International Accounting Standards - unibg.it. International... · International accounting...

1 © 2014 Accenture

Bergamo, March 2014

High performance. Delivered.

International Accounting Standards

2 © 2014 Accenture

Agenda

From IT GAAP to IAS

Applications

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Italian rule 1606/2002 CE

Listed Companies

Application field(artt. 4 e 5)

Consolidated

Financial Statement

Not listed companies

Company Only

statement

Consolidated

Financial Statement

Company Only

statement

Ias Mandatory

application(1° January

2005)

Not required

Exeptions (art. 9)

Companies whose debt shares are listed on ruled markets on EU

Companies listed on not EU markets who adopt principles accepted internationally

❶

❷

IAS adoption

(1° january 2007)

Ias standards mandatory application started on 2005

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…… but represents a multi impact process regarding:

Organization and operational aspects

Legal aspects

Financial and Directional reporting

Investor and analysts relations

Performance management models and tools

Processes and tools to collect and handle informations

Ias conversion is not only an accounting and financial reporting change…

International accounting standards

5 © 2014 Accenture

Companies main impacted areas are those related to accounting systems

and reporting. Organization processes and information system are strongly

impacted

New classification criteria of assets and liabilites

Transition from “cost model” to “fair value model”

Need of risk management systems reliable and articulates

More volatility on financial statement results and less room for “balance sheets politics”

ACCOUNTING SYSTEM AND REPORTING

New organization constrains to handle financial instruments (ie: classification, hedge transactions)

Strong actions on information system are needed to adopt new accounting and valuation standards

It is necessary to revise some internal processes to correctly evaluate financial instruments

PROCESSES AND INFORMATION SYSTEM


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Assets and liabilities value will not be the same on different periods but will change with the market changes, with

profit and loss impacts and more volatility

Fair value measurement

Disclosure must be changed in order to undertake a juridical fact explanation and to look at real economic impacts

(ie Financial Leasing)

Economic substance of transactions

IAS 14 -Segment Reporting- companies must communicate balance sheet and financial statement data articulated

into company segments. Geografic and business segments are to be indicated. As an impact, there is a

convergence between accounting and business informations

Segment Reporting

Main Ias innovations are related to fair value measurement, importance of economic

substance of transactions , segment reporting


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IAS Descrizione

IAS 1 Presentation of financial statements

IAS 2 Inventories

IAS 7 Statement of cash flows

IAS 8 Accounting policies, changes in accounting estimates and errors

IAS 10 Events after the Reporting Period

IAS 11 Long term contracts

IAS 12 Income taxes

IAS 14 Segment reporting

IAS 16 Property, plant and equipment

IAS 17 Leasing

IAS 18 Revenues

IAS 19 Employee benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 23 Borrowing costs


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IAS Descrizione

IAS 24 Related party disclosure

IAS 26 Accounting and Reporting by Retirement. Benefit Plans

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions

IAS 31 Inteterests in joint ventures

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings per share

IAS 34 Interim financial reporting

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and. Contingent Assets

IAS 38 Intangible assets


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IAS Descrizione

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

IFRS 1 First-time Adoption of International. Financial Reporting Standards

IFRS 2 Shares based payments

IFRS 3 Business combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources


10 © 2014 Accenture

Top changes in classification and measurement

The main impact is related to the time evaluation of not performing loans: time value has to be included in

impairment measurement criteria and credit net present value must be calculated

The main impact is related to classification and measurement: stocks associated to Fair value measurement

have direct effects on profit and loss. Available for sales stocks have imact on financial statement (reserves).

