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IFRS Update for Financial Services

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IFRS Update for Financial Services

  1. 1. IFRS Update for Financial Services 7 May 2015 KPMG AG, Zurich
  2. 2. IFRS Update for Financial Services IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Negative Interest: Impact IFRS 15 Revenue from Contracts with Customers
  3. 3. IFRS Update for Financial Services IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Negative Interest: Impact IFRS 15 Revenue from Contracts with Customers
  4. 4. 3© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Verification of the business model and the cash flow criteria are the essential steps for classifying financial assets in accordance with IFRS 9 No No Yes Fair Value through Other Comprehensive Income (No Recycling) FVOCI Fair Value Option FVO Fair Value through Other Comprehensive Income (with Recycling) FVOCI No Business Model Held to Collect Business Model Held to Collect and to Sell SPPI criteria Fair Value Option Amortised Cost AC SPPI criteria Held for Trading OCI Option Yes No No Yes Fair Value Option Business Model Trading Fair Value through Profit and Loss FV YesYes Equity Instruments Derivatives Debt Instruments IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Wrap-up Classification and Measurement of Financial Assets
  5. 5. 4© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Definition of "significant increase in credit risk" requires robust data analysis and judgement Three Stage Approach Transfer if significant increase in credit risk STAGE 2 EL Lifetime 1yr STAGE 1 EL Lifetime 1yr IAS 39 Move back if transfer criteria no longer met Objective evidence of impairment Move back if transfer criteria no longer met STAGE 3 EL Lifetime 1yr IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Wrap-up Impairment
  6. 6. 5© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. The classification of financial liabilities remains substantially unchanged in comparison to IAS 39 No Yes Amortised Cost (AC) Fair Value through Profit and Loss (FV) Fair Value Option FVO Yes Yes No No Derivative Host contract (Bifurcation) Held for Trading Fair Value Option Embedded Derivatives that require bifurcation DerivativesDebt Instruments IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Wrap-up Impairment
  7. 7. 6© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. ■ Qualitative ■ Quantitative ■ Statement offinancial position ■ Statement ofcomprehensive income ■ Other disclosures (e.g. fairvalue) Significance of financial instruments for financial position andperformance Nature and extent of risks arising from financial instruments IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Overview of IFRS 7: Financial Instruments Disclosures (1/3)
  8. 8. 7© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. IFRS 7 Contents – Extract Applicable under IAS 39 IFRS 9 Statement of financial position X amended Categories of financial assets and financial liabilities X amended Financial assets or financial liabilities at FVTPL X amended Effect of own credit risk New Credit Exposure designated at FVTPL New Equity instruments designated at FVOCI - New Reclassification X amended Offsetting financial assets and financial liabilities X X Collateral X X Allowance account for credit losses X amended Reconciliations of amounts arising from expected credit losses New Compound financial instruments with multiple embedded derivatives X X Defaults and breaches X X IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Overview of IFRS 7: Financial Instruments Disclosures (2/3)
  9. 9. 8© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. IFRS 7 Contents – Extract Applicable under IAS 39 IFRS 9 Statement of comprehensive income X amended Items of income, expense, gains or losses X amended Separate line items in profit or loss New Net gains/losses per category X X IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Overview of IFRS 7: Financial Instruments Disclosures (3/3)
  10. 10. 9© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Disclosures shall be sufficient to understand the effect of credit risk on the amount, timing, and uncertainty of furture cash flows. ■ General principles ■ Expected credit loss calculations Credit risk management practices More extensive disclosures regarding Amounts arising from expected credit losses Credit risk exposures IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Credit Risk and Expected Credit Losses
  11. 11. 10© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Significant increase in credit risk Other Definition of Default  How instruments are grouped, if credit losses are measured on a collective basis  Write-off policy  Basis  Inputs, assumptions estimation techniques used  Forward-looking information Expected credit loss calculation IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Credit risk management practice
  12. 12. 11© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Disclosures shall be sufficient to understand the effect of credit risk on the amount, timing, and uncertainty of future cash flows. ■ Modifications ■ Collateral ■ Written-off assets ■ POCI assets More extensive disclosures regarding Amounts arising from expected credit losses IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Credit Risk and Expected Credit Losses
  13. 13. 12© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Disclosures shall be sufficient to understand the effect of credit risk on the amount, timing, and uncertainty of future cash flows. By credit risk rating grades ■ Gross carrying amount of financial assets ■ Exposure to credit risk on loan commitments ■ Financial guarantee contracts More extensive disclosures regarding Credit risk exposures IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Credit Risk and Expected Credit Losses
  14. 14. 13© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Consumer loancredit risk exposureby internal rating grades Corporate loanriskprofile by probability of default 1. 2.Corporate loancredit riskprofile by external rating grades3. But consider disclosure for each bucket IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Credit Risk Exposure - by Rating Illustratives
  15. 15. 14© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Risk Management Strategy Amount, timing and uncertainty of future cash flows Effects of hedge accounting on financial position and performance IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Hedge Accounting Disclosures
  16. 16. 15© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. or ? IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Information procurement
  17. 17. 16© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. THE CHALLENGE ■ Difficulty in translating disclosure requirements into data concepts and the underlying data and processes to produce the IFRS 9 data. ■ Lack of comparison of data requirements under IFRS 7 versus IFRS 9. THE BENEFITS ■ Catalogue of data items mapped to IFRS 9 disclosure requirements. ■ Identification of disclosure requirements which require interpretation and calculation and/or involve judgement. ■ Identification of data items that are currently not required for provision of disclosures under IFRS 7 but are required under new IFRS 9 rules.THE SOLUTION ■ The data taxonomy is a standalone tool which will help organisations identify the data and data flows required to produce IFRS 9 compliant quantitative disclosures. ■ It highlights the disclosures that require judgement and/or data objects and the underlying processes which are required to calculate the data items. ■ It will also highlight which data items and disclosure requirements are new and are not being reported under current IFRS 7 rules. THE FUTURE ■ KPMG is currently working to expand the IFRS 9 Data Taxonomy to cover all data points required, not only for quantitative disclosure, but for expected credit loss calculation. IFRS 9 amends IFRS 7 Financial Instruments: Disclosures KPMG Tools – Data Taxonomy
  18. 18. IFRS Update for Financial Services IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Negative Interest: Impact IFRS 15 Revenue from Contracts with Customers
  19. 19. 18© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Remove inconsistencies and weaknesses in existing requirements Provide a more robust framework for addressing revenue issues Provide more useful information through improved disclosure requirements Simplify preparation of financial statements by reducing the number of requirements by having one revenue framework IFRS 15 IFRS 15 Revenue from Contracts with Customers Key Facts - Background
  20. 20. 19© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. 5 4 3 2 Identify the contract with a customer1 Identify the performance obligations2 Determine the transaction price3 Allocate the transaction price4 Recognise revenue5 1 Revenue 19 IFRS 15 Revenue from Contracts with Customers The Five Step Model Overview
  21. 21. 20© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Loan Banking Services Credit Cards Arrangements Covered Services IFRS 15 applies to fees and commissions in the Financial Services Sector ■ IFRS 15 does not apply to – Lease contracts – Insurance contracts – Financial instruments and other contractual rights or obligations (e.g. derivatives, debt, receivables, debt and equity securities) – Guarantees other than product or service warranties – Non-monetary exchanges between entities in the same line of business to facilