The Bank Statement

23 Pages·2015·0.97 MB·English

THE IFRS – Global Banking
BANK STATEMENT
Q3 2015 NEWSLETTER

lC ient clearing is an NEGATIVE INTEREST RATES
evolving area and bansk AND CLIENT CLEARING
iw ll need to continue to eW lcome to the 3Q 2015 issue o f our uq arterly banik ng nesw letter
in hw ich ew provide updates on IFR S developments that directly
invest time to perof rm the impact bansk and consider the potential accounting implications o f
relevant analyses.� regulatoryr� euq irements.
Highlights
Elizabeth Graystone, l � Spotlight on IFRS 9 : the uE ropean Financial Reporting Advisory Group
Banking Accounting Advisory, surveys n� ancial institutions on implementation o f IFR9 �S Financial
KPMG in the UK Instruments – see page2� .
l �hT e IA BS decides to go of r a second discussion paper in its macro hedging
project and continues discussing fnancial instruments with characteristics
of equity – see page5� .
l � Accounting challenges and questions arising rf om negative interest rates : ew
loo k at some o f the common issues – see page .8
l � Client clearing of OTC derivatives continues to generate debate. eW loo k at the
impact on a clearing members’ balance sheet – see� page 12.
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SPOTLIGHT ON IFRS 9
EFRAG issues In August 2015, the uE ropean Financial Reporting Advisory Group FE( RAG ) published the results o f
its of llou- w p uq estionnaire on IFR S 9 Financial Instruments t( he FE RAG report.) hT is uq estionnaire
results of its pre-
aw s a of llou- w p to the ones carried out in 2012 and 201,3 and aimed to n� d out to hw at etx ent the
endorsement
concerns raised by constituents in previous e� ld tests still apply atf er the publication o f the n� al
questionnaire standard in uJ ly 201.4
hT e participants ew re as of llosw .
Participants
By country � By industry �
France 10 aB nik ng 11
Germany 8 Insurance 4
Italy 1 tO her industries 9
ewS den 1 � �
UK 4 � �
24 24
hT e uq estionnaire f ocused on :
• classic� ation and measurement ;
• the interaction betew en IFR S 9 and the insurance contracts standard ;
• epx ected credit losses ;
• costs related to implementing the impairment model ; and
• general hedge accounting.
Classifcation and measurement
hT e maoj rity o f participants have perof rmed a preliminary uq alitative impact analysis and aimed to
carry out a uq antitative analysis during 20151– .7 oH ew ver, one participant rf om the banik ng sector
noted that its uq antitative analysis ow uld not be started until the standard is endorsed by theUE � .
hT e maoj rity o f participants estimated that the of lloiw ng percentages o f n� ancial assets in the
eix sting IA S 93 Financial Instruments: Recognition and Measurement categories ow uld meet the
solely payments o f principal and interest PS( PI ) criterion.
Existing IAS 39 classifcation Percentage meeting SPPI criterion
Loans and receivables 59 1– 00%
eH ld to maturity Almost 100%
Availableof- rs- ale debt instruments 08 1– 00%
hT e FE RA G report provides more details on entities ’ progress in implementing the classic� ation
and measurement reuq irements and their viesw on the types o f n� ancial instruments that ow uld
meet or af il the PS PI criterion.
Participants ew re divided on the PS PI criterions’ implications of r their lending practices.
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Interaction between IFRS 9 and the insurance contracts standard
Participants rf om the insurance and banik ng industries had dief f rent viesw on ho w to resolve the
interaction betew en IFR S 9 and the of rthcoming ne w standard that iw ll replace IFR S 4 Insurance
Contracts.
All participants rf om the insurance industry argued that IFR S s’9 eef f ctive date should be deef rred
of r the insurance industry until the ne w insurance contracts standard becomes eef f ctive, or that its
adoption should be voluntary until that time. hT e main concern regarded the useuf lness o f n� ancial
reporting of r users o f n� ancial statements in the period betew en the application o f IFR S 9 and the
ne w insurance contracts standard, because staek holders ow uld epx erience tow maoj r changes in
an insurers’ n� ancial statements in short succession.
Expected credit losses
All participants rf om the banik ng and insurance industry had to some etx ent analysed the IFR 9 �S
impairment reuq irements. Most o f those epx ected to have a materially complete understanding o f
the impairment reuq irements in 2015.
hT e respondents hw o ansew red this uq estion a( pproix mately hal )f indicated that their ris k
management systems ew re currently partly compliant iw th IFR S 9 but they epx ected to be uf lly in
line iw th the standard in the uf ture.
Participants rf om the banik ng and insurance sectors noted that they aimed to leverage their
eix sting regulatory approach and stress testing methodologies in order to achieve consistency
betew en the regulatory and the accounting models. hT ey epx ected to maek aduj stments to their
regulatory systems such as the of lloiw ng :
• including current and of raw rdl- ooik ng inof rmation ;
• aduj sting eix sting regulatory ris k parameters based on a throught- hec- ycle or donw turn
perspective ; and
• measuring the deaf ult ris k on an instrument, rather than using a counterparty basis.
oS me participants ew re able to provide a uq antitative impact assessment o f the epx ected credit
loss reuq irements, as of llosw :
• loans: an increase in loss alloaw nces o f betew en 25 and 50 percent of r the maoj rity o f the
respondents ;
• debt securities: estimates ranged rf om no change to an increase o f more than 100 percent ; and
• other fnancial instruments: increase mainly in the range o f 02– 5 percent.
Costs related to implementing the impairment model
aH l f o f the participants rf om the banik ng and insurance industries ansew red this uq estion, and
they epx ected signic� ant costs in implementing the impairment reuq irements. oS me o f these
participants estimated implementation eof f rts at 25,000 to 04 ,000 mand- ays.
hT e of lloiw ng areas ew re highlighted in this contetx :
• building ne w specic� IFR S 9 models;
• signic� ant I T costs to meet ne w disclosure reuq irements;
• signic� ant costs relating to the ne w reuq irements on modic� ation o f n� ancial assets ; and
• costs relating to reconciliation betew en IFR S 9 and aB sel numbers.
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General hedge accounting
oS me participants identie� d areas that ew re still unclear or that had not been solved by the n� al
version o f IFR S .9 oS me o f the specic� issues raised included :
• the application o f the UE carveo- ut;
• reliance on part o f the implementation guidance rf om IA S 9 3 that aw s not transef rred to IFR S ; 9 and
• the application o f proyx hedging.
Overall assessment of the standard
oS me participants rf om the banik ng industry recommended that IFR S 9 be endorsed and some
recommended early endorsement. oN participants recommended not endorsing it.

EFRAG issues nO 15 eS ptember 2015, FE RAG submitted its endorsement advice on IFR S 9 of r use in the UE
and uE ropean cE onomic Area. hT e endorsement advice concludes that, overall, IFR S 9 meets
endorsement
all technical endorsement criteria o f the IAS Regulation, ecx ept of r the impact on the insurance
advice on IFRS 9
industry o f applying IFR S 9 beof re the n� alisation o f the of rthcoming insurance contracts standard.
FE RAG noted that the IA BS is ow rik ng on a solution of r the insurance industry and is epx ected
to maek decisions in the netx tow months. FE RAG iw ll provide uf rther advice relevant to the
insurance industry as the IA BS ow r k proceeds.
FE RAG recommended that businesses carrying out insurance activities be permitted r( ather than
reuq ired ) to account of r n� ancial instruments in compliance iw th IFR S .9
ITG tackles some At its second substantive meeting – in eS ptember 2015 – the IFRr S T ansition Resource Group
of r Impairment o f Financial Instruments I( GT ) discussed uf rther issues that ew re submitted by
diffcult areas
1
staek holders .
of judgement
hT e main points raised at the meeting ew re as of llosw .