Stocks held to maturity measured at amortized cost

Derivatives are posted as assets or liabiliets and measured applying fair value criteria. Specific and strict rules

have to be applied in case of hedging: fair value hedge, cash flow hedge, foreing investments hedge

The main impact is related to consolidation area that includes partecipations on entities who have different

activities from banks. Moreover, alla partecipations other than control and strong influence, should be measured

at fair value with effects on profit and loss

Amortization should not be calculated on ground

Capitalization of costs more strict with impacts on profit and loss

Present value of post employment benefits must be calculated and posted

Credits

Stocks

Derivatives

Partecipating

interests

Property

Long term

costs

Post

employment

benefits



- Impairment losses ( mln €) -


~630

~200 ~80

~240 ~1.150

Non performing loans

Bonis Credits Stock evaluation

Reserves and Intangible assets

Altro

Effects on 1° january 2005 (net

worth): ~€850mln

Effects on profit and loss: ~€300mln

New impairment model with modified clusters

Time value impact

Fonte: BNL Presentazione interna aumento di capitale

Ias new measurement

criterias impacted

bancance sheet and profit

and loss on first time

adoption

BNL decided to take the

opportunity to “clean”

balance sheet from implicit

losses

Mark to market evaluation on FIAT

stock

Ias first time adoption required to BNL a capital increase because of different

credit evaluation criteria


Main impacts:

1. Classification and measurement

2. Impairment of performing loans

3. Impairment of non performing loans

4. Segment reporting

BUSINESS PROCESSES

Segment

Reporting

Impairment non

performing clients

Classification

and measurement

Impairment performing

clients

Ias application could have strong impacts on credit area measurement

—IAS effects on credits —



Held for Trading (HFT) Held to Maturity (HTM) Loans and receivables originated by the entity (Originated) Available for sale (AFS) Other Liabilities

Measurement criterias:

Held for Trading (HFT) ed Available for sale (AFS)

Held to Maturity (HTM) e Loans and Receivables Originated by the entity (Originated) ed other Liabilities

Hedging Instruments

Fair Value (FV)

Amortized Costs

Fair Value (FV)

Based on classification, Ias measurement changes

I Principi Contabili Internazionali

- Classification -

- Measurement -


Credit Area is mainly impacted by Ias 32 and Ias 39 with effects on bank

processes and IT tools to classify and measure

— Classificazione —


Financial assets classified on one of the following

categories:

• Financial asset/liabilities at Fair Value through

Profit & Loss (FVTPL)

• Held to Maturity (HTM)

• Loans & Receivables (LR)

• Available for Sale (AFS)

Credits are classified as Loans & Receivables or

Available for Sale (as bank is supposed to sell its

credits)

Nearly 100% of Banking groups chose to classify

credits as “Loans & Receivables”.

Credits posted for product and type

of customers:

Es. Voce 40. Crediti verso clientela

Current accounts

Personal loans

Mortages

Other loans

Foreign credits

Other products

— IT GAAP — — Ias principles—


Amortized cost measurement criteria is associated to the classification

category and hedging

— Measurement —


Credits are measured at best supposes value related to:

• Client Reliability and his ability to pay for his debts

• Difficulties on soveraign debs

• Negative Credit portfolio forecasts

Impairment must be applied with prudence principles

Initial Recognition (First time adoption): financial instruments must be posted at cost less up front fees

Following measurements::

Evaluation on Fair value hedge:

— IT GAAP — — Ias standards—

LR

AfS

Amortized cost+ Impairment

Fair Value

Profit and loss related to Impairment

Net worth/ Profit and loss Impairment

Class Balance sheet evaluation

Fair value changes

All Fair Value Profit and loss

Class Balance sheet evaluation

Fair value changes


- Amortized Cost-

Initial value

– Capital reimbursment

+/- Amortizing using effective interest rate

– Impairment

+Revaluation

Amortized Cost of an asset (loans or credit) or of a liability (ie deposits) is the value used to

initially measure the asset, decreased of capital reimbursement and increased of amortizing

calculated using effective interest rate, netting impairment provisions

IAS 39: “A Legal Entity has to post an asset or a liability on balance sheet

whether the Entity becomes part of contract clauses”



