IFRS 9 Financial Instruments

135 Pages·2014·2.35 MB·English

IFRS
First Impressions:
IFRS 9 Financial
Instruments
September 2014
kpmg.com/ifrs
Contents
Fundamental changes call for careful planning 2 7.3 Host contracts that are not fnancial assets
in the scope of IFRS 9 38
Setting the standard 3
8 Reclassifcation 39
1 Key facts 4 8.1 Conditions for reclassifcation of fnancial assets 39
2 How this could impact you 6 8.2 Timing of reclassifcation of fnancial assets 40
8.3 Measurement on reclassifcation of fnancial
3 Scope 8 asets 41
3.1 Overview 8
9 Measurement on initial recognition 42
3.2 Own-use exemption 8
3.3 Loan commitments and contract assets 8 10 Subsequent measurement 44
4 Recognition and derecognition 9 10.1 Financial assets 44
10.2 Financial liabilities 45
5 Classifcation of fnancial assets 10 10.2.1 General principles 45
5.1 Introduction 10 10.2.2 Measurement of changes in credit risk 45
5.1.1 Overview of classifcation 10
11 Amortised cost and the effective interest method 50
5.1.2 Amortised cost measurement category 13
11.1 Calculating amortised cost 50
5.1.3 FVOCI measurement category 13
11.2 Calculating the EIR 51
5.1.4 FVTPL measurement category 13
11.2.1 General approach 51
5.1.5 FVOCI election for equity instruments 14
11.2.2 Credit-adjusted EIR 52
5.2 Contractual cash fows assessment – the SPPI
criterion 14 11.3 Calculating interest revenue and expense using
the EIR 53
5.2.1 Meaning of ‘principal’ and ‘interest’ 15
11.3.1 General approach 53
5.2.2 Time value of money 17
11.3.2 Approach for credit-impaired fnancial
5.2.3 Contractual provisions that change the
asets 53
timing or amount of contractual cash 
fows 19 11.4 Revisions to estimated cash fows 53
5.2.4 De minimis or non-genuine features 22 11.5 Modifcations of fnancial assets 54
5.2.5 Non-recourse assets 22 11.5.1 Overview 54
5.2.6 Contractually linked instruments 23 11.5.2 Gains or losses on modifcations of
fnancial assets 55
5.2.7 Examples of instruments that may or
do not meet the SPPI criterion 25 12 Impairment 58
5.3 Business model assessment 27 12.1 Scope of the impairment requirements 58
5.3.1 Overview of the business models 27 12.1.1 General requirements 58
5.3.2 Assessing the business model 28 12.1.2 Equity investments 60
5.3.3 Held-to-collect business model 30 12.2 Overview of the new impairment model 60
5.3.4 Both held to collect and for sale 12.3 The general approach to impairment 61
business model 32 12.3.1 The expected credit loss concept 61
5.3.5 Other business models 33 12.3.2 12-month expected credit losses and
6 Classifcation of fnancial liabilities 34 lifetime expected credit losses 64
6.1 Overview of classifcation 34 12.3.3 When is it appropriate to recognise
12-month expected credit losses or
6.2 Fair value option for fnancial liabilities 35
lifetime expected credit losses? 65
6.2.1 Would split presentation create or
12.3.4 Signifcant increase in credit risk 66
enlarge an accounting mismatch? 36
12.4 Measurement of expected credit losses 78
6.3 Deletion of the cost exception for derivative
fnancial liabilities 37 12.4.1 Overview 78
12.4.2 Defnition of ‘cash shortfall’ 80
7 Embedded derivatives 38
12.4.3 The estimation period – the expected
7.1 Overview 38 life of the fnancial instrument 82
7.2 Host contracts that are fnancial assets in the 12.4.4 Probability-weighted outcome 84
scope of IFRS 9 38
12.4.5 Time value of money 84 15.2.2 Transition requirements for classifcation
and measurement 119
12.4.6 Reasonable and supportable information 86
15.2.3 Transition requirements for impairment 123
12.4.7 Collateral 88
15.2.4 Previous versions of IFRS 9 124
12.4.8 Individual or collective basis of
measurement 89 15.3 Disclosures on initial application of IFRS 9 126
12.4.9 Financial guarantee contracts and loan 15.3.1 Classifcation and measurement 126
commitments 89
15.3.2 Impairment 127
12.4.10 Example of measurement of expected
15.4 First-time adopters of IFRS 127
credit losses 91
16 FASB proposals and US GAAP convergence 129
12.5 Write-offs 92
16.1 Classifcation and measurement of fnancial