• IGT members appeared to agree that internal credit ris k ratings and behavioural indicators may
be valuable tools in applying the ne w standard.
• IA BS board members epx lained their belie f that estimates o f epx ected credit losses on
revolving credit af cilities should not include losses on epx ected drad- w onw s that ecx eed
contractual creditl� imits.
• nE tities iw ll need to consider ho w to incorporate relevant of raw rdl- ooik ng inof rmation into their
estimates. hT e nature o f inputs and models used of r this purpose are liek ly to evolve over time.
• iD sclosures are important in epx laining ho w estimates have been made – including hw ether any
relevant af ctors have been ecx luded.
• A representative o f the aB sel oC mmittee on aB nik ng uS pervision reported that its n� al
guidance on accounting of r epx ected credit losses ow uld be published beof re the end o f 2015,
and epx lained the changes that it aw s maik ng in response to comments received.
For each issue submitted, the IA BS iw ll consider hw at action – i f any – is reuq ired.
hT e IGT s’ netx meeting is planned of r 11 eD cember 2015. hT e deadline of r submission o f issues is
21cO � tober 2015.
1. For a summary o f the discussions, see our IFR S eN sw letter : IFR S 9 Impairment .
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IASB ACTIVITIES AFFECTING YOUR BANK
Second In its uJ ly 2015 meeting, the IA BS decided to issue a second discussion paper on its macro
hedge accounting proej ct beof re publishing an epx osure dratf . hT is is because the comment
discussion paper
letters and ef edbac k that it received did not include suc� f ient inof rmation to enable the oB ard to
for macro hedging
develop an epx osure dratf . oH ew ver, the IA BS iw ll consider the possibility o f moving straight to an
epx osure dratf i f uf rther deliberations lead to a comprehensive solution addressing recognition,
measurement and disclosure reuq irements.
Also in uJ ly 2015, the oB arda� pproved the scope and approach of r identiyf ing the inof rmation
needs o f constituents. In particular, it decided that the scope should include inof rmation needs
arising both hw en:
• entities carry out dynamic ris k management activities ; and
• entities af ce interest rate ris k but do not carry out dynamic ris k management activities to
manage the ris.k
For more inof rmation, see our IFRS Newsletter: Financial Instruments, uJ ly 2015.
Financial At its eS ptember meeting, the oB ard of cused on the classic� ation o f nond- erivatives. It:
instruments with • discussed the etx ent to hw ich the reuq irements in IA S 23 Financial Instruments: Presentation
characteristics capture the ef atures that users need to maek their assessments ; and
of equity • considered three possible classic� ation approaches.
lC assic� ation o f derivatives iw ll be considered at a uf ture meeting.
For more inof rmation, see our IFRS Newsletter: Financial Instruments, eS ptember 2015.
Measuring quoted In uJ ly 2015, the oB ard discussed ho w to proceed iw th the measurement proposals included
in the epx osure dratf )DE( Measuring Quoted Investments in Subsidiaries, Joint Ventures and
investments in
Associates at Fair Value.
subsidiaries,
joint ventures hT e IA BS decided to undertaek uf rther research on :
and associates • the af ir value measurement o f investments in subsidiaries, associates and oj int ventures that
at fair value are uq oted in an active marek t ; and
• the measurement o f the recoverable amount o f cashg- enerating units on the basis o f af ir
value less costs o f disposal hw en the cashg- enerating unit is an entity that is uq oted in an
activem� arek t.
hT e IA BS iw ll continue its discussion on this topic at uf ture meetings.

IFRS 15: New In eS ptember 2015, the IA BS conr� med a oney- ear deef rral o f the eef f ctive date o f its ne w
revenue standard by issuing an amendment to the standard. oC mpanies are no w reuq ired to apply
effective date
IFR S 15 Revenue from Contracts with Customers no later than 1 aJ nuary 201.8 aE rly adoption
continues to be permitted.
