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IFRS 9
Financial Instruments
Part 5c:
2Dr. Th. Goswin International Accounting Standards
Designated to replace IAS 32 and IAS 39
Response to the financial crisis:
Beginning of crisis in August 2008, decrease of marketvalues of securitized financial instruments (e.g. ABS),increasing consumption of Equity Capital
Request by G20 to contribute to limit impact of crisisthrough change of accounting procedures
Amendment to IAS 39: If FV Instruments are not intendedto be traded on short view, reclassification may beallowed, values “frozen” on 01.10.2008
Decision taken to “reconstruct” regulation on FinancialInstruments and to summarize in one standard: IFRS 9
IFRS 9: Financial instruments
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3Dr. Th. Goswin International Accounting Standards
Situation at the peak of the crisis (I):
IFRS 9: Financial instruments
Asset Liability
Credit Derivative: 100 Equity: 50
Cash: 50 Liabilities: 100
4Dr. Th. Goswin International Accounting Standards
Situation at the peak of the crisis (II):
IFRS 9: Financial instruments
Asset Liability
Credit Derivative: 100Loss on M.V.: -20New M.V.: 80
Equity: 50Retained earnings -20Total Equity: 30
Cash: 50 Liabilities: 100
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5Dr. Th. Goswin International Accounting Standards
Solution to “solve” the crisis (III):
IFRS 9: Financial instruments
Asset Liability
„Frozen“ value of CD 80 „Frozen“ Equity: 30
Cash: 50 Liabilities: 100
6Dr. Th. Goswin International Accounting Standards
IFRS 9 originally issued in November 2009, reissued inOctober 2010, intended to be applicable originally from01.01.2013 onwards, new date of application now 01.01.2018
IFRS 9 consisting of 3 parts (improvements):
Classification and Measurement
Amortized cost and impairment
Hedge Accounting
Greatest improvement is, that “expected loss model” nowacceptable
Clear procedure defined with steps of implementation
IFRS 9: Financial instruments
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7Dr. Th. Goswin International Accounting Standards
New regulation on classification: Classification according to IAS 39: Rule based Complex and difficult to apply Multiple impairment models Own credit gains and losses recognized in profit or loss for
fair value option liabilities (not applicable in the EU) Complicated reclassification rules
Classification according to IFRS 9: Principle based Based on business model and nature of cash flow One impairment model Own credit gains and losses presented in OCI for FVO
liabilities Business model driven reclassification
IFRS 9: Financial instruments
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New regulation on classification:
Consecutive measurement depends on the intended use ofthe financial instrument: The business model
Target of the investment is to keep the asset in order togenerate consecutive and regular cash-flow
Contract details of the asset lead to payment flows at fixedmoments in time, these flows consist of coupon paymentand repayment of principals only.
Both conditions have to be fulfilled simultaneously
IFRS 9: Financial instruments
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9Dr. Th. Goswin International Accounting Standards
IFRS 9: Financial instruments
Financial Assets
Business Model Test
Measurement according to
amortized cost
Measurement according to Fair Value
Recognition of coupon in I.S.
Recognition of F.V. change in I.S.
10Dr. Th. Goswin International Accounting Standards
IFRS 9: Financial instruments
Instrument within the scope of IFRS 9
Contractual cash flows are solely principal and interest?
Held to collect contractual cash flows only?
Fair value Option?
Amortized cost Fair value through profit and loss (Presentation option for equity investments to
present fair value changes in OCI)
Held to collect contractual cash flows and for sale?
Fair value Option?
Fair value through OCI
no
no
no
yes
yes yes
no
yes
no
yes yes no
other standard
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11Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
Classification is made at the time, when financialinstrument is recognized the first time
Financial instrument can be measured at amortized cost(net of any write-down for impairment), if the two followingconditions are met:
Business model test: Objective of entity’s businessmodel is to collect contractual cash-flow rather than tosell the instrument prior to its contractual maturity torealize fair value changes
Cash-flow characteristics test: Contractual terms ofasset give rise on specified dates to cash-flows thatconsist of repayment of principal and interest onamount outstanding
IFRS 9: Financial instruments
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In detail: DEBT INSTRUMENTS
What is a business model?
Refers to how an entity manages its financial assets inorder to generate cash-flows, selling financial assets orboth
Business model should be determined on a level thatreflects how financial assets are managed to achieve aparticular business objective (i.e. what do we want toachieve?)
Business model can be observed through activities, thatan entity undertakes to achieve business objective. Sono evaluation on individual level (no assertion) butobjective facts to be considered
IFRS 9: Financial instruments
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13Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
What is a business model?
Objective facts:
Business plans
Compensation for managers (i.e. bonus plans)
Amount and frequency of general sales activities
Past sales activities and expectations about future salesactivity
Having some sale activity is not necessarily inconsistentwith the business model
Same with sales as a result of (e.g.) an increase of creditrisk
If sales are more than insignificant, entity, must assess,how these sales are in consistency with business model.
IFRS 9: Financial instruments
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In detail: DEBT INSTRUMENTS
What business model qualifies for fair value through othercomprehensive income (FVOCI)?
Here, business objective is both to collect contractualcash flows and selling financial assets
In comparison to model, based on contractual cash-flows (etc.), this model typically has greater frequencyand volume of sales
Typical objectives:
Manage liquidity
Maintain particular interest yield profile
Match duration of financial liabilities to duration of assetsthey are funding
IFRS 9: Financial instruments
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15Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
What are the characteristics of a contractual cash flow?
In general, contractual cash flows are solely payments ofprincipal and interest (SPPI)
Only financial assets with such cash flows are eligible foramortized cost or FVOCI)
Clarification: interest can comprise not only for time value ofmany and credit risk
But
Return for liquidity risk, amounts to cover expenses, profitmargin
As long as consistency with a basic lending arrangement isgiven (for instance: if contractual cash flows include a returnfor equity price risk, this is not in accordance with SPPI)
IFRS 9: Financial instruments
16Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
What are the characteristics of a contractual cash flow?
Basic element of identifying SPPI is „Time Value ofMoney“, which determines the contractual payment ofinterest (and alike elements)
Example: Fixed interest rate (i.e. 10% p.a.) or variableinterest rate (i.e. index, 3 month Libor). In that case timevalue of money is calculated on that time. However,tenors may be concluded, where determination ofinterest rate (i.e. coupon) differs from usualpreconditions of interest rate fixing (e.g. 3 month Libor,re-fixed every week)
IFRS 9: Financial instruments
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17Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
What are the characteristics of a contractual cash flow?
In this case, individual assessment, if FI fulfill the cashflow characteristics and if the cash flow representsSPPI.
Objective is to determine, if cash flow differssignificantly from cash flow with unmodified time valueof money element
In cases of doubt: Precondition of contractual cash flowis not given, valuation according to amortized cost notpossible
IFRS 9: Financial instruments
18Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
What are the characteristics of a contractual cash flow?
Example:
Pre-payable financial asset to have contractual cash flowsthat are SPPI (FX bond, bond with an add on). Testing ofcontractual lending arrangement is given
Regulated interest rates, set by government, notrepresenting time value of money, acceptable as SPPI aslong they do not introduce risk or volatility, that isinconsistent with a basic lending arrangement
IFRS 9: Financial instruments
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19Dr. Th. Goswin International Accounting Standards
In detail: DEBT INSTRUMENTS
All other debt instruments, which do not pass the two testshave to be measured by Fair Value through profit and loss
Transaction costs are part of the Fair Value at first timerecognition
Amortization of transaction costs until maturity via effectiveinterest method
Fair Value option:
An entity can voluntarily measure a debt instrument by FairValue, if otherwise an “accounting mismatch” would occur
In this case, transaction costs are to be expensedimmediately via profit and loss
IFRS 9: Financial instruments
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In detail: EQUITY INSTRUMENTS
All Equity instruments to be measured at fair value thoughprofit and loss
Transaction costs to be expensed immediately via profit andloss
No “cost exception” for unquoted equities:
IAS 39 has an exception for investments in unquoted equityinstruments (and some related derivatives). The exceptionrequires that these instruments be measured at cost (lessimpairment) if fair value cannot be determined reliably.
IFRS 9: Financial instruments
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21Dr. Th. Goswin International Accounting Standards
In detail: EQUITY INSTRUMENTS
“Other comprehensive income option”: If equity investment isnot held for trading, entity can make irrevocable decision atinitial recognition to measure it at “fair value through othercomprehensive income”
Dividend income recognized in profit and loss
FV changes recognized in Equity via “other comprehensiveincome”
IFRS 9: Financial instruments
22Dr. Th. Goswin International Accounting Standards
Treatment of Financial Liabilities according to IFRS 9
Similar to IAS 39, two categories of liabilities exist:
Fair value through profit or loss (FVTPL): Liabilities held withthe intention (and possibility) of trading (i.e. callable bond)
Amortized cost (AC): Liabilities, which are paid back atmaturity (other liabilities)
Fair Value Option: Entity can voluntarily measure accordingto Fair Value, if
By doing so an “accounting mismatch” is avoided (or)
The liability is part of a group of liabilities and/or assets,which are (risk-) managed as an appropriate investmentstrategy and supervised by key management personnel.
