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Maxim Orlov

November 29, 2016

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Overview and background

28 November 2016 IFRS 9 Financial Instruments Page 1

(1) Classification and

Measurement

(4) Key impacts

(2) Impairment (ECL) (3) Hedge accounting

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(1) Classification and measurement– main changes from IAS 39

28 November 2016 Page 2

Financial instruments in the scope of IFRS 9

Financial assets Financial liabilities

New classification criteria

New categories that use

OCI

New presentation: ‘own

credit’ related FV

changes in OCI

IFRS 9 Financial Instruments

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The new classification and measurement model for financial assets


Debt (including hybrid contracts)

Pass

No

Neither (1)

nor (2)

BM with objective that

results in collecting

contractual cash flows and

selling financial assets

1 3 2

No

Yes

Derivatives

No

Yes

Amortised cost

FVTPL FVOCI

(with recycling)

FVOCI

(no recycling)

Fail

Hold-to-collect

contractual

cash flows

Conditional fair value

option (FVO) elected?

Fail Fail

Held for

trading?

Yes No

FVOCI option

elected ?

‘Business model’ test (at an aggregate level)


‘Contractual cash flow characteristics’ test

(at instrument level)

Equity

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(2) Impairment: Expected credit loss model – general approach


Stage 2 Stage 3 Stage 1

Loss

allowance

updated

at each

reporting

date

12-month ECL Lifetime ECL (credit losses that result from

default events that are possible

within the next 12-months)

Lifetime

ECL

criterion

Credit risk has increased significantly

since initial recognition (whether on an individual or collective basis)

+ Credit-impaired

Interest

revenue

recognised

Effective Interest

Rate (EIR) on gross

carrying amount

EIR on gross

carrying amount

EIR on amortised cost

(gross carrying amount less loss allowance)

Change in credit risk since initial recognition Improvement Deterioration


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Simplified approach and purchased or originated credit-impaired assets


Simplified

approach

Purchased or

originated

credit-impaired

assets


► Scope: financial assets that are credit-impaired

on purchase or origination

► ECL on initial recognition reflected in credit-

adjusted EIR (no ‘day one’ 12-month ECL)

► Loss allowance based on subsequent changes

in lifetime ECL

► Scope: contract assets, trade receivables and

lease receivables

► Loss allowance based on lifetime ECL

► No tracking of changes in credit risk

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(3) Hedge accounting: snapshot of key differences


Requirement IAS 39 IFRS 9

► Risk component as eligible hedged item Financial

items All items

► 80%-125% test X

► Retrospective effectiveness testing X

► Quantitative effectiveness test Depends

► Qualitative effectiveness test X Depends

► Special accounting for ‘costs of hedging’ X

► Rebalancing of hedge ratio X

► Dedesignation if ineffective, but risk

management objective unchanged X


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How to achieve hedge accounting


Base hedge ratio on the actual quantities used for risk management

3) Does hedge ratio reflect an imbalance that would create hedge ineffectiveness?

Formal designation and documentation

Identify eligible hedged item(s) and eligible hedging instrument(s)

Define risk management (RM) strategy and objective

To avoid

ineffectiveness

the ratio may

need to differ

from the one

used in RM

No

Yes

Yes

No

Yes

No


1) Is there an economic relationship between hedged item and hedging instrument?

2) Does effect of credit risk dominate fair value changes?

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Rebalancing of hedge ratio

• Only changes to the hedge ratio to reflect expected

changes in the relationship between the hedged item

and the hedging instrument

• Other changes made to the quantities of the hedged

item or hedging instrument would not be rebalancing

• Rebalancing is only relevant if there is basis risk

between the hedged item and the hedging

instrument

28 November 2016 Page 8 IFRS 9 Financial Instruments

Increasing or decreasing the volume of

the hedged item

Increasing or decreasing the volume of

the hedging instrument

Rebalancing can be achieved by:

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Hedge accounting: risk components

Criteria for designation of risk components

► Risk component must be separately identifiable

► Risk component must be reliably measurable

Types of risk components

► Contractually specified components

► Some non-contractually specified components

Market structure is relevant for:

► Analysis whether a non-contractually specified component is separately identifiable

► The measurement of the risk component


Allowing non-contractually specified risk components as eligible hedged items

opens up a new area of judgment

The assessment of the market structure will normally require the involvement of

personnel with a good understanding of the drivers of market prices

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Accounting for the cost of hedging


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(4) Key impacts


Classification & Measurement

Fair value through OCI

classification of some

portolios of debt

securities

Fair value through OCI

option for equity

instruments

Embedded derivatives

on financial assets

Impairment

Impairment requirements for trade receivables (with and without a significant financing component as per IFRS 15)

Impairment of lease & contract receivables

Impairment of fair value through OCI debt instruments

Impairment of intragroup loans in separate financial statements

Hedge accounting

Less rules-based

More economic hedging strategies qualifying for hedge accounting (e.g., aggregated exposures, risk components)

Accounting for costs of hedging

Significant disclosures to ‘tell the story’

Fair value option for own use contracts

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Thank you Your financial risk management journey: making the

most of IFRS 9

Maxim Orlov

Partner | Assurance, German Business Network

Ernst & Young LLC

+7 (495) 660 4874

[email protected]

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