T1 - Implementación NIIF 9 Instituciones no Financieras - Stephen Cooper

International Financial Reporting Standards

IFRS 9 Financial Instruments (other than financial institutions) Joint IFRS Foundation and INCP IFRS Conference, Cartagena November 2015

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS 9 - Financial Instruments • Final version of IFRS 9 Financial Instruments published in July 2014  replaces previous versions of IFRS 9  brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39

• Mandatory effective date - 1 January 2018 with early application permitted • EU Endorsement Status - EFRAG has issued a draft endorsement advice letter which:  concludes that the preliminary assessment is that IFRS 9 satisfies the criteria for endorsement for use in the EU  advises that the IASB should defer the effective date of IFRS 9 for insurance businesses

Question 1 Regarding the 1 January 2018 effective date:

A. We plan to early adopt B. We will need the time between now and 2018 to be ready C. 2018 will be near impossible to achieve; other critical activities will need to be delayed D. Don’t know

Question 2

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To date, how extensive has engagement with your auditors (client) been on implementing IFRS 9?

A. Extensive; working closely together B. Modest; some discussions but we still have time or consider that we can handle it ourselves C. None so far; we have not really started D. None so far and none expected; IFRS 9 doesn’t present issues or challenges for us

IFRS 9 - Financial Instruments Classification and measurement • A logical, single classification approach for financial assets driven by cash flow characteristics and business model • Improvements to “own credit” for financial liabilities

Impairment • A much needed and strongly supported forwardlooking ‘expected loss’ model

Hedge accounting • An improved and widely welcomed model that better aligns accounting with risk management

Question 3 Operationally, which sections of IFRS 9 are most important to your company or clients?

A. B. C. D.

Classification and Measurement Impairment Hedging All are about equally important

International Financial Reporting Standards

Classification and measurement

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Classification & Measurement – a superior approach • Logical and principle-based, single classification approach  driven by cash flow characteristics and business model within which the financial assets are being managed  eliminates complex bifurcation requirements

• Improved reclassification rules consistent with how the assets are being managed  financial assets reclassified between measurement categories only when the business model for managing them changes

• Solution to ‘own credit’ concerns for financial liabilities  P&L volatility will no longer result from changes in own credit, while information on own credit will still be available for users

• Elimination of IAS 39 tainting rules

The IFRS 9 classification model for assets Business model = hold to collect

Business model = hold to collect and sell

Other business models

Cash flows are solely payments of principal and interest (SPPI)

Amortised cost

FV on balance sheet and AC in P&L*

FVPL

Other types of cash flows

FVPL

FVPL

FVPL

FVOCI

*Excludes equity investments. Can elect to present FV changes in OCI.

Business model test • Factual assessment based on how assets are managed:  Not based on intent for individual asset  Typically observable through activities that the entity undertakes  Anchor is how cash flows are realised

• Reclassify only if business model changes Hold to collect (amortised cost)  Generate value by collecting contractual cash flows  Consider past sales information and future expectations  Some sales may be consistent if infrequent or insignificant

Hold to collect and sell (FVOCI)  Generate value by collecting contractual cash flows AND selling  Involves greater frequency and volume of sales eg liquidity needs, interest yield management, asset/liability management

Question 4 Regarding use of a “business model” approach for Classification and Measurement:

A. Makes perfect sense; accounting should be aligned with management’s interests and actions B. Adds too much complexity versus IAS 39 C. Disagree with both IFRS 9 and IAS 39; all financial assets should be at FVTPL D. Don’t know; no opinion

Solely Payments of Principal and Interest (‘SPPI’) characteristics • Contractual cash flows consistent with a basic lending arrangement (simple instruments) • Principal is the fair value of the financial asset at initial recognition • Interest is consideration for:  time value of money and credit risk;  basic lending risks(eg liquidity risks);  other associated costs(eg administrative costs); and  a profit margin

A modified time value of money element is permitted as long as the effect of the modification on the cash flows is not significant.

Question 5 It is possible, in a company, that the exact same financial asset could be accounted for in 3 different ways. Does this make sense?

A. Yes; accounting should follow the business model B. No; identical assets should always be accounted for in the same way C. With adequate disclosures, it doesn’t matter D. Don’t know; no opinion

Alternative Classifications

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Financial Assets - Fair Value Option • Available in cases of “accounting mismatch” Equity investments – FVOCI alternative • Available for investments in equity instruments which are not held for trading • Features:  instrument by instrument  dividends recognised in P&L  no recycling  no impairment

Financial liabilities – ‘own credit’ designated under the fair value option (FVO)

Financial statements – IFRS 9 Balance sheet Financial liabilities – FVO

Full FV

P&L Gain or loss

all FV ∆ except own credit OCI

Gain or loss

FV ∆ due to ‘own credit’*

* Not recycled

• Otherwise, P&L gain when ‘own credit’ deteriorates, loss when it improves • Required by IFRS 9 for liabilities under the FVO • IFRS 9 allows the ‘own credit’ requirements to be early applied in isolation

Treatment of financial liabilities is carried forward from IAS 39 essentially unchanged

International Financial Reporting Standards

Impairment

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Benefits of the expected loss model Forward-looking model that is responsive to changes in credit risk and responds to the calls of the G20 and others • Broader range of information required to be considered  Ensures more timely recognition of expected credit losses  Elimination of IAS 39 threshold

 Builds on existing systems to balance costs and benefits  Approximates 2009 ED in more operational manner

• Single model reduces complexity of multiple approaches • Enhanced disclosures:  Illustrate how an entity has applied the requirements  Show assets which have significantly increased in credit risk

Overview of general model Change in credit quality since initial recognition Expected credit losses recognised 12-month expected credit losses

Lifetime expected credit losses

Lifetime expected credit losses

Interest revenue Gross basis

Gross basis

Stage 1 Performing

Stage 2 Underperforming

Net basis Stage 3 Non-performing

12 month expected credit losses When to recognise 12-month expected credit losses?

• Performing assets, ie • No significant increase in credit risk has been determined • Low credit risk simplification can be used to make this determination (for example ‘investment grade’)

12 month expected credit losses are portion of the lifetime expected credit losses – they are not the expected cash shortfalls over the next 12 months

Lifetime expected credit losses When to recognise lifetime expected credit losses?

• Underperforming assets, ie:  A significant increase in credit risk has been determined  30 Days Past Due rebuttable presumption • Non performing assets, ie:  Asset is credit impaired  90 Days Past Due rebuttable presumption

Question 6 Regarding the recognition of impairment losses, do you prefer: A. The expected loss emergence model required by IFRS 9 B. The FASB’s “full Day 1” expected loss emergence model C. Neither – the IASB should have retained the existing incurred loss model D. Some other method

Determining whether credit risk has increased significantly • Change in credit risk over the life of the instrument (ie risk of a default occurring)  Compared to credit risk at initial recognition  Relative rather than absolute assessment  Need to determine what is meant by “default” • Maturity matters • Not changes in expected credit losses • Can be done on an individual or collective basis • Does not require a mechanical assessment but need to use reasonable and supportable information

Determining whether credit risk has increased significantly – operational simplifications • High quality financial instruments (‘low credit risk’)  choice to assume no significant increase in credit risk – therefore continue to recognise 12 month expected credit loss

• 30 days past due  rebuttable presumption that credit risk has increased significantly – therefore recognise lifetime expected credit loss

• Trade receivables (that contain a significant financing component) and lease receivables  accounting policy choice to recognise lifetime expected credit loss

• Trade receivables (that do not contain a significant financing component)  requirement to recognise lifetime expected credit loss

Measuring expected credit losses Expected credit losses need to reflect: • Probability weighted outcome  must consider possibility that default will/will not occur

• Time value of money  discount at effective interest rate or an approximation thereof

• Reasonable and supportable information  available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions

Particular measurement methods are not prescribed

Reasonable and supportable information • Borrower specific factors: • changes in operating results of borrower, technological advances that affect future operations, changes in collateral supporting obligation

• Macro-economic factors: • house price indexes, GDP, household debt ratios

• The data sources could be: • Internal data - credit loss experience and ratings • External data - ratings, statistics or reports

Historical information can be used as a base but must be updated to reflect current conditions and future forecasts

© IFRS Foundation. 30 Cannon Street | London EC4M

Disclosures

Reconciliation of allowance accounts showing key drivers for change

Inputs, assumptions and techniques used to estimate expected credit losses (and changes in techniques)

Explanation of gross carrying amounts showing key drivers for change

Inputs, assumptions and techniques used to determine ‘significant increase in credit risk’ and ‘default’

Quantitative

Gross carrying amount per credit risk grade or delinquency

Write-offs, recoveries, modifications

Qualitative

Inputs, assumptions and techniques used to determine ‘credit impaired’

Write off policies, modification policies, collateral

Transition Resource Group for Impairment of Financial Instruments (‘ITG’) • •

The ITG was established to provide support for the IASB’s stakeholders who are implementing the new expected credit loss requirements: Forum for questions regarding implementation

•

Make the IASB aware of implementation issues – any actions required would follow normal due process

•

Educational role

•

Limited life during the transition period

•

Will not publish any guidance

•

Three meetings to date; one introductory conference call in December 2014 and two face to face meetings in April and September 2015.

