Impairment of Assets: IAS 39/IFRS 9 by CPA Solomon Atsiaya

1. INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA IMPAIREMENT OF ASSETS IAS 39/IFRS 9 BY CPA SOLOMON ATSIAYA CEO KENYA POLICE SACCO Credibility . Professionalism . AccountAbility

2. INTRODUCTION • IFRS 9, Financial Instruments firstissued in November 2009; introduces the requirements for the classification, measurement and recognition of financial assets and financial liabilities . The complete version of IFRS 9 was issues in July 2014 and replaced IAS 39. The standard is effective for annual periods beginning on or after January 1, 2018. • IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value • The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of financial liabilities designated as at fair value through the profit of loss.

3. CLASSIFICATION OF FINANCIAL INSTRUMENTS • Sacco's classify financial instruments into the following categories: • Financial assets and financial liabilities at fair value through profit or loss which comprise financial assets and liabilities acquired or incurred for the purpose of selling for profit making or financial assets and financial liabilities managed by the Sacco and their performance evaluated on a fair value basis in accordance with the Sacco’s investment strategy

4. Classification of financial instruments cont’d • Loans and receivablesare non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Society provides money, goods or services directly to a customer with no intention of trading the receivable • Available for-sale-financial assets which comprise of non-derivative financial assets that are not classified under any other categories of financial assets. Quoted investments are classified as available for sale and carried at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the fair value reserve. • Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. Where a sale occurs other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and classified as available for sale

5. Impairment of Assets • Delayed recognition of credit losses on loans was identified as a weakness thus the introduction of IFRS 9 • IFRS 9 introduces an "expected credit loss" impairment that requires a timely recognition of expected credit loss

6. Recognition of financial assets • Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. • Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest rate method. • Gains and losses arising from changes in the fair value of “financial assets at fair value through profit or loss” are included in profit or loss in the period in which they arise.

7. Recognition of financial assets • Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. • Dividends on available-for-sale equity instruments are recognised in profit or loss when the Society’s right to receive payment is established

8. Derecognition of financial Assets A SACCO Society is required to derecognise a financial asset only when the contractual rights to the cash flows from the asset expire or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

9. Impairment of Reserves Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss.

10. Loan Loss reserves • Saccos are required to ensure an appropriate and adequate level of provisioning for the expected credit loss is maintained at all times • Loans to members are stated net of provision for bad and doubtful loans. • Loans are classified into the following categories for purpose of provisioning: • Performing Loans are those that are being repaid as per the contractual terms

11. Loan Loss reserves cont’d • Watch loans are those that are past due up to 30 days • Substandard loans are those that are past due over 31-180 Days • Doubtful loans are those that past due over 180 - 360 Days • Loss loans are those that have remained unpaid over 360 days. They are considered uncollectible or of little value and their continued recognition is unwarranted.

12. Loan Loss reserves cont’d SASRA provides an impairment guide on the expected credit loss as follows; Performing Loans - 1%* Watch Loans - 5% Substandard - 25% Doubtful - 50% Loss Loans - 100% * Performing loans may be provided as a general risk. Saccos may provide for performing loans depending on their delinquency levels

13. LONG LIVE THE CO-OPERTAIVE MOVEMENT IN KENYA Contacts-mail solotsa@gmail.com Mobile; 0722-381327 Credibility . Professionalism . AccountAbility