IFRS 9 Financial instruments:Classification and Measurement

On 24 July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9 Financial Instruments (IFRS 9, or the Standard). It brings together the classification and measurement, expected credit loss impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The expected classification and measurement requirements must be adopted with the other IFRS 9 requirements from 1 January 2018, with early application permitted, subject to EU approval.

CredentialsWe have developed a comprehensivelandscape of services in the field offinancial instruments covering bothmethodological as well as quantitativeaspects.

Our client base is located across:

• CSE

• Austria

• Russia

• CIS countries

Our strengths include our absolute focuson your needs, and our deep subjectmatter expertise with the support ofour global network.The introduction of our services is justthe beginning of what we strive for – along-lasting relationship with continuedsupport and significant added value foryou – our client.

What you need to know about IFRS 9 in relation to classification and measurement

• The objective of IFRS 9 is to set out the requirements for recognizing and measuring financial assets, financialliabilities and some contracts to buy or sell non-financial items.

• Financial assets are measured at amortized cost, FVPL or FVOCI. The majority of the measurement categoriesdefined by IAS 39 have ceased to exist.

• The new FVOCI measurement category results in different treatment for debt and equity instruments. In the caseof equity securities, unlike debt instruments, gains and losses in OCI are not recycled upon sale and there is noimpairment accounting.

• The measurement classification of debt instruments depends on two principle-based assessments: the entity’sbusiness model for managing the financial asset and the financial asset’s contractual cash flow characteristics.

• Apart from the ‘own credit risk’ requirements, classification and measurement of financial liabilities is unchangedfrom the existing requirements in IAS 39.

• The rules for embedded derivative treatment for financial assets have changed as have the rules forreclassifications, while derecognition rules remain broadly unchanged.

Application challengesSuccessful transition towards IFRS 9 will require an early start and analysis of the standards requirements, including therisk management strategy and objectives. The new Classification and Measurement principles bring a number ofchallenges in the implementation of the new standard:• An entity needs to review its strategy for managing its financial assets and assess the impact of the IFRS 9

requirements on the financial results, ratios, regulatory requirements and main KPIs.

• An entity needs to classify a debt instrument on the basis of its contractual cash flow characteristics if it intends tohold it outside of the FVPL measurement regime. It requires significant judgment as to whether these cash flowssolely represent the payment of principal and interest thereon.

• Additionally, further judgment is required to assess business models for debt instruments and the assessment cannotbe determined by a single factor or activity. Instead, the entity must consider all relevant evidence that is availableat the date of the assessment.

• Assessment and ongoing monitoring of new transactions and their compliance with the business model used by theentity needs to be performed and its impact on possible reclassification of all affected assets.

• New disclosures will be required to qualitatively enhance business information provided by entities in their financial statements.

EY | Assurance | Tax | Transactions | Advisory

Why EY Over the last five years the EY Financial Services Advisory practice has grown rapidly in response to market developments and the needs of our clients. In Central Europe, we now have over 20 partners leading a team of over 300 people, working closely with global EY hubs for financial services. All our people focus on the financial sector and therefore they have a deep understanding of the challenges you face.

We have arguably the deepest and largest dedicated advisory practice in the financial services market globally. We were rated the EMEA market leader in consulting by revenue and market share in the financial services sectors of banking, securities and insurance by Gartner in 2014.

Our clients rightly expect us to bring genuine insight and ideas on how to respond to the key issues impacting them. They need practical, grounded experience on how to implement and sustain change in an increasingly complex, interconnected environment. As a single, integrated practice, we are able to draw on an unrivalled depth and range of industry, technical and consulting expertise to support your needs.

That’s how EY makes a difference.

Contacts

Phase IAnalysis of existing portfolios

Phase IVControl environment and ongoing support

Phase IIAdjustment and Redesign

Phase III

and Measurement system Implementation

Data & IT

Where EY can help

© 2015 EYGM Limited.All Rights Reserved.This material has been prepared for generalinformational purposes only and is not intended to berelied upon as accounting, tax, or other professionaladvice. Please refer to your advisors for specificadvice.

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existing methods. We will support you in the IT/ISaspect of classification and measurement. The performance ofthe business model and cash flowcharacteristics tests will require a higher level of judgment that we are ready to help you with. In the caseof new transactions / new portfolios we are ready to help you with appropriate classification.

We are prepared to discuss with you both your existing requirements and the upcoming IFRS 9requirements in general, which are changing rapidly in the current business environment, andanalyze them in the light of standard requirements and opportunities as a matter of ongoingsupport.

Gergely SzaboPartner | Financial ServicesTel.: +3614518244E-mail: gergely.szabo@hu.ey.com

Maria WilliamsExecutive Director | FAASTel.: +3614518384E-mail: maria.williams@hu.ey.com

Zsolt KonyaSenior Manager | Financial ServicesTel.: +3614518443E-mail: zsolt.konya@hu.ey.com

Phase IIFRS 9 introduces new rules and perspectives to the classification and measurement of financialinstruments. Understandably, it will also significantly affect the current classification andmeasurement regime as the new requirements will require consideration of an entity’s businessmodel, developed to manage such financial instruments. The analysis must encompass at least:

• An understanding of the current portfolio management and measurement methods analysisand the IFRS 9 impact

• Current financial instruments and their cash flow characteristics analysis

• Current business model analysis

• Analysis of changes in line with the new IFRS 9 requirements

Our analysis will evaluate the existing classification and measurement classifications under IFRS 9and our diagnostic report will provide details of suggested changes. We will also assist you inestablishing implementation timetables in line with the IFRS 9 requirements and prioritize stepsfor implementation.

Phase IIIn phase II we go further and assist you to identify and/or propose changes needed to theclassification and measurement regime of existing financial instruments/portfolios to comply withthe new requirements. We are also able to support you with the redesign of the overall set-up andimplementation of the necessary changes.

Outputs of Phase II will be the adjusted accounting methodology and redesign recommendations report.

Phase IIIIn this phase we can help with implementation of the new principles such as implementationof contractual cash flows characteristics and business model tests, modification of management reporting anddisclosures.

Phase III outputs may differ based on the actual scope of the work. However, generally they will coverimplementation of the final report containing IFRS 9 classification and measurement requirementsand preparation of internal manuals on classification and measurement methods.

Phase IVIFRS 9 Classification and measurement is continual process and we offer a similar relationship with EY.We are also ready to assist or advise you on evaluating the effectiveness and efficiency of theimplemented classification process and optimization of