ifrs for banks - bot

IFRS for banksBenny Verhelst

Bangkok, July 2009

Agenda

29 October, 2009© 2009 finarch. All rights reserved. 2

Topics start endIntroduction to IFRS and categories of financial instruments 13h30 14h45

break 14h45 15h15exposure draft on classification, revenue recognition and exposure draft on fair value 15h15 16h30

Introductionto IFRS/IAS

IASBPrinciple-based standards

IFRS International Financial Reporting Standards

Standards

IAS International Accounting Standards

IFRIC International Financial Reporting Interpretations Committee

Interpretation of standards

SIC Standards Interpretation Committee

Newest standards

IFRS (newest standards)IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments

Older standards

IAS 1 Presentation of Financial Statements IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 2 Inventories IAS 27 Consolidated and Separate Financial Statements IAS 7 Statement of Cash Flows IAS 28 Investments in Associates IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 29 Financial Reporting in Hyperinflationary Economies IAS 10 Events After the Balance Sheet Date IAS 31 Interests in Joint Ventures IAS 11 Construction Contracts IAS 32 Financial Instruments: Presentation IAS 12 Income Taxes IAS 33 Earnings per Share IAS 16 Property, Plant and Equipment IAS 34 Interim Financial Reporting IAS 17 Leases IAS 36 Impairment of Assets IAS 18 Revenue IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 19 Employee Benefits IAS 38 Intangible Assets IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 39 Financial Instruments: Recognition and Measurement IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 40 Investment Property IAS 23 Borrowing Costs IAS 41 Agriculture IAS 24 Related Party Disclosures

IAS (older standards)

IFRS Framework notions


Objective of financial statements=provide information on the financial position, performance and changes in financial position

Framework sets out conceptsthat underlie the preparation and presentation of financial statements

the IASB likes to achieve transparency through:

1.Fair Value

2.Disclosures

IFRS Framework notions


Accrual basis:effects of transactionsare recognised when they occur+ reported in the periods to which they relate

Going concern: Entity will continue operation in the foreseeable future

Understandability

Underlying assumptions

Qualitative characteristics

Relevance

Materiality

Reliability

Faithful representation

Substance over form

Neutrality

Prudence

CompletenessComparability

True and fair view

Timeliness

Talk the talk

to RECOGNISE:incorporate in the balance sheet or income statement

Assets Liabilities

Equity

LiabilityAssets

Statement of financial position

Resource controlled by the entity as a result of past events and from which future economic benefits are expected

Present obligation of the entity arising from past events, the

settlement of which is expected to result in an outflow of resources

Residual interest in the assets of the

entity after deducting all its

liabilities

Expense Income

Comprehensive income(P&L)

Expenses Income

to DERECOGNISE:removal of a previously recognised asset or liability from the statement of financial position (balance sheet)

to DISCLOSE:give details on (text and/or figures)

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity,

other than those relating to contributions from equity participants

Decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases

in equity, other than those relating to distributions to equity

participants

USGaaprules-based standards

• FASB: issues United States Generally Accepted Accounting Principles (USGaap)

• Short-term/long-term convergence projects with IFRSe.g. IFRS 8 is almost copy/paste of SFAS 131

• Memorandum of Understanding (2008) sets out priorities and milestones to be achieved on major joint projects by 2011


What to remember?

IFRS/IAS notionsConvergence with USGaap

Where can I get more information?

www.iasb.orgwww.fasb.org

Categories of financial instruments

July, 2009

Scope


IAS 39

all types of financial instruments:

•loans

•deposits

•bonds

•shares (except when you have significant influence)

•derivatives (except weather derivatives)

SubsidiariesIAS 27

AssociatesIAS 28

Joint venturesIAS 31

LeasesIAS 17

Employee benefitsIAS 19

InsurancecontractsIFRS 4

Agenda


1. Financial instruments

2. Financial assets

3. Financial liabilities

Financial instruments

Financial instrument:

Any contract that gives rise to a financial asset of one entity and a financial liability or equityinstrument of another entity


Assets Liabilities

Equity

DebtAssets

Statement of financial position

examples:

Cash (financial asset for holder/ financial liability for central bank)

Shares/ baskets of shares (financial asset for owner/ equity for issuing company)

Contractual right to receive cash or other financial asset; e.g. Loans, bonds (financial asset for owner/ debt for issuer)

Contractual right to exchange financial assets/liabilities under conditions that are potentially unfavourablee.g. Derivatives (options, futures, swaps)

(asset if positive fair value/ liability for counterparty, and vice versa)

Financial instruments


Contract that may be settled in the entity’s own instruments(financial asset for holder/ financial liability for central bank)

Non- derivativefor which the entity may be obliged to receive a variable number of the entity’s own equity instruments

e.g. Convertible bonds

(financial asset for owner of convertible bond/ financial liability for issuing company)

Derivative(financial asset for holder/ financial liability for issuing bank)

e.g. Warrants (options where new shares are created)

Trade date/settlement date


Trade date: date an entity commits to purchase or sell an asset

Settlement date date an asset is delivered to or by the entity

IAS 39 allows trade date or settlement date accounting for regular way purchase or sale of financial assets

EXCEPT for DERIVATIVES: always trade date accounting!

delivery of assets is required within the timeframe established by regulation or convention in the market place concerned

Agenda



2. Financial assets


Categories


Financial ASSETS

Loans and receivables

Held-to-Maturity

Investments(HTM)

Financial assets@ fair valueThrough P&L

Held for trading

Fair valueoption

AvailableFor Sale

(AFS)

Mixed measurement



Held-to-Maturity

Investments(HTM)


AvailableFor Sale

(AFS)

INITIAL SUBSEQUENT

FairValue

+Transaction

costs

Amortisedcost

Fair valueThrough P&L

Fair valueThrough equity

Fair Value+

Transactioncosts

Fair Value

if you include transaction costs in this

category they would disappearin P&L at the

first revaluation

fair value at initial recognition

=normally

transaction price




Amortisedcost

Tempting to put things in there

because no volatility in fair value is shown

Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:a.Those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial designates at fair value through p&l;

b.Those that the entity upon initial designation designates available for sale; or

c.Those for which the holder may not recover substantially all of its initial investment, other than through credit deterioration, which shall be classified as available for sale

What can I put in there?Mortgages, loans, unlisted bonds...

No derivatives, no shares (because

payments not determinable), no bonds listed in an active market, no loans that you intend to sell in the near future...

Categories


Financial ASSETS


Held-to-Maturity

Investments(HTM)


Held for trading

Fair valueoption

AvailableFor Sale

(AFS)

Held-to-maturity


Amortisedcost

Tempting to put things in there

because no volatility in fair value is shown

Non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intent and ability to hold to maturity other than:a.Those that the entity upon initial designation designates as at fair value through p&l;

b.Those that the entity upon initial designation designates as available for sale;

c.Those that meet the definition of loans and receivables

No derivatives, no shares (because

payments not determinable + no maturity), no loans, no bonds you intend to sell before maturity

Held-to-Maturity

Investments(HTM)

What can I put in there?Treasury bills and bonds that the bank intends to hold until maturity(ALM might put part of its portfolio here)

Held-to-maturity


Tainting rules

During year or 2 previous years, the entity sells, reclassifies, transfers or exercises put options on more than an insignificant portion of the HTM category

Held-to-Maturity

Investments(HTM)

Penalty

1.Reclassification of ALL HTM to available for sale

2.Cannot classify other assets as HTM during the year of disposal and next 2 years

P&L impactcould be

significant

Held-to-maturity


No tainting when

−Sale close to maturity, with minimal effect on fair value

−Sale occurs after collection of substantially all original principal

−Isolated non-recurring event beyond the entity’s control such as:

o Sale right after significant unexpected deterioration of the issuer’s creditworthiness

o Change in tax lax or regulatory environment

o Business combination that triggers the need for selling the HTM portfolio

Held-to-Maturity

Investments(HTM)