IFRS 9: Financial instruments
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23Dr. Th. Goswin International Accounting Standards
IFRS 9: Financial instruments
Financial Liabilities
Measurement according to
amortized cost
Measurement according to Fair Value
Other Liabilities Trading Liabilities
No impact on P&L Impact on P&L
24Dr. Th. Goswin International Accounting Standards
In principle, the approach of IAS 39 remains unchanged.
Problem:
Approach criticized due to “artificial” creation of profits asa consequence of deterioration of own credit standing.
Therefore this approach still not applicable within EU
IFRS 9 offers improvement of treatment of liabilities:
Amount of profit, which is attributable to marketmovements to be recognized in Income Statement
Amount of profit, which is attributable to deterioration ofown credit standing to be recognized as “othercomprehensive income”
IFRS 9: Financial instruments
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25Dr. Th. Goswin International Accounting Standards
Reclassification:
For Financial Assets reclassification is required betweenFVTPL and AC (and vice versa), if and only if the entity’sbusiness model objective for its financial assets changes
In this case the previous model does not apply any more
If reclassification is decided (appropriate), it must be donefrom reclassification date. No restating of previous gains,losses or interest
No limitation of reclassifications considered
However: Reclassification is a significant event andexpected to be uncommon
IFRS 9: Financial instruments
26Dr. Th. Goswin International Accounting Standards
IFRS 9: Financial instruments
Financial Assets
Business Model Test
Measurement according to
amortized cost
Measurement according to Fair Value
Reclassification
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27Dr. Th. Goswin International Accounting Standards
Reclassification:
Users of financial statement must be provided withsufficient information to understand and evaluate thereclassification
Especially how the cash flows on financial assets areexpected to be realized
IFRS 7 requires disclosures about reclassifications:
Amount of financial assets moved out and into differentcategories
Detailed explanation of the change in business model and itseffect on income statement(s)
IFRS 9: Financial instruments
28Dr. Th. Goswin International Accounting Standards
De-recognition: ASSETS
1st step: Determine whether asset under consideration is an
Entire asset
Specially identified cash-flows from an asset (e.g. pre-maturerepayment of a loan)
Fully proportionate share of a cash-flow (pro rata, e.g. regularrepayment of proportion of loan, mortgage, etc)
2nd step: Determine, whether the asset has been transferredand if so, whether the asset is subsequently eligible for de-recognition:
Entity has transferred the contractual rights to receivecash-flows
IFRS 9: Financial instruments
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29Dr. Th. Goswin International Accounting Standards
De-recognition: ASSETS
2nd step:
Entity has retained the contractual rights to receive cash-flows, but has assumed a contractual obligation to passthese cash-flows to someone else under an arrangementthat meets the following conditions:
Entity has no obligation to pay amounts unless it collectsequivalent amounts on original asset (e.g. sale of an option onsecondary market)
Entity is prohibited from selling or pledging the original asset(e.g. a loan/mortgage)
The entity has obligation to remit those cash-flows withoutmaterial delay (e.g. factoring)
IFRS 9: Financial instruments
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De-recognition: ASSETS
3rd step: Determination whether risk out of investment aretransferred as well.
Substantial transfer of risks: Full de-recognition of asset
Retaining of risks: De-recognition of asset precluded
No full retaining and no full transfer of risks (“in-between-case”): Determination of control of risks
Entity does not control: De-recognition may be appropriate(IAS 39 requires provision, IFRS 9 does not mention)
Entity still controls risk: Recognition of the asset to the extentof ongoing involvement in the asset
IFRS 9: Financial instruments
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31Dr. Th. Goswin International Accounting Standards
IFRS 9: Financial instruments
De-recognition of Fundamental Financial Assets
Transfer of rights
Transfer of risks
Transfer of control
De-recognition Recognition insofar further involvement
De-recognition, maybe provision to be created
Recognition
no
yes
yes
no
no yes
32Dr. Th. Goswin International Accounting Standards
De-recognition: LIABILITIES:
Financial liability to be removed from balance sheet, whenand only when it is extinguished
Obligation specified in the contract is either discharged orcancelled or expires (e.g. Option)
If there was an exchange between existing borrower andlender of debt instrument with substantially different terms,or if there was a substantial modification of the terms ofexisting liability, the previous liability is de-recognized and anew liability is recognized
Gain and loss of the exchange to be considered directly andimmediately in the income statement.
