Financial Instrument Standards Recap and Update 1 December 2009 Nelson Lam 林智遠 MBA MSc BBA ACA ACIS CFA CPA(Aust.) CPA(US) FCCA FCPA FHKIoD MSCA 2008-09 Nelson Consulting Limited 1 Today s Agenda Recap of Financial i Instrument tstandards d Update on Amended Financial Instrument Standards (effective from 2009) Update on Amended Financial Instrument Standards (effective after 2009) HKFRS 9 Financial Instruments (early application allowed for 2009) 2008-09 Nelson Consulting Limited 2 1
Today s Agenda Recap of Financial i Instrument tstandards d 2008-09 Nelson Consulting Limited 3 Financial Instrument Standards HKAS 32 HKAS 39 Presentation Classification of financial Liabilities and Equity instruments t Compound Financial Instruments Recognition and derecognition of Offsetting financial instruments Measurement of financial HKFRS 7 instruments Disclosure requirements Derivatives and embedded derivatives Hedging and hedge accounting 2008-09 Nelson Consulting Limited 4 2
Initial Recognition & Measurement Initial recognition requirements for financial assets and financial liabilities in HKAS 39 are the same. An entity is required to recognise a financial asset or a financial liability on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. In other accounting standards, the recognition criteria are 1)it is probable that future economic benefits associated with the item will flow to (or flow out from) the entity; and 2)the cost of the item can be measured reliably. Imply trade date accounting Imply settlement date accounting Financial instrument Financial asset Financial liability 2008-09 Nelson Consulting Limited 5 Initial Recognition & Measurement For financial assets, an entity can choose to recognise and derecognise a financial asset either using trade date accounting or settlement date accounting if it is a regular way purchase or sale of financial asset A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned. Financial instrument Financial asset Initial Recognition Trade Date Accounting Regular Way of Financial Assets 2008-09 Nelson Consulting Limited 6 3
Initial Recognition & Measurement For both financial assets and financial liabilities, HKAS 39 has the same initial recognition requirements the same initial measurement basis When a financial asset or financial liability (except for it at fair value through profit or loss) is recognised initially, an entity is required to measure it at: 1.its fair value plus 2.its transactions costs that are directly attributable to the acquisition iti or issue of the financial i asset or financial liability 2008-09 Nelson Consulting Limited 7 Financial Assets Classification FA at FV through P/L 1. Financial assets at fair value through profit or loss Financial instrument Financial asset Financial liability AFS financial i assets Loans and receivables HTM investments 2. Available-for-sale financial assets 3. Loans and receivables 4. Held-to-maturity investments Initial recognition and measurement principle for financial assets and financial liabilities are the same But, HKAS 39 further defines financial asset into 4 categories for subsequent measurement (financial liability to be discussed later) The 4-category classification will affect the subsequent measurement of financial assets, but not the initial measurement. 2008-09 Nelson Consulting Limited 8 4
Financial Assets Classification Determine the category of a financial asset for subsequent measurement Meet conditions as investments in equity instruments without fair value no Classified as held for trading no Designated as at fair value through profit or loss no Designated as available for sale no Meet the definition of loans and receivables no Meet the definition and tainting rule of held-to-maturity investments yes yes yes yes yes yes Investments in equity instruments without fair value (at cost) Financial assets at fair value through profit or loss Available-for-sale financial assets (at fair value through equity) Loans and receivables (at amortised cost) Held-to-maturity investments (at amortised cost) FA at FV through P/L AFS financial i assets Loans and receivables HTM no investments 2008-09 Nelson Consulting Limited Sourced from Intermediate Financial Reporting (2008) by Nelson Lam and Peter Lau 9 Measurement Financial Assets Reclassification Reclassification FA at FV through P/L AFS financial assets Loans and receivables HTM investments at Fair Value at Fair Value at Cost at Amortised Cost at Amortised Cost An entity shall NOT reclassify a financial instrument into or out of the fair value through profit or loss category while it is held or issued. Not described in HKAS 39 but, implicitly, it is not feasible to reclassify a financial into or out of loans and receivables 2008-09 Nelson Consulting Limited 10 5
Measurement Financial Assets Reclassification Reclassification FA at FV An entity shall NOT reclassify a financial through P/L at Fair Value From 1 July 2008 (issued in Oct 2008) instrument into or out of the fair value through at Fair Value profit or loss category while it is held or AFS An entity: financial a) issued. assets shall not reclassify at Cost a derivative out of the fair value through profit or loss category while it is held or issued.; Loans b) shall and not reclassify receivables at Amortised any financial Cost instrument out of the fair value through profit or loss category if upon initial recognition it was designated by the entity as at fair value through profit or loss; and HTM investments c) may, if a financial at Amortised asset is Cost no longer held for the purpose p of selling or repurchasing it in the near term (notwithstanding that the financial asset may have been acquired or incurred principally for the purpose of selling or repurchasing it in the near term), reclassify that financial asset out of the fair value through profit or loss category if the requirements in HKAS 39.50B or 50D are met. An entity shall not reclassify any financial instrument into the fair value through profit or loss category after initial recognition. 2008-09 Nelson Consulting Limited 11 Financial Assets Reclassification Case 2008 annual report: The financial consequence of the reclassification is that the reclassified assets are no longer marked-to-market through the income statement. Amounts reclassified as loans and receivables are accounted as such from the date of reclassification and tested thereafter for impairment. Amounts reclassified as available for sale are held at fair value with changes in the fair value recognised in equity, and tested for impairment. 2008-09 Nelson Consulting Limited 12 6