- Amortized cost: accounting example-

IT GAAP Accounting

Credit Life Cycle IAS Accounting

First time adoption 01.01.2005

Case:

1000 : loan with 5 years duration and final rembursment of 100% of capital;

5: expenses payed by customer

Credit posted at a value rettified of up front fees

1

2 First installment payment Case:

5 : interest payed in cash

1: difference between contract interests and interests calculated using effective interest rate

Amortization schedule calculated using effective interest rate generates higher interests for each installment

Value Sign Account

1.000 € Debit Credits

995 € Credit Cash

5 € Credit Up-front

fees

Value Sign Account

995 € Debit Credits

995 € Credit Cash

Value Sign Account

5 € Debit Cash

5 € Credit Interest

Value Sign Account

5 € Debit Cash

5 € Credit Interests

1 € Debit Credits

1 € Credit Up-front


Accounting impact of Amortized Cost could be argued comparing IT GAAP

and Ias approach


Changes on assets and liabilities value measured using Amortized Cost

method are posted on Profit and Loss

Cash

995

1) Loan disburment

Measurement at 2)

n

ss

s

s

TIR

CFtAmortized

1 )1(cos

Cash

995

5

3) Interests

5

6 990 S S

Esempio di valutazione al Costo Ammortizzato

Credits

995

Credits

996 S

995

1 1



- Il Fair Value -

FINANCIAL INSTRUMENT LISTED

ON A REGULATED MARKET

SIMILAR INSTRUMENT PRICE

DISCOUNTING BACK AT MARKET INTEREST

RATEERCATO

MATHEMATICAL METHODS

COST EVALUATION

IAS 39 defines how to calculate fair value when a ufficial price is not defined

If other methods are not usable, cost method could be used

As an alternative, a pricing of a similar financial instriment could be taken as current value

As an alternative discounted cash flows at market interest rates can be used to calculate fair value

As an alternative, mathematical methods could be used as they are accepted by financial markets

Fair Value is a evaluation method based on current market value, as an

expression of the value adverse parties are disposed to pay to buy the asset


1

2

3

4

5


Asset and liabilities fair value could change with effects on

profit and loss.

Bonds

1800

1) 01/01

On 31/12 value is calculated using discounted cash flows using market interest rates

2) 2000)1(1

n

ss

s

s

i

CFFV

Bonds

1800

200

3) FV variations 31/12

200

Balance Sheet

200 2000 S

Profit and loss

S

Example of an asset measured at Fair Value




Bonis customers Default Customers:

Sofferenze

Incagli

Ristrutturati o in corso di ristrutturazione

Past Due > 180 gg

Non Performing

Performing

Value of credit is

high?

Analytical Impairment Analytical/Collective

impairment Collective impairment

YES NO

— Process of non performing loans evaluation—

Non performing loans status


Basel 2 segments

Corporate

SME’s Corporate

SME’s Retail

Public Sector Entities

Banks

Sovereign

Specialized Lending

Retail: Residential Mortgages

Retail: Qualifying Revolving

Retail: Other Exposures

Segmentation has two objetives: Ias impairment starting from

01.01.05 Capital absorbtion for Basel

2 starting from 01.01.07

Credit evaluation process, starting from 1° january 2005 requires customers

segmentation with a convergence to basel 2 portfolios



Non performing loans will be evaluated using an amortized plan with

recovery cash flows

Regulation defines an Analytical Impairment based on Net present value of future cash flow

for every single position:

Discounting is calcuted using effective interest rates registered on the day opf transition

to non performing

Recovery plan could be defined using standard calculation methods on significant

portfolios

Impairment must be calculated on every single account

— Analytical Impairmnet—



Risk Types

Credit Risk

Interest Rate Risk

Exchange Risk

Hedging derivatives are used to decrease bank risks


micro-hedging, a one to one relation between the financial instrument and the asset hedged

macro-hedging, a portfolio relation between the financial instrument and assets hedged

- Hedging Types-

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