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PwCPwC
Hot topics treasury seminar
IFRS 9 is here to say
18 June 2015Discover and unlockyour potential…
PwC
Program
Where are we: timelines Classification and measurement Hedge accounting Impairment Questions?
218 June 2015Hot topics treasury seminar
PwC
Where are we: timelines
IFRS 9 is here to stay
PwC
Overview | Three Phases of IFRS 9
Phase I
Classification and measurement
Phase II
Impairments: Expected credit losses
Phase III
Hedge accounting
IFRS 9: Financial instruments
“A logical, single classification approach driven by cash flow characteristics and how it’s managed”
“An urgently needed and strongly supported forward-looking ‘expected loss’ model”
“An improved and widely welcomed model that better aligns accounting with risk management”
Ph
as
es
IAS
B’s
v
iew
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Timelines of IFRS 9
2009 2010 2011 2012 2013 2014 2015 ff
Classification & Measurement
Impairment
General Hedge Accounting
Nov 2009
Standard (Assets)
Juli 2014
Standard
Juli 2014
Standard
Juli 2009
ExposureDraft (Assets)
Mai 2010
ExposureDraft (Liab.)
Nov 2012
ED LimitedAmendments
Nov 2013
Standard
Dez 2009
ExposureDraft
Jan 2011
Supplement Document
Sept 2012
Review Draft
März 2013
ExposureDraft
Dez 2010
ExposureDraft
Okt 2010
Standard
(Liabilities)
IASB Working Group on
IFRS 9
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IFRS 9 - current status
Having established an effective date for IFRS 9, corporates start taking stock on the impact of IFRS 9 and their approach to implementation
EU / EFRAG CorporateIASB
• IASB published IFRS 9 on 24 July 2014
• IFRS 9 is mandatory from 1 January 2018
• IFRS 9 needs to be applied in entirety, except for the OCI treatment of OCS of financial liabilities in FVO
• Early application is allowed (endorsement required in the EU)
• Endorsement process not yet started
• EFRAG/EU are currently constituting the respective bodies
• Endorsement might be expected in the second half of 2015
• Endorsement process of comprehensive standards such as IFRS 9 usually takes 12 months or longer
• Most corporate have closely followed the development of IFRS 9
• In Europe, most corporates did not conducted pre-studies on IFRS 9. Only a few corporates have started implementation projects
• The level of efforts in Europe has been mixed ranging from “wait and see” to full scope
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Timelines from IAS 39 to IFRS 9Implementation period of de facto two years
2014 2015 2016 2017 2018
Key milestones
Preparation for
transition phase
Impact assessment
Parallel run
IAS 39 &
IFRS 9
1 Jan 2017
Transition date IFRS 9
Q1 2018
First FS issued under IFRS 9
GO LIVE
Today
718 June 2015Hot topics treasury seminar
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Classification and measurement
IFRS 9 is here to stay
PwC
Classification and measurementFinancial assets – Debt instruments
Business model ‘hold to collect‘?
Solely payments of principal and interest?
Fair value option applied?
Amortised cost
FVPLFVOCI
(with recycling)
Business model “hold & sell“?
no
yes
yes
no
yes
yes
no
Debt instruments
no
no
yes
Caption: SPPI = Solely Payments of Principal & InterestFVOCI = Fair Value through Other Comprehensive IncomeFVPL = Fair Value through Profit & Loss
Scope for expected credit loss model - on balance, see slides phase 2
Need to defineBusiness Model & assess cash flows
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SPPI-criteriaAnalysis of contractual cashflows
2. Classification and measurement
The cash flows represent solely payments of principal and interest without hedging on the outstanding amount
Amortised cost orFair Value through OCI
Fair Value through P&L
yes no
Principle Principles-based analysis if the financial instrument is a basic lending arrangement
Definition principal:
Fair value of a financial asset at initial recognition (adj. for e.g. repayments ofprincipal)
Definition interest:
Compensation for the time value of money and credit risk. Also other basic lendingrisks (e.g. liquidity risk) and costs (e.g. servicing or administrative costs), as well asprofit margins.
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Classification and measurementFinancial assets – Derivatives & Equity Instruments
• Derivatives – no change between IAS 39 and IFRS 9 requirements
• Equity instruments:
- Held for trading: FVPL
- For instruments other than trading, possibility to elect the classification FVOCI. Election must be performed on instrument-per-instrument basis at inception. The classification is irrevocable.
Note that if an entity elects the classification FVOCI, the change in FV of the shares will be recorded in OCI while the dividend will be recorded in PL.
For impact of the election on FVH, see slides phase 3
FVPLFVOCI
(no recycling)
yes
yes
no
no
Trading?
FVOCI 0ption applied?
Derivatives Equity instruments
Caption: FVOCI = Fair Value through Other Comprehensive IncomeFVPL = Fair Value through Profit & Loss
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18 June 2015Hot topics treasury seminar
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Classification and measurementFinancial liabilities
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Hedge accounting
IFRS 9 is here to stay
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IFRS 9 Opportunity to reconsider use of derivatives and hedging at a time of “new” risks
Identifying and responding to key risks:
• FX fluctuations
• Volatility of commodity prices
• Low interest rate environment
• Elevated credit risk
Reflecting risk management in your financial reporting
IAS 39
IFRS 9
Alignment between risk and accounting provides opportunities to reconsider your risk management policies
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IFRS 9 – what has NOT changed?
