IFRS 9 Financial Instruments

Transcription

1 Part 5c: IFRS 9 Financial Instruments Designated to replace IAS 32 and IAS 39 Response to the financial crisis: Beginning of crisis in August 2008, decrease of market values of securitized financial instruments (e.g. ABS), increasing consumption of Equity Capital Request by G20 to contribute to limit impact of crisis through change of accounting procedures Amendment to IAS 39: If FV Instruments are not intended to be traded on short view, reclassification may be allowed, values frozen on Decision taken to reconstruct regulation on Financial Instruments and to summarize in one standard: IFRS 9 2 1

2 Situation at the peak of the crisis (I): Asset Liability Credit Derivative: 100 Equity: 50 Cash: 50 Liabilities: Situation at the peak of the crisis (II): Asset Liability Credit Derivative: 100 Loss on M.V.: -20 New M.V.: 80 Equity: 50 Retained earnings -20 Total Equity: 30 Cash: 50 Liabilities:

3 Solution to solve the crisis (III): Asset Liability Frozen value of CD 80 Frozen Equity: 30 Cash: 50 Liabilities: IFRS 9 originally issued in November 2009, reissued in October 2010, intended to be applicable originally from onwards, new date of application now IFRS 9 consisting of 3 parts (improvements): Classification and Measurement Amortized cost and impairment Hedge Accounting Greatest improvement is, that expected loss model now acceptable Clear procedure defined with steps of implementation 6 3

4 New regulation on classification: Classification according to IAS 39: Rule based Complex and difficult to apply Multiple impairment models Own credit gains and losses recognized in profit or loss for fair value option liabilities (not applicable in the EU) Complicated reclassification rules Classification according to IFRS 9: Principle based Based on business model and nature of cash flow One impairment model Own credit gains and losses presented in OCI for FVO liabilities Business model driven reclassification 7 New regulation on classification: Consecutive measurement depends on the intended use of the financial instrument: The business model Target of the investment is to keep the asset in order to generate consecutive and regular cash-flow Contract details of the asset lead to payment flows at fixed moments in time, these flows consist of coupon payment and repayment of principals only. Both conditions have to be fulfilled simultaneously 8 4

5 Financial Assets Business Model Test Measurement according to amortized cost Measurement according to Fair Value Recognition of coupon in I.S. Recognition of F.V. change in I.S. 9 Instrument within the scope of IFRS 9 yes no other standard Contractual cash flows are solely principal and interest? no yes Held to collect contractual cash flows only? no Held to collect contractual cash flows and for sale? no yes Fair value Option? yes no Fair value Option? yes yes no Amortized cost Fair value through profit and loss (Presentation option for equity investments to present fair value changes in OCI) Fair value through OCI 10 5

6 In detail: DEBT INSTRUMENTS Classification is made at the time, when financial instrument is recognized the first time Financial instrument can be measured at amortized cost (net of any write-down for impairment), if the two following conditions are met: Business model test: Objective of entity s business model is to collect contractual cash-flow rather than to sell the instrument prior to its contractual maturity to realize fair value changes Cash-flow characteristics test: Contractual terms of asset give rise on specified dates to cash-flows that consist of repayment of principal and interest on amount outstanding 11 In detail: DEBT INSTRUMENTS What is a business model? Refers to how an entity manages its financial assets in order to generate cash-flows, selling financial assets or both Business model should be determined on a level that reflects how financial assets are managed to achieve a particular business objective (i.e. what do we want to achieve?) Business model can be observed through activities, that an entity undertakes to achieve business objective. So no evaluation on individual level (no assertion) but objective facts to be considered 12 6

7 In detail: DEBT INSTRUMENTS What is a business model? Objective facts: Business plans Compensation for managers (i.e. bonus plans) Amount and frequency of general sales activities Past sales activities and expectations about future sales activity Having some sale activity is not necessarily inconsistent with the business model Same with sales as a result of (e.g.) an increase of credit risk If sales are more than insignificant, entity, must assess, how these sales are in consistency with business model. 13 In detail: DEBT INSTRUMENTS What business model qualifies for fair value through other comprehensive income (FVOCI)? Here, business objective is both to collect contractual cash flows and selling financial assets In comparison to model, based on contractual cashflows (etc.), this model typically has greater frequency and volume of sales Typical objectives: Manage liquidity Maintain particular interest yield profile Match duration of financial liabilities to duration of assets they are funding 14 7

