IFRS 9 – Tax
Reporting Impact
for Financial
Institutions?
Presented on December 9, 2015
Agenda
Introduction
Classification and measurement of financial assets
Impairment
1
2
34
5
6© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Hedge accounting4
Classification and
Measurement
General Taxation of Financial Institutions
Mark-to-Market Properties• Shares• Specified debt obligation that is a FMV property – if not an
investment dealer• Specified debt obligation – if an investment dealer• Tracking property that is a FMV property
Specified Debt Obligations (SDOs)• Includes virtually all debt securities that may be held by an FI
• Specifically, it includes: loan, bond, debenture, mortgage, hypothecary claim, note agreement of sale or any other similar indebtedness, or
• Debt obligation where taxpayer purchased the interest
General Taxation of Financial Institutions
FMV Property• Value in accordance with GAAP at its fair value in balance sheet as
at the end of the taxation year• Does not include write-downs of SDOs
General Taxation of Financial Institutions
Mark-to-Market Properties• All gains and losses recognized in full on income account
• Profit from disposition included in income• Loss from disposition deducted from income
• Gains and losses recognized on an annual accrual basis• Deemed disposition at FMV and deemed reacquisition at FMV
at year end
General Taxation of Financial Institutions
Specified Debt Obligations (SDOs) – not MTM property• Prescribed amount included in income
Annual accrual basis Based on accounting practices and takes into account
premiums/discounts & FX gains and losses
• Dispositions of SDO Gains and losses recognized on actual disposition Recognized in full on income account and not as capital gains
and losses Amortized and recognized over remaining term of an
obligation
Classification – Financial Assets
Measurement categories
The measurement categories are similar:
Significant changes in criteria for classifying assets.
* FVTPL – fair value through profit or loss, FVOCI – fair value through other comprehensive income, HTM – held to maturity, AFS – available for sale
FVTPL*
Amortised cost
FVOCI*
IFRS 9 IAS 39
FVTPL
Loans and receivables/ HTM*
AFS*
Derivatives embedded in a financial asset are not separated – the whole asset is assessed for classification.
Reclassification of financial assets is subject to strict conditions and expected to be very infrequent.
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Measurement of Financial Assets
Measurement category
P&L OCI Presentation of gains/losses same as
under IAS 39?
Amortised cost Interest, impairment losses,foreign exchange gains and losses, gain or loss on disposal
-
Debt investments at FVOCI
Interest, impairment losses,foreign exchange gains and losses, gain or loss on disposal
Other gains and losses
Equity investmentsat FVOCI
Dividends (unless clearly represents recovery of part of cost of investment)
Fair value gains and losses
FVTPL All gains and losses -
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
Classification – Financial Liability
Measurement categories
Requirements from IAS 39 largely retained
Generally classified as measured at amortised cost or at FVTPL.
Presentation in OCI* of gain or loss on a financial liability designated at FVTPL attributable to changes in own credit risk.
Reclassification of financial liability – not permitted.
* OCI – other comprehensive income
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
IFRS 9 – Tax Considerations
AFS• Current rules – AFS changes to fair value recognized to OCI Schedule 1 adjustment required to include MTM adjustment in taxable
income Related current/deferred taxes also recognized to OCI When AFS disposed of, realized gain/loss recognized to P&L and also
required to recycle out related tax to P&L
• New rules – AFS no longer valid classification of financial asset No change if asset reclassified from AFS to FVTPL or FVOCI If FVTPL, no Schedule 1 adjustment required
IFRS 9 – Tax Considerations
Debt Securities• If carried at amortized cost and reclassified to FVTPL or FVOCI Unrealized gain/loss will be taxable in year of accounting conversion If unrealized gain significant, cash payment may be required Transition provisions like 2007?
• If carried at FMV and reclassified to amortized cost Security will go from MTM property to a SDO for tax purposes More problematic for tax Transition provisions?
Impairment
General Taxation – Loan Loss Provisions for FI’s
Doubtful or Impaired Debts
• Loan or lending asset must be “impaired” before reserve can be claimed
• Impaired loan reserve based on lesser of two amounts:1. Total of each amount which is reasonable amount as a
reserve (other than sectoral reserve) for the year for loan2. 90% of amount of impaired loan reserve (other than sectoral
reserve) for specifically identified loans determined for the year in accordance with GAAP
Impairment – the new model
Past events
Expected loss model
Forecast of future economic conditions
+
+
Current conditions
Generally, all financial assets carry a loss allowance.
- No trigger is required for recognising impairment
More judgement.
One model for financial instruments in the scope of IFRS 9.
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
General (Dual Measurement) Approach
Under the general principle, one of two measurement bases
applies:
- 12-month expected credit losses; or
- lifetime expected credit losses.
The measurement basis depends on whether there has been a
significant increase in credit risk since initial recognition.
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
IFRS 9 – Tax Considerations
New impairment model• May not fit the requirements under the tax rules for claiming a
doubtful debt reserve Tax purposes still require reserve based on individual assets
Actuarial reserves• Currently – actuarial reserve contain provision for asset credit
defaults. These actuarial reserves for life companies deductible and claims reserves are 95% deductible Double counting?
Tax accounting• Increase in loan loss provisions for accounting increase deferred
tax asset for non-deductible provisions
Hedge Accounting
Hedge Accounting
Broader availability of hedge accounting• Previous hedge accounting rules were more onerous; may be
targeted opportunities in the new rules
• More hedging strategies qualify for hedge accounting
IFRS 9 – Tax Considerations
Hedge accounting• Broader availability for hedge accounting – more items booked to
OCI for effective hedges Related current/deferred tax also recognized in OCI
• Consider availability of tax hedge Accounting treatment influential?
KPMG CONFIDENTIAL
The information contained herein is of a general nature and is
not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate
and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a
thorough examination of the particular situation.
© 2015 KPMG LLP, a Canadian limited liability partnership
and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are
registered trademarks or trademarks of KPMG International.