12.6 Special approach for assets that are
assets and fnancial liabilities 129
credit-impaired at initial recognition 94
16.2 Impairment 129
12.6.1 Defnition of ‘credit-impaired’ asset 94
16.3 Hedge accounting 129
12.6.2 Initial measurement 95
About this publication 130
12.6.3 Subsequent measurement 95
12.6.4 Modifcations 97
Acknowledgements 132
12.7 Simplifed approach for trade and lease
receivables and contract assets 97
12.7.1 Overview 97
12.7.2 Defnitions 98
12.7.3 Specifc measurement issues 98
12.8 Presentation of expected credit losses in the
fnancial statements 100
12.8.1 Assets measured at amortised cost,
lease receivables and contract assets 100
12.8.2 Loan commitments and fnancial
guarantee contracts 101
12.8.3 Debt instruments measured at FVOCI 101
12.9 Interaction between expected credit losses
and interest revenue 102
12.10 Comparison with Basel regulatory model 102
13 Hedge accounting 106
14 Presentation and disclosures 107
14.1 Presentation 107
14.2 Disclosures 107
14.2.1 Overview 107
14.2.2 Classifcation and measurement of
fnancial assets and fnancial liabilities 107
14.2.3 Credit risk and expected credit losses 109
15 Effective date and transition 117
15.1 Overview 117
15.2 Transition 118
15.2.1 General principle 118
2 | First Impressions: IFRS 9 Financial Instruments
Fundamental changes call for careful
planning
On 24 July 2014, the IASB issued the fourth and fnal version of its new standard on fnancial instruments accounting – IFRS 9
Financial Instruments. This completes a project that was launched in 2008 in response to the fnancial crisis. After long debate
about this complex area, the implementation effort can begin in earnest.
The new standard includes revised guidance on the classifcation and measurement of fnancial assets, including impairment,
and supplements the new hedge accounting principles published in 2013.
In the past, concerns have been raised about ‘too little, too late’ provisioning for loan losses. The new expected credit loss
model for the recognition and measurement of impairment aims to address these concerns, and accelerates the recognition of
losses by requiring provisions to cover both already-incurred losses and some losses expected in the future.
The new standard will have a massive impact on how banks account for credit losses on their loan portfolios. Provisions
for bad debts will be bigger and are likely to be more volatile, and adopting the new rules will require a lot of time, effort
and money. A major issue for banks and investors in banks will be how adoption of the new standard will affect regulatory
capital ratios. Banks will need to factor this into their capital planning, and users are likely to be looking for information on the
expected capital impact.
Insurers will also be signifcantly impacted by IFRS 9. The industry has to plan for the adoption of new standards on both
fnancial instruments and insurance contracts over the next few years. The overall effect cannot be assessed until the insurance
standard is fnalised over the next 12 months, but we can expect a sea-change in fnancial reporting for most insurers.
Other corporates should not automatically assume that the impact of the classifcation, measurement and impairment
requirements of the new standard will be small, as this depends on the exposures they have and how they manage them.
Planning for IFRS 9 adoption – including implementation of the new hedge accounting requirements published in 2013 – is likely
to be an important issue for corporate treasurers and accountants generally.
The new standard has a mandatory effective date of 1 January 2018, but may be adopted early. As the standard has been
completed in stages, the relatively few entities that have adopted a previously released version of IFRS 9 can continue to use it
until then. In addition, entities can adopt in isolation the part of the standard that allows them to refect the effects of changes in
credit risk on certain marked-to-market liabilities outside of proft or loss.
Entities need to think about when they plan to adopt the new standard. Many banks may need the whole three and a half years
up to 2018 to prepare for adoption of the expected credit loss requirements. However, the possibility of early adopting only the
‘own credit’ amendment would provide some welcome relief from proft or loss volatility caused by fuctuations in an entity’s
own credit risk.
Chris Spall (Leader)
Enrique Tejerina (Deputy leader)
Terry Harding (Deputy leader)
Ewa Bialkowska
KPMG’s global IFRS fnancial instruments leadership team
KPMG International Standards Group
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
First Impressions: IFRS 9 Financial Instruments 3
Setting the standard  
eS tting the standard
A phased approach to completing IFR S 9
Since November 2008, the IASB has been working to replace its standard on fnancial instruments, IAS 39 Financial Instruments:
Recognition and Measurement. The IASB structured the project in three phases:
● Phase 1: Classifcation and measurement of fnancial assets and fnancial liabilities
● Phase 2: Impairment
● Phase 3: Hedge accounting.
The issuance in July 2014 of the complete version of IFRS 9: Financial Instruments, hereafter referred to as IFRS 9, marks
the culmination of this project. However, the IASB has decided to separate the accounting for macro hedging from the
accounting for general hedging. The Board is still working on developing a new model for macro hedge accounting, and in April
2014 it issued a discussion paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to
Macro Hedging.1
This First Impressions focuses on the chapters of IFRS 9 dealing with Phases 1 and 2 of the project, and the changes that these
chapters introduce relative to IAS 39. The new general hedge accounting model that is incorporated in IFRS 9 was originally
included in IFRS 9 (2013), and is discussed in our First Impressions: IFRS 9 (2013) – Hedge accounting and transition, issued in
December 2013.
IFRS 9 retains, largely unchanged, the requirements of IAS 39 relating to scope and the recognition and derecognition of
fnancial instruments.
hT e dief rent versions o f IFR S 9
IFRS 9 has been completed in stages, with the IASB’s phased approach refected in a number of versions of the standard being
issued since 2009. Previous versions of IFRS 9 will be superseded by the version issued in July 2014 at its effective date of
1 January 2018. However, entities that have adopted (or will adopt) a previous version by 31 January 2015 may continue to apply
that version until IFRS 9’s mandatory effective date of 1 January 2018 (see 15.2.4.1).
The following versions of IFRS 9 have been issued.
eV rsion uS mmary o f content
IFR S 9 2( 00)9 Includes guidance on the classifcation and measurement of fnancial assets.
Incorporates IFRS 9 (2009), and adds requirements for the classifcation and measurement of
IFR S 9 2( 010)
fnancial liabilities.
Incorporates IFRS 9 (2010), with amendments to its transition requirements, and adds guidance on
IFR S 9 2( 01)3
general hedge accounting.
Incorporates IFRS 9 (2013), with amendments to the requirements for the classifcation and
IFR S 9 2( 014) measurement of fnancial assets, and adds requirements for the new expected credit loss model for
impairment.
Amendments to other standards
IFRS 9 introduces consequential amendments to other standards. References to other standards (except for IAS 18 Revenue and
IAS 39) in this publication are to the versions as amended by IFRS 9. References to IAS 18 and IAS 39 are to the standards that
have been superseded by IFRS 15 Revenue from Contracts with Customers and IFRS 9 respectively.
1 For detailed analysis of the discussion paper, see our New on the Horizon: Accounting for dynamic risk management activities, issued in July 2014.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
4 | First Impressions: IFRS 9 Financial Instruments
1 Key facts
Scope ● IFRS 9 carries forward the scope of IAS 39, and adds:
– an option to include certain contracts that would otherwise be subject to the ‘own use’
exemption; and
– certain loan commitments and contract assets (see 12.7.2) in respect of the impairment
requirements.
