Disclaimer. HKFRS 9 (2014) Classification and Measurement of Financial Assets and Financial Liabilities

Size: px

Start display at page:

Download "Disclaimer. HKFRS 9 (2014) Classification and Measurement of Financial Assets and Financial Liabilities"

Mercy Nicholson
5 years ago
Views:

1 HKFRS 9 (2014) Classification and Measurement of Financial Assets and Financial Liabilities Date 23 August 2017 Time 19:00 21:00 Venue Duke of Windsor Social Service Building Disclaimer The materials of this seminar are intended only to provide general information on the subject concerned and shall not be relied upon for technical advice. ZHONGHUI ANDA and the speakers take no responsibility for any errors or omissions in, or for the loss incurred by individuals or companies due to the use of, the materials of this seminar. No claims, actions or legal proceedings in connection with this seminar brought by any individuals or companies having reference to the materials of this seminar will be entertained by ZHONGHUI ANDA and the speakers. Any unauthorized audio and video recordings of this seminar without the consent of the speakers are strictly prohibited, and represent a copyright violation.

2 HKFRS 9 (2014) Financial Instruments Classification and measurement driven by cash flow ( CF ) characteristics and business model Effective for annual periods beginning on or after 1 Jan 18 with earlier application permitted. 3 Classification and Measurement of Financial Assets 4 categories: Amortised cost Fair value through other comprehensive income (FVTOCI) (recycled to P/L) FVTOCI (not recycled to P/L) Fair value through profit or loss (FVTPL) 4

3 Amortised cost category if both conditions met: Asset held within business model to hold assets to collect contractual CF and Contractual terms of asset give rise on specified dates to CF that are solely payments of principal and interest on principal outstanding (SPPI nature). 5 FVTOCI category (recycled to P/L) if both conditions met: Asset held within business model both collecting contractual CF and selling assets and Meet SPPI nature 6

4 FVTOCI category (recycled to P/L) measurement: Recognise in P/L as if asset measured at amortised cost Interest calculated using effective interest method recognised in P/L Asset measured in B/S at FV 7 FVTOCI category (recycled to P/L) measurement: Asset treated as monetary measured at amortised cost in foreign currency Exchange differences on amortised cost recognised in P/L Other gains or losses recognised in OCI When asset derecognised, cumulative gains or losses in OCI reclassified to P/L 8

5 FVTOCI category (not recycled to P/L) Irrevocable election at initial recognition for investments in equity instruments Election on instrument-by-instrument basis Neither held for trading nor contingent consideration Present subsequent changes in FV in OCI and not recycled Dividends recognised in P/L unless clearly represents recovery of cost 9 FVTPL category Others measured at FVTPL with gains or losses recognised in P/L Dividends recognised in P/L At initial recognition may irrevocably designate asset at FVTPL if eliminate or significantly reduce accounting mismatch 10

6 Business model to hold assets to collect contractual CF Realise CF by collecting contractual payments over life of instrument Consider information about past sales and reasons Need not hold all instruments until maturity sales due to increase in credit risk sales to manage credit concentration risk sales close to maturity and proceeds approximate remaining CF Paragraph B4.1.4 of HKFRS 9 (2014) provides examples 11 Business model both collecting contractual CF and selling assets Manage everyday liquidity needs Maintain particular interest yield profile Match duration of assets to duration of liabilities Involve greater frequency and value of sales but no threshold Paragraph B4.1.4C of HKFRS 9 (2014) provides examples 12

7 Other business models Not one of above two models Manages assets realising CF through sale, realise FV collection of contractual CF is incidental Performance evaluated on FV basis Held for trading collection of contractual CF is incidental 13 Contractual CF that are SPPI nature Basic lending arrangement Time value of money and credit risk are significant elements of interest Other basic lending risks (liquidity risk) and costs Profit margin Interest can be negative 14

8 Exposure to risks or volatility in CF unrelated to basic lending arrangement (changes in equity prices or commodity prices) Leverage not have economic characteristics of interest (option, forward and swap contracts) Examples of SPPI nature variable interest rate that consider time value of money, credit risk and other basic lending risks and costs, as well as profit margin prepayment substantially represents unpaid principal and interest and reasonable compensation for early termination Paragraph B of HKFRS 9 (2014) provides examples of SPPI nature Paragraph B of HKFRS 9 (2014) provides examples of not SPPI nature 15 Classification and Measurement of Financial Liabilities All financial liabilities subsequently measured at amortised cost, except for: 1. Financial liabilities at FVTPL Including derivative subsequently measured at FV with gains or losses recognised in P/L Change in FV attributable to changes in credit risk presented in OCI and not subsequently transferred to P/L 16

9 Present in P/L all gains and losses on loan commitments and financial guarantee contracts designated at FVTPL. At initial recognition may irrevocably designate financial liability at FVTPL if: eliminate or significantly reduce accounting mismatch or performance evaluated on FV basis Financial liabilities arise when transfer of financial asset not qualify for derecognition or when continuing involvement approach applies When continuing involvement, net carrying amount of transferred asset and associated liability is: amortised cost of rights and obligations retained if transferred asset measured at amortised cost, or equal to FV of rights and obligations retained if transferred asset measured at FV 18

10 3. Financial guarantee contracts Contract subsequently measured at higher of: loss allowance and FV initially recognised less income recognised under HKFRS Commitments to provide loan at below-market interest rate Commitment subsequently measured at higher of: loss allowance and FV initially recognised less income recognised under of HKFRS Contingent consideration in business combination Subsequently measured at FV with changes recognised in P/L 20

11 Embedded Derivatives If hybrid contract contains host financial asset, apply requirements on classification of financial assets to entire hybrid contract If host not financial asset, embedded derivative separated if: embedded derivative not closely related to host; embedded derivative meet definition of derivative; and hybrid contract not measured at FVTPL 21 If hybrid contract and host not financial asset, may designate entire hybrid contract at FVTPL unless: embedded derivative not significantly modify CF or clear with little or no analysis that separation prohibited If unable to measure embedded derivative separately, designate entire hybrid contract at FVTPL 22

12 Guidance on Amortised Cost Measurement Revisions to estimated CF For floating-rate financial assets and liabilities, periodic re-estimation of CF to reflect movements in market rates of interest alters effective interest rate If revise estimates of payments or receipts (excluding modifications of CF of financial assets below): adjust carrying amount to reflect revised estimated contractual CF recalculate carrying amount as present value of estimated future contractual CF discounted at original effective interest rate adjustment recognised in P/L 23 Modifications of CF of financial assets When contractual CF of financial asset renegotiated or otherwise modified and not result in derecognition recalculate carrying amount and recognise modification gain or loss in P/L carrying amount recalculated as present value of renegotiated or modified CF discounted at original effective interest rate costs or fees incurred adjust carrying amount and amortised over remaining term 24

13 Modifications of CF of financial liabilities Substantial modification accounted for as extinguishment of original liability and recognition of new liability, difference recognised in P/L Substantially different if discounted present value of CF under new terms discounted using original effective interest rate, is at least 10 per cent different from discounted present value of remaining CF If extinguishment, costs or fees incurred recognised in P/L If not extinguishment, costs or fees incurred adjust carrying amount and amortised over remaining term 25 Reclassification Shall not reclassify financial liability Change business model, reclassify financial assets Following not changes in business model: change intention related to particular financial assets temporary disappearance of particular market for financial assets transfer of financial assets between parts of entity with different business models Reclassify financial assets prospectively 26

14 Amortised cost and FVTPL category From amortised cost to FVTPL FV measured at reclassification date difference between previous amortised cost and FV recognised in P/L From FVTPL to amortised cost FV at reclassification date becomes new carrying amount effective interest rate determined on basis of FV at reclassification date 27 Amortised cost and FVTOCI category From amortised cost to FVTOCI FV measured at reclassification date difference between previous amortised cost and FV recognised in OCI effective interest rate not adjusted 28

15 From FVTOCI to amortised cost reclassified at FV at reclassification date gain or loss recognised in OCI adjusted against FV of asset not reclassification adjustment effective interest rate not adjusted 29 FVTPL and FVTOCI category From FVTPL to FVTOCI continue to be measured at FV effective interest rate determined on FV at reclassification date From FVTOCI to FVTPL continue to be measured at FV gain or loss recognised in OCI reclassified to P/L as reclassification adjustment 30

16 Investments in Equity Instruments All investments in equity instruments and contracts thereon measured at FV Cost may be appropriate estimate of FV insufficient more recent information available wide range of possible FV measurements Cost is never best estimate of FV for investments in quoted equity instruments (or contracts thereon) 31 Indicators that cost might not be representative of FV: significant change in performance of investee compared with budgets, plans or milestones significant change in market for investee s equity or products significant change in global economy or economic environment significant change in performance of comparable entities internal matters of investee such as fraud, commercial disputes, litigation, changes in management or strategy evidence from external transactions in investee s equity 32

17 33

Practical Issues on HKFRS Part III We Passionately Develop Quality Programmes

Practical Issues on HKFRS Part III Date 25 August 2015 Time 1:00 21:00 Venue Duke of Windsor Social Service Building www.zhtraining.com Disclaimer The materials of this seminar are intended only to provide