International Financial Reporting for Insurers. August 11 12, Hong Kong. Session 29: Asset Accounting/IFRS 9 Financial Instruments.

Transcription

1 International Financial Reporting for Insurers August 11 12, 2014 Hong Kong Session 29: Asset Accounting/IFRS 9 Financial Instruments Sam Ho

2 Asset Accounting / IFRS 9 Financial Instruments Sam Ho AIA Group IFRS 9 Financial Instruments A new accounting standard on financial instruments which replaces IAS 39 New version of IFRS 9 issued in 24 July 2014 Effective date: 1 January

3 Key Changes from IAS 39 Key changes Different asset classification New impairment approach Implication Change in classification criteria and how financial assets are reported in the financial statements Early recognition of impairment loss 3 Number of classification category for investment asset is reduced IAS 39 IFRS 9 Held-To-Maturity Fair Value Through Profit or Loss (FVPL) Held for Trading / Derivative Fair Value Option Available-For-Sale (AFS) Loans and Receivables Amortised Costs Fair Value Through Profit or Loss (FVPL) (Including Fair Value Option) Fair Value Through Other Comprehensive Income (FVOCI) 4 2

4 Accounting treatment by asset classifications IAS 39 IFRS 9 Accounting Treatment Held-to- Maturity Loans and Receivables Amortised Costs Assets measured at amortised costs Assets measured at amortised costs FVPL FVPL Assets measured at FV; changes in FV reported through P&L AFS FVOCI Assets measured at FV; changes in FV reported through equity* * Realised gain / loss on disposal is treated differently between debts and equities under IFRS 9 5 Classification and measurement new assessment 6 3

5 Contractual Cash Flows assessment Are cash flows solely payments of principal and interest (SPPI)? Yes go to Business Model test No FVPL Principal is the amount transferred by the current holder for the financial asset (i.e. taking into account discount / premium) Interest generally represents returns for time value of money, credit risk, liquidity spread, etc. (e.g., cash flows of equity securities do not qualified as interest ) 7 Business Model test Hold to collect cash flows Business model is to collect cash flows (e.g. bond coupons) Hold & Sell Business model is both to collect cash flows and to sell Other business models Others (e.g. to realise fair value changes) Amortised cost OR FVOCI OR FVPL FVPL Option if it eliminates or significantly reduces accounting mismatch 8 4

6 IFRS 9 Financial Liability IAS 39 IFRS 9 Amortised cost Amortised cost Trading FVPL Designated at FVPL FVPL but changes in own credit risk recognised in OCI 9 IFRS 9 Impairment Day 1 bad debt / loan loss provisions! 10 5

7 IFRS 9 Impairment Accelerated recognition of loss provision Deteriorating 12 month expected credit losses credit quality since Lifetime expected credit losses initial recognition Lifetime expected credit losses Stage 1 Stage 2 Stage 3 Initial recognition* Assets with significant increase in credit risk since initial recognition* Credit impaired assets objective evidence as per IAS 39 * except for purchased or originated credit impaired assets 11 Interaction between IFRS 9 and Insurance Contracts Phase II Avoid accounting mismatches and volatility in reported profit OCI Solution in ED insurance contracts: Impact from change in current discount rate reported through OCI. (Tentative Decision: Option to report the impact through P&L) IFRS 9 FVOCI debt securities: only applicable if solely Principle and Interest. Accounting mismatch could arise if not all assets backing the insurance liability qualify Timing of IFRS 9 (2018) and IFRS 4 phase II (2019?) option to re-designate financial assets? 12 6

8 To wrap up Financial assets classification is determined by the nature of their cash flows and how they are managed IFRS 9 classification and impairment model of financial assets represent a change from the IAS 39 practice which affects the accounting treatment of the financial assets how they are accounted for and measured in the financial statements the reported results for the period Consider the interaction between the accounting treatment for financial assets and insurance contract liabilities in performance reporting 13 7