8 In detail: DEBT INSTRUMENTS What are the characteristics of a contractual cash flow? In general, contractual cash flows are solely payments of principal and interest (SPPI) Only financial assets with such cash flows are eligible for amortized cost or FVOCI) Clarification: interest can comprise not only for time value of many and credit risk But Return for liquidity risk, amounts to cover expenses, profit margin As long as consistency with a basic lending arrangement is given (for instance: if contractual cash flows include a return for equity price risk, this is not in accordance with SPPI) 15 In detail: DEBT INSTRUMENTS What are the characteristics of a contractual cash flow? Basic element of identifying SPPI is Time Value of Money, which determines the contractual payment of interest (and alike elements) Example: Fixed interest rate (i.e. 10% p.a.) or variable interest rate (i.e. index, 3 month Libor). In that case time value of money is calculated on that time. However, tenors may be concluded, where determination of interest rate (i.e. coupon) differs from usual preconditions of interest rate fixing (e.g. 3 month Libor, re-fixed every week) 16 8

9 In detail: DEBT INSTRUMENTS What are the characteristics of a contractual cash flow? In this case, individual assessment, if FI fulfill the cash flow characteristics and if the cash flow represents SPPI. Objective is to determine, if cash flow differs significantly from cash flow with unmodified time value of money element In cases of doubt: Precondition of contractual cash flow is not given, valuation according to amortized cost not possible 17 In detail: DEBT INSTRUMENTS What are the characteristics of a contractual cash flow? Example: Pre-payable financial asset to have contractual cash flows that are SPPI (FX bond, bond with an add on). Testing of contractual lending arrangement is given Regulated interest rates, set by government, not representing time value of money, acceptable as SPPI as long they do not introduce risk or volatility, that is inconsistent with a basic lending arrangement 18 9

10 In detail: DEBT INSTRUMENTS All other debt instruments, which do not pass the two tests have to be measured by Fair Value through profit and loss Transaction costs are part of the Fair Value at first time recognition Amortization of transaction costs until maturity via effective interest method Fair Value option: An entity can voluntarily measure a debt instrument by Fair Value, if otherwise an accounting mismatch would occur In this case, transaction costs are to be expensed immediately via profit and loss 19 In detail: EQUITY INSTRUMENTS All Equity instruments to be measured at fair value though profit and loss Transaction costs to be expensed immediately via profit and loss No cost exception for unquoted equities: IAS 39 has an exception for investments in unquoted equity instruments (and some related derivatives). The exception requires that these instruments be measured at cost (less impairment) if fair value cannot be determined reliably

11 In detail: EQUITY INSTRUMENTS Other comprehensive income option : If equity investment is not held for trading, entity can make irrevocable decision at initial recognition to measure it at fair value through other comprehensive income Dividend income recognized in profit and loss FV changes recognized in Equity via other comprehensive income 21 Treatment of Financial Liabilities according to IFRS 9 Similar to IAS 39, two categories of liabilities exist: Fair value through profit or loss (FVTPL): Liabilities held with the intention (and possibility) of trading (i.e. callable bond) Amortized cost (AC): Liabilities, which are paid back at maturity (other liabilities) Fair Value Option: Entity can voluntarily measure according to Fair Value, if By doing so an accounting mismatch is avoided (or) The liability is part of a group of liabilities and/or assets, which are (risk-) managed as an appropriate investment strategy and supervised by key management personnel

12 Financial Liabilities Other Liabilities Measurement according to amortized cost No impact on P&L Trading Liabilities Measurement according to Fair Value Impact on P&L 23 In principle, the approach of IAS 39 remains unchanged. Problem: Approach criticized due to artificial creation of profits as a consequence of deterioration of own credit standing. Therefore this approach still not applicable within EU IFRS 9 offers improvement of treatment of liabilities: Amount of profit, which is attributable to market movements to be recognized in Income Statement Amount of profit, which is attributable to deterioration of own credit standing to be recognized as other comprehensive income 24 12

13 Reclassification: For Financial Assets reclassification is required between FVTPL and AC (and vice versa), if and only if the entity s business model objective for its financial assets changes In this case the previous model does not apply any more If reclassification is decided (appropriate), it must be done from reclassification date. No restating of previous gains, losses or interest No limitation of reclassifications considered However: Reclassification is a significant event and expected to be uncommon 25 Financial Assets Business Model Test Measurement according to amortized cost Measurement according to Fair Value Reclassification 26 13

14 Reclassification: Users of financial statement must be provided with sufficient information to understand and evaluate the reclassification Especially how the cash flows on financial assets are expected to be realized IFRS 7 requires disclosures about reclassifications: Amount of financial assets moved out and into different categories Detailed explanation of the change in business model and its effect on income statement(s) 27 De-recognition: ASSETS 1 st step: Determine whether asset under consideration is an Entire asset Specially identified cash-flows from an asset (e.g. pre-mature repayment of a loan) Fully proportionate share of a cash-flow (pro rata, e.g. regular repayment of proportion of loan, mortgage, etc) 2 nd step: Determine, whether the asset has been transferred and if so, whether the asset is subsequently eligible for derecognition: Entity has transferred the contractual rights to receive cash-flows 28 14

15 De-recognition: ASSETS 2 nd step: Entity has retained the contractual rights to receive cashflows, but has assumed a contractual obligation to pass these cash-flows to someone else under an arrangement that meets the following conditions: Entity has no obligation to pay amounts unless it collects equivalent amounts on original asset (e.g. sale of an option on secondary market) Entity is prohibited from selling or pledging the original asset (e.g. a loan/mortgage) The entity has obligation to remit those cash-flows without material delay (e.g. factoring) 29 De-recognition: ASSETS 3 rd step: Determination whether risk out of investment are transferred as well. Substantial transfer of risks: Full de-recognition of asset Retaining of risks: De-recognition of asset precluded No full retaining and no full transfer of risks ( in-betweencase ): Determination of control of risks Entity does not control: De-recognition may be appropriate (IAS 39 requires provision, IFRS 9 does not mention) Entity still controls risk: Recognition of the asset to the extent of ongoing involvement in the asset 30 15

16 De-recognition of Fundamental Financial Assets Transfer of rights no yes yes Transfer of risks no Transfer of control no yes De-recognition Recognition insofar further involvement De-recognition, maybe provision to be created Recognition 31 De-recognition: LIABILITIES: Financial liability to be removed from balance sheet, when and only when it is extinguished Obligation specified in the contract is either discharged or cancelled or expires (e.g. Option) If there was an exchange between existing borrower and lender of debt instrument with substantially different terms, or if there was a substantial modification of the terms of existing liability, the previous liability is de-recognized and a new liability is recognized Gain and loss of the exchange to be considered directly and immediately in the income statement

17 Derivatives: All derivatives, including those unquoted, are measured a fair value Fair Value changes are recognized in profit and loss, unless the entity has decided to classify the derivative as a hedging instrument, Requirements of IAS 39 to apply If fair value not available, best estimates to be applied (i.e. certified valuers, Option price models) Transaction costs to be expensed immediately via income statement 33 Embedded Derivatives: Hybrid contract, which is a combination of derivative element with non-derivative host Consequence: Cash-flow not entirely applicable to business model and cash-flow characteristics test, having strong elements of stand-alone-derivative. Derivative, which is attached to an other financial instrument and is contractually transferable independently to third party is not an embedded derivative, but a separate financial instrument, to be accounted separately No risk attachment/risk separation testing required (as in IAS 39) 34 17

18 Embedded Derivatives: Embedded derivatives, that under IAS 39 would be accounted separately, due to different risk structure (not closely related), will not be separated any more Categorization into FVTPL of the entire instrument, even if only a part of contractual cash-flow do not represent payment of interest and repayment of principal (e.g. convertible bond) 35 Insurance Contract Financial Instrument Financial asset Financial liability Equity instrument Fundamental Financial asset Amortized Cost Fair Value Liabilities Held for Trading Plain Equity Capital Derivatives Plain Derivatives Embedded Derivatives Other liabilities Compound Equity Instrument Hedging Instruments Fair Value Hedge Cash-flow Hedge Hedge of a net investment in a foreign operation Macro Hedge Synthetic Equity Instrument 36 18

19 IAS 32/39: Financial instruments (Excursion: Overview on Financial Instruments) Financial assets Traded at spot market Conclusion and settlement of contract at the same time Traded at forward market Conclusion and settlement of contract at different times Interest Instruments Shares (Equity Instruments) conditional forwards unconditional forwards Buyer acquires right, seller accepts commitment Buyer and seller accept commitment - Money Market instruments - Capital Market instruments - Common shares -Preferred Stock (Premium sh.) - Options -Instruments similar to Options (Caps, Floors etc.) -Forwards - Futures -Swaps 37 Summary: Treatment of the different financial instruments First time recognition in every case by Fair Value Interest instruments: Testing of Business Model and Cash- Flow Characteristics, categorization to AC and FVTPL, application of Fair Value Option Shares: Application of FVTPL, Other Comprehensive Income Option, no Cost Exemption in case of absence of price quotation Derivatives: Application of FVTPL, no accounting options Hedging instruments: According to IAS 39, changes and simplifications promised, but not disclosed so far 38 19

20 Summary: Treatment of the different financial instruments Embedded Derivatives: in general accounting procedure as a whole (as one Financial Instrument, no separation foreseen), application of FVTPL, no cost exemption applicable, simplification of procedures in comparison to IAS 39 Own Equity: No changes so far, IAS 39 applicable Own liabilities: categorization into Trading Liabilities and Other Liabilities, treatment according to EFRAG proposal: Profit, out of market movements to be recognized in Income Statement Profit, attributable to deterioration of own credit standing to be recognized as other comprehensive income 39 Open issue: Asset and Liability offsetting: US-GAAP allows the offsetting of assets and liabilities, if there is a masternetting-agreement available: In case of default of bankruptcy all and asset and liability contracts are netted into a single payable or receivable amount. IFRS does not allow this procedure IASB and FASB were unable to agree on a compromise, as a result an amendment to IAS 32 was agreed on special disclosures, which allow analysts to more easily compare credit exposure The said amendment is still under preparation 40 20

21 Impairment IAS 32 required an impairment model, based on incurred losses. Incurred loss model assumes that all loans will be repaid, until evidence to the contrary (Loss trigger event). Only at that point, an impaired loan (or portfolio) is written down Basel II requires a proactive approach, creation of provisions and reserves for credit event. IFRS 9 accepts now expected loss approaches whereby expected losses are recognized throughout the life of a loan/financial asset, even if it is measured at amortized cost, recognition of a potential loss at an earlier level 41 Three stages of impairment: Stage 1: Stage 2: As soon as a financial instrument If the credit risk increases is originated of purchased, 12 significantly and the month expected credit losses are resulting credit quality is not recognized in profit or loss and a considered to be low credit loss allowance is established. risk, full lifetime expected credit losses are recognized. This serves as a proxy for the initial expectations of credit Lifetime expected credit losses. losses are only recognized, if the credit risk increases For financial assets, interest significantly from when the revenue is calculated on the gross entity originates or carrying amount (i.e. without purchases the financial adjustment for expected credit instrument. losses. Stage 3: If the credit risk of a financial asset increases to the point, that it is considered creditimpaired, interest revenue is calculated based on the amortized cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be individually assessed. Lifetime expected credit losses are still recognized on these financial assets

22 12-month expected credit losses: Portion of lifetime expected credit losses, that represent the EXPECTED credit losses, which result from default events on a FINANCIAL INSTRUMENT (in general), which are possible within the 12month after the reporting date It is not the expected CASH shortfall over the next twelve month, however, it is the effect of the entire credit loss on an asset weighted by the probability that this loss will occur in the next 12 month. It is also not the credit losses on assets, that are forecasted to actually default in the next 12 month If an entity can identify such assets (or a portfolio), these are recognized in LIFETIME EXCPECTEDCREDIT LOSS month expected credit loss: Expected risk, acceptable damage calculated statistically out of past events Example: about 600 credit events with different rate of repayment/default 50 enterprises created 0% default 70 enterprises created 0.25% default 95 enterprises created 0.5% default.. 1 enterprise created 4.75% default 0 enterprise created 5% default and more Average loss of credit: 1% i.e. 1% of all credits default 1% expected risk, part of calculation of credit cost Lossrate Number of cases creating loss rel. Freqeuncy of cases weighted loss 0,00% 50 0,0% 0,0% 0,25% 70 11,2% 0,0% 0,50% 95 15,2% 0,1% 0,75% ,1% 0,1% 1,00% 90 14,4% 0,1% 1,25% 80 12,8% 0,2% 1,50% 70 11,2% 0,2% 1,75% 50 8,0% 0,1% 2,00% 30 4,8% 0,1% 2,25% 20 3,2% 0,1% 2,50% 10 1,6% 0,0% 2,75% 5 0,8% 0,0% 3,00% 3 0,5% 0,0% 3,25% 2 0,3% 0,0% 3,50% 1 0,2% 0,00% 3,75% 1 0,2% 0,00% 4,00% 1 0,2% 0,00% 4,25% 1 0,2% 0,00% 4,50% 1 0,2% 0,00% 4,75% 1 0,2% 0,00% 5,00% 0 0,0% 0,00% Over 5% 0 0,0% 0,00% Expected loss = Σ (loss * frequency of loss) = Σ weighted loss 44 22

23 12 month expected credit loss: Example: Investment in interest rate swap Consideration of counterparty risk Calculation of credit value adjustment at the beginning of swap arrangement EPE ENE Period potential exposures Credit Spread credit charges with 50% probability Discount Factor Cash value EPE ENE counterparty own counterparty own difference 4,00% ,80% 0,40% 0,000 0,000 0,000 1,000 0, ,90% 0,45% 0,041-0,020 0,020 0,962 0, ,00% 0,50% 0,080-0,040 0,040 0,925 0, ,00% 0,50% 0,105-0,053 0,053 0,889 0, ,00% 0,50% 0,120-0,060 0,060 0,855 0, ,00% 0,50% 0,125-0,063 0,063 0,822 0, ,00% 0,50% 0,120-0,060 0,060 0,790 0, ,00% 0,50% 0,105-0,053 0,053 0,760 0, ,00% 0,50% 0,080-0,040 0,040 0,731 0, ,00% 0,50% 0,045-0,023 0,023 0,703 0, ,00% 0,50% 0,000 0,000 0,000 0,676 0,000 explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50% Summ 0, credit value adjustment Lifetime expected credit losses: Expected present value measure of losses, that arise, if a borrower defaults on his obligation throughout the life of the financial instrument. They are the weighted average credit losses, with the probability of default as the weight. Difference to 12-month expected credit losses: 12-month expected losses are proportion of lifetime expected losses, limited to an expectation within 12month. Lifetime expected credit losses consider both amount and timing of payments, this means, that a credit loss has to be recognized eve, when the entity expects to be paid in full but at a later moment

24 Lifetime expected credit losses: Example: Portfolio of home loans originated in a country: Stage 1: 12-month expected credit losses are recognized for all loans on initial recognition Stage 2: information emerges, that one region in the country is experiencing tough economic conditions. Therefore it is expected, that the loans in that region may be more exposed to default. Lifetime expected credit losses are recognized for those loans within that region additionally to the 1-month expected credit losses. Stage 3: more information emerges and the entity is able to identify some particular loans which have already defaulted or will imminently default. Lifetime expected cedit losses continue to be recognized, but interest revenue switches to a net interest basis. 47 Lifetime expected credit loss: Example: Investment in interest rate swap Consideration of change of risk if an (even remote) event is triggered (e.g. change of interest rate Calculation of credit value adjustment in course of time Beginning of contract EPE ENE EPE ENE Change of interest rate after one year 9 24