Recognition and ● IFRS 9 carries forward from IAS 39 the requirements for recognition and derecognition of fnancial
derecognition instruments, with only minor amendments.
Classifcation of ● IFRS 9 contains three principal classifcation categories for fnancial assets – i.e. measured at:
fnancial assets amortised cost, fair value through other comprehensive income (FVOCI) and fair value through
and fnancial proft or loss (FVTPL). The existing IAS 39 categories of held-to-maturity, loans and receivables, and
liabilities available-for-sale are removed.
● A fnancial asset is classifed as being subsequently measured at amortised cost if the asset is held
within a business model whose objective is to collect contractual cash fows, and the contractual
terms of the fnancial asset give rise to cash fows that are solely payments of principal and interest
(the ‘SPPI criterion’).
● A fnancial asset is classifed as being subsequently measured at FVOCI if it meets the SPPI criterion
and is held in a business model whose objective is achieved by both collecting contractual cash
fows and selling fnancial assets.
● All other fnancial assets are classifed as being subsequently measured at FVTPL. In addition,
an entity may, at initial recognition, irrevocably designate a fnancial asset as at FVTPL if doing so
eliminates or signifcantly reduces an accounting mismatch that would otherwise arise.
● At initial recognition of an equity investment that is not held for trading, an entity may irrevocably
elect to present in other comprehensive income (OCI) subsequent changes in its fair value.
● IFRS 9 retains the existing requirements in IAS 39 for the classifcation of fnancial liabilities.
Embedded ● IFRS 9 retains the existing requirements in IAS 39 for derivatives where the host is not a fnancial
derivatives asset in the scope of IFRS 9 – e.g. a fnancial liability, a lease receivable or an insurance contract.
● However, derivatives embedded in fnancial assets that are in the scope of IFRS 9 are never
separated. Instead, the whole hybrid instrument is assessed for classifcation.
Reclassifcation ● Reclassifcation of fnancial assets is required if the objective of the business model in which they
are held changes after initial recognition of the assets, and if the change is signifcant to the entity’s
operations. Such changes are expected to be very infrequent. No other reclassifcations are permitted.
● No reclassifcation of fnancial liabilities is permitted.
Measurement Measurement at initial recognition
● IFRS 9 generally retains IAS 39’s requirements on measurement at initial recognition.
Subsequent measurement – fnancial assets
● For assets classifed as subsequently measured at amortised cost, interest revenue, expected credit
losses and foreign exchange gains or losses are recognised in proft or loss. On derecognition, any
gain or loss is recognised in proft or loss.
● For assets classifed as subsequently measured at FVOCI, interest revenue, expected credit losses,
and foreign exchange gains or losses are recognised in proft or loss. Other gains and losses on
remeasurement to fair value are recognised in OCI. On derecognition, the cumulative gain or loss
previously recognised in OCI is reclassifed from equity to proft or loss.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
First Impressions: IFRS 9 Financial Instruments 5
1 Key facts  
Measurement ● For assets classifed as subsequently measured at FVTPL, all gains and losses are recognised in
c( ontinued) proft or loss.
● For equity investments for which subsequent changes in fair value are presented in OCI, the
amounts recognised in OCI are never reclassifed to proft or loss. However, dividend income on
these investments is generally recognised in proft or loss.
uS bseuq ent measurement – n� ancial liabilities
● IFRS 9 retains almost all of the existing requirements in IAS 39 on the subsequent measurement
of fnancial liabilities. However, the portion of the gain or loss on a fnancial liability designated as
at FVTPL that is attributable to changes in its credit risk is generally presented in OCI, with the
remaining amount of the change in fair value presented in proft or loss.
Amortised cost ● The defnition of amortised cost is similar to that in IAS 39.
and recognition
● Generally, interest revenue is calculated by applying the effective interest rate (EIR) to the gross
o f interest
carrying amount of a fnancial asset. The gross carrying amount of a fnancial asset is the asset’s
amortised cost gross of any impairment allowance. However, when an asset is credit-impaired,
interest is calculated by applying the EIR to the amortised cost – i.e. net of impairment allowance.
