IFRS 9 Impairment Requirements Central 1 Credit Union IFRS 9 Information Session June 6, 2017
Disclaimer The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The contents of this presentation is based on the IFRS 9 standard published by the IASB in July 2014. 2
What is IFRS 9? Phases Classification and Measurement Scope of Changes Classification and measurement of assets based on business model and contractual cash flow characteristics 3 classifications for financial assets: amortized cost, fair value through other comprehensive income (FVOCI) or FVTPL Impairment Concept of forward-looking expected credit loss (ECL) to replace IAS 39 incurred loss model intent is to address pro-cyclicality post credit-crisis Dual measurement approach: - Stage 1: 12 months expected credit losses ; and - Stage 2/3: Lifetime expected credit losses Hedge Accounting Hedge accounting follows risk management No bright line for hedge effectiveness assessment IFRS 9 is effective for annual periods beginning on or after January 1, 2018 3
IFRS 9: Global & Canadian Landscape OSFI has required that Canadian Domestic Systemically Important Banks adopt IFRS as at Nov. 1, 2017, earlier than the mandatory effective date Credit Unions will be able to benefit from practical examples and industry practices adopted by the banks On a global level, significant budgets have been set aside for the implementation of IFRS 9 given the extensive impact Banks anticipate their expected credit loss provisions to increase and exceed those calculated under Basel rules 4
Challenges for implementing IFRS 9 The challenges of IFRS 9 impairment reach beyond accounting and require changes to systems and processes Calculating and recognizing ECL especially over the lifetime is most significant change under IFRS 9 Lifetime Expected Credit Losses Disclosure requirements demand increased data models and merging of risk and accounting data Accounting & Disclosures IFRS 9 changes and challenges Stage Allocation Adequacy of provisions depends on expected credit losses including each individual asset s change in credit quality, which must be monitored 5
Staging assessment The accounting treatment is determined by staging, which depends on deterioration or improvement in credit risk since initial recognition Transfer from Stage 1 to Stage 2 upon significant increase in PD since origination Transfer from Stage 2 to Stage 3 upon objective evidence of impairment Stage 1 Status: not deteriorated Provision: 1 year ECL Stage 2 Status: deteriorated Provision: Lifetime ECL Stage 3 Status: credit impaired Provision: Lifetime ECL** 1 Provisioning Cliff Effect 2 No provisioning Cliff Effect 3 12-month expected credit losses Lifetime expected credit losses Transfer back to Stage 1 from 2 when criteria no longer met (symmetric model) Transfer back to Stage 2 from 3 when asset has recovered from default* * Assets that are credit-impaired at acquisition or origination remain in Stage 3 until maturity * Unlike Stage 1 and Stage 2, interest revenue for those in Stage 3 is recognized based on amortized cost (net of provision) instead of gross carrying amount 6
Measurement of expected credit losses An estimate of ECL reflects: An unbiased and probability-weighted amount Evaluation of a range of possible plausible outcomes (i.e. not a stress test) Time value of money Reasonable and supportable information that is available without undue cost or effort about: - Past events - Current conditions - Forecasts of future events and economic conditions Historical loss experience adjusted for differences in asset attributes Adjustments for current economic conditions Reasonable and supportable forecasts of future events and economic conditions Estimate of ECL IAS 39 New under IFRS 9 7
Measurement of expected credit losses (cont d) ECL = PD X EAD X LGD Probability of default Exposure at default Loss given default Expected credit loss Cash shortfalls discounted by effective interest rate (EIR) Rating PD 1 0.02% Expected exposure at = 2 0.10% time of default : : X X 5 1.60% (drawn principal, accrued : : interest) 10 100% Facility % Loss Subordinated 80% : : Senior secured 60% : : Cash collateral 5% Insured 0% Probabilityweighted forward-looking scenarios Borrower quality Term, Covenants Forward-looking factors Draws, prepayments Repayment schedule Type of facility (loan vs revolver) Seniority Collateral type, value (LTV) Forward-looking factors Forward-looking factors and impact on behavior and balances 8
IFRS 9 Impairment - practical challenges Data availability and quality IT system capabilities Interpretation of IFRS 9 requirements and application to Credit Union s specific circumstances Governance and co-ordination between different functions within the Credit Union (e.g.; finance, accounting, credit, treasury, risk, IT) Greater monitoring requirements for credit portfolio Auditability of information Project management capabilities, competing with other strategic priorities (cost management, regulatory requirements) 9
IFRS 9 Impairment Key Changes Checklist Determine key changes that have to be made to current methodology, policies, processes and practices to meet IFRS 9 requirements: Definitions of default and significant change in credit risk thresholds Monitoring credit risk from origination to record date Segmenting portfolio based on similar risk characteristics (individual loan or portfolio level) Lifetime of loans/portfolios, including expected life for revolvers/credit cards Assumptions to estimate draws, repayments and prepayments Forward-looking economic factors and forecasts, including multiple probabilityweighted scenarios for Staging and ECL measurement ECL calculation methodology and model Incremental information required for IFRS 9 disclosures Policy choices relating to transition including restatement of comparatives Data flows and requirements, including internal and external sources Governance and control implications 10
Q&A 11
kpmg.ca/audit Ivan Wong Senior Manager, Audit T. 604 646 6414 E. ivanwong@kpmg.ca Douglas Neish Director, Financial Risk Management T. 416 777 3211 E. daneish@kpmg.ca KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative ( KPMG International ). KPMG member firms around the world have 174,000 professionals, in 155 countries. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such. 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.