25 Period potential exposures Credit Spread credit charges with 50% probability Discount Factor Cash value EPE ENE counterparty own counterparty own difference 4,00% ,80% 0,40% 0,000 0,000 0,000 1,000 0, ,90% 0,45% 0,041-0,020 0,020 0,962 0, ,00% 0,50% 0,080-0,040 0,040 0,925 0, ,00% 0,50% 0,105-0,053 0,053 0,889 0, ,00% 0,50% 0,120-0,060 0,060 0,855 0, ,00% 0,50% 0,125-0,063 0,063 0,822 0, ,00% 0,50% 0,120-0,060 0,060 0,790 0, ,00% 0,50% 0,105-0,053 0,053 0,760 0, ,00% 0,50% 0,080-0,040 0,040 0,731 0, ,00% 0,50% 0,045-0,023 0,023 0,703 0, ,00% 0,50% 0,000 0,000 0,000 0,676 0,000 explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50% Summ 0,338 credit value adjustment potential exposures Credit Spread credit charges with 50% probability Discount Factor Period Cash value EPE ENE counterparty own counterparty own counterparty own difference 4,00% ,80% 0,40% 0,072 0,000 0,072 1,000 0, ,90% 0,45% 0,072 0,000 0,072 0,962 0, ,00% 0,50% 0,105-0,018 0,088 0,925 0, ,00% 0,50% 0,120-0,030 0,090 0,889 0, ,00% 0,50% 0,125-0,038 0,088 0,855 0, ,00% 0,50% 0,120-0,040 0,080 0,822 0, ,00% 0,50% 0,105-0,038 0,068 0,790 0, ,00% 0,50% 0,080-0,030 0,050 0,760 0, ,00% 0,50% 0,045-0,018 0,028 0,731 0, ,00% 0,50% 0,000 0,000 0,000 0,703 0,000 explanation from yield curve from yield curve from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50% Summ 0,554 credit value adjustment 49 Increase in credit risk since initial recognition Stage 1 Stage 2 Stage 3 Impairment recognition 12-month expected credit losses Interest revenue Effective interest on gross carrying amount Lifetime expected credit losses Effective interest on gross carrying amount Lifetime expected credit losses Effective interest on amortized cost 50 25

26 Measuring expected credit losses: Expected credit losses (in general) are an estimate of credit losses over the life of the financial instrument Factors to be considered: Probability weighted outcome. Neither best case nor worst case scenario Estimate should reflect the possibility that credit lost occurs and that no credit loss occurs Time value of money. Expected credit loss to be discounted to reporting date Based on reasonable and supportable information that is available without undue cost or effort (i.e not necessary to obtain external rating for all credit exposures) 51 Measuring expected credit losses: Examples: Discriminant analysis µ bankrupt µ stable Value at Risk (VAR) Option pricing theory 52 26

27 Measuring expected credit losses: Entity required to use reasonable and supportable information that is available at reporting date and that includes information about past events, current conditions and forecasts of future conditions No need to use a crystal ball to predict future, everything depends on the availability of the information. As forecast horizon increases, quality of information decreases. Although model should be forward looking, historical data is an anchor. Adjustment of historical data to current economic trends is may be necessary. IFRS 9 does not prescribe any model or method. As long as findings and observations are justifiable, preconditions of IFRS 9 fulfilled. 53 Assessing significant increases in credit risk: IFRS 9 requires life expected credit losses to be recognized, when there are significant increases in credit risk since initial recognition At beginning of lifetime of credit entity assesses initial creditworthiness of the borrower. Initial creditworthiness is taken evaluated. If in course of time a re-valued creditworthiness shows difference to initial expectations (i.e. if when lender is not receiving compensation for the level of credit risk to which he is now exposed), readjustment of expectation has to be done. This is reflected in the income statement as a financial loss Important: there is a significant increase of credit risk before a financial asset becomes impaired. And this risk is already reflected in the financial statement

28 Disclosure: Explain basis for expected credit loss calculations How credit losses and changes in credit risk are assessed Reconciliation from opening to closing of allowance balance for 12-month losses, separately from lifetime losses allowances balance Balances of carrying amount from opening to closing for financial instruments, subject to impairment Users of financial statements must be able to understand the reasons for changes in the allowance balances (i.e. if it is caused by changes in credit risk or increased lending). Additionally: Information on rating grades and modification of contractual cash flows. 55 Hedge accounting: Clarification on the eligibility of financial instruments managed on a contractual cash flow basis in a fair value hedge Target: Simplification of hedge accounting procedures for fair value hedges Aligning hedge accounting more with Risk Management and provide more useful information for analysis Establish a more objective-based approach to hedge accounting address inconsistencies and weaknesses in existing model 56 28

29 Hedge accounting: Aspects considered Objective Alternatives to hedge accounting Hedged items Presentation and disclosure Hedge accounting Hedging instruments Groups and net positions Discontinuation and rebalancing Effectiveness assessment 57 Hedge accounting: Main questions solved in IFRS 9 (1) Definition of what financial instrument qualify for designation as hedging instrument (2) Definition of what items (existing or expected) qualify as hedged items (3) How should an entity account a hedging relationship (4) Hedge accounting presentation and disclosures 58 29