IFRS 9: Financial instruments
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33Dr. Th. Goswin International Accounting Standards
Derivatives:
All derivatives, including those unquoted, are measured afair value
Fair Value changes are recognized in profit and loss,unless the entity has decided to classify the derivative as ahedging instrument, Requirements of IAS 39 to apply
If fair value not available, best estimates to be applied (i.e.certified valuers, Option price models)
Transaction costs to be expensed immediately via incomestatement
IFRS 9: Financial instruments
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Embedded Derivatives:
Hybrid contract, which is a combination of derivativeelement with non-derivative host
Consequence: Cash-flow not entirely applicable tobusiness model and cash-flow characteristics test, havingstrong elements of “stand-alone-derivative”.
Derivative, which is attached to an other financialinstrument and is contractually transferable independentlyto third party is not an embedded derivative, but a separatefinancial instrument, to be accounted separately
No risk attachment/risk separation testing required (as inIAS 39)
IFRS 9: Financial instruments
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35Dr. Th. Goswin International Accounting Standards
Embedded Derivatives:
Embedded derivatives, that under IAS 39 would beaccounted separately, due to different risk structure (notclosely related), will not be separated any more
Categorization into FVTPL of the entire instrument, even ifonly a part of contractual cash-flow do not representpayment of interest and repayment of principal (e.g.convertible bond)
IFRS 9: Financial instruments
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Financial Instrument
Financial asset Financial liability Equity instrument
Fundamental Financial asset
Derivatives
Hedging Instruments
Amortized Cost
Fair Value
Plain Derivatives
Embedded Derivatives
Fair Value Hedge
Cash-flow Hedge
Hedge of a net investment in a foreign operation
Macro Hedge
Liabilities Held for Trading
Other liabilities
Plain Equity Capital
Compound Equity Instrument
Synthetic Equity Instrument
Insurance Contract
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37Dr. Th. Goswin International Accounting Standards
IAS 32/39: Financial instruments (Excursion: Overview on Financial Instruments)
Financial assets
Traded at spot market Traded at forward market
Conclusion and settlement of contract at the same time
Conclusion and settlement of contract at different times
Interest Instruments
Shares (Equity Instruments)
conditional forwards
unconditional forwards
Buyer acquires right, seller accepts commitment
Buyer and seller accept commitment
- Options
-Instruments similar to Options (Caps, Floors etc.)
- Forwards
- Futures
-Swaps
- Money Market instruments
- Capital Market instruments
- Common shares
-Preferred Stock (Premium sh.)
38Dr. Th. Goswin International Accounting Standards
Summary: Treatment of the different financial instruments
First time recognition in every case by Fair Value
Interest instruments: Testing of Business Model and Cash-Flow Characteristics, categorization to AC and FVTPL,application of Fair Value Option
Shares: Application of FVTPL, “Other ComprehensiveIncome Option, no “Cost Exemption” in case of absence ofprice quotation
Derivatives: Application of FVTPL, no accounting options
Hedging instruments: According to IAS 39, changes andsimplifications promised, but not disclosed so far
IFRS 9: Financial instruments
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39Dr. Th. Goswin International Accounting Standards
Summary: Treatment of the different financial instruments
Embedded Derivatives: in general accounting procedure asa whole (as one Financial Instrument, no separationforeseen), application of FVTPL, no “cost exemption”applicable, simplification of procedures in comparison toIAS 39
Own Equity: No changes so far, IAS 39 applicable
Own liabilities: categorization into “Trading Liabilities” and“Other Liabilities”, treatment according to EFRAGproposal:
Profit, out of market movements to be recognized in IncomeStatement
Profit, attributable to deterioration of own credit standing to berecognized as “other comprehensive income”
IFRS 9: Financial instruments
40Dr. Th. Goswin International Accounting Standards
Open issue:
Asset and Liability offsetting: US-GAAP allows theoffsetting of assets and liabilities, if there is a master-netting-agreement available: In case of default ofbankruptcy all and asset and liability contracts are nettedinto a single payable or receivable amount. IFRS does notallow this procedure
IASB and FASB were unable to agree on a compromise, asa result an amendment to IAS 32 was agreed on specialdisclosures, which allow analysts to more easily comparecredit exposure
The said amendment is still under preparation
IFRS 9: Financial instruments
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41Dr. Th. Goswin International Accounting Standards
Impairment
IAS 32 required an impairment model, based on “incurredlosses”.
Incurred loss model assumes that all loans will be repaid,until evidence to the contrary (Loss trigger event). Only atthat point, an impaired loan (or portfolio) is written down
Basel II requires a proactive approach, creation ofprovisions and reserves for credit event.
IFRS 9 accepts now “expected loss approaches” wherebyexpected losses are recognized throughout the life of aloan/financial asset, even if it is measured at amortizedcost, recognition of a potential loss at an “earlier level”
IFRS 9: Financial instruments
42Dr. Th. Goswin International Accounting Standards
Three stages of impairment:
IFRS 9: Financial instruments
Stage 1:
As soon as a financial instrument
is originated of purchased, 12
month expected credit losses are
recognized in profit or loss and a
loss allowance is established.