Furthermore, because users and preparers o f n� ancial statements have said that they n� d some
aspects o f IFR S 15s’ revenue reuq irements unclear, in uJ ly 2015 the IA BS published proposed
amendments to the ne w standard : epx osure dratf 2/DE 015 6/ Clarifcations to IFRS 15.
hT e proposed amendments of cus on changes and claric� ations relating to :
• licences ;
• principal vs agent ;
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• identiyf ing perof rmance obligations ; and
• transition.
hT e FA BS plans several detailed epx osure dratf s, but the IA BS epx ects to issue uj st this one set o f
targeted amendments.
hT e deadline of r submitting comments to the IA BS is 2 8 cO tober 2015. hT e IA BS epx ects to
complete its redeliberations on the amendments by the end o f 2015.
IFRS 9: Transition In eS ptember 2015, the IFR S Interpretations oC mmittee discussed tow hedge accounting issues
relating to the transition rf om IA 93 �S to IFR S :9
for hedge
accounting 1. hw ether an entity can treat a hedging relationship as a continuing hedging relationship on
transition rf om IA S 93 to IFR 9 �S i f it changes the hedged item rf om an entire nonn�- ancial item
to a component o f the nonn�- ancial item a( s permitted by IFR )9 �S in order to align the hedge
iw th the entitys’ ris k management obej ctive ; and
2. hw ether an entity can continue iw th its original hedge designation o f the entire nonn�- ancial
item under IFR S .9
hT e oC mmittee noted that paragraph .72.22 o f IFR S 9 reuq ires a change to the hedged item to
be ree� cted on a prospective basis. Also, changing the hedged item hw ile continuing the original
hedge relationship ow uld be euq ivalent to the retrospective application o f the hedge accounting
reuq irements in IFR S ,9 hw ich is prohibited ecx ept in the limited circumstances described in
paragraph .72.2 6 o f IFR S .9 hT e oC mmittee observed that of r issue 1 those limited circumstances
do not apply and thereof re the original hedge relationship could not be treated as a continuing
hedge relationship on transition to IFR S .9
In relation to issue 2, the oC mmittee observed that:
• IFR S 9 supports the use o f hedge designations that are not eax ct copies o f actual ris k
management p‘( royx hedging )’ i f they ree� ct ris k management in that they relate to the same
type o f ris k that is being managed and the same type o f instruments that are being used of r that
purpose ; and
• the use o f proyx hedging in cases in hw ich it ree� cts the entitys’ ris k management did not
appear to be restricted to instances in hw ich IFR S 9 had prohibited an entity rf om designating
hedged items in accordance iw th its actual ris k management.
Accordingly, the oC mmittee noted that hedge designations o f an entire nonn�- ancial item could
continue on transition to IFR S 9 i f they meet the uq aliyf ing criteria in IFR S .9 hT e oC mmittee
tentatively decided not to add these issues to its agenda.
IAS 32: In eS ptember 2015, the IFR S Interpretations oC mmittee discussed ho w an entity ow uld classiyf
the liability – i.e. as a n� ancial or nonn�- ancial liability – hw en it issues a prepaid card and ho w the
Classifcation
entity ow uld account of r the unspent balance o f the card, considering that the entity does not have
of the liability
an obligation to deliver cash to the merchants( .) hT e prepaid card had the of lloiw ng ef atures :
for a prepaid
• no epx iry date;
card in the
issuer’s fnancial • cannot be reuf nded, redeemed or ecx hanged of r cash;
statements
• is redeemable only of r goods or services ;
• is redeemable only at selected merchants hw( ich may include the entity,) and, depending on
the card programme, ranges rf om a single merchant to all merchants that accept a specic� card
netow r.k nO redemption by the cardholder at a merchants( ) to purchase goods or services, the
entity has a contractual obligation to pay cash to the merchants( ;)
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• no bace-k nd ef es, hw ich means that the balance on the prepaid card does not reduce unless it is
spent by the cardholder ; and
• is not issued as part o f a customer loyalty programme.
hT e oC mmittee observed that the liability o f the entity of r the prepaid card meets the den� ition o f
a n� ancial liability, because the entity has a contractual obligation to deliver cash to the merchants
on behal f o f the cardholder and the entity does not have an unconditional right to avoid delivering
cash to settle this contractual obligation.