Financial Assets Reclassification Case It explained in its 2008 annual report about the implication of the reclassification as follows: If these reclassifications had not been made, the Group s pre-tax profit would have been reduced by US$3.5 billion from US$9.3 billion to US$5.8 billion. The reduction would have been US$0.9 billion in the North America (NA s loss before tax: US$ 15.5 B) and US$2.6 billion in the Europe segments (EU s profit before tax: US$ 10.9 B; 2007: US$ 8.6 B). There was no significant impairment identified on the loans transferred even though the fair value continued to fall as a consequence of illiquidity and market sentiment. 2008-09 Nelson Consulting Limited 13 Measurement Financial Assets Reclassification Summary Reclassified from FV through P/L (not designated) AFS financial assets Loans and receivables FV through P/L (not designated) N/A Not allowed specifically Not allowed specifically Reclassified to AFS financial assets Non-derivative financial assets not meeting the definition of loans and receivables (in rare circumstances N/A Not allowed implicitly Loans and receivables Non-derivative financial asset meeting the definition of loans and receivables (with intention and ability to hold the financial asset for the foreseeable future or until maturity) N/A 2008-09 Nelson Consulting Limited 14 7
Financial Liability Classification Financial i instrument Financial asset Financial liability Amortised cost FL at FV through P/L Continuing involvement Financial guarantee Commitment to low-rate loans After initial recognition, an entity shall measure all financial liabilities at amortised cost using the effective interest method, except for: a)financial liabilities at fair value through profit or loss b) financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or when the continuing involvement approach applies. c) Financial guarantee contracts d) Commitments to provide a loan at a below-market interest rate. 2008-09 Nelson Consulting Limited 15 Effective for 2009 Dec. Year-End Selected new interpretations and amendments to HKFRSs Effective for periods beginning on/after Amendments to HKFRS 2 Vesting Conditions and Cancellations 1 Jan. 2009 HKFRS 8 Operating Segments 1Jan Jan. 2009 HKAS 1 (Revised) Presentation of Financial Statements 1 Jan. 2009 HKAS 23 (Revised) Borrowing Costs 1 Jan. 2009 Amendments to HKFRS 1 and HKAS 27 Cost of an Investment in 1 Jan. 2009 a Subsidiary, Jointly Controlled Entity or Associate Amendments to HKAS 32 and HKAS 1 Puttable Financial 1 Jan. 2009 Instruments and Obligations Arising on Liquidation HK(IFRIC) 13 Customer Loyalty Programmes 1 Jul. 2008 HK(IFRIC) 15 Agreements for the Construction of Real Estate 1 Jan. 2009 HK(IFRIC) 16 Hedges of a Net Investment in a Foreign Operation Annual improvements to HKFRSs 2008 HK(IFRIC) 18 Transfers of Assets from Customers Amendments to HKFRS 7 Improving Disclosure about Financial Instruments Amendments to HK(IFRIC) 9 and HKAS 39 Embedded Derivatives 1 Oct. 2008 1 Jan. 2009 1 Jul. 2009 (trans. date) 1 Jan. 2009 Ended on/after 30 Jun. 2009 2008-09 Nelson Consulting Limited Updated from HKICPA, HKFRS Update, 24 Aug. 2009 16 8
Effective after 2009 Dec. Year-End Selected new interpretations and amendments to HKFRSs Effective for periods beginning on/after HKFRS 1 (Revised) First-time Adoption of HKFRS 1 Jul. 2009 Amendments to HKFRS 1 Additional Exemptions for First-time 1 Jan. 2010 Adopters Amendments to HKFRS 2 Share-based Payment Group Cashsettled Share-based Payment Transactions 1 Jan. 2010 HKAS 27 (Revised) Consolidated and Separate Financial 1 Jul. 2009 Statements HKFRS 3 (Revised) Business Combination 1 Jul. 2009 Amendments to HKAS 39 Eligible Hedged Items 1 Jul. 2009 HK(IFRIC) 17 Distributions ib ti of Non-cash hassets to Owners Annual Improvements to HKFRSs 2009 HKFRS 9 Financial Instruments 1J Jul. 2009 1 Jan. 2010 (unless specified) 1 Jan. 2013 2008-09 Nelson Consulting Limited Updated from HKICPA, HKFRS Update, 24 Aug. 2009 17 Today s Agenda Update on Amended Financial Instrument Standards (effective from 2009) 2008-09 Nelson Consulting Limited 18 9
HKAS 32 and 1 Amendments 2008-09 Nelson Consulting Limited 19 HKAS 32 and 1 Amendments An issuer applies the definitions of financial instruments to determine Condition (a) Condition (b) Contractual obligations to deliver cash or another financial i assets No Contractual obligations to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer No Under a non-derivative that includes contractual obligation to deliver a variable no. of its own equity instrument No Under a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed no. of its own equity instrument Equity instrument No Financial liability 2008-09 Nelson Consulting Limited Sourced from Intermediate Financial Reporting (2008) by Nelson Lam and Peter Lau 20 10
HKAS 32 and 1 Amendments HKAS 32.16 states that: A financial instrument is an equity instrument if, and only if, both conditions (a) and (b) are met. Because of these requirements, certain financial instruments representing residual interests in some entities net assets are classified as financial liabilities (rather than equity instruments). The amendment intends to introduce a limited exemption that (even such financial instruments meet the definition of financial liabilities in HKAS 32) those financial instruments will be presented as if they are equity instruments (given they meet the conditions in the amendment). 2008-09 Nelson Consulting Limited 21 HKAS 32 and 1 Amendments Pursuant to the amendments, the definitions of financial asset and financial liabilities are amended to clarify that Certain puttable financial instruments meeting the conditions in HKAS 32 are classified as equity instrument. A puttable instrument is defined as: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder. 2008-09 Nelson Consulting Limited 22 11
