Acumen Financial Institutions Accounting and Reporting. IFRS 9 Financial Instruments Classification 9 June 2015

Transcription

1 Acumen 2015 Financial Institutions Accounting and Reporting IFRS 9 Financial Instruments Classification 9 June 2015

2 About the presenters

3 Presenter 1 George W. Prieksaitis Partner george.w.prieksaitis@ca.ey.co m National Leader of EY s Financial Accounting Advisory services Over 20 years of experience with a focus on financial services clients, with a strong background in derivative valuation, complex financial instruments, merchant banking, loan loss accounting, leasing and securitization & derecognition issues. Currently an EY Canada member of our Global Financial Instruments Working Group, Fair Value Subject Matter Group, and Global Leasing Subject Matter Group Member of the IASB s IFRS 9 Impairment Transition Resource Group Extensive experience in capital markets transactions, including prospectuses and initial public offerings and also in working with Board of Directors on corporate governance matters. Extensive experience in corporate lending, derivative, and broker-dealer operations through the wholesale banking segment of the TD Bank, the Canadian banking operations of many multinational entities including Walmart Bank Canada, Rabobank, Comerica Bank, Manulife Financial Corporation, Intesa Bank and the Bank of New York, and the investment and derivative operations of insurance companies like London Life Insurance Company and Canada Life Assurance Extensive experience helping clients listed above as they converted to International Financial Reporting Standards from Canadian GAAP Coordinated audit services for the wholesale segment of The Toronto-Dominion Bank, operating in 12 different countries, that includes the audit of derivative, fixed income, foreign exchange and equity trading and institutional brokerage businesses. Also coordinated the audit of internal controls (SOX 404) and loan loss accounting for all of TD Bank. Page 2

4 Presenter 2 Omar Halloum Senior Manager omar.halloum@ca.ey.com A Toronto-based experienced senior manager in the Financial Accounting Advisory Services (FAAS) group of EY Canada, providing financial reporting and accounting advice on complex accounting issues, transactions and the implementation of new accounting standards. Over 12 years of experience working primarily with financial institutions. He has significant technical experience in International Financial Reporting Standards (IFRS) and US GAAP. Began working in EY Toronto office in While working in Toronto, Omar has focused on all aspects of CGAAP/IFRS for financial institutions with a focus on financial instruments and consolidation. He has been integral to developing EY s position on various accounting matters related to consolidation and securitization under IFRS. Recently concluded a three year secondment in Ernst & Young s Global IFRS Services Central Team (GIFRS) in London, England. As part of his financial instruments focused role, Omar observed International Accounting Standards Board (IASB) meetings, discussed topics with IASB staff and assisted in drafting EY publications as well as comment letters setting out EY s position to IASB and International Financing Reporting Interpretations Committee (IFRIC) exposure drafts. A member (and former secretary) of EY s Global IFRS Subject Matter Groups on financial Instruments (FIWG) and fair value measurement (FVMWG). He is also a member of the EY Americas Professional Practice Financial instruments Expert Network. A contributor and reviewer of EY s International GAAP Manual (IGAAP). IGAAP is EY s flagship annual commentary on the application of IFRS. Page 3

5 Agenda Classification model Key changes from IAS 39 Overview Characteristics test Business model assessment Reclassifications Fair value option Appendix: transition provisions Page 4

6 Classification model

7 Significant changes from IAS 39 Financial assets New classification Model Financial liabilities Same existing classification Model No bifurcation OCI categories differ from AFS Revised fair value option Existence or lack of an active market is no longer a criterion No tainting rules, but Unquoted equity instruments No cost exemption New presentation: own credit related FV changes presented in OCI ( only for FVO liabilities) Page 6

8 Synopsis of key aspects of the classification model for financial assets Debt (including hybrid contracts) Derivatives Equity Contractual cash flow characteristics test (at instrument level) Pass Fail Fail Fail Business model assessment (at an aggregate level) Held for trading? No No BM: Hold-to collect contractual cash flows Conditional fair value option (FVO) elected? No BM: Achieved by collecting contractual cash flows & selling financial assets Yes BM: Neither 1 nor 2 Yes No FVOCI option elected? Yes Amortised cost Fair value through OCI (FVOCI) (with recycling) Fair value through P/L (FVPL) Fair value through OCI (FVOCI) (no recycling) Page 7

