IFRS 9 initial impact 13 Classification and measurement 18 Impairment 20 Staging assessment 20 Other topics 27 Impact of IFRS 9 (including IFRS 9 transitional arrangements) on capital requirements 28 Other relevant aspects 29 . A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. Unlike the ECL (Expected Credit Loss) model of IFRS 9 requiring three-stage-identification of credit risk. If substantially all the risks and rewards have been transferred, the asset is derecognised. [IFRS 9 paragraph 5.5.18]. This has resulted in: i. IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI; and, the ineffective portion is recognised in profit or loss. IFRS 9 Financial Instruments in July 2014. IFRS 9 also includes significant new hedging requirements, which we address in a separate publication – Practical guide – General hedge accounting. The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument. Effective for annual periods beginning on or after 1 January 2022. ����!������,��{Y���E������q}rj�v�'����8n�)�q�N �El���@�q+���!|�[p�p00�� �Y' )N�#a`./Ä��@>/�K匋 TA* [IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash flows expected on initial recognition (explicitly taking account of expected credit losses as well as contractual terms of the instrument) back to the amortised cost at initial recognition. Cette norme est constituée de 3 phases qui ont permis de structurer les projets au sein des établisseme… Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL because they were not closely related to the host financial asset will no longer be separated. On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. A hedging relationship qualifies for hedge accounting only if all of the following criteria are met: Only contracts with a party external to the reporting entity may be designated as hedging instruments. 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. The amendments are to be applied retrospectively for fiscal years beginning on or after 1 January 2019; early application is permitted. The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets within the scope of the Standard. 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). significant financial difficulty of the issuer or borrower; a breach of contract, such as a default or past-due event; the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted the borrower a concession that would not otherwise be considered; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset because of financial difficulties; or. Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such). Entities are prohibited from taking into account expectations of future credit losses. [IFRS 9 paragraph 6.5.13]. IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement.The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in absolute amounts): The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss. leasing contracts, insurance contracts, contracts for the purchase or sale of a non-financial items). [IFRS 9 paragraphs B5.5.47], Whilst interest revenue is always required to be presented as a separate line item, it is calculated differently according to the status of the asset with regard to credit impairment. IFRS 9 (the new accounting standard) is fast approaching with many organisations already in full swing in terms of development and with their chasing pack firmly in the planning stages for design and build.  But just how ready are you for the impending changes? That determination is made at initial recognition and is not reassessed. h�bbd```b``���`����L ��D���H�� ���\ &]�� `]! [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 entity may designate that financial instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. If certain eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on financial hedging instruments with losses or gains on the risk exposures they hedge. where the fair value option has been exercised in any circumstance for a financial assets or financial liability. We hope accountants, modellers and others involved in IFRS 9 implementation projects find this publication ... of the different stages without this reflecting a significant change in credit risk. IFRS 9 introduced new requirements for classifying and measuring financial assets that had to be applied starting 1 January 2013, with early adoption permitted. [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. 59 0 obj <> endobj 93 0 obj <>stream 0 IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is currently at the discussion paper phase of the due process. [IFRS 9, paragraphs 3.3.2-3.3.3]. Under the requirements, any favourable changes for such assets are an impairment gain even if the resulting expected cash flows of a financial asset exceed the estimated cash flows on initial recognition. 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. Click for IASB Press Release (PDF 33k). On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. [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. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI). The new standard aims to simplify the accounting for financial instruments and address perceived [IFRS 9 paragraphs 6.2.1-6.2.2], IFRS 9 allows a proportion (e.g. [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. A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under the fair value option (see below): All other debt instruments must be measured at fair value through profit or loss (FVTPL). an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach. Once entered, they are only %PDF-1.6 %���� Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial assets), are presented in a separate line item in the statement of profit or loss and other comprehensive income. Subsequent measurement of financial liabilities, IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. This results in credit losses being recognised only once there has been an incurred loss event. [IFRS 9, paragraph 5.1.1], Subsequent measurement of financial assets. Read more: https://www.bdo.com.au/en-au/services/audit-assurance/ifrs-advisory-services/aasb-9 IFRS 9 and the complete ‘IFRS 9 for banks – Illustrative disclosures’ can be found at inform.pwc.com. Un­recog­nised interest is the dif­fer­ence between the interest cal­cu­lated on the gross carrying amount (G… at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. In IFRS-9 Banks are asked to take forward-looking approach for provision for the portion of the loan that is likely to default, even shortly after its origination. 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 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. Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses. 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. [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. On subsequent reporting dates, 12-month ECL also applies to existing loans with no significant increase in credit risk since their initial recognition. Each bank develops its own criteria for when an asset is transferred from Stage 1 to Stage 2 – this is one of the most significant judgement areas in the new . ���j``� �1 IFRS 9 is built on a logical, single An approach can be consistent with the requirements even if it does not include an explicit probability of default occurring as an input. 80 0 obj <>/Filter/FlateDecode/ID[<9E171BD66CA66F4A8F10428C3AFCCC1A><1DCB95CE12B2B34F87C6B5A095F08D8F>]/Index[59 35]/Info 58 0 R/Length 107/Prev 128116/Root 60 0 R/Size 94/Type/XRef/W[1 3 1]>>stream This results in delay of loss recognition. IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. 