In light o f the eix sting guidance in IA S 23 and IFR S 9 I( A S ,)93 the oC mmittee tentatively decided
not to add this issue to its agenda.
IAS 39: Separation In eS ptember 2015, the IFR S Interpretations oC mmittee discussed the application o f the
embedded derivative reuq irements o f IA 93 �S in a negative interest rate environment. pS ecic� ally,
of an embedded
the oC mmittee considered:
interest rate foor
from a foating • hw ether paragraph AGb(3 ) o f IA S 93 should apply to an embedded interest rate o� or in a
o� ating rate host debt contract in a negative interest rate environment ; and
rate host contract
in a negative • ho w to determine the m‘ arek t rate o f interest ’ reef rred to in that paragraph.
interest rate
hT e oC mmittee observed that :
environment
• paragraph AGb(3 ) o f IA S 93 should be applied in a negative interest rate environment in the
same aw y as it ow uld be applied in a positive interest rate environment ; and
• to determine the marek t rate o f interest of r the purpose o f applying paragraph AGb(3 ) o f
IA,93 �S an entity is reuq ired to consider the specic� terms o f the contract, including the relevant
credit or other spreads appropriate of r the counterparty and the marek t in hw ich it is operating.
hT e oC mmittee tentatively decided not to add this issue to its agenda.
Insurance contracts project
In uJ ly, the oB ard continued its discussions on the accounting conseuq ences o f temporary
volatility and accounting mismatches in prot� or loss caused by the dief f rent eef f ctive dates o f
IFR 9 �S and the of rthcoming insurance contracts standard.
At its eS ptember meeting, the oB ard discussed:
• addressing the conseuq ences o f dief f ring eef f ctive dates o f IFR S 9 and the ne w insurance
contracts standard;
• disaggregating changes in marek t variables of r contracts ; and
• mitigating rissk related to direct participating insurance contracts.
For more inof rmation, see our IFRS Newsletter: Insurance, uJ ly and eS ptember 2015
of( rthcoming.)
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NEGATIVE INTEREST RATES – NEW ACCOUNTING
CHALLENGES AND QUESTIONS
Until recently, negative rates ew re an unusual phenomenon. uB t in the past year, certain

Negative benchmar k interest rates in various currencies and tenors have become negative and remained
interest so. eN gative interest rates create real economic challenges of r bansk and their customers, and the
iw der marek t economy. uB t they also lead to accounting challenges and uq estions that have not
rates lead to
previously been considered. hT is article considers some o f the common themes.
accounting
challenges
and questions Is negative interest on a fnancial asset part of a bank’s net interest margin?
that have not hT e presentation o f negative interest arising on n� ancial assets aw s discussed in the previous
previously edition o f The Bank Statement 2Q( 2015 ) and aw s hotly debated in the runu- p to the IFR S
Interpretations oC mmittee agenda decision published in aJ nuary 2015.
been
considered. hT e oC mmittee noted that i“ nterest resulting rf om a negative eef f ctive interest rate on a n� ancial
asset does not meet the den� ition o f interest revenue in IA S 1 8 Revenue, because it ree� cts a
Ewa Bialkowska, gross outo� w instead o f a gross ino� ,w o f economic benet� sh.T �” is letf a uq estion o f hw ere to
KPMG in the UK present such negative interest in a bans’k statement o f prot� or loss and other comprehensive
income – i.e. hw ether it can be included in interest epx ense, and iw thin the net interest margin
that bansk generally present on the af ce o f the income statement.
hT e appropriate presentation iw ll reuq ire the application o f uj dgement, taik ng into account the
materiality o f the amounts. In many cases, negative interest iw ll be immaterial.