Basic hedge accounting models
retained(i.e. FVH, CFH & NIH)
Hedge accounting is optional
Detailed rules on eligible hedged items
and hedging instruments
Documentation still needed
Derivatives still at fair value
Ineffectiveness recognised in P&L
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IFRS 9 – what has changed?Hedging instruments
IAS 39 IFRS 9
Embedded derivatives allowed as hedging instruments
Embedded derivatives only allowed if embedded in financial liabilities and separated from the host contract
Non-derivatives only for FX risk Non-derivatives @FVTPL, also for other than FX risk
Options – changes in time value are recognised in P&L
Options – changes in aligned time value are deferred in OCI. Reclassification to P&L depends on the nature of the hedged item:• Transaction related• Time period related
Forwards - Two alternatives for recognising fairvalue changes of forward points
Forwards - Three alternatives for recognising fair value changes of forward points
Currency basis spreads – no specific accounting treatment. Currency basis spreads included in hedged item of a cash flow hedge but not in a fair value hedge
Currency basis spreads – similar accounting as to forward points.
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IFRS 9 – what has changed?Hedged items
IAS 39 IFRS 9 Only possible to hedge risk components of financial items
Possible to hedge risk components of both financial and non-financial items
Derivatives not allowed as hedged items Aggregated positions allowed
Net positions not allowed Net positions (including net nil positions) allowed as hedged item, in certain circumstances
Equity instruments through OCI cannot be hedged item
Equity instruments through OCI can be hedged items
Use of layers as hedged item relatively restricted. Layers only for cash flow hedges
Layers allowed for both cash flow hedges, fair value hedges and groups of items
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IFRS 9 – what has changed?Hedged items – risk components
Possible to hedge risk components of both financial and non-financial items if separate identifiable and reliably measurable.
Gas oil Fuel oilOther components
eg. transport charges
Natural gas
Hedged item
Example: Long-term supply contract for natural gas
Pricing of natural gas according to contractually specified formula:
Hedged item Hedged item
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IFRS 9 – what has changed?Hedge effectiveness and rebalancing
Key changes
• Omission of the quantitative bandwidth of 80-125% for assessing hedge effectiveness
• Only prospective proof (quantitative or qualitative) of effectiveness required
• No discontinuance of hedge accounting due to the results of the assessment of hedge effectiveness, but calculation infective portions and recognition in P&L still required
Rebalancing
• Adjustments in the designated quantities of the hedged item or the hedging instrument of an existing hedging relationship
• Purpose: maintaining a hedge ratio that complies with the hedge effectiveness requirements
• Ineffectiveness is determined and recognised immediately before adjusting the hedging relationship
• NOTE: If Risk Management objective has changed, then rebalancing does not apply. Hedge accounting should be discontinued
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Impairment
IFRS 9 is here to stay
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General ApproachThe three stages of the credit deterioration model
Absolute credit quality Does the financial asset meet the definition of ‘low credit risk’ at the reporting date?
Credit-impaired
Does the financial asset meet the credit-impaired definition (same definition as in IAS 39)?
Performing
12-Months-EL (interest revenue on gross basis)
Significant increase of credit risk
EL over Lifetime (interest revenue on gross basis)
Credit-impaired
EL over Lifetime (interest revenue on net basis)
1 2 3
no
yes
yes
Relative credit quality
Has the credit risk increased significantly since initial recognition?
Assessment based on payment status:
If more than 30 days overdue yes (rebuttable presumption)
no
no yes
Change in credit quality since initial recognition
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General ApproachDefinitions of ‘(expected) credit losses’ in the IFRS 9 model
12-month expected credit losses
Are a portion of the lifetime expected credit losses and represent the amount of expected credit losses that result from default events that are possible within 12 months after the reporting date.
Lifetime expected credit losses
The expected credit losses that result from all possible default events over the life of the financial instrument.
Credit loss The difference between all principal and interest cash flows that are due to an entity in accordance with the contract and all the cash flows the entity expects to receive discounted at the original EIR.
Expected credit losses
The weighted average of credit losses. Expected loss (EL), as anticipated for such assets on a statistical basis. Standard risk cost compensate the expected loss.
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Assessment of a significant increase in credit riskBasis for stage transfer during the financial asset’s lifetime
Absolute probabilities are
not sufficientVariation between
reporting date and initial
recognition
Probability of Default(‘PD’)
12 months unless lifetime assessment is
necessary
Counterparty assessment
Maximumcredit risk for a
portfolio
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The Standard provides two operational simplifications:
• For trade receivables or contract assets that do not contain a significant financing component: Relief from calculating 12-month ECL and to assess when a significant increase in credit risk occurred. Lifetime ECL throughout the trade receivable’s life.
• For lease receivables and trade receivables or contract assets that contain a significant financing component: Accounting policy choice to apply simplified approach to measure loss allowance at lifetime ECL on initial recognition.
Accounting policy choice can be applied individually for:
• lease receivables
• trade receivables with significant financing component
• contract assets with significant financing component
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Questions…
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More information
Trainer:Name trainer: Kees-Jan de VriesPhone number: +31 88 792 4922E-mail: [email protected]
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Thank you for your attention...
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