ifrs 9 tax reporting impact for financial...

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

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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


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


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


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.

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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 -



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



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


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.



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.




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


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?

Thank You

Presenter Information:

Pamela ZabaryloT. 416.777.8691E. [email protected]

mailto:[email protected]

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and timely information, there can be no guarantee that such

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© 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.

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