I f the negative interest arising on n� ancial assets is material, then its inclusion in i‘ nterest income ’
ow uld be inconsistent iw th the oC mmittees’ agenda decision. oH ew ver, it may be appropriate to
include it in i‘ nterest epx ense ’ and crossr- eef r to a note that epx lains the amount and its nature.
I f greater prominence is appropriate, then separate disclosure on the af ce o f the income
statement may be appropriate. nO e o f the bansk included in the oH‘ w do you compare ’? article in
our 2Q 2015 Bank Statement chose this presentation.
Impact of negative interest rates on derecognition analysis for fnancial assets
An analysis o f hw ether a n� ancial asset should be derecognised otf en involves determining
hw ether the n� ancial asset has been transef rred, as den� ed in IA S .93 I,f as part o f the transaction,
a ban k retains the contractual rights to receive the cash o� sw o f the n� ancial asset but assumes a
contractual obligation to pass on the cash o� sw , then the arrangement uq alie� s as a transef r only i f
it meets the p‘ asst- hrough ’ criteria.
hT e concept o f passt- hrough naturally envisages a scenario in hw ich the transef ror o f the n� ancial
asset subej ct to the passt- hrough arrangement collects cash o� sw rf om the issuer o f the asset,
hw ich the transef ror is then obliged to pass on to the transef ree. uB t ho w is this concept applied to
a n� ancial asset that reuq ires the holder o f the asset to maek payments to the issuer, rather than
to collect cash o� sw rf om the issuer?
IA S 93 doesnt’ envisage the scenario o f negative interest rates and does not contain epx licit
guidance on hw ether passt- hrough should still be possible on such an asset, and i f so ho w it
should be incorporated into a derecognition analysis.
Accordingly, of r an asset bearing a negative coupon, it iw ll be necessary to understand the specic�
legal arrangements and apply uj dgement to apply IA S .93
Impact of an interest foor of zero
oC mpleix ties may arise i f the contractual terms o f a o� ating interest rate n� ancial asset
incorporate a o� or o f ez ro – i.e. in the event o f the interest rate becoming negative, the coupon on
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the asset euq als ez ro. In some countries that are currently epx eriencing a negative interest rate
environment, it is not uncommon of r an interest rate o� or o f ez ro to be incorporated in retail loans
such as mortgages.
oS metimes there is a lac k o f clarity about contractual terms, and some bansk are involved in
legal disputes about hw ether the o� ors eix st and hw ether instead their borroew rs are entitled to
receive payments rf om their bansk .
Accounting compleix ties of r an interest o� or o f ez ro may arise in relation to:
• hedge accounting ; and
• potential separation o f an embedded derivative in the of rm o f a ez ror- ate o� or.
Hedge accounting
A debt instrument on hw ich the interest rate is linek d to a benchmar k rate that is o� ored at ez ro
and aw s originated beof re the benchmar k became negative may be a hedged item in a cash o� w
hedge o f the variability o f interest cash o� sw .
hT e of lloiw ng is an eax mple o f such a hedging relationship:
• hedged item: variability in LIROB cash o� sw receivable rf om a loan. LIROB cash o� sw on the
loan are o� ored at ez ro ; and
• hedging instrument: interest rate saw p that pays LIROB and receives a ex� d rate. LIROB
cash o� sw under the saw p do not have a o� or. hT e loan is not prepayable and credit ris k is not
signic� ant.
In this eax mple, i f LIROB becomes negative :
• LIROB cash o� sw rf om the loan are ez ro and the overall interest receivable on the loan
becomes ex� d at the amount o f the margin over LIROB i( f any ;) and
• under the interest rate saw p, ex� d coupons are received rf om the receive leg and variable cash
o� sw are received rf om the pay leg – i.e. the saw p receives negative LIROB .
