1 / 27

IFRS 9 - NEW ACCOUNTING MODEL FOR FINANCIAL INSTRUMENTS (Replacing IAS-39)

IFRS 9 - NEW ACCOUNTING MODEL FOR FINANCIAL INSTRUMENTS (Replacing IAS-39). Hasan Marfani December 2018. Agenda. Background Reasons for Replacement of IAS-39/Key Elements of IFRS 9 Overview of Classification and Measurement Requirements IFRS 9 Credit Impairment Overview

terese
Download Presentation

IFRS 9 - NEW ACCOUNTING MODEL FOR FINANCIAL INSTRUMENTS (Replacing IAS-39)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. IFRS 9 - NEW ACCOUNTING MODEL FOR FINANCIAL INSTRUMENTS(Replacing IAS-39) Hasan Marfani December 2018

  2. Agenda • Background • Reasons for Replacement of IAS-39/Key Elements of IFRS 9 • Overview of Classification and Measurement Requirements • IFRS 9 Credit Impairment Overview • Key Judgments and Challenges related to IFRS 9 implementation • Impact on Modaraba/Leasing Sector By Hassan Marfani, ACA

  3. Background On 24 July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9. As per IASB, IFRS 9 is effective for accounting periods beginning on or after 1 January 2018. SECP has already adopted IFRS with effective date of 01 July 2018. . By Hassan Marfani, ACA

  4. Reasons for replacement of IAS-39- Cont… • The criticism on IAS-39, in brief : • Fair value accounting was said to have created cycles of accounting write downs and distressed selling of assets during the Crisis • The application of IAS-39 impairment model for loan loss provisions results in delayed recognition of credit losses • The over complexity of IAS-39 such as mined valuation models, multiple impairment approaches, complicated category transfer rules and hedge accounting requirement. By Hassan Marfani, ACA

  5. Reasons for replacement of IAS-39- Cont… • In view of above criticism, IASB received calls to reduce the complexity of accounting standards for financial instruments from G-20, the Financial Stability Board, the European Union and regulators and other stakeholders from around the world. • The work on IFRS 9 started in 2009 andafter 5 years of extensive technical work and stakeholders consultations, the final standard was issued in July 2014. By Hassan Marfani, ACA

  6. IFRS-9 – Classification and Measurement of financial instruments By Hassan Marfani, ACA

  7. By Hassan Marfani, ACA

  8. By Hassan Marfani, ACA

  9. Classification of Financial Assets 1.Fair Value through P/L 2.Fair Value through OCI 3. Amortized Cost (AC) By Hassan Marfani, ACA

  10. By Hassan Marfani, ACA

  11. Classification of Financial Liabilities 1.Fair Value through P/L 2. Amortized Cost By Hassan Marfani, ACA

  12. IFRS-9 Classification and Measurement – Un-quoted Equity Instruments • No cost exemption for unquoted equity instruments  all equities at fair value • Cost may be used as a proxy for fair value in certain circumstances • Indicators of when cost might not represent fair value • A significant change in the performance of the investee • Changes in expectation that technical milestones will be achieved • A significant change in the market for the investee company or its products • A significant change in the global economy or the economic environment • A significant change in the observable performance of comparable companies, or in the valuations implied by the overall market. • Internal matters such as fraud, commercial disputes, or litigation, or changes in management or strategy. • Evidence from external transactions in the investee’s equity, either by the investee (such as a fresh issue of equity), or by transfers of equity instruments between third parties. By Hassan Marfani, ACA

  13. IFRS-9 Classification and Measurement – Debt Instruments (Cont…) Business Model Test • In some cases, an entity may have more than one business model, in which case, the assessment would be made at a portfolio level rather than an entity level. • Is a matter of fact and not management intention. • Reclassifications of portfolio is not allowed unless there is a change in business model By Hassan Marfani, ACA

  14. Reclassification of Financial Assets-b/w Categories-AC,FVOCI,FVP/L By Hassan Marfani, ACA

  15. Impairment of Financial Assets Under IFRS 9 By Hassan Marfani, ACA

  16. Background In response to the reporting issues highlighted by the Global Financial Crisis, a Financial Crisis Advisory Group (FCAG) was setup in October 2008 The objective of FCAG was to advice IASB and US FASB to bring improvements in the financial reporting standards that could enhance investor confidence in the financial markets The FCAG, in its report published in July 2009, identified delayed recognition of loan losses as one of the primary weaknesses in the accounting standards and recommended to explore alternatives model which is more forward looking By Hassan Marfani, ACA