9 Non derivative non-traded equities Presentation of FV changes in OCI: Available for all equities that are not held for trading Only if definition of equity in IAS 32 is met (limited exceptions) Free choice at initial recognition, on a share by share basis. Irrevocable (no reclassification) Disclosures: e.g., reasons for election, fair value of each instrument Dividends will be recognised in profit or loss, if return on investment (not return of investment) No recycling of fair value changes to profit or loss on impairment, disposal or in any other circumstances No impairment testing Hedge accounting may be possible! Page 8 IFRS 9: Financial instruments

10 Contractual cash flow characteristics test: Contractual cash flows that are solely payments of principal and interest (SPPI) Consistent with a basic lending arrangement which includes consideration for: Time value of money Credit risk Other basic lending risks and costs: Liquidity risk Admin costs Profit margin Do not introduce exposure to risks or volatility unrelated to a basic lending arrangement Elements inconsistent with a basic lending arrangement include: Exposure to changes in equity or commodity prices Leverage Page 9

11 SPPI test Contractually linked instruments ( look through ) A simple securitisation Senior tranche Protection Middle tranche(s) Protection Junior tranche Risk The most senior tranche will probably pass the SPPI test if it pays cash flows that are SPPI Middle tranches need detailed assessment The junior tranche will almost certainly fail the SPPI test Underlying assets that are SPPI plus instruments that are non- SPPI but reduce cash flow volatility or align cash flows Page 10

12 SPPI test Any flexibility? Deviation from pure principal and interest Modified time value of money element Other Threshold / Test Could not be significantly different Not genuine? De-minimis? Probability is not relevant Page 11

13 Business model assessment factors to consider Page 12

14 Distinguishing the business models Amortized cost FVOCI FVPL Business model objective: Holding to collect cash flows Business model objective: Is achieved by realizing CFs via both holding and selling e.g.,: Replication portfolios Liquidity portfolios: Every day needs, & high churning rate Business model objective: Other e.g., Management to realize cash flows through sale Managed on a fair value basis Sales are incidental Holding to collect is integral/fundamental Performance: Interest earned and credit losses realized. Examples of permitted sales: Due to deterioration in credit quality in line with investment policy Infrequent, even if significant Insignificant, even if frequent Close to Maturity Sales are fundamental Holding to collect is also fundamental Performance: Overall return. Neither a free choice nor a residual (unlike AFS). SPPI test is necessary. In practice, however, will likely function as a default category! Sales are fundamental Holding to collect is incidental Decisions & performance: Focused on fair value information Activities results in active buying and selling Page 13

15 How to perform the tests? What to assess first: business model test or characteristics test? Business model Level and granularity of assessment Determine the ideal balance sheet Reverse engineer to instruments and business model? Adjust the business model before first time application? Page 14

16 Characteristics test: Professional Judgement based on facts and circumstances Could be significantly different from benchmark cashflows? De minimis effect? Not genuine? Characteristics at the date of acquisition, where is that data? Tranches and contractually linked instruments Can the underlying pool of instruments change after initial recognition? Subordination Page 15

17 The FVOCI measurement category for debt instruments Measurement mechanics Expected credit losses Derived as for amortised cost instruments Recorded in profit or loss with offseting entry in OCI! Interest income Calculated using the effective interest method Recorded in profit or loss Foreign currency gains and losses Calculated based on the amortised cost Recorded in profit or loss (P/L) Other fair value gains and losses Recognised in OCI and recycled to P/L only on derecognition (unlike AFS) Page 16

18 Disappearance of AFS classification Type of instrument SPPI met? Possible category? ECL? Non-traded equities Non plain vanilla loans and debt securities Separated host instruments Simple debt securities quoted in an active market ABS securities junior tranche NHA MBSs NHA MBS I/O strips CMB bonds Loans with an embedded prepayment option Simple debt securities managed on a fair value basis Bonds convertible into fixed number of shares Preferred shares Page 17