Accordingly, the LIROB b- ased cash o� sw on the loan are ex� d at ez ro i( .e. they are not variable )
during the period hw en LIROB is negative. oH ew ver, there is still an epx osure to variability in
uf ture interest cash o� sw due to changes in LIROB , because LIROB may turn positive in uf ture
periods – thereof re, ew believe that the designated hedged ris k continues to eix st and is eligible
of r hedge accounting in accordance iw th IA.93 �S
iS milarly, a uq estion arises over hw ether the hedged LIROB b- ased cash o� sw can still be regarded
as highly probable, even though it is possible that the LIROB component iw ll be ez ro. Again,
ew believe that the analysis is not changed merely by LIROB becoming negative – the hedged
of recast transactions are the receipts o f interest rf om the loan and these transactions are still
of recast to occur ; it is uj st that the LIROB component may be ez ro.
oH ew ver, hw en the o� or alters the cash o� w prol� e on the hedged item it can lead to immediate
retrospective ineef f ctiveness, and ultimately result in a hedge af ilure. nE tities testing eef f ctiveness
o f the hedge using a hypothetical derivative techniuq e ow uld incorporate the o� or ef ature into the
hypothetical derivative, hw ereas the real derivative hedging instrument ow uld in most cases be an
interest rate saw p iw thout a similar o� or.
I f the hedge relationship is determined to be highly eef f ctive on a retrospective basis, then there is
potentially a larger issue o f hw ether it is epx ected to remain highly eef f ctive prospectively.
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Potential separation of an embedded derivative
IA S 93 reuq ires an embedded derivative that meets certain conditions to be separated rf om
a hybrid contract and accounted of r separately as a derivative. hT e standard contains specic�
reuq irements in paragraph AGb(3 ) in relation to caps and o� ors. It states that an embedded o� or
on the interest rate on a debt contract is closely related to the host contract hw( ich means that
separation is not reuq ired ) provided that the o� or is at or belo w the marek t rate o f interest hw en
the contract is issued and the o� or is not leveraged.
hT e issue o f separation o f an embedded derivative o� or rf om a o� ating rate debt instrument iw th
a benchmar k o� or o f ez ro, hw ose benchmar k interest rate is belo w ez ro at the time o f issue o f the
instrument, has been subej ct to discussion.ow T viesw emerged : one arguing that separation is
reuq ired and one that it is not.
hT e issue aw s debated by the oC mmittee in eS ptember 2015, hw ich tentatively decided not to add
this issue to its agenda.
In draiw ng this conclusion, the oC mmittee observed that paragraph AGb(3 ) o f IA S 93 maek s no
distinction betew en positive and negative interest rates and, thereof re, its reuq irements should
be applied consistently in both cases. hT e oC mmittee also discussed ho w to interpret the term
m‘ arek t rate o f interest ’ of r the purpose o f applying paragraph AGb(3 ) o f IA 93 �S – see the ‘ IA BS
activities aef f cting your bank ’ section o f this nesw letter.
Is cash on term deposit with negative interest rate a cash equivalent?
aC sh euq ivalents are held of r the purpose o f meeting shortt- erm cash commitments, rather
than of r investment or other purposes. hT e den� ition o f cash euq ivalents in IA S 7 Statement of
Cash Flows reef rs to s“ hort term, highly liuq id investments that are readily convertible to nk onw
amounts o f cash and hw ich are subej ct to insignic� ant ris k o f changes in value. ”
oS me have uq eried hw ether cash placed on term deposit iw th a negative interest rate, hw ich
means that the amount repayable iw ll be less than the amount originally deposited, still uq alie� s
as a cash euq ivalent of r the purposes o f IA S.7 oH ew ver, a negative rate alone on a term deposit
account iw ll not generally alter the eligibility o f the balance of r classic� ation as cash and
cashe� uq ivalents.
Is a repo receivable a cash equivalent?
hT e presence o f negative rates on vanilla deposit accounts has also prompted some to loo k of r
alternative products that oef f r a positive return on the cash held to meet shortt- erm commitments,
such as reverse securities repurchase transactions r( epos.) For eax mple, a ban k may consider the
of lloiw ng transaction.
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