HKAS 32 and 1 Amendments HKAS 32.16 is amended and states that: As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in 1. HKAS 32.16A and 16B, or 2. HKAS 32.16C and 16D. 16A and 16B 16C and 16D 2008-09 Nelson Consulting Limited 23 HKAS 32 and 1 Amendments HKAS 32.16A states that a puttable financial instrument includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of the put. an instrument that includes such an obligation is classified as an equity instrument if it has all the following features (simplified): a. It entitles the holder to a pro rata share of the entity s net assets in the event of the entity s liquidation. 16A and 16B b. The instrument is in the class of instruments that is subordinate to all other classes of instruments. c. All financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features. d. It does not include any contractual obligation to deliver cash or another financial asset to another entity (or to exchange equity unfavourably) e. The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity 2008-09 Nelson Consulting Limited 24 12
HKAS 32 and 1 Amendments HKAS 32.16B states that, for an instrument to be classified as an equity instrument, in addition to the instrument having all the above features, the issuer must have no other financial instrument or contract that has: a. total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract) and b. the effect of substantially restricting or fixing the residual return to the puttable instrument holders. 16A and 16B 2008-09 Nelson Consulting Limited 25 HKAS 32 and 1 Amendments HKAS 32.16C states that some financial instruments include a contractual obligation for the issuing entity to deliver to another entity a pro rata share of its net assets only on liquidation. an instrument that includes such an obligation is classified as an equity instrument if it has all the following features (simplified): a. It entitles the holder to a pro rata share of the entity s net assets in the event of the entity s liquidation. b. The instrument t is in the class of instruments t that t is subordinate to all other classes of instruments. c. All financial instruments in the class of instruments that is subordinate to all other classes of instruments must have an identical contractual obligation for the issuing entity to deliver a pro rata share of its net assets on liquidation. 16C and 16D 2008-09 Nelson Consulting Limited 26 13
HKAS 32 and 1 Amendments HKAS 32.16D states that, for an instrument to be classified as an equity instrument, in addition to the instrument having all the above features, the issuer must have no other financial instrument or contract that has: a. total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract) and b. the effect of substantially restricting or fixing the residual return to the instrument holders. 16C and 16D Similar to 16B 2008-09 Nelson Consulting Limited 27 HKAS 32 and 1 Amendments Effective Date and Transition An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the changes for an earlier period, it shall disclose that fact and apply the related amendments to HKAS 1, HKAS 39, HKFRS 7 and HK(IFRIC)-Int 2 at the same time. This amendment introduced a limited scope exception; therefore, an entity shall not apply the exception by analogy. The classification of instruments under this exception shall be restricted to the accounting for such an instrument under HKAS 1, 32 & 39 and HKFRS 7. The instrument shall not be considered an equity instrument under other guidance, e.g. HKFRS 2. 2008-09 Nelson Consulting Limited 28 14
HKAS 32 and 1 Amendments Effective Date and Transition When applying the amendments, an entity is required to split a compound financial instrument with an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation into separate liability and equity components. If the liability component is no longer outstanding, a retrospective application of those amendments to HKAS 32 would involve separating two components of equity. The first component would be in retained earnings and represent the cumulative interest accreted on the liability component. The other component would represent the original equity component. Therefore, an entity need not separate these two components if the liability component is no longer outstanding at the date of application of the amendments. 2008-09 Nelson Consulting Limited 29 Annual Improvement Project 2008 2008-09 Nelson Consulting Limited 30 15
Introduction Annual Improvement Project A vehicle for making non-urgent but necessary amendments to IFRS (and consequentially HKFRSs) Introduced by the IASB in 2007 and issued each year 2008 Annual Improvement Project is the first one The project has two parts: Part I contains amendments that result in accounting changes for presentation, recognition or measurement purposes, with the IASB s rationale included in related Bases for Conclusions. Part II contains amendments that are terminology or editorial changes only, which the IASB expects to have no or minimal effect on accounting. 2008 Project has 24 Amendments to 15 HKFRSs 11 Amendments to 9 HKFRSs 2008-09 Nelson Consulting Limited 31 Today s Agenda 2008 Annual Improvement Project Part I 2008 Annual Improvement Project Part II 2008-09 Nelson Consulting Limited 32 16
Part I: Summary HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations HKAS 1 Presentation of Financial Statements HKAS 16 Property, Plant and Equipment HKAS 19 Employee Benefits HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance HKAS 23 Borrowing Costs HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates and HKAS 31 Interests in Joint Ventures HKAS 29 Financial i Reporting in Hyperinflationary Economies HKAS 36 Impairment of Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 40 Investment Property HKAS 41 Agriculture 2008-09 Nelson Consulting Limited 33 Amendments to HKAS 1 HKAS 1 Presentation of Financial Statements (as revised in 2007) Previously, some considered that HKAS 1.71 implied that financial liabilities classified as held for trading in accordance with HKAS 39 Financial Instruments: Recognition and Measurement are always required to be presented as current. The current amendment clarifies that : The held for trading category in HKAS 39.9 is for measurement purposes and includes financial assets and liabilities that may not be held primarily for trading purposes. In consequence, such financial assets and liabilities that may not be held primarily for trading purposes should be presented as current or non-current on the basis of its settlement date. IASB thus removed the identified inconsistency by amending examples of current liabilities in HKAS 1.71. The IASB also amended HKAS 1.68 in respect of current assets to remove a similar inconsistency. Affect presentation only 2008-09 Nelson Consulting Limited 34 17