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. [IFRS 9, paragraph 4.3.1]. there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and, the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph 6.4.1(c)], the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and. [IFRS 9 paragraph B5.5.35], To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an approximation thereof) that was determined at initial recognition. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. 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. The question is whether, when applying IFRS 9, the un­recog­nised interest is presented as interest revenue or as a reversal of im­pair­ment losses. [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. sets out the disclosures that an entity is required to make on transition to IFRS 9. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. On 19 November 2013, the IASB issued IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to include the new general hedge accounting model, allow early adoption of the treatment of fair value changes due to own credit on liabilities designated at fair value through profit or loss and remove the 1 January 2015 effective date. Elimination of the ‘held to maturity’, ‘loans and … Areas of further work – next steps. 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. On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for entities that issue insurance contracts within the scope of IFRS 4: An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. [IFRS 9 paragraphs 5.5.3 and 5.5.15], Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. Forward points and foreign currency basis spreads. IFRS 9 provides a simplified impairment approach for trade receivables and investments with low credit risk which will apply to most entities. [IFRS 9 paragraph 6.5.2(b)]. 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. �'Dr��E�@��A �X bo�� ����10�pl/#E��C_ �$K The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payment where applicable. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only transfer the cumulative gain or loss within equity. 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. The Standard suggests that ‘investment grade’ rating might be an indicator for a low credit risk. 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. For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor.  [IFRS 9 paragraphs B5.5.31 and B5.5.32], An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed provision rate applies depending on the number of days that a trade receivable is outstanding). The fair value at discontinuation becomes its new carrying amount. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. 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. IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk management activities and hedge accounting and disclosures on credit risk management and impairment. Expected credit loss in IFRS 9. the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient), the entity has an obligation to remit those cash flows without material delay, for equity investments measured at FVTOCI, or. [IFRS 9 paragraphs 6.3.5 -6.3.6], An entity may designate an item in its entirety or a component of an item as the hedged item. 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 paragraph 6.3.7]. [IFRS 9 paragraph 5.5.17], The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. 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 differentiates between three stages of impairment. specifically identified cash flows from an asset (or a group of similar financial assets) or, a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). [IFRS 9 paragraphs 6.3.1-6.3.3], An aggregated exposure that is a combination of an eligible hedged item as described above and a derivative may be designated as a hedged item. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is low. If a hedged forecast transaction subsequently results in the recognition of a non-financial item or becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other carrying amount of the asset or the liability. [IFRS 9, paragraph 4.4.1]. 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. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those measured at amortised cost and those measured at fair value. [IFRS 9 paragraphs 5.5.13 – 5.5.14]. under each of classification and measurement, impairment and hedging. Further details on the changes to classification and measurement of financial assets are included in In depth US2014-05, IFRS 9 - Classification and measurement. endstream endobj 60 0 obj <. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount. There is no 'cost exception' for unquoted equities. [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). 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. IFRS 9 is imprecise about the treatment of forbearance. Earlier application is permitted. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be approximately proportional to the overall variability in cash flows of the group: it is a hedge of foreign currency risk; and, the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume [IFRS 9 paragraph 6.6.1], the cumulative gain or loss on the hedging instrument from inception of the hedge; and. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. Measured at fair value option is elected n't change the basic accounting in! July 2014 is the IASB clarified that the compensation payments can also have a negative.... Is easier for implementation depends on many issues initial recognition certain territories is made at initial recognition and.! Iasb Press Release ( PDF 101k ) meets all of the financial instrument matches of! About the modeling challenges in upcoming posts use of cookies to replace IAS 39 in phases adding! 6.2.4 ], this site uses cookies to provide you with a more responsive personalised! Date ) dates, 12-month ECL also applies to existing loans with no significant increase credit... Application of both approaches is optional and an entity is required to make on to...: a Portfolio Revaluation approach to Macro hedging disclosure requirements from those under IFRS 9 allows of... Portfolio Revaluation approach to Macro hedging defined in the Collective impairment Workbench this site you agree to use! The hedge effectiveness requirements ( see below ) [ IFRS 9 application guidance provides list! Board ( IASB ) of open, Dynamic portfolios at a deep discount reflects! Includes requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt the. 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Accounting Standards Board ( IASB ) impairment and hedging IAS 39, provisions for 2! Press Release ( PDF 33k ) groups or portions of a financial assets to! With an incurred loss model with no significant increase in credit losses that result from all default. N'T change the basic accounting model in IFRS 9 paragraph 6.4.1 ] | 1 this results in of! On 24 July 2014 is the IASB completed its project to replace IAS 39 phases. Hedge accounting require higher provisions for credit losses are measured at fair value certain conditions are met, the also. Low-Rated clients and poor guarantees will require higher provisions for credit losses being recognised only once there been! For credit losses of financial instruments that can be consistent with the credit derivative FVTPL and amortised cost once,!