This serves as a proxy for the
initial expectations of credit
losses.
For financial assets, interest
revenue is calculated on the gross
carrying amount (i.e. without
adjustment for expected credit
losses.
Stage 2:
If the credit risk increases
significantly and the
resulting credit quality is not
considered to be low credit
risk, full lifetime expected
credit losses are recognized.
Lifetime expected credit
losses are only recognized,
if the credit risk increases
significantly from when the
entity originates or
purchases the financial
instrument.
Stage 3:
If the credit risk of a financial
asset increases to the point,
that it is considered credit-
impaired, interest revenue is
calculated based on the
amortized cost (i.e. the gross
carrying amount adjusted for
the loss allowance). Financial
assets in this stage will
generally be individually
assessed.
Lifetime expected credit
losses are still recognized on
these financial assets.
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43Dr. Th. Goswin International Accounting Standards
12-month expected credit losses:
Portion of lifetime expected credit losses, that representthe EXPECTED credit losses, which result from defaultevents on a FINANCIAL INSTRUMENT (in general), whichare possible within the 12month after the reporting date
It is not the expected CASH shortfall over the next twelvemonth, however, it is the effect of the entire credit loss onan asset weighted by the probability that this loss willoccur in the next 12 month.
It is also not the credit losses on assets, that are forecastedto actually default in the next 12 month
If an entity can identify such assets (or a portfolio), theseare recognized in LIFETIME EXCPECTEDCREDIT LOSS
IFRS 9: Financial instruments
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12 month expected credit loss: Expected risk, “acceptable”
damage calculated statistically out of past events
Example: about 600 credit events with different rate of repayment/default50 enterprises created 0% default70 enterprises created 0.25% default95 enterprises created 0.5% default
…..
1 enterprise created 4.75% default0 enterprise created 5% default and more
Average loss of credit: 1%i.e. 1% of all credits default
1% expected risk, part of calculation of credit cost
Loss-rate
Number of cases creating loss
rel. Freqeuncy of cases
weighted loss
0,00% 50 0,0% 0,0%0,25% 70 11,2% 0,0%0,50% 95 15,2% 0,1%0,75% 100 16,1% 0,1%1,00% 90 14,4% 0,1%1,25% 80 12,8% 0,2%1,50% 70 11,2% 0,2%1,75% 50 8,0% 0,1%2,00% 30 4,8% 0,1%2,25% 20 3,2% 0,1%2,50% 10 1,6% 0,0%2,75% 5 0,8% 0,0%3,00% 3 0,5% 0,0%3,25% 2 0,3% 0,0%3,50% 1 0,2% 0,00%3,75% 1 0,2% 0,00%4,00% 1 0,2% 0,00%4,25% 1 0,2% 0,00%4,50% 1 0,2% 0,00%4,75% 1 0,2% 0,00%5,00% 0 0,0% 0,00%
Over 5% 0 0,0% 0,00%
IFRS 9: Financial instruments
Dr. Th. Goswin International Accounting Standards
Expected loss = Σ (loss * frequency of loss)= Σ weighted loss
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12 month expected credit loss:
Example: Investment in interest rate swap
Consideration of counterparty risk
Calculation of credit value adjustment at the beginning of swap arrangement
IFRS 9: Financial instruments
Dr. Th. Goswin International Accounting Standards
0
9
16
2124 25 24
21
16
9
00
‐9
‐16
‐21‐24 ‐25 ‐24
‐21
‐16
‐9
0
‐30
‐20
‐10
0
10
20
30
0 1 2 3 4 5 6 7 8 9 10
EPE
ENE
Periodpotential exposures Credit Spread credit charges with 50% probability Discount Factor
Cash valueEPE ENE counterparty own counterparty own difference 4,00%
0 0 0 0,80% 0,40% 0,000 0,000 0,000 1,000 0,0001 9 -9 0,90% 0,45% 0,041 -0,020 0,020 0,962 0,0192 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,925 0,0373 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,889 0,0474 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,855 0,0515 25 -25 1,00% 0,50% 0,125 -0,063 0,063 0,822 0,0516 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,790 0,0477 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,760 0,0408 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,731 0,0299 9 -9 1,00% 0,50% 0,045 -0,023 0,023 0,703 0,016
10 0 0 1,00% 0,50% 0,000 0,000 0,000 0,676 0,000
explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%
Summ 0,338credit value adjustment
46Dr. Th. Goswin International Accounting Standards
Lifetime expected credit losses:
Expected present value measure of losses, that arise, if aborrower defaults on his obligation throughout the life ofthe financial instrument. They are the weighted averagecredit losses, with the probability of default as the weight.
