Asset Accounting /IFRS 9 Financial Instruments

Insurance IFRS Seminar

December 1, 2016

Francesco Nagari

Session 12

2

IFRS 9 Financial Instruments

• A new accounting standard on financial instruments

which replaces IAS 39

• New version of IFRS 9 issued in 24 July 2014

• Effective date: 1 January 2018

3

Key Changes from IAS 39

Key changes Implication

Different asset

classification

criteria

Change in classification criteria

and how financial assets are

reported in the financial

statements

New impairment

approach

Early recognition of impairment

loss

4

IFRS 9 Financial Asset

• Number of classification category for investment asset is

reduced from four to threeIFRS 9

• Held-To-Maturity

• Fair Value Through

Profit or Loss (FVPL)

• Held for Trading /

Derivative

• Fair Value Option

• Available-For-Sale

(AFS)

• Loans and Receivables

• Amortised Costs

• Fair Value Through

Profit or Loss (FVPL)

(Including Fair Value

Option)

• Fair Value Through

Other Comprehensive

Income (FVOCI)

IAS 39

5

IFRS 9 Financial Asset

• Accounting treatment by asset classifications

* Realised gain / loss on disposal is treated differently between debts and equities under IFRS 9

IAS 39 IFRS 9 Accounting Treatment

Held-to-

Maturity

Amortised

Costs

Assets measured at amortised costs

Loans and

Receivables

Category

eliminated

Assets measured at amortised costs

FVPL FVPL Assets measured at FV; changes in

FV reported through P&L

AFS FVOCI Assets measured at FV; changes in

FV reported through equity*

6

IFRS 9 Financial Asset

• Classification and measurement – new assessment

7

IFRS 9 Financial Asset

• Contractual Cash Flows assessment

– Are cash flows solely payments of principal and interest (SPPI)?

• Yes – go to Business Model test

• No – FVPL

– Principal is the amount transferred by the current holder for the financial asset

(i.e. taking into account discount / premium)

– Interest generally represents returns for time value of money, credit risk,

liquidity spread, etc. (e.g., cash flows from equity securities do not qualify as

“interest”)

8

IFRS 9 Financial Asset

• Business Model test

Amortised cost FVPL

Hold to collect

cash flowsOther business

modelsHold & Sell

FVOCI

FVPL Option – available only if it eliminates

or significantly reduces an accounting

mismatch

OR OR

Business model is to

collect cash flows

(e.g. bond coupons)

Business model is both

to collect cash flows and

to sell

Others (e.g. to realise

fair value changes)

9

IFRS 9 Financial Liability

Trading

Designated at FVPL

Amortised cost Amortised cost

FVPL

FVPL but changes in

‘own credit risk’

recognised in OCI

IAS 39 IFRS 9

10

IFRS 9 Impairment

‘Day 1’ bad debt /

loan loss

provisions!

11

Assets with significant

increase in credit risk

since initial

recognition*

Credit impaired assets –

objective evidence as per

IAS 39

Initial recognition*

Stage 1 Stage 2 Stage 3

* except for purchased or originated credit impaired assets

credit quality

since

initial recognitionDeteriorating

12 month expected credit

lossesLifetime expected

credit losses

Lifetime expected

credit losses

IFRS 9 Impairment

Accelerated

recognition of

loss provision

12

Interaction between IFRS 9 and Insurance Contracts Phase II (IFRS 17)

Avoid accounting mismatches and volatility in reported profit

‘OCI Solution’ in IFRS 17: Impact from change in current

discount rate reported through OCI based on a voluntary

accounting policy choice on a portfolio by portfolio basis

IFRS 9 FVOCI debt securities: only applicable if solely ‘Principle

and Interest’. Accounting mismatch could arise if not all assets

backing the insurance liability qualify

Timing of IFRS 9 (2018) and IFRS 4 phase II (2021) option to

re-designate financial assets, overlay approach or deferral

approach

13

To wrap up…

• Financial assets classification is determined by the nature of

their cash flows and how they are managed

• IFRS 9 classification and impairment model of financial

assets represent a change from the IAS 39 practice which

affects the accounting treatment of the financial assets

– how they are accounted for and measured in the financial

statements

– the reported results for the period

• Consider the interaction between the accounting treatment for

financial assets and insurance contract liabilities in

performance reporting

Thank You