[IFRS 9, paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition. In particular, exposures with low-rated clients and poor guarantees will require higher provisions for stage 2 migration. impairment levels under IFRS 9 would obviously require taking into account the switch from through-the-cycle to point-in-time PD’s. Value changes are recognised in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging instrument in an eligible hedging relationship. the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9 paragraph 6.4.1]. [IFRS 9 paragraph 6.3.7]. 30 Annex I – Summary of main impacts 34 IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, subject to endorsement in certain territories. For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. In addition, different impairment models are applied to financial assets measured at amortised cost, debt instruments classified as available for sale and equity instruments classified as available for sale. rebalances the hedge) so that it meets the qualifying criteria again. If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument (credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if: An entity may make this designation irrespective of whether the financial instrument that is managed for credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside the scope of IFRS 9). An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. Also, whilst in principle the assessment of whether a loss allowance should be based on lifetime expected credit losses is to be made on an individual basis, some factors or indicators might not be available at an instrument level. IFRS 9 replaces the rules based model in IAS 39 with an approach which bases classification and measurement on the business model of an entity, and on the cash flows associated with each financial asset. Whilst for equity investments, the FVTOCI classification is an election. [IFRS 9 paragraphs B5.5.22 – B5.5.24]. Un­recog­nised interest is the dif­fer­ence between the interest cal­cu­lated on the gross carrying amount (G… h�b```a``v�*�@(� [IFRS 9 paragraph 6.7.1], If designated after initial recognition, any difference in the previous carrying amount and fair value is recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2]. The term Stage 3 is not formally defined in the standard but has become part of the common description of the IFRS 9 methodology.. [IFRS 9 paragraph 6.5.2(b)]. The entity may designate that financial instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. IFRS 9 will reduce profitability margins, especially for medium- and long-term exposures, because of the capital consumption induced by higher provisioning levels for stage 2. [IFRS 9 Appendix A]. Each word should be on a separate line. Earlier application is permitted. Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such). In October 2017, the IASB clarified that the compensation payments can also have a negative sign. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair value option is applied. [IFRS 9 paragraph 5.5.11], Purchased or originated credit-impaired financial assets are treated differently because the asset is credit-impaired at initial recognition. Three stages of impairment . the liability is part or a group of financial liabilities or financial assets and financial liabilities that is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. The hedge accounting requirements in IFRS 9 are optional. [IFRS 9 paragraph 5.5.5], With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. sets out the disclosures that an entity is required to make on transition to IFRS 9. The application guidance provides a list of factors that may assist an entity in making the assessment. IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, paragraph 4.2.2]: A financial liability which does not meet any of these criteria may still be designated as measured at FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the liability and are not clearly closely related. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year instrument) of a hedging instrument to be designated as the hedging instrument. When a hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change in the time value in OCI which is later removed or reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. %%EOF An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5], Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. [IFRS 9 paragraph 6.2.5], Combinations of purchased and written options do not qualify if they amount to a net written option at the date of designation. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss. If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9, paragraph 5.1.1], Subsequent measurement of financial assets. [IFRS 9 paragraph 6.3.4], The hedged item must generally be with a party external to the reporting entity, however, as an exception the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation. On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss. IFRS 9 also includes significant new hedging requirements, which we address in a separate publication – Practical guide – General hedge accounting. 93 0 obj <>stream Impairment of loans is recognised - on an individual or collective basis - in three stages under IFRS 9:Stage 1 - When a loan is originated or purchased, ECLs resulting from default events that are possible within the next 12 months are recognised (12-month ECL) and a loss allowance is established. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified. On subsequent reporting dates, 12-month ECL also applies to existing loans with no significant increase in credit risk since their initial recognition. Many forbearance measures clearly fall under the concept of “significant increase in credit risk” and therefore are to be classified in stage 2, and be subject to the lifetime ECL approach for calculating the impairment allowances. IFRS 9 is built on a logical, single [IFRS 9 paragraph 6.5.4]. [IFRS 9 paragraph 6.5.5], An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). Impact of IFRS 9 as at 31 December 2017 (2) Page 9 The previous slide is based on data published at the time this deck was compiled Where unclear, the movement has been classed as ‘stage 2’ Note the significant differences: HSBC did not separately disclose the effect on stages 2 and 3. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be designated as the hedging instrument. Two measurement categories continue to exist: FVTPL and amortised cost. Definition. [IFRS 9, paragraph 4.1.4], Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. IFRS fokussiert IFRS 9 – Das neue Wert- minderungsmodell im Überblick IFRS Centre of Excellence Juli 2014 Das Wichtigste in Kürze Mit dem jüngst veröffentlichten IFRS 9 (2014) Finan-zinstrumente werden neben den Vorschriften für Wertminderungen auch die Klassifizierung und Bewer-tung von Finanzinstrumenten endgültig geregelt. [IFRS 9, paragraph 4.3.5], IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the amount of change in fair value attributable to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented in profit or loss. Please read, International Financial Reporting Standards, Financial instruments — Macro hedge accounting, IBOR reform and the effects on financial reporting — Phase 2, Deloitte e-learning on IFRS 9 - classification and measurement, Deloitte e-learning on IFRS 9 - derecognition, Deloitte e-learning on IFRS 9 - hedge accounting, Deloitte e-learning on IFRS 9 - impairment, IBOR reform and the effects on financial reporting — Phase 1, IFRS Foundation publishes IFRS Taxonomy update, European Union formally adopts IFRS 4 amendments regarding the temporary exemption from applying IFRS 9, Educational material on applying IFRSs to climate-related matters, IASB officially adds PIR of IFRS 9 to its work plan, EFRAG endorsement status report 16 December 2020, A Closer Look — Financial instrument disclosures when applying Interest Rate Benchmark Reform – Phase 1 amendments to IFRS 9 and IAS 39 and Phase 2 amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16, EFRAG endorsement status report 6 November 2020, EFRAG endorsement status report 23 October 2020, Effective date of IBOR reform Phase 2 amendments, Effective date of 2018-2020 annual improvements cycle, IAS 39 — Financial Instruments: Recognition and Measurement, IFRIC 10 — Interim Financial Reporting and Impairment, Different effective dates of IFRS 9 and the new insurance contracts standard, Financial instruments — Effective date of IFRS 9, Financial instruments — Limited reconsideration of IFRS 9, Transition Resource Group for Impairment of Financial Instruments, Original effective date 1 January 2013, later removed, Amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 (removed in 2013), and modified the relief from restating comparative periods and the associated disclosures in IFRS 7, Removed the mandatory effective date of IFRS 9 (2009) and IFRS 9 (2010). [IFRS 9 paragraph 6.5.10], Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. [IFRS 9 paragraph 6.5.8], If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is amortised to profit or loss based on a recalculated effective interest rate. A “credit-adjusted effective interest” rate should be used for expected credit losses of purchased or originated credit-impaired financial assets.  In contrast to the “effective interest rate” (calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit losses of the financial asset. There are three types of hedging relationships: Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the probability of that default occurring. the hedging relationship consists only of eligible hedging instruments and eligible hedged items. endstream endobj startxref IFRS 9’s general approach to recognising impairment is based on a three-stage process which is intended to reflect the deterioration in credit quality of a financial instrument. the seniority of the financial instrument matches that of the instruments that can be delivered in accordance with the credit derivative. [IFRS 9, paragraph 4.3.1]. The question is whether, when applying IFRS 9, the un­recog­nised interest is presented as interest revenue or as a reversal of im­pair­ment losses. The IFRS 9 guidelines pose some interesting challenges, including the following: An important consideration in the impairment model in IFRS 9 is the use of forward-looking information in the models. Under IFRS 9, Financial Instruments, banks will have to estimate the present value of expected credit losses in a way that reflects not only past events but also current and prospective economic conditions.Clearly, complying with the 160-page standard will require advanced financial modeling skills. Which model is easier for implementation depends on many issues. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. IFRS 9 requires that when there is a significant increase in credit risk, institutions must move an instrument from a 12-month expected loss to a lifetime expected loss. In November 2018, the Committee discussed how an entity presents un­recog­nised interest in the statement of profit or loss when a credit-im­paired (stage 3) financial asset is sub­se­quently paid in full or is no longer credit-im­paired (both cases referred to as "cured"). [IFRS 9 paragraph 5.5.18]. where the fair value option has been exercised in any circumstance for a financial assets or financial liability. All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. [IFRS 9 paragraph 5.4.1], In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount. If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business model. �'Dr��E�@��A �X bo�� ����10�pl/#E��C_ �$K [IFRS 9, paragraph 4.1.5]. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement, and is effective for annual periods beginning on or after January 1, 2018. 59 0 obj <> endobj The assessment of whether there has been a significant increase in credit risk is based on an increase in the probability of a default occurring since initial recognition. IFRS 9 (2014) was issued as a complete standard including the requirements previously issued and the additional amendments to introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. Areas of further work – next steps. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9. it consists of items individually, eligible hedged items; the items in the group are managed together on a group basis for risk management purposes; and. Once entered, they are only The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2]. [IFRS 9 paragraph 6.5.13]. Financial assets measured at amortised cost; Financial assets mandatorily measured at FVTOCI; Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL); Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL); Lease receivables within the scope of IAS 17, Contract assets within the scope of IFRS 15, the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). Within the IFRS scheme, the credit assets should be assigned to three stages at each reporting date: IFRS 9 provides a simplified impairment approach for trade receivables and investments with low credit risk which will apply to most entities. In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of each hedged period: If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. 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