● Interest expense is calculated by applying the EIR to the amortised cost of a fnancial liability.
Impairment ● IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new
model applies to fnancial assets that are not measured at FVTPL, including loans, lease and trade
receivables, debt securities, contract assets under IFRS 15 and specifed fnancial guarantees and
loan commitments issued. It does not apply to equity investments.
● The model uses a dual measurement approach, under which the loss allowance is measured as either:
– 12-month expected credit losses; or
– lifetime expected credit losses.
● The measurement basis generally depends on whether there has been a signifcant increase in
credit risk since initial recognition.
● A simplifed approach is available for trade receivables, contract assets and lease receivables,
allowing or requiring the recognition of lifetime expected credit losses at all times. Special rules
apply to assets that are credit-impaired at initial recognition.
eH dge ● The new standard carries forward the general hedge accounting requirements originally published in
accounting 2013. The IASB is continuing to work on its macro hedge accounting project.
Presentation and ● IFRS 9 introduces new presentation requirements and extensive new disclosure requirements.
disclosures
efE ctive date ● The mandatory effective date is 1 January 2018. Early adoption is permitted.
and transition
● An entity may early adopt in isolation the new requirements for ‘own credit’ gains and losses on
fnancial liabilities designated as at fair value.
● Generally, the standard is applied retrospectively. However, the hedge accounting requirements are
generally applied prospectively.
● Apart from some aspects of hedge accounting, the restatement of comparative information for prior
periods is not required and is permitted only if information is available without the use of hindsight.
oC mparison to ● Convergence between the IASB and the FASB has not been achieved. The FASB is continuing to
U S GAAP deliberate changes to the accounting for fnancial instruments under US GAAP.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
6 | First Impressions: IFRS 9 Financial Instruments
2 How this could impact you
Judgements – new complexities
New systems and processes
and wider scope
Classifcation The implementation of a business New processes will be needed
and model approach and the SPPI criterion to allocate fnancial assets to the
measurement may require judgement to ensure that appropriate measurement category.
of fnancial fnancial assets are classifed into the
In addition, entities that have already
assets appropriate category. Deciding whether
applied, or are planning to early apply,
the SPPI criterion is met will require
IFRS 9 (2009), IFRS 9 (2010) or IFRS 9
assessment of contractual provisions
(2013) may have to re-engineer the
that do or may change the timing or
conversion process to take into account
amount of contractual cash fows – e.g.
the new requirements of the standard
prepayment features.
on the classifcation and measurement
of fnancial assets.
Impairment Estimating impairment is an art rather The new model is likely to have a
than a science. It involves diffcult signifcant impact on the systems and
judgements about whether loans will processes of banks, insurers and other
be received as due – and, if not, how fnancial services entities, due to its
much will be recovered and when. The extensive new requirements for data
new model – which widens the scope and calculations. In addition, all entities
of these judgements – relies on entities with trade receivables will be affected,
being able to make robust estimates of: but the impact is likely to be smaller, and
● expected credit losses; and certain simplifcations are available.
● the point at which there is a signifcant Expanded data and calculation
increase in credit risk. requirements may include:
For this purpose, entities will need ● estimates of 12-month and lifetime
to decide how key terms such as expected credit losses;
‘signifcant increase’ and ‘default’ will be ● information and data to determine
defned in the context of the instruments whether a signifcant increase in credit
they hold. risk has occurred or reversed; and
Also, judgement will be needed ● data for the extensive new disclosure
to ensure that the measurement requirements.
of expected credit losses refects
reasonable and supportable information
that is available without undue cost or
effort and that includes historical, current
and forecast information.