  17. Incurred Loss Model under IAS-39 Interest income is recognized over the period of the loan on the basis of contractual cash flows (Effective interest method) Impairment is recognized only when there is a objective evidence of impairment i.e. when a loss event has occurred It may argued that interest income is overstated in periods before a loss event occurs because it is inherent in the nature of assets that certain credit losses will occur By Hassan Marfani, ACA

  18. ExpectedLossModelofIFRS 9 The impairment requirements applies to debt instruments such as loans, debt securities, bank deposits, lease receivables, loan commitments and financial guarantee contracts. Under the expected loss model impairment is recognized over the life of assetson the basis of future expected loss events In other words, impairment allowance is made even before there any objective evidence of impairment or occurrence of default event The scope of impairment requirements, therefore is much broader and are designed to result in earlier recognition of credit losses This model will potentially address the concerns about IAS 39 incurred loss model i.e. too little and too late By Hassan Marfani, ACA

  19. Overview of Expected Loss Model of IFRS 9 3 stage model which recognizes impairment over time based on changes in credit quality since origination of loans Stage 1 Stage 2 Stage 3 Performing Under-performing Non-performing Loans with low credit risk and with no significant increase in credit risk since origination Loans for which credit risk has increased significantly since initial recognition Loans with objective evidence of impairment

  20. The key change brought by IFRS 9 is in relation to the accounting provisions for loan losses which are required to be made using expected loss model under the IFRS 9. Currently, loan loss provisions are made when there is an objective evidence of impairment (i.e. incurred loss model). This is a fundamental shift in provisioning. IFRS 9 Credit Impairment Overview

  21. IFRS 9 Credit Impairment Overview Stage 1 Stage 2 Stage 3 • The credit risk has increased significantly since initial recognition • improvementdeterioration 12-month expected credit losses Allowance: Lifetime expected credit losses + Objective evidence of impairment Criterion: Interest revenue based on: Gross carrying amount Net carrying amount Gross carrying amount Gross carrying amount If no reasonable expectation of recovery – Write off

  22. IFRS 9 Credit Impairment OverviewStaging Approach Information to take into account for assessment of increased credit risk Internal watch-list accounts Changes in external market indicators – price of borrower debt or equity Adverse changes in business or economic conditions Changes in the value of collaterals and repayment behaviour Changes in internal price indicators and credit ratings downgrade 30 days past due rebuttable presumption Changes in operating results Changes in external credit ratings • However…. By Hassan Marfani, ACA

  23. IFRS 9 Credit Impairment OverviewExpected Credit Loss 2 3 1 • ECL = PD x LGD x EAD Risk Parameters 1 2 3 • PD • The probability of defaulting if you haven’t already • LGD • The forecasted economic loss if the default happens • EAD • The forecasted exposure at each point in time • Discount factor (EIR) By Hassan Marfani, ACA

  24. IFRS 9 Credit Impairment OverviewSteps Involved Portfolio Segmentation and Staging Step 1 Determination of Exposure at default (EAD) Step 2 Determination of segment wise PDs Step 3 Estimation of LGD Step 4 Computation of ECL and Scenarios Step 5 By Hassan Marfani, ACA

  25. Key Challenges • Revocable and Irrevocable commitments • Credit Conversion Factors Estimation • Behavioral analysis of revolving facilities • Lack of availability of historical data of 5 to 7 years • Determination of statistically significant relationship between Macro-economic factors and defaults ratio • Economic LDG rather than collateral based LGD • Lack of availability of historical recovery data for credit portfolio to compute workout LGD • Allocation of collateral amongst facilities • Discounting of future cash flows By Hassan Marfani, ACA

  26. Implementation Challenges By Hassan Marfani, ACA

  27. Challenges for Modaraba and/or Leasing Sector while adopting IFRS-9 • Since recycling of Gain for equity instruments is not allowed under FV through OCI category, realized gain will not be distributed to certificate holders. • Impairment model as suggested in IFRS-9 uses proactive approach which has more inclination towards risk assessment side, historical data and economic indicators which create following challenges for Modaraba/leasing sector: • Lack of Human Resource with relevant expertise • Dealing of Modaraba/leasing sector in SME sector posing risk of non availability of relevant data for assessment of credit risk • Categorizing any financing as stage1 or 2 is always a subjective matter raising difference of opinions b/w Mgt. and auditors • Cost Constraints • Initial impact on profitability By Hassan Marfani, ACA

More Related