measured at fair value even if the business model was to hold 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

6 Financial Assets At amortised cost 6 Business model: objective of holding instruments is to collect contractual cash flows rather than to sell prior to contractual maturity to realise fair value changes not an instrument by instrument approach to classification assess contractual terms of instruments within such a business model 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

7 Financial Assets At amortised cost continued 7 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 No tainting rules for assets at amortised cost gains or losses from derecognising such items to be presented separately with additional disclosures 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

8 Financial Assets Equity investments: OCI alternative 8 Alternative presentation of fair value changes in other comprehensive income (OCI) Scope investments in equity instruments not held for trading Features alternative available instrument by instrument dividends recognised in P&L no recycling, impairment or change in presentation 2013 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

9 Financial Assets Embedded derivatives 9 Hybrid contracts Financial host Non-financial host No separation part of classification IAS 39 guidance retained

10 Financial Assets Fair Value Option (FVO) 10 Fair value option available, if Accounting mismatch Managed on fair value basis Embedded derivative(s) Not managed to collect contractual cash flows = FV Hybrid contracts financial host classified entirety *Circumstances when FVO available is unchanged for financial liabilities

11 Financial Assets Application guidance 11 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 Does not apply to equities held by financial institutions and investment funds Contractually linked and non-recourse instruments Detailed application guidance Look through approach 11

12 Financial Assets Summary of Key Changes from IAS Classification Measurement Impairment IAS 39 IFRS 9 Rules-based categories each with different measurement methods Different impairment rules depending on category and instrument type Principles-based, classifications based on a clear rationale Irrevocable option at initial recognition to present fair value changes of some equity investments in OCI Only debt instruments at amortised cost (or FVOCI, as proposed) are tested for impairment

13 Financial Assets Summary of Key Changes continued 13 Tainting Reclassification Embedded derivatives FVO IAS 39 IFRS 9 Tainting rules for held to maturity investments Some reclassifications permitted/required Bifurcation of embedded derivatives required in some cases Available if specific criteria are met No tainting rules Reclassifications required if and only if business model changes No separation, same classification approach (for hybrid financial assets with financial hosts) Available if eliminating or significantly reducing an accounting mismatch

14 Illustration Equity Investment 14 Held for trading Fair value - with changes recognised in profit or loss Not held for trading Fair value irrevocable choice of recognising changes in profit or loss or OCI

15 Illustration Debt Investment 15 Held to collect contractual cash flows Amortised cost (FVO available if criteria are met) Not held to collect contractual cash flows Fair value through profit or loss* *could be FVOCI according to Limited Amendments ED

16 Illustration Debt Investment (embedded derivative) 16 Hybrid contract (as a whole) has P&I cash flows and is held to collect contractual CFs* Whole instrument at amortised cost All other hybrid contracts with financial hosts Whole instrument at fair value through profit or loss* *Limited Amendments ED proposes clarifications to the P&I test which may result in more instruments at amortised cost

17 Classification and measurement Financial liabilities 17 Except: All financial liabilities Amortised cost FVO for mismatch, managed on FV basis and hybrids Own credit in OCI Held for trading Fair value through P&L Hybrid financial liabilities are bifurcated No reclassification permitted

18 Financial Liabilities FVO and own credit 18 What is own credit? fair value changes in liability arising from changes in the liability s credit quality How is it measured? often measured as change in margin over a benchmark 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

19 Financial Liabilities FVO and own credit continued 19 To address own credit risk Retain IAS 39 measurement 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) 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 (IFRS 7 B4) 19

20 Financial Liabilities FVO and own credit continued 20 Financial liability at FVO on statement of financial position at (full) fair value Change in FV attributable to all factors except own credit risk Change in FV attributable to own credit (not recycled) Profit Profit or Loss XXX Statement of Comprehensive Income Other Comprehensive Income XXX Mandatory for all liabilities at FVO unless this would create or enlarge an accounting mismatch 20

21 International Financial Reporting Standards Reopening Phase I Classification and Measurement The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

22 Reopening Phase I 22 Limited modifications IFRS 9 is sound and operational Address specific application issues Consider interaction of IFRS 9 and insurance project Seek to reduce key differences with the FASB s classification and measurement model Both are mixed measurement models Both consider characteristics of the instrument and business model Joint deliberations but separate exposure drafts

23 Scope of possible changes 23 Clarify the contractual cash flow characteristics and business model tests Reconsider the need for bifurcation of financial assets To address interaction with the insurance project and align with the FASB s model, consider: Introducing a third business model Whether some debt instruments should be remeasured through OCI Knock on effects, eg interrelated issues for financial liabilities, transition and disclosure

24 Classification and measurement Financial assets 24 Business model test Contractual cash flow characteristics Amortised cost (one impairment method) FVO for accounting mismatch (option) Reclassification required when business model changes All other Instruments: Equities Derivatives Some hybrid contracts Fair Value (No impairment) Equities: OCI presentation available (alternative)

25 Classification and measurement Financial assets: possible changes 25 Business model test Contractual cash flow characteristics Amortised cost (one impairment method) FVOCI (one impairment method) FVO for accounting mismatch (option) Reclassification required when business model changes All other Instruments: Equities Derivatives Some hybrid contracts Fair Value (No impairment) Equities: OCI presentation available (alternative)

26 Cash flow characteristics assessment 26 Affirms the principle in IFRS 9 cash flows not solely principal and interest (P&I) measured at FVPL cash flows solely P&I, measurement depends on the business model Does not change the assessment for most instruments Clarifies the application of the principle when: Interest rate is leveraged or There is an interest rate mismatch Requires cash flows on actual instrument be compared with a benchmark instrument

27 Amortised cost Contractual cash flow characteristics 27 Contractual cash flow characteristics Contractual terms that give rise to solely payments of Principal Interest Modified P&I satisfies test IF Compared with a benchmark instrument Difference not more than insignificant Interest = Consideration for time value of money credit risk

28 Amortised cost Business model 28 Financial assets qualify for amortised cost if: Objective of business model is to collect contractual cash flows Clarify the term hold to collect by providing additional application guidance on: Type of business activities Frequency and nature of acceptable sales

29 Bifurcation 29 3 primary options considered: Current asymmetrical model in IFRS 9 Bifurcation of both assets and liabilities No bifurcation Several bifurcation methods considered Decision to retain the current model

30 Business model/strategy 30 IFRS 9 business models Held to collect contractual cash flows (amortised cost) Other (FVTPL) Introduced FVOCI: Interest revenue: effective interest method Impairment: same as amortised cost Other gain/loss in OCI: recycle to P/L on derecognition P/L same as for amortised cost

31 Business model/strategy continued 31 Contractual cash flow characteristics Do not satisfy Business model Hold to collect FVPL Amortised cost Both hold to collect and sell FVOCI Reclassification applies to all business models

32 Financial liabilities 32 Accounting as for IAS 39 except for financial liabilities under Fair Value Option These financial liabilities recorded on statement of financial position at full fair value Changes in fair value attributable to own credit recorded in OCI (not recycled) All other changes recorded in Profit or loss Mandatory for all liabilities under the FVO unless this would create or enlarge an accounting mismatch

33 Convergence 33 Both boards have mixed measurement models Similarities in classification criteria Characteristics of instruments Business model/strategy Sought to reduce key differences FASB had FVOCI for some debt instruments FASB retained bifurcation for financial assets FASB prohibited reclassification Joint redeliberation of key differences. Two proposed models now largely aligned Separate exposure drafts

34 Thank You IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

35 35 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.