Amendments to HKAS 1 Example A financial liability that is not held for trading purposes, such as a derivative that is not a financial guarantee contract or a designated hedging instrument, should be presented as current or non-current on the basis of its settlement date. For example, derivatives that have a maturity of more than twelve months and are expected to be held for more than twelve months after the reporting period should be presented as non-current assets or liabilities. 2008-09 Nelson Consulting Limited 35 Amendments to HKAS 1 Transition and Effective Date An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact. No specific transition stated Imply Retrospectively Comparatives should be reclassified 2008-09 Nelson Consulting Limited 36 18
Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement Derivatives classified as held for trading is not allowed for reclassification into or out of the fair value through profit or loss category under HKAS 39.50 HKAS 39.50A is added to clarify that the following changes in circumstances are not reclassifications for the purposes of HKAS 39.50: a. a derivative that was previously a designated and effective hedging instrument in a cash flow hedge or net investment hedge no longer qualifies as such; b. a derivative becomes a designated and effective hedging instrument in a cash flow hedge or net investment hedge; c. financial assets are reclassified when an insurance company changes its accounting policies in accordance with HKFRS 4.45 i.e. when an insurer changes accounting policies when it first applies HKFRS 4 2008-09 Nelson Consulting Limited 37 Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement Previously, HKAS 39.73 referred to the need for hedging instruments to involve a party external to the reporting entity. In doing so, it used a segment as an example of a reporting entity. However, HKFRS 8 Operating Segments requires disclosure of information that is reported to the chief operating decision maker even if this is on a non-hkfrs basis. Therefore, the two HKFRSs appeared to conflict. In Improvement Project issued in May 2008, the IASB removed from HKAS 39.73 references to the designation of hedging instruments at the segment level. i.e. all words referring to segment are deleted. 2008-09 Nelson Consulting Limited 38 19
Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect actual and revised estimated cash flows. The entity recalculates the carrying amount by computing the present value of estimated future cash flows at the financial instrument s original effective interest rate or, HKAS 39.92 refers to when applicable, the revised effective interest revised effective rate calculated in accordance with HKAS 39.92. interest rate calculated when fair value hedge The adjustment is recognised in profit or accounting ceases. loss as income or expense. 2008-09 Nelson Consulting Limited 39 Amendments to HKAS 39 Effective Date and Transition An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. An entity shall apply the amendments in HKAS 39.9 and 50A as of the date and in the manner it applied the 2005 amendments described in HKAS 39.105A. Earlier application of all the amendments is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact. Follow 39.105A 2008-09 Nelson Consulting Limited 40 20
Today s Agenda 2008 Annual Improvement Project Part II 2008-09 Nelson Consulting Limited 41 Part II: Transition & Effective Date The amendments in Part II shall be applied for annual periods beginning on or after 1 January 2009. Earlier application is permitted. 2008-09 Nelson Consulting Limited 42 21
Part II: Summary HKFRS 7 Financial Instruments: Disclosures HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Reporting Period HKAS 18 Revenue HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance HKAS 29 Financial Reporting in Hyperinflationary Economies HKAS 34 Interim Financial Reporting HKAS 40 Investment Property HKAS 41 Agriculture 2008-09 Nelson Consulting Limited 43 Amendments to HKFRS 7 HKFRS 7 Financial Instruments: Disclosures HKFRS 7.IG 13 is amended to avoid the disclosure of total interest expense offset with total interest income Now, total interest expense (in gross amount) disclosed in accordance with HKFRS 7. 20(b) is a component of the finance costs For reference: HKFRS 7.20(b) requires the disclosure of total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss 2008-09 Nelson Consulting Limited 44 22
Improving Disclosures about Financial Instruments (Amendments to HKFRS 7) 2008-09 Nelson Consulting Limited 45 Amendments to HKFRS 7 in 03/2009 The aim of the amendments was to enhance disclosures about fair value and liquidity risk SFAS 157 of US FASB requires disclosures that are based on a three-level fair value hierarchy for the inputs used in valuation techniques to measure fair value. The Board concluded that such a hierarchy would improve comparability between entities about the effects of fair value measurements as well as increase the convergence of IFRSs and US generally accepted accounting principles (GAAP). Therefore, the Board decided to require disclosures for financial instruments on the basis of a fair value hierarchy. 2008-09 Nelson Consulting Limited 46 23
1. Fair Value Disclosure If there has been a change in valuation technique, the entity shall disclose that change and the reasons for making it. A fair value hierarchy for disclosure is also required: classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. 2008-09 Nelson Consulting Limited 47 1. Fair Value Disclosure The fair value hierarchy shall have the following levels: a. quoted prices (unadjusted) d) in active markets for identical assets or liabilities (Level 1); b. inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and c. inputs for the asset or liability that are not based on observable bl market data (unobservable bl inputs) (Level 3). 2008-09 Nelson Consulting Limited 48 24