30 Hedge accounting: (1) and (2) Non-derivative financial assets or liabilities, measured by fair value through profit and loss (FVTPL) may be eligible as a hedging instrument (for derivatives and non-derivatives) Non-derivative financial assets and liabilities measured not by FVTPL may lead to operational problems and therefore do not qualify as hedging instruments Non-derivative financial assets or liabilities, measured by fair value through profit and loss (FVTPL) may be eligible as a hedged item 59 Hedge accounting: (1) and (2) Derivatives qualify as a hedged item Derivatives may qualify as hedging Instrument as well, especially in case of covering interest rate risk and foreign currency risk Although the two risks can be hedged with one instrument altogether, the board acknowledges the fact that entities often hedge these risks with different instruments However, derivatives need to be identified formally as a hedging instrument 60 30

31 Hedge accounting: (3) Accounting procedures: Fair value hedge: Gain and loss from re-measuring hedging instrument to be recognized as other comprehensive income Hedged gain or loss of hedged item to be recognized separately in income statement (next to gain/loss of the entire asset/liability, that was hedged), and afterwards recognized in other comprehensive income Ineffective portion of hedging operation to be shown in income statement 61 Hedge accounting: (3) Accounting procedures: Cash flow hedge: Eligible only, if close relation between hedge instrument and hedged item, formal designation, hedge effectiveness given an more than accidental Gains and losses of hedged itemto show in equity (cash flow hedge reserve), gains and losses of hedging instrument to be shown in other comprehensive income, if ineffective part existing, to be shown in income statement 62 31

32 Hedge accounting: (3) Accounting procedures: Hedge of a net investment in a foreign operation: Gain or losses on the hedging instrument shall be recognized in other comprehensive income if effective, in-effective part to be shown in income statement For hedging operations prior to first time application of IFRS 9, Cash flow hedge reserve shall be transferred to profit and loss 63 Hedge accounting: (4) Disclose information about: an entity s risk management and how it is applied to current risk problems how the entity s hedging activities may affect the amount, timing and uncertainty of its future cash flows the effect of the hedge accounting has on the entity s statement of financial positions (balance sheet), statement of comprehensive income (income statement) and statement of changes in equity 64 32

33 Hedge accounting: (4) Disclose information on Risk Management strategy, explain how risks arise how the entity manages each risk (separately for individual risks or the entirety of risks) the extent of risk exposure the entity manages 65 Hedge accounting: (4) Disclose information on the amount, timing and uncertainty of future cash flow For each category of risk exposure disclose quantitative information to analyze - type of risk exposure, which is managed - extend of hedging to every risk exposure - effect of hedging to every risk exposure 66 33

34 Hedge accounting: (4) Disclose information on the amount, timing and uncertainty of future cash flow, in particular: amount or quantity (tons etc.) of risk to which entity is exposed amount or quantity of risk, which is hedged how hedging changes the exposure to risk for each category a description of sources of hedge ineffectiveness (currently and as a future expectation) 67 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for fair value hedge, cash-flow hedge and hedge of a net investment ( ) - carrying amount of the hedging instruments, and - notional amounts or other quantities (tons etc.) related to hedging instrument 68 34

35 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for hedged items For fair value hedges Carrying amount of accumulated gains and losses on the hedged items, presented in separate line in balance sheet (statement of financial positions), separating assets from liabilities Balance remaining in balance sheet for hedges, where hedging has been discontinued 69 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for hedged items For cash flow hedges Balance in the cash flow hedge reserve (i.e. Equity) for continuing hedges, when there was an effect on income statement Balance remaining in balance sheet for hedges, where hedging has been discontinued 70 35

36 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk For fair value-, cash flow-, and hedges of a net investment (...) Changes in the value of the hedging instrument recognised in other comprehensisve income Hedge ineffectiveness recognized in profit and loss A description of the items, where hedge ineffectiveness is included 71 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk For fair value hedges Change of the value of the hedged item 72 36

37 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk For cash flow-, and hedges of a net investment (...) For hedges of net positions the hedging gains or losses recognized in a separate line in the income statement Amount reclassified from cash flow hedge reserve to profit and loss as a reclassification adjustment Description of the line item in the income statement, affected by reclassification 73 Hedge accounting: (4) Disclose of effects of hedge accounting on primary financial statement A reconciliation calculation shall be given, that Allows users to identify the different adjustments, classifications and operations, which have an effect on balance sheet, income statement, statement of profit and loss, statement of other comprehensive income and statement of changes of equity 74 37

38 Thank you for your attention 75 38