How to calculate amortised cost


Amortisedcost

Amount @initial

recognition

Principalrepayments

Cumulativeamortisationof difference

between initial amount and

maturity amount

= - +/-

write-downfor

impairmentor un-

collectability

-

use effectiveinterest rate

method



Calculate the amortised cost:

−We buy a bond above par for 102

−the bond will be repaid in 3 years at 100

−the bond pays 6% interest

102 Fair value + transaction costs=

101,37 102 0 - 0,63= - +/- 0-1

0

0 1 2 3

-102 6 6 106

effective yield (IRR in excel)= 5,2620%

102 x 5,2620% = 5,3672 = revenue recognised in P&L for year 1

Debit current account 6

Credit bond 0,63

Credit interest income 5,37

Debit bond 102

Credit current account 102



100,70 101,37 0 - 0,67= - +/- 0-2

0 100,70 100 - 0,70= - +/- 0-3


101,37 x 5,2620% = 5,3340 = revenue recognised in P&L for year 2


Credit bond 0,67


101,371


100,70 x 5,2620% = 5,2989 = revenue recognised in P&L for year 3


Credit bond 100,70


What makes this complex?


Principal repayments (partial)

prepayment

Receipt of reinvestment fee from client

Daycount conventions(360/365...)

ImpairmentFloating interest rates

Step-up interest rates

Adjustments to contractual interest rate

Accordeon-loans (changing maturities)

Full amount of debt drawn spread over a period

Categories


Financial ASSETS


Held-to-Maturity

Investments(HTM)


Held for trading

Fair valueoption

AvailableFor Sale

(AFS)

Held for trading


a. acquired principally for the purpose of selling or repurchasing in the near term

b. part of a portfolio managed together + evidence of pattern of short-term profit-taking

c. derivative(except guarantee or hedging)

What can I put in there?Derivatives, shares, bonds,

even loans you intend to trade...(typically the trading portfolio

of a bank, merchant bank/global markets)


Held for trading

Fair value option


designated upon initial recognition as at fair value through P&L

− The instrument contains significant embedded derivative(s) that would otherwise need to be separated (IAS 39.11a)

− If it results in more relevant information:

− reduces accounting mismatch

− group of assets that are managed/evaluated on fair value basis

Why would you want this?

−alternative to hedge accounting−alternative to consolidation of certain private equity investments−avoid bifurcation of embedded derivatives−for unit-linked contracts (measurement matching for insurance)


Fair valueoption

Fair value hierarchy

Active Market

1.quoted prices are readily and regularly available2.prices represent actual an regularly occurring

market transactions on an arm’s length basis

Fair Value = amount for which

– an asset could be exchanged, – a liability settled, or – an equity instrument granted could be exchanged,

between knowledgeable, willing parties in an arm’s length transaction.

Cost

Quoted Prices in Active Market

Valuation Techniques

Subject to change by new draft IFRS

on fair value measurement

Categories


Financial ASSETS


Held-to-Maturity

Investments(HTM)


Held for trading

Fair valueoption

AvailableFor Sale

(AFS)

Available for sale


Those non-derivative financial assets that are designated as available for sale or are not classified asa.Loans and receivables

b.held-to-maturity investments

c.financial assets at fair value through P&L

No derivatives

AvailableFor Sale

(AFS)

Fair valueThrough equity

What can I put in there?Shares, bonds,...(typically the ALM portfolio

of a bank)SUNDRY

Impact of revaluations is shown in equity (other comprehensive income), and not in P&L (comprehensive income)

AFSUnquoted equity instruments

Investments in equity instruments

1. that do not have a quoted market price in an active market and

2. whose fair value cannot be determined

(+ derivatives linked to such unquoted instruments)

shall be measured at cost

CostAvailableFor Sale

(AFS)

What if you should be revaluing something but you are unable

to calculate a fair value?

Held for trading


Held-to-Maturity

Investments(HTM)

Held for trading

Fair valueoption

AvailableFor Sale

(AFS)

NOTALLOWED NOT

ALLOWED

NOTALLOWED

Tainting rule(all other HTM securities

must be reclassified as AFS)

From AFSor trading

From AFS(or trading in rare

circumstances only)

From HTMbut tainting rule applies

(or trading in rare circumstances only)

To HTMor loans andreceivables

To AFS, HTMor loans andreceivables

reclassificationsIN

reclassificationsOUT

Agenda



2. Financial assets


Categories


Financial LIABILITIES

Other liabilities

Financial liabilities

@ fair valueThrough P&L

Held for trading

Fair valueoption

Measurement




INITIAL SUBSEQUENT

Fair Value+

Transactioncosts

Amortisedcost

Fair valueThrough P&LFair Value

Otherliabilities

Liabilities @ Fair value




Held for trading

Fair valueoption

idem as asset side

Changes in credit risk of the liability should be included in the fair value

1. you have issued convertible bonds and put them into fair value option

2. your credit rating deteriorates

3. this has a positive impact on the fair value of your convertible bonds (market value goes down which is an unrealised gain for you)

4. you need to disclose this

e.g. negativefair values ofderivatives

e.g. bonds containingan embeddedderivative that

would otherwise need to be separated

Other liabilities


Other liabilities

Amortisedcost

All non-derivative financial liabilities that are not classified as trading or at fair value through P&L

Client deposits,savings accounts,

...

Reclassifications


Other liabilities

Held for trading

Fair valueoption

NOTALLOWED

NOTALLOWED

reclassificationsIN



What to remember?

different categoriesyour intentions matter + labels you give are very stickyclassification has an impact on revenue recognition


IAS 32IAS 39

Intermission


Exposure Draft:Financial Instruments:

Classification and Measurement

July, 2009

Replacing IAS 39


− Two measurement categories (fair value and amortised cost)

− Characteristics of instrument drive measurement− Elimination of tainting rules− One impairment method

(now same bond has more severe impairment if it is in AFS than if it is HTM)

− Single classification approach (simplified accounting for ‘embedded derivatives’)

− All equity investments at fair value (through P&L or other comprehensive income/equity)

Implications


− Not mandatory before 2012, but early application permitted at the end of 2009;

− A lot more bonds will be classified at amortised cost

− Only shares can be revalued through equity (no more available for sale bonds)

− Clearer guidance on calculation methods for amortised cost or present value techniques

− Significant impact on disclosures to be expected

New classification


Financial ASSETS

Amortised costFinancial assets

@ fair valuethrough P&L

Held for trading

Fair valueoption

Equity investments @

fair value through equity

Amortised cost


Amortised cost

instrument has onlybasic loan features

managed on a contractual yield basis

contractual terms that give rise on specified dates to cash flows that are payments of principal and interest on theprincipal outstanding.

only if they are managed, and their performance evaluated on the basis of the contractual cash flows that are generated when held or issued

• held for trading• acquired at a discount that

reflects incurred credit losses.

financial asset or financial liability that does not meet these conditions shall be measured at fair value (profit or loss or other comprehensive income)

New classification


Financial ASSETS



Held for trading

Fair valueoption



Held for trading


a. acquired principally for the purpose of selling or repurchasing in the near term

b. part of a portfolio managed together + evidence of pattern of short-term profit-taking

c. derivative(except guarantee or hedging)

What can I put in there?Derivatives, shares, bonds,

even loans you intend to trade...(typically the trading portfolio

of a bank, merchant bank/global markets)


Held for trading

Fair value option


designated upon initial recognition as at fair value through P&L

Only if it eliminates or significantly reduces a measurement or recognition inconsistency (‘accounting mismatch’)

Why would you want this?

−alternative to hedge accounting−alternative to consolidation of certain private equity investments−for unit-linked contracts (measurement matching for insurance)


Fair valueoption

New classification


Financial ASSETS



Held for trading

Fair valueoption






• irrevocable election to present in other comprehensive income subsequent changes in the fair value of investments in equity instruments (not held for trading)

• dividends from those investments recognise in other comprehensive income (when the entity’s right to receive payment is established)

• No recycling of gains and losses to profit or loss is allowed

• No impairment requirements are necessary

Reclassifications


NOTALLOWED

NOTALLOWED

reclassificationsIN


Amortised cost

Financial assets@ fair valuethrough P&L



Categories


Financial LIABILITIES

Other liabilities



Held for trading

Fair valueoption

Reclassifications


Other liabilities

Held for trading

Fair valueoption

NOTALLOWED

NOTALLOWED

reclassificationsIN



What to remember?

New categoriesReclassifications possible in 2009


Exposure draft on Financial Instruments: Classification and measurement

IAS 39

IAS 18 Revenue:interest

July, 2009

Revenue shall be recognised when


Recognition in profit or loss

Risks and rewardshave been transferred

Seller retains no continuing managerial involvementor effective control over goods sold

Amount can be measured reliably

Economic benefits of transaction will flow to the entity

Costs incurred fortransaction can bemeasured reliably

Interests, royalties, dividends


What? IFRS definition Revenue recognition

interest charges for the use of cash or cash equivalents or amounts due

recognised using effective interest method (IAS 39.9 + AG5-AG8)

royalties charges for the long-term assets (e.g. patents, trademarks, copyrights, and computer software)

recognised on accrual basis

dividend distributions of profits to holders of equity investments in proportion to their holdings

when shareholder’s right to receive payment is established (different treatment for investment in associates IAS 28)

Financial service fees

PURPOSE determines accounting:

1. Fees part of the effective interest rate

2. Fees earned as services are provided

3. Fees earned on the execution of a significant act


Recognised in P&L as services are provided

SPREAD fee as adjust-ment to effective interest

rate (except (held for) trading)

Recognised in P&L when significant act

is completed

In which periodshould I show this fee

in P&L?

Fees part of effective interest rate


ORIGINATION FEESreceived relating to creation of financial ASSET

Deferred because they generate an involvementwith the resulting financial instrumente.g. fee for evaluating borrower condition, for evaluating and recording guarantees,

collateral and other security arrangements, negotiating terms of instrument,preparing and processing documents, and closing the transaction

COMMITMENT FEESreceived to originatea loan (loan commitment outside IAS 39)

Fee for loan commitmentFEE = compensation for ongoing involvementIf the commitment expires (e.g. client decided not to draw on the credit line), the commitment fee can be taken into P&L on expiry

ORIGINATION FEESreceived on issuingfinancial LIABILITIES(at amortised cost)

Generates involvement with the financial liabilityCommitment fee and related transaction costs included in the initial carrying amount of the financial liability

Fees EARNEDas services are provided


Fees for SERVICING a loan

Recognised as revenue as services are provided

COMMITMENT FEESreceived for unsuc-sessful originations(loan commitment outside IAS 39)

When unlikely that lending arrangement will be entered into, fee recognised as revenue ona time proportion basis over commitment period

Investment management fees

Fees charged for managing investments recognised as revenue as services are provided(except if incremental costs can be identified seperately + measured reliably +probable that they will be recovered, then recognised as asset + amortised)

Fees EARNEDon execution of SIGNIFICANT ACT


Commision on allotment of shares

Recognised as revenue when shares have been allotted

Placement feesfor arranging a loan between a borrower and an investor

Recognised as revenue when loan has been arranged

Loan syndication fees

1. arranging entity retains no part of loan: recognised as revenue when syndication is completed

2. arranging entity retains a part for itself:a. if same interest rate as other participants:

recognise as revenue when syndication is completed

b. if different interes rate: amortise as part of effective interest rate


What to remember?

What to spread and what not


IAS 18IAS 39

Fair Value considerations

July, 2009

Agenda


1. Current definitions

2. Future IFRS

3. Fair value hierarchy

4. Valuation techniques

5. Cost

DefinitionIFRS 2.A

amount for which

– an asset could be exchanged, – a liability settled, or – an equity instrument granted could be

exchanged, between knowledgeable, willing parties in an arm’s length transaction.

Assets Liabilities

Equity

DebtAssets

Statement of financial position Fair Value

Problems current standards

Lack of guidance when to go from one level to another, and when to go back ...



Cost

Quoted Prices in Active Market

?

?

Significant impact on what price to use for revaluing portfolios

When is a market no

longer active?

Agenda



2. Future IFRS



5. Cost

Future IFRS on Fair Value

• Single source of guidance for all fair value measurements

• Clarification of definition of fair value• Convergence with USGAAP standard

SFAS 157• Enhanced disclosure:

• extent of use of Fair Value • inputs used

Exposure draft for new IFRS

new definition

price that would be

received to sell an asset or

paid to transfer a liability

in an orderly transaction betweenmarket participants at the measurement date.

amount for which

– an asset could be exchanged, – a liability settled, or – an equity instrument granted could

be exchanged, between knowledgeable, willing parties in an arm’s length transaction.

Fair Value Fair Value

newIFRS on

Fair Value

PRICE

Transaction


A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities

it is not a forced transaction(e.g. a forced liquidation or distress sale).

orderly transaction

absence of an actual transaction

assume a hypothetical transaction considered from the perspective of a participant who holds the asset or owes the liability

Transaction


most advantageous market

•market that maximises the amount that would be received to sell the asset or •minimises the amount that would be paid to transfer the liability,

after considering transaction costs and transport costs.

= principal market

market with the greatest volume and level of activity for the asset or liability.

(provided entity can access that market)

orderly transaction

takes place in most advantageous market

presumed to be the market in which the entity would normally enter into a transaction


Buyers and sellers in the most advantageous market for the asset or liability that are:

independent of each other, i.e.

not relatedparties (IAS 24)

knowledgeable, i.e. sufficiently informed to

make an investment decision and are

presumed to be as knowledgeable as the

reporting entity about the asset or liability

able to enter into a transaction for the asset or liability; and

willing to enter into a transaction for the asset or liability, i.e. they are motivated but not forced or otherwise compelled to do so.

market participants

Agenda



2. Future IFRS



5. Cost

Fair Value Hierarchy

Cost

Level 3

Level 2

Level 1

quoted prices in active markets for the same instrument (i.e. without modification or repackaging)

quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based onobservable market data

valuation techniques for which any significant input

is not based on observable market data.


A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

active marketactive market

1.quoted prices are readily and regularly available

2.prices represent actual an regularly occurring market transactions on an arm’s length basis

new

NOT active markets


indicators

significant decrease in

volume/ level of activity

quotations vary substantially over

time or among market makers

few recent transactions

price quotations not based on current

information

previously highly correlated indices now uncorrelated

significant increase in implied liquidity premiums, yields or performance indicators

wide bid-ask spread

significant decline for new issues

little information released publicly

if market is not active, a change in valuation technique may be appropriate

NOT orderly


indicators not orderly

there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant

there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary

Even if a market is not active, it is not appropriate to conclude that alltransactions in that market are not orderly (i.e. are forced or distress sales)

seller is in or near bankruptcy or receivership (i.e. distressed) or the seller was required to sell to meet regulatory or legal requirements (i.e. forced)

transaction price is an outlierwhen compared with other recent transactions for the same or similar asset or liability

Initial recognition

Transaction price = best evidence of fair valueUnless...

• Transaction is between related parties• Transaction under duress/ seller is forced to accept the

price in the transaction• Different unit of account• Market is different than the most advantageous

market

But if…

transaction price differs from fair value, the entity recognises the resulting gain or loss in profit or loss unless IFRS requires otherwise

Day One Profit or Lossnew IAS 39.AG76A

Day one profit or loss: fair value at initial recognition differs from the transaction price

fair value +

transaction costs that are directly attributable (for financial instruments not held at fair value)

According to the classification

Fair value is evidenced by •comparison with other observable current market transactions in the same instrument or•based on a valuation technique whose variables include only data from observable markets

Level 2

Level 1

e.g. below market loans to employees:

difference recognised in p&l as employee benefit

Day One Profit or Lossnew IAS 39.AG76A

Day one profit or loss: fair value at initial recognition differs from the transaction price

defer the difference between the fair value at initial recognition and the transaction price

recognise that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price.

Fair value is NOT evidenced by •comparison with other observable current market transactions in the same instrument or•based on a valuation technique whose variables include only data from observable markets

Level 3

Liabilities

Fair value of a liability

• if no observable market price, use same methodology as corresponding asset

• adjust the observed price for the asset for features that are present in the asset but not present in the liability

• If no corresponding asset, use present value techniques to estimate price market participants would demand to assume liability

• Do not ignore information about market participants that is reasonably available

• Fair value reflects non-performance risk = risk that an entity will not fulfil an obligation (includes credit risk)

• Restrictions on ability to transfer do not affect fair value of a liability

Spread : amount by which the ask price exceeds the bid

BIDprice a buyer is willing to pay for a

security

ASKprice a seller is willing to accept for a security, also known as the offer

price

≤

• price within the bid-ask spread that is most representative of fair value shall be used to measure fair value, regardless of where the input is categorised in the fair value hierarchy.

• New IFRS does not preclude the use of mid-market pricing as a practical expedient for fair value measurements within a bid-ask spread.

• If a bid-ask spread is not observable directly or indirectly (similar asset or liability), an entity need not undertake exhaustive efforts to estimate a bid-ask spreadLevel 1

Agenda



2. Future IFRS



5. Cost

Valuation Technique

establish what the transaction price wouldhave been in an arm’s length exchange motivated by normal business considerations



estimate the price at which an orderly transaction would take place between market participants at the measurement date

new

Level 3

Level 2

highest and best use

highest and best use

use of an asset by market participants that would maximise the value of the asset or the group of assets and liabilities (eg a business) within which the asset would be used.

in-usevaluation premiseA basis used to determine the fair value of an asset that provides maximum value to market participants principally through its use in combination with other assets and liabilities as a group.

in-exchangevaluation premise

A basis used to determine the fair value of an asset that provides maximum value to market participants principally on a stand-alone basis.

To be used for fair value of financial asset

or

Physically possible

Legally permissible

Financially feasible

Valuation Technique


uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

market approach income approach cost approach

uses valuation techniques to convert future amounts (e.g. cash flows or income and expenses) to a single present (discounted) amount.

Value indicated by current market expectations about those future amounts. e.g. present value techniques, option pricing models (Black-Scholes-Merton)

reflects the amount that would currently berequired to replace the service capacity of an asset (current replacement cost)

inputs


unobservable inputs

1.Inputs for which market data are not available and 2.that are developed on the basis of the best information available about the assumptions that market participants would use when pricing the asset or liability.

observable inputs

1.Inputs that are developed on the basis of available market

data and 2.reflect the assumptions that market participants would use

when pricing the asset or liability.

Level 3

Level 2

Agenda



2. Future IFRS



5. Cost

Cost Unquoted equity instruments IAS39.AG80-81

Investments in equity instruments

1. that do not have a quoted market price in an active market and

2. whose fair value cannot be determined

(+ derivatives linked to such unquoted instruments)

shall be measured at cost

Cost


What to remember?

Fair value hierarchyDay one profit or lossdraft new IFRS


IAS 39Exposure draft IFRS 7Exposure draft new IFRS on Fair Value Measurement

ifrs for banks - bot

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