19 Consitional fair value option (FVO) election: IFRS 9 vs. IAS 39 Fair value option available, if Accounting mismatch Managed on fair value basis Embedded derivative(s) FVPL by default Hybrids with financial assets host classified in entirety IFRS 9 includes 2 additional opportunities to designate at FVO (hedging section) Page 18

20 Reclassifications Reclassifications of financial assets would be required when, and only when, an entity changes its business model for managing financial assets Prohibited in all other circumstances A high hurdle Occur only when an entity either begins or ceases to perform an activity that is significant to its operations (e.g., via acquisition or disposal) Any reclassification is to be accounted for prospectively from the Reclassification date the first day of the reporting period following the change Detailed disclosures will be required in financial statements Reclassification of liabilities is prohibited Page 19 Page 19

21 Questions?

22 Appendix

23 Transition provisions

24 Transition General provisions (1) Retrospective application is generally required in relation to the classification and impairment requirements The hedge accounting requirements to be applied prospectively Restatement of comparatives is not required, but allowed only if can be done without the use of hindsight Transition disclosures are required, even if the entity choose to restate the comparative figures for the effect of applying IFRS 9 Page 23

25 Transition General provisions (2) The date of initial application (DIA) is the date when an entity first applies the requirements of IFRS 9. Must be the beginning of a reporting period. IFRS 9 is not applied to financial assets or financial liabilities that have been derecognized at the DIA For entities who decides to restate comparatives: Operational complexity: Was intended to be a transition relief but not really. Confusing: Comparative information must be prepared on a mixed basis, reducing the value of the information provided Page 24

26 Transition Classification (1) Classification requirement Transition provision Business model assessment On the basis of the facts and circumstances that exist as of the DIA. Resulting classification is applied retrospectively, irrespective of the entity s business model in prior reporting periods SPPI test Investments in equity instruments FVO designations for financial assets and financial liabilities As of the date of initial recognition* of the financial asset. *2 impracticability exceptions Designation at FVOCI for non held for trading investments is made at the DIA Designation is re-opened based on the facts and circumstances at the DIA. As such, new designations may be permitted and revocation of previous designations may be required

27 Transition Classification (2) Measurement requirement Hybrid contracts (financial assets) Effective interest method Unquoted equity investments and related derivatives Transition provision For hybrid contracts bifurcated under IAS 39, At DIA, any difference between the fair value of the entire contract and the sum of the fair values of the components of should be recognized in opening retained earnings When impracticable to retrospectively apply the effective interest method, the fair value at the DIA is treated as the new carrying amount or amortized cost at that date If measured at cost under IAS 39, then should be measured at fair value at the DIA. Any difference between previous carrying value and fair value should be recognized in opening R/Es or other component of equity

28 Classification and measurement Transition disclosures In reporting period that includes the DIA, the entity discloses: Original category and carrying amount at class level The new category and carrying amount at class level How classification requirements have been applied Reasons for any designations or de-designations at FVPL FVO option de-designations: Amounts involved, distinguishing between mandatory and elective de-designations. Changes in classifications as at the DIA Impact of reclassifications Page 27

29 Illustration One possible way to meet the quantitative transition disclosure requirements noted on the previous slide Page 28

30 Questions?

31 Thank you

32 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. EY Financial Accounting Advisory Services The changing accounting and reporting landscape provides challenges for multinational companies as they seek to respond to global market conditions and report their financial results while facing increased scrutiny from a range of stakeholders. EY's accounting, regulatory, compliance and information technology professionals combine technical experience with business and industry insights to help clients navigate complexity. Whether your focus is on managing highly technical accounting requirements or addressing governance and regulatory issues, having the right advisors on your side can make all the difference. Our team uses proven and integrated methodologies to help you resolve your challenging business problems, deliver accurate financial reports in complex market conditions and make sustainable improvements for the longer term. We understand that you need services that are adapted to your specific industry issues, so we bring our broad sector experience and deep subject matter knowledge to your projects in a proactive and objective way Ernst & Young LLP All Rights Reserved. EYGM legal disclaimer This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/ca