Difference to 12-month expected credit losses:
12-month expected losses are proportion of lifetime expectedlosses, limited to an expectation within 12month.
Lifetime expected credit losses consider both amount andtiming of payments, this means, that a credit loss has to berecognized eve, when the entity expects to be paid in full but ata later moment.
IFRS 9: Financial instruments
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47Dr. Th. Goswin International Accounting Standards
Lifetime expected credit losses:
Example: Portfolio of home loans originated in a country:
Stage 1: 12-month expected credit losses are recognized for allloans on initial recognition
Stage 2: information emerges, that one region in the country isexperiencing tough economic conditions. Therefore it isexpected, that the loans in that region may be more exposed todefault. Lifetime expected credit losses are recognized forthose loans within that region additionally to the 1-monthexpected credit losses.
Stage 3: more information emerges and the entity is able toidentify some particular loans which have already defaulted orwill imminently default. Lifetime expected cedit losses continueto be recognized, but interest revenue switches to a netinterest basis.
IFRS 9: Financial instruments
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Lifetime expected credit loss:
Example: Investment in interest rate swap
Consideration of change of risk if an (even remote) event is triggered (e.g. change of interest rate
Calculation of credit value adjustment in course of time.
IFRS 9: Financial instruments
Dr. Th. Goswin International Accounting Standards
0
9
16
2124 25 24
21
16
9
00
‐9
‐16
‐21‐24 ‐25 ‐24
‐21
‐16
‐9
0
‐30
‐20
‐10
0
10
20
30
0 1 2 3 4 5 6 7 8 9 10
EPE
ENE
9
16
2124 25 24
21
16
9
0
9
0
-7
-12-15 -16 -15
-12
-7
0
-20
-15
-10
-5
0
5
10
15
20
25
30
0 1 2 3 4 5 6 7 8 9
EPE
ENE
Beginning of contract
Change of interest rate after one year
25
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IFRS 9: Financial instruments
Dr. Th. Goswin International Accounting Standards
Periodpotential exposures Credit Spread credit charges with 50% probability Discount Factor
Cash valueEPE ENE counterparty own counterparty own difference 4,00%
0 0 0 0,80% 0,40% 0,000 0,000 0,000 1,000 0,0001 9 -9 0,90% 0,45% 0,041 -0,020 0,020 0,962 0,0192 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,925 0,0373 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,889 0,0474 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,855 0,0515 25 -25 1,00% 0,50% 0,125 -0,063 0,063 0,822 0,0516 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,790 0,0477 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,760 0,0408 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,731 0,0299 9 -9 1,00% 0,50% 0,045 -0,023 0,023 0,703 0,016
10 0 0 1,00% 0,50% 0,000 0,000 0,000 0,676 0,000
explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%
Summ 0,338credit value adjustment
Periodpotential exposures Credit Spread credit charges with 50% probability Discount Factor
Cash valueEPE ENE counterparty own counterparty own counterparty own difference 4,00%
0 9 9 18 0 0,80% 0,40% 0,072 0,000 0,072 1,000 0,0721 16 0 16 0 0,90% 0,45% 0,072 0,000 0,072 0,962 0,0692 21 -7 21 -7 1,00% 0,50% 0,105 -0,018 0,088 0,925 0,0813 24 -12 24 -12 1,00% 0,50% 0,120 -0,030 0,090 0,889 0,0804 25 -15 25 -15 1,00% 0,50% 0,125 -0,038 0,088 0,855 0,0755 24 -16 24 -16 1,00% 0,50% 0,120 -0,040 0,080 0,822 0,0666 21 -15 21 -15 1,00% 0,50% 0,105 -0,038 0,068 0,790 0,0537 16 -12 16 -12 1,00% 0,50% 0,080 -0,030 0,050 0,760 0,0388 9 -7 9 -7 1,00% 0,50% 0,045 -0,018 0,028 0,731 0,0209 0 0 0 0 1,00% 0,50% 0,000 0,000 0,000 0,703 0,000
explanation from yield curve from yield curve from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%
Summ 0,554
credit value adjustment
50Dr. Th. Goswin International Accounting Standards
Increase in credit risk since initial recognition
IFRS 9: Financial instruments
Stage 1
12-month expected credit losses
Effective interest on gross carrying amount
Stage 2
Lifetime expected credit losses
Effective interest on gross carrying amount
Stage 3
Lifetime expected credit losses
Effective interest on amortized cost
Impairment recognition
Interest revenue
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51Dr. Th. Goswin International Accounting Standards
Measuring expected credit losses:
Expected credit losses (in general) are an estimate of creditlosses over the life of the financial instrument
Factors to be considered:
Probability weighted outcome. Neither best case nor worstcase scenario
Estimate should reflect the possibility that credit lost occursand that no credit loss occurs
Time value of money. Expected credit loss to be discounted toreporting date
Based on reasonable and supportable information that isavailable without undue cost or effort (i.e not necessary toobtain external rating for all credit exposures)
IFRS 9: Financial instruments
52Dr. Th. Goswin International Accounting Standards
Measuring expected credit losses:
Examples:
Discriminant analysis
Value at Risk (VAR)
Option pricing theory
IFRS 9: Financial instruments
µ bankrupt µ stable
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53Dr. Th. Goswin International Accounting Standards
Measuring expected credit losses:
Entity required to use reasonable and supportable informationthat is available at reporting date and that includes informationabout past events, current conditions and forecasts of futureconditions
No need to use a „crystal ball“ to predict future, everythingdepends on the availability of the information. As forecast horizonincreases, quality of information decreases.