1. Fair Value Disclosure The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety shall be determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance ifi of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. 2008-09 Nelson Consulting Limited 49 1. Fair Value Disclosure For fair value measurements recognised in the statement of financial position an entity shall disclose for each class of financial instruments: 1. the level in the fair value hierarchy 2. any significant transfers between Level 1 and Level 2 of the fair value hierarchy (with other details) 3. Further details for Level 3. An entity shall present the quantitative disclosures as required above in tabular format unless another format is more appropriate. 2008-09 Nelson Consulting Limited 50 25
1. Fair Value Disclosure Case At 31 December 2008 (US$m) Assets Quoted market price Valuation Techniques Using observable inputs With significant unobservable inputs Total Trading assets 234,399 185,369 7,561 427,329 Financial assets designated at FV 14,590 13,483 460 28,533 Derivatives 8,495 476,498 9,883 494,876 Financial instruments: AFS 103,949 173,157 9,116 286,222 Liabilities Trading liabilities 105,584 135,559 6,509 247,652 Financial liabilities designated at FV 23,311 51,276-74,587 Derivatives 9,896 473,359 3,805 487,060 2008-09 Nelson Consulting Limited 51 2. Liquidity Risk Disclosure An entity shall disclose: a. a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities; b. a maturity analysis for derivative financial liabilities. The maturity analysis shall include the remaining contractual maturities for those derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows. For example, this would be the case for: i. an interest rate swap with a remaining maturity of five years in a cash flow hedge of a variable rate financial asset or liability. ii. all loan commitments. c. a description of how it manages the liquidity risk inherent in (a) and (b). 2008-09 Nelson Consulting Limited 52 26
HKFRS 7 Amendments Effective Date An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. In the first year of application, an entity need not provide comparative information for the disclosures required by the amendments. Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact. 2008-09 Nelson Consulting Limited 53 Embedded Derivatives (Amendments to HK(IFRIC) Int 9 and HKAS 39) 2008-09 Nelson Consulting Limited 54 27
Embedded Derivatives As a result of the amendment on reclassification of financial assets HK(IFRIC)-Int 9 and HKAS 39 should be amended HK(IFRIC)-Int 9.7 requires: An entity shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is either a. a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, or b. a reclassification of a financial asset out of the fair value through profit or loss category, in which cases an reassessment is required. 2008-09 Nelson Consulting Limited 55 Embedded Derivatives The assessment whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative on reclassification of a financial asset out of the fair value through profit or loss category in accordance with HK(IFRIC)-Int 9.7 (i.e. the previous slide) shall be made on the basis of the circumstances that existed on the later date of: a. when the entity first became a party to the contract; and b. a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. For the purpose of this assessment HKAS 39.11(c) shall not be applied (ie the hybrid (combined) contract shall be treated as if it had not been measured at fair value with changes in fair value recognised in profit or loss). If an entity is unable to make this assessment the hybrid (combined) contract shall remain classified as at fair value through profit or loss in its entirety. (HK(IFRIC)-Int 9.7A added) 2008-09 Nelson Consulting Limited 56 28
Embedded Derivatives HKAS 39.12 is also amended and added with the following requirements: If an entity is unable to measure separately the embedded derivative that would have to be separated on reclassification of a hybrid (combined) contract out of the fair value through profit or loss category, that reclassification is prohibited. In such circumstances the hybrid (combined) contract remains classified as at fair value through profit or loss in its entirety. 2008-09 Nelson Consulting Limited 57 Embedded Derivatives Effective Date and Transition Embedded Derivatives (Amendments to HK(IFRIC)- Int 9 and HKAS 39) issued in March 2009 amended HK(IFRIC)-Int 9.7 and added HK(IFRIC)-Int 9.7A. An entity shall apply those amendments for annual periods ending on or after 30 June 2009. An entity shall apply HKAS 39.12, as amended by Embedded Derivatives (Amendments to HK(IFRIC)- Int 9 and HKAS 39), issued in March 2009, for annual periods ending on or after 30 June 2009. 2008-09 Nelson Consulting Limited 58 29
Today s Agenda Update on Amended Financial Instrument Standards (effective after 2009) 2008-09 Nelson Consulting Limited 59 Eligible Hedged Items (Amendments to HKAS 39) 2008-09 Nelson Consulting Limited 60 30
HKAS 39 Eligible Hedged Items Amendment to HKAS 39 Eligible Hedged Items is to clarify: a. The designation of a one-sided risk in a One-Sided d Risk hedged item b. The designation of inflation as a hedged risk or portion in particular situations c. Assessing hedge effectiveness by adding new paragraphs to HKAS 39. Inflation Assessing Hedge Effectiveness 2008-09 Nelson Consulting Limited 61 HKAS 39 Eligible Hedged Items An entity can designate all changes in the cash flows or fair value of a hedged item in a hedging relationship. only changes in the cash flows or fair value of a hedged item above or below a specified price or other variable (i.e. a one-sided risk). The intrinsic value of a purchased option hedging instrument (assuming that it has the same principal terms as the designated risk), but not its time value, reflects a one-sided risk in a hedged item. (AG99BA) One-Sided d Risk 2008-09 Nelson Consulting Limited 62 31
