IFRS 9 Implementation Workshop 31 st January 1 st February 2018

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1 Historical Perspectives of IFRS 9 and the Implementation Guideline Presentation by: CPA Cliff Nyandoro IFRS 9 Implementation Workshop 31 st January 1 st February 2018 Uphold public interest PwC

2 Why IFRS 9? In December 1998, the International Accounting Standards Board (IASB), issued the accounting standard IAS 39 with the aim to define the principles for the recognition, measurement and disclosures of financial and non-financial instruments. After the economic crisis in 2008, the IASB decided to issue the IFRS 9 standard with particular attention to classification and measurement of financial instruments. The IASB published the final version of IFRS 9 in July 2014 replacing IAS 39. Later, the ever-changing nature of markets and the creation of new financial instruments, necessitated a number of improvements and additions to the accounting standard IAS 39, until the year The main new features include a new model of "classification and measurement", impairment and hedge accounting. The new standard has been in application from 1 January 2018 but early application was allowed.

3 Why IFRS 9? Work on IFRS 9 was accelerated in response to the financial crisis. The global financial crisis involved, among its effects, the spread of the conviction that the accounting rules contributed, at least for acceleration and escalation, to the worsening economic crisis. During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards. For this reason, after the beginning of the global crisis, the accounting standards were subject to evaluation by IASB regulators. The new standards identified by the IASB in IFRS 9 will ensure a more timely recognition of expected losses. The goal of these changes is to simplify the existing rules and strengthen investor confidence in the financial statements of banks, the financial system and other sectors.

4 Why IFRS 9? Many application problems emerged from IAS 39 regarding classification and measurement of financial assets, characterized by various classification categories and associated models of valuation. For these reasons, the IASB to make it easier, for users of financial statements, in the understanding of the information, provided for the replacement of previous models. The new model results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements.

5 Why IFRS 9? IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value.

6 IFRS 9 focus areas Three categories of debt assets based on business model and contractual cash flows. Classification and Measurement Expected credit loss is going to replace the incurred credit loss model Impairment Hedging now more aligned to risk management principles Hedging 6

7 IFRS 9 vs IAS 39 Classification and Measurement Impairment Hedging 7

8 Need for Implementation Guidelines The IFRS 9 implementation Work Group ICPAK and TASK

9 Objective of the IFRS 9 Implementation Working Group Need to have a working group of the stakeholders (regulators, preparers and auditors) to develop guidance that will ensure consistent implementation in the market. Drive comparable accounting policies, financial information and disclosures for similar businesses. Consistent interpretation and application of the more complex principles of the standard, and source data to be used in modelling (particularly at macro level). Technical guidance has been reviewed by the Professional Standards Committee of the ICPAK Council.

10 Areas considered by the IFRS 9 Implementation Working Group Areas Incorporated Other areas 1 Expected credit loss methodology 2 Probability of default (PD) 3 Loss given default (LGD) 4 Exposure at default (EAD) 5 Macro economic forecasts and forward looking Information 6 Significant accounting policies and Default 7 Staging assessment 10

11 Highlight of IFRS 9 Implementation Working Group topics covered Topic Examples of approach Example of none compliance Expected credit loss methodology Probability of default ECLs are based on four components: Probability of Default, Exposure at Default, Loss Given Default and Discount Rate. Adaptations of collective methodologies such as roll/transition rates may be possible. Loss given default For secured exposures the approach includes at a minimum the following components: Forecasts of future collateral valuations; Time to realization of collateral. Exposure at default Staging assessment For unsecured exposures the approach includes at a minimum the following components: Time to recovery; recovery rates; & cure rates. The modelling approach for EAD reflects expected changes in the balance outstanding over the lifetime of the loan exposure that are permitted by the current contractual terms. Process to assess changes in credit risk is multifactor and holistic which may include element, Qualitative element and Backstop indicators. Stage 1: (0-30), Stage 2: (31 to 90 days), Stage 3: (91 and above) Groupings of exposures for collective assessment and measurement that result in segments that do not share credit risk characteristics. Assuming a constant marginal rate of default over the remaining lifetime of a product without appropriate supporting analysis. Performing no analysis as to the macroeconomic dependency of LGD or its components. Using new or existing EAD models developed for other purposes (e.g. regulatory capital) without demonstrating that these models are fit for purpose under IFRS 9 Using information that was designed for regulatory purposes, unless it is adjusted to be fit for use under IFRS 9.

12 Implementation Guideline Access Access the implementation guideline on the ICPAK website: Technical Guidelines for Accounting Standards

13 Questions & Comments

14 END Thank You!