Although model should be forward looking, historical data is ananchor. Adjustment of historical data to current economic trendsis may be necessary.
IFRS 9 does not prescribe any model or method. As long asfindings and observations are justifiable, preconditions of IFRS 9fulfilled.
IFRS 9: Financial instruments
54Dr. Th. Goswin International Accounting Standards
Assessing significant increases in credit risk:
IFRS 9 requires life expected credit losses to be recognized, whenthere are significant increases in credit risk since initialrecognition
At beginning of lifetime of credit entity assesses initialcreditworthiness of the borrower. Initial creditworthiness is takenevaluated.
If in course of time a re-valued creditworthiness shows differenceto initial expectations (i.e. if when lender is not receivingcompensation for the level of credit risk to which he is nowexposed), readjustment of expectation has to be done.
This is reflected in the income statement as a financial loss
Important: there is a significant increase of credit risk before afinancial asset becomes impaired. And this risk is alreadyreflected in the financial statement.
IFRS 9: Financial instruments
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55Dr. Th. Goswin International Accounting Standards
Disclosure:
Explain basis for expected credit loss calculations
How credit losses and changes in credit risk are assessed
Reconciliation from opening to closing of allowance balance for12-month losses, separately from lifetime losses allowancesbalance
Balances of carrying amount from opening to closing for financialinstruments, subject to impairment
Users of financial statements must be able to understand thereasons for changes in the allowance balances (i.e. if it is causedby changes in credit risk or increased lending).
Additionally: Information on rating grades and modification ofcontractual cash flows.
IFRS 9: Financial instruments
56Dr. Th. Goswin International Accounting Standards
Hedge accounting:
Clarification on the eligibility of financial instrumentsmanaged on a contractual cash flow basis in a fair valuehedge
Target:
Simplification of hedge accounting procedures forfair value hedges
Aligning hedge accounting more with RiskManagement and provide more useful information foranalysis
Establish a more objective-based approach to hedgeaccounting
address inconsistencies and weaknesses in existingmodel
IFRS 9: Financial instruments
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57Dr. Th. Goswin International Accounting Standards
Hedge accounting:
Aspects considered
IFRS 9: Financial instruments
Hedge accounting
Objective
Hedging instruments
Discontinuation and
rebalancing
Presentation and
disclosure
Alternatives to hedge
accounting
Hedged items
Effectiveness assessment
Groups and net positions
58Dr. Th. Goswin International Accounting Standards
Hedge accounting: Main questions solved in IFRS 9
(1) Definition of what financial instrument qualify for
designation as hedging instrument
(2) Definition of what items (existing or expected)
qualify as hedged items
(3) How should an entity account a hedging relationship
(4) Hedge accounting presentation and disclosures
IFRS 9: Financial instruments
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59Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(1) and (2)
Non-derivative financial assets or liabilities,measured by fair value through profit and loss(FVTPL) may be eligible as a hedging instrument (forderivatives and non-derivatives)
Non-derivative financial assets and liabilitiesmeasured not by FVTPL may lead to operationalproblems and therefore do not qualify as hedginginstruments
Non-derivative financial assets or liabilities,measured by fair value through profit and loss(FVTPL) may be eligible as a hedged item
IFRS 9: Financial instruments
60Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(1) and (2)
Derivatives qualify as a hedged item
Derivatives may qualify as hedging Instrument aswell, especially in case of covering interest rate riskand foreign currency risk
Although the two risks can be hedged with oneinstrument altogether, the board acknowledges thefact that entities often hedge these risks withdifferent instruments
However, derivatives need to be identified formallyas a hedging instrument
IFRS 9: Financial instruments
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61Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(3) Accounting procedures:
Fair value hedge: Gain and loss from re-measuringhedging instrument to be recognized as othercomprehensive income
Hedged gain or loss of hedged item to be recognizedseparately in income statement (next to gain/loss ofthe entire asset/liability, that was hedged), andafterwards recognized in other comprehensiveincome
Ineffective portion of hedging operation to be shownin income statement
IFRS 9: Financial instruments
62Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(3) Accounting procedures:
Cash flow hedge: Eligible only, if close relationbetween hedge instrument and hedged item, formaldesignation, hedge effectiveness given an more thanaccidental
Gains and losses of hedged itemto show in equity(cash flow hedge reserve), gains and losses ofhedging instrument to be shown in othercomprehensive income, if ineffective part existing, tobe shown in income statement