HKAS 39 Eligible Hedged Items Example An entity can designate the variability of future cash flow outcomes resulting from a price increase of a forecast commodity purchase. In such a situation, only cash flow losses that result from an increase in the price above the specified level are designated, for example: One-Sided d Risk The price over $60 are designated. The price below $60 are not designated. The hedged risk does not include the time value of a purchased option because the time value is not a component of the forecast transaction that affects profit or loss (HKAS 39.86(b)). (AG99BA) As a designated one-sided risk does not contain the time value of a purchased option hedging instrument, there will be no offset between the cash flows relating to the time value of the option premium paid and the designated hedged risk. Therefore, the IASB concluded that a purchased option designated in its entirety as the hedging instrument of a one-sided risk will not be perfectly effective. (BC172F) 2008-09 Nelson Consulting Limited 63 HKAS 39 Eligible Hedged Items HKAS 39.81 permits an entity to designate (as hedged item) something other than the entire fair value change or cash flow variability of a financial instrument. For example: a) all of the cash flows of a financial instrument may be designated for cash flow or fair value changes attributable to some (but not all) risks; or b) some (but not all) of the cash flows of a financial instrument may be designated for cash flow or fair value changes attributable to all or only some risks (i.e. a portion of the cash flows of the financial instrument may be designated for changes attributable to all or only some risks). (AG99E) Inflation 2008-09 Nelson Consulting Limited 64 32
HKAS 39 Eligible Hedged Items To be eligible for hedge accounting, the designated risks and portions must be separately identifiable components of the financial instrument, and changes in the cash flows or fair value of the entire financial instrument arising from changes in the designated risks and portions must be reliably measurable. (AG99F) Inflation 2008-09 Nelson Consulting Limited 65 HKAS 39 Eligible Hedged Items HKAS 39.AG99F(b) specifically states that: inflation is not separately identifiable and reliably Not eligible for designation measurable and cannot be designated as a risk or a portion Inflation of a financial instrument unless the following requirements are met a contractually specified inflation portion of the cash flows of a recognised inflation-linked bond (assuming there is no requirement to account for an embedded derivative separately) is separately identifiable and reliably measurable as long as other cash flows of the instrument are not affected by the inflation portion. 2008-09 Nelson Consulting Limited 66 33
HKAS 39 Eligible Hedged Items HKAS 39.74(a) permits an entity to separate the intrinsic value and time value of an option contract and designate as the hedging instrument only the change in the intrinsic value of the option contract. Such a designation may result in a hedging relationship that is perfectly effective in achieving offsetting changes in cash flows attributable to a hedged one-sided risk of a forecast transaction, if the principal terms of the forecast transaction and hedging instrument are the same. (AG110A) Assessing Hedge Effectiveness 2008-09 Nelson Consulting Limited 67 HKAS 39 Eligible Hedged Items If an entity designates a purchased option in its entirety as the hedging instrument of a one-sided risk arising from a forecast transaction, the hedging relationship will not be perfectly effective. This is because the premium paid for the option includes time value and, as stated in HKAS 39.AG99BA, a designated one-sided risk does not include the time value of an option. Therefore, in this situation, there will be no offset between the cash flows relating to the time value of the option premium paid and the designated hedged risk. (AG110B) Assessing Hedge Effectiveness 2008-09 Nelson Consulting Limited 68 34
Effective Date and Transition An entity shall apply Eligible Hedged Items (Amendment to HKAS 39) retrospectively for annual periods beginning g on or after 1 July 2009, in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is permitted. If an entity applies Eligible Hedged Items (Amendment to HKAS 39) for periods beginning before 1 July 2009, it shall disclose that fact. Applied Retrospectively ti 2008-09 Nelson Consulting Limited 69 Improvements to HKFRSs 2009 2008-09 Nelson Consulting Limited 70 35
Introduction Annual Improvement Project A vehicle for making non-urgent but necessary amendments to IFRS (and consequentially HKFRSs) Introduced by the IASB in 2007 and issued each year Improvement to HKFRSs 2009 is the one finalised in 2009 The project has amended 10 HKFRSs and 2 HK(IFRIC) Interpretations 2008-09 Nelson Consulting Limited 71 Summary Amendments to HKFRS 2 Share-based Payment HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations HKFRS 8 Operating Segments HKAS 1 Presentation of Financial Statements HKAS 7 Statement of Cash Flows HKAS 17 Leases HKAS 18 Revenue HKAS 36 Impairment of Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives HK(IFRIC)-Int 16 Hedges of a Net Investment in a Foreign Operation 2008-09 Nelson Consulting Limited 72 36
Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement HKAS 39 is amended to clarify 3 areas: 1. Scope exemption for business combination Scope Exemption contracts 2. Cash flow hedge accounting Cash Flow Hedge Accounting 3. Treating loan prepayment penalties as closely related embedded derivatives Loan Prepayment Penalties 2008-09 Nelson Consulting Limited 73 Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement HKAS 39 shall be applied by all entities to all types of financial instruments except: a)... g) any forward contracts between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction. Scope Exemption 2008-09 Nelson Consulting Limited 74 37
Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement Qualifying items (not only for cash flow hedge) For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions that involve a party external to the entity can be designated as hedged items. It follows that hedge accounting can be applied to transactions between entities or segments in the same group only in the individual or separate financial statements of those entities or segments and not in the consolidated financial statements of the group. As an exception Cash Flow Hedge Accounting 2008-09 Nelson Consulting Limited 75 Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement Cash flow hedge If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses Cash Flow Hedge that were recognised in other comprehensive Accounting income in accordance with HKAS 39.95 shall be reclassified from equity to profit or loss as a reclassification adjustment (see HKAS 1 (as revised in 2007)) in the same period or periods during which the hedged forecast cash flows affects profit or loss (such as in the periods that interest income or interest expense is recognised). However, if an entity expects that all or a portion of a loss recognised in other comprehensive income will not be recovered in one or more future periods, it shall reclassify into profit or loss as a reclassification adjustment the amount that is not expected to be recovered. 2008-09 Nelson Consulting Limited 76 38
Amendments to HKAS 39 HKAS 39 Financial Instruments: Recognition and Measurement The economic characteristics and risks of an embedded derivative are not closely related to the host contract in the following examples g) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless: Implies closely related ii) the exercise price of a prepayment option reimburses the lender for an amount up to the approximate present value of lost interest for the remaining term of the host contract. Loan Prepayment Penalties Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the host contract over the effective interest rate the entity would receive at the prepayment date if it reinvested the principal amount prepaid in a similar contract for the remaining term of the host contract. 2008-09 Nelson Consulting Limited 77 Amendments to HKAS 39 Effective Date and transition For scope exemption and hedge, an entity shall apply the amendments prospectively to all unexpired contracts for annual periods beginning on or after 1 January 2010. For loan repayment penalties, an entity shall apply the amendment for annual periods beginning on or after 1 January 2010. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact. Apply Prospectively 2008-09 Nelson Consulting Limited 78 39
Today s Agenda HKFRS 9 Financial Instruments (early application allowed for 2009) 2008-09 Nelson Consulting Limited 79 HKFRS 9 Financial Instruments 2008-09 Nelson Consulting Limited 80 40
Background In response to the input received on its work responding to the financial crisis, and following the conclusions of the G20 leaders and the recommendations of international bodies, the IASB announced an accelerated timetable for replacing IAS 39 in April 2009, and finally, IFRS 9 Financial Instruments in Nov. 2009 HKFRS 9 was issued to maintain international convergence with the issuance of IFRS 9. 2008-09 Nelson Consulting Limited 81 Background It is intended that HKFRS 9 will ultimately replace HKAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly, the project to replace HKAS 39 is divided into three main phases. As each phase is completed, as well as its separate project on the derecognition of financial instruments, the relevant portions of HKAS 39 will be deleted and chapters in HKFRS 9 will be created to replace the requirements in HKAS 39. The replacement of HKAS 39 in its entirety is aimed to be completed by the end of 2010. 2008-09 Nelson Consulting Limited 82 41
Background HKFRS 9 issued so far includes only the chapters relating to the classification and measurement of financial assets. HKFRS 9 addressed those matters first because they form the foundation of a standard on reporting financial instruments. Moreover, many of the concerns expressed during the financial crisis arose from the classification and measurement requirements for financial assets in HKAS 39. Financial Assets Only 2008-09 Nelson Consulting Limited 83 Structure of HKFRS 9 Chapters 1 Objective 2 Scope 3 Recognition and Derecognition 4 Classification 5 Measurement 6 Hedge Accounting (not used yet) 7 Disclosures (not used yet) 8 Effective Date and Transition 2008-09 Nelson Consulting Limited 84 42
Chapter 1 and 2 Objective The objective of HKFRS 9 is to establish principles for the financial reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity s future cash flows. Scope An entity shall apply HKFRS 9 to all assets within the scope of HKAS 39 Financial Instruments: Recognition and Measurement. 2008-09 Nelson Consulting Limited 85 Chapter 3 Recognition and Derecognition An entity shall recognise a financial asset in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument. When an entity first recognises a financial asset, it shall classify it in accordance with paragraphs 4.1-4.5 and measure it in accordance with paragraph 5.1.1. A regular way purchase or sale of a financial asset shall be recognised and derecognised in accordance with paragraphs 38 and AG53 AG56 of HKAS 39. Same as before Amended (Ch. 4 of HKFRS 9) Amended (Ch. 5 of HKFRS 9) Same as before 2008-09 Nelson Consulting Limited 86 43
Chapter 4 Classification Unless para. 4.5 of HKFRS 9 (so-called fair value option ) applies, an entity shall classify financial assets as subsequently measured at either amortised cost or fair value on the basis of both: a) the entity s business model for managing the financial assets; and b) the contractual cash flow characteristics of the financial asset. (para. 4.1) Amortised cost Fair value 2008-09 Nelson Consulting Limited 87 Chapter 4 Classification Assets within the scope of HKAS 39 classified on initial recognition Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? Fair value option? No No No Amortised cost Fair value Through other comprehensive income Through profit or loss 2008-09 Nelson Consulting Limited 88 44