•

One issue relating to revolving credit facilities has been raised with the IASB:

•

•

The staff dis not propose any further action in relation to this issue

•

The IASB noted the issue but observed that the requirements of IFRS 9 were clear

Next ITG meeting - 11th December 2015

© IFRS Foundation. 30 Cannon Street | London EC4M

International Financial Reporting Standards

Convergence

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Convergence with the FASB • An important consideration throughout the project • Lack of convergence - disappointing for all of us • Ultimately, the IASB decided that it was most important to improve IFRS on a timely basis.

• IFRS 9 is a complete package which includes:  a logical, single classification approach for financial assets including improvements to own credit  a single and more forward looking impairment model for financial instruments and  a hedge accounting model that aligns risk management more closely with accounting.

Convergence with the FASB • Current Status* of the FASB Financial Instruments related projects: Project

Current Stage

Estimated Completion

Classification and Measurement

Final Standard

Q4 2015

Hedge Accounting

Exposure Draft

Q1 2016

Impairment

Final Standard

Q1 2016

* Per FASB website as at 10th November 2015

Question 7 Regarding convergence on Financial Instruments as a whole:

A. Convergence is/ was critical. IFRS 9 should not have been finalised at this time B. Convergence, while desirable, is not critical. The IASB was correct to finalise IFRS 9 when it did.

C. For financial instruments, convergence is not important and did not need to be a joint project D. Some other answer

Question 8

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Having listened to us, which of the below describes what you think about IFRS 9?

A. B. C. D.

It’s more difficult It’s easier than I thought You’ve confirmed my assessment of IFRS 9 I wish we had stayed with IAS 39

International Financial Reporting Standards

Hedge accounting

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Š 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Accounting and risk management

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Feedback on IAS 39: Recognition and Measurement • Lack of an overarching principle; complex and rule-based • Inability for preparers to reflect hedges in financial statements • Hard for users to understand risk management practices

• • • •

Solutions in IFRS 9: Financial Instruments Major overhaul of hedge accounting Align accounting treatment with risk management activity Enable preparers to better reflect hedging in financial statements Provide disclosures to help users understand risk management and its impact on the financial statements

Hedge Accounting - major improvements

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• Designate risk components of non-financial instruments • Ability to hedge aggregated exposures (combinations of derivatives and non-derivatives) • Introduction of ‘costs of hedging’ to improve the transparency around some hedging instruments • A principle-based hedge effectiveness assessment to achieve hedge accounting • Disclosures that meet the objectives of understanding the hedged risks; how those are managed; and effect of hedging A new approach to how accounting interacts with risk management

Designating Risk Components Example – hedging a component of a non financial item Measuring the success of hedging jet fuel contracts with crude oil futures

Portion unreflective of hedge

Crude oil hedging instrument

IAS 39

Jet fuel price Gas oil price

IFRS 9

Crude oil price

Hedging Aggregated Exposures

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Example: hedging commodity price & FX risk Commodity supplier

Commodity futures contract

FX forward contract

US$

Commodity US$ US$

US$ â‚Ź

Aggregated exposure Manufacturer

Not an eligible hedged item under IAS 39

Costs of hedging

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Costs of hedging

Time value of options

Forward element of forward contract

Foreign currency basis spreads

New accounting approach should result in less volatility in P&L and aid the alignment of accounting and risk management

Hedge effectiveness

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Hedge effectiveness Hedge effectiveness test 1. Economic relationship 2. Effect of credit risk 3. Hedge ratio

Measuring and recognising hedge ineffectiveness

Assessment of hedge effectiveness is now more closely aligned with risk management

Disclosures

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Hedge accounting disclosures

Risk management strategy

Amount, timing and uncertainty of future cash flows

Effects of hedge accounting on the primary financial statements

Specific disclosures for dynamic strategies and credit risk hedging

Questions and comments