IFRS 9: Financial instruments
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63Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(3) Accounting procedures:
Hedge of a net investment in a foreign operation:
Gain or losses on the hedging instrument shall berecognized in other comprehensive income ifeffective, in-effective part to be shown in incomestatement
For hedging operations prior to first time applicationof IFRS 9, Cash flow hedge reserve shall betransferred to profit and loss
IFRS 9: Financial instruments
64Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose information about:
an entity’s risk management and how it is appliedto current risk problems
how the entity’s hedging activities may affect theamount, timing and uncertainty of its future cashflows
the effect of the hedge accounting has on theentity’s statement of financial positions (balancesheet), statement of comprehensive income(income statement) and statement of changes inequity
IFRS 9: Financial instruments
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65Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose information on Risk Management strategy,
explain
how risks arise
how the entity manages each risk (separately
for individual risks or the entirety of risks)
the extent of risk exposure the entity manages
IFRS 9: Financial instruments
66Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose information on the amount, timing anduncertainty of future cash flow
For each category of risk exposure disclosequantitative information to analyze
- type of risk exposure, which is managed
- extend of hedging to every risk exposure
- effect of hedging to every risk exposure
IFRS 9: Financial instruments
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67Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose information on the amount, timing anduncertainty of future cash flow, in particular:
amount or quantity (tons etc.) of risk to whichentity is exposed
amount or quantity of risk, which is hedged
how hedging changes the exposure to risk
for each category a description of sources ofhedge ineffectiveness (currently and as a futureexpectation)
IFRS 9: Financial instruments
68Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primary
financial statement, in tabular form, for fair value
hedge, cash-flow hedge and hedge of a net
investment (…)
- carrying amount of the hedging instruments, and
- notional amounts or other quantities (tons etc.)
related to hedging instrument
IFRS 9: Financial instruments
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69Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primaryfinancial statement, in tabular form, for hedged items
• For fair value hedges
• Carrying amount of accumulated gains and losseson the hedged items, presented in separate line inbalance sheet (statement of financial positions),separating assets from liabilities
• Balance remaining in balance sheet for hedges,where hedging has been discontinued
IFRS 9: Financial instruments
70Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting onprimary financial statement, in tabular form, forhedged items
• For cash flow hedges
• Balance in the cash flow hedge reserve (i.e.Equity) for continuing hedges, when there was aneffect on income statement
• Balance remaining in balance sheet for hedges,where hedging has been discontinued
IFRS 9: Financial instruments
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71Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primaryfinancial statement, in tabular form, for eachcategory of risk
For fair value-, cash flow-, and hedges of a netinvestment (...)
Changes in the value of the hedging instrumentrecognised in other comprehensisve income
Hedge ineffectiveness recognized in profit andloss
A description of the items, where hedgeineffectiveness is included
IFRS 9: Financial instruments
72Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primaryfinancial statement, in tabular form, for eachcategory of risk
• For fair value hedges
• Change of the value of the hedged item
IFRS 9: Financial instruments
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73Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primaryfinancial statement, in tabular form, for eachcategory of risk
For cash flow-, and hedges of a net investment (...)
For hedges of net positions the hedging gains orlosses recognized in a separate line in the incomestatement
Amount reclassified from cash flow hedge reserveto profit and loss as a reclassification adjustment
Description of the line item in the incomestatement, affected by reclassification
IFRS 9: Financial instruments
74Dr. Th. Goswin International Accounting Standards
Hedge accounting:
(4) Disclose of effects of hedge accounting on primaryfinancial statement
A reconciliation calculation shall be given, that
Allows users to identify the different adjustments,classifications and operations, which have aneffect on balance sheet, income statement,statement of profit and loss, statement of othercomprehensive income and statement of changesof equity
IFRS 9: Financial instruments
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75Dr. Th. Goswin International Accounting Standards
Thank you for your attention