Chapter 4 Classification Assets within the scope of HKAS 39 classified on initial recognition Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? Amortised cost A financial asset shall be measured at amortised cost if both of the following conditions are met: a. the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows. b. the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. (para. 4.2) 2008-09 Nelson Consulting Limited 89 Chapter 4 Classification Assets within the scope of HKAS 39 classified on initial recognition Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? No No A financial asset shall be measured at fair value unless it is measured at amortised cost in accordance with para. 4.2. (para. 4.4) Fair value 2008-09 Nelson Consulting Limited 90 45
Chapter 4 Classification Assets within the scope of HKAS 39 classified on initial recognition Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? Fair value option? Notwithstanding para. 4.1-4.4, an entity may, at initial recognition, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch. (para. 4.5) No Amortised cost Fair value Through profit or loss 2008-09 Nelson Consulting Limited 91 Chapter 4 Classification If a hybrid contract contains a host that is within the scope of this HKFRS, an entity shall apply the requirements in para. 4.1-4.5 (as discussed above) to the entire hybrid contract. If a hybrid contract contains a host that is not within the scope of this HKFRS, an entity shall apply the requirements in para. 11 13 and AG27 AG33B of HKAS 39 (as before) to determine whether it must separate the embedded derivative from the host. If the embedded derivative must be separated from the host, the entity shall: a. classify the derivative in accordance with either para.4.1-4.4 for derivative assets or para. 9 of HKAS 39 for all other derivatives; and b. account for the host in accordance with other HKFRSs. 2008-09 Nelson Consulting Limited 92 46
Chapter 4 Classification Assets within the scope of HKAS 39 classified on initial recognition Reclassification restricted to change in business model Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? Fair value option? No No No Amortised cost Fair value When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with para. 4.1 4.4. 2008-09 Nelson Consulting Limited 93 Chapter 5 Measurement Initial measurement (same as HKAS 39) At initial recognition, an entity shall measure a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Initial Measurement Fair Value + Transaction Cost 2008-09 Nelson Consulting Limited 94 47
Chapter 5 Measurement Subsequent Measurement After initial recognition, an entity shall measure financial assets in accordance with para. 41-4 4.1-4.5 (as discussed above) at fair value or amortised cost An entity shall apply the impairment requirements of HKAS 39 to all financial assets measured at amortised cost. No impairment requirements on financial assets measured at fair value An entity shall apply the hedge accounting requirements of HKAS 39 to financial assets that are designated as hedged items. Amortised cost Fair value 2008-09 Nelson Consulting Limited 95 Chapter 5 Measurement Reclassification If an entity reclassifies financial assets in accordance with para. 4.9 (as discussed), it shall apply the reclassification prospectively from the reclassification date the entity shall not restate any previously recognised gains, losses or interest. If, in accordance with para. 4.9, an entity reclassifies a financial asset so that it is measured at fair value, its fair value is determined at the reclassification date any gain or loss arising i from a difference between the previous carrying amount and fair value is recognised in profit or loss If, in accordance with para. 4.9, an entity reclassifies a financial asset so that it is measured at amortised cost, its fair value at the reclassification date becomes its new carrying amount. 2008-09 Nelson Consulting Limited 96 48
Chapter 5.4 Gains and Losses For those classified as measured at fair value Part of hedging relationship No Fair value option? No Equity instrument? Elected to present gains and losses in other comprehensive income? Held for trading? No Fair value through other comprehensive income No No Hedge accounting (IAS 39.89 to 102) Fair value through profit or loss 2008-09 Nelson Consulting Limited 97 Chapter 5.4 Gains and Losses For those classified as measured at fair value Part of hedging relationship No Fair value option? No Equity instrument? Elected to present gains and losses in other comprehensive income? A gain or loss on a financial asset that is measured at fair value and is not part of a hedging g relationship shall be recognised in profit or loss unless : the financial asset is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income (para. 5.4.1) Held for trading? No Fair value through other comprehensive income Fair value through profit or loss 2008-09 Nelson Consulting Limited 98 49
Chapter 5.4 Gains and Losses Assets within the scope of HKAS 39 classified on initial recognition Held within a business model whose objective is to hold assets in order to collect contractual cash flows? Asset s terms give rise on specified dates to cash flows that are solely payments of principal and interest? A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging g relationship shall be recognised in profit or loss when the financial asset is derecognised, impaired or reclassified, and through the amortisation process. (para. 5.4.2) Fair value option? No Amortised cost 2008-09 Nelson Consulting Limited 99 Chapter 5.4 Gains and Losses A gain or loss on financial assets that are a. hedged items shall be recognised in accordance with para. Same as before 89-102 of HKAS 39 b. accounted for using settlement date accounting shall be recognised in accordance with para. Same as before 57 of HKAS 39 2008-09 Nelson Consulting Limited 100 50
Chapter 5.4 Gains and Losses At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of HKFRS 9 that are not held for trading. (para. 5.4.4) If an entity makes such election, it shall recognise in profit or loss dividends from that investment when the entity s right to receive payment of the dividend is established in accordance with HKAS 18 Revenue. (para. 5.4.5) Equity instrument? No Elected to present gains and losses in other comprehensive income? Held for trading? No No Fair value through other comprehensive income Fair value through profit or loss 2008-09 Nelson Consulting Limited 101 Chapter 6 and 7 Chapter 6 and 7 not yet used As hedge accounting and disclosure not yet introduced 2008-09 Nelson Consulting Limited 102 51