Next steps Entities will need to develop appropriate Entities may have to design and
methodologies and controls to implement new systems and databases
ensure that judgement is exercised and related internal controls. Banks that
appropriately and consistently plan to use the expected credit loss data
throughout the organisation, and already captured for regulatory capital
supported by appropriate evidence. requirements calculations under the
Basel framework will need to identify
differences between the two sets
of requirements.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
First Impressions: IFRS 9 Financial Instruments 7
2 How this could impact you  
uqE ity, regulatory capital and
Impact on KPIs and volatility
covenants may be aef cted
lC assic� ation The way in which an entity classifes The new standard may have a signifcant
and fnancial assets could affect the impact on the way fnancial assets
measurement way its capital resources and capital are classifed and measured, resulting
o f n� ancial requirements are calculated. This may in changes in volatility within proft
assets affect banks and other fnancial services or loss and equity, which in turn are
entities that have to comply with the likely to impact key performance
Basel capital requirements or other indicators (KPIs).
national capital adequacy requirements.
However, the own credit requirements
for fnancial liabilities will help to reduce
proft or loss volatility, which may
be an incentive to early adopt these
requirements.
Impairment The initial application of the new model Credit risk is at the heart of a bank’s
may result in a large negative impact business, and is an important element
on equity for banks and, potentially, of an insurer’s business. Accordingly,
insurance and other fnancial services the standard is likely to have a signifcant
entities. It may also affect covenants. In impact on the KPIs of banks, insurers
addition, the regulatory capital of banks and similar entities.
may be impacted. This is because equity
The new model is likely to introduce new
will refect not only incurred credit losses
volatility because:
but also expected credit losses.
● credit losses will be recognised for
The impact on an entity may be
all fnancial assets in the scope of the
substantially infuenced by:
new model – rather than only for those
● the size and nature of its fnancial assets for which losses have been
instrument holdings and their incurred;
classifcation; and
● external data used as inputs may
● the judgements it makes in applying be volatile – e.g. ratings, credit
the IAS 39 requirements and that it spreads and predictions about future
will make under the new model. conditions; and
● any move from a 12-month to
a lifetime expected credit loss
measurement and vice versa may
result in a big change in the loss
allowance.
eN tx steps Entities should assess the impact and As well as understanding the
develop a plan to mitigate any negative impact and communicating it to key
consequences. The implementation stakeholders, banks and other entities
plan should involve discussions with that are subject to stress testing should
analysts, shareholders, regulators and factor the new requirements into their
providers of fnance. tests, to ensure that the potential
impact under adverse scenarios can be
properly understood and addressed.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
8 | First Impressions: IFRS 9 Financial Instruments
3 Scope
3.1 Overview
IFRS 9.2, 5.5.1 IFRS 9 largely carries forward the scope of IAS 39. Accordingly, fnancial instruments that are in the
scope of IAS 39 are also in the scope of IFRS 9. In addition, certain other instruments are included in
the scope of IFRS 9. This is illustrated by the diagram below.
Scope of IFRS 9
Financial Certain contracts For the recognition and
instruments that that are subject to measurement of expected
are in the scope of the own-use credit losses:
IAS 39 exemption Ÿ certain loan commitments that
+ + are not measured at FVTPL
Ÿ contract assets as defined by
IFRS 15 (see 12.7.2)

3.2 Own-use exemption
IFRS 9.2.4–5 A contract to buy or sell a non-fnancial item that can be settled net in cash or in another fnancial
instrument is excluded from the scope of IAS 39 if the contract was entered into, and continues to
be held, for the purposes of the receipt or delivery of a non-fnancial item in accordance with the
entity’s expected purchase, sale or usage requirements. This is commonly referred to as the ‘own-
use’ exemption.
IFRS 9.2.4–5 Although IFRS 9 retains the exemption, it allows an entity to irrevocably designate such a contract, at
inception, as at FVTPL. The designation can be made only if it eliminates or signifcantly reduces an
accounting mismatch that would otherwise arise.2
3.3 Loan commitments and contract assets
IFRS 9 includes the following additional items in the scope of its impairment requirements (see 12.1):
● loan commitments issued that are not measured at FVTPL; and
● contract assets in the scope of IFRS 15.
2 For further discussion on this issue, see our First Impressions: IFRS 9 (2013) – Hedge accounting and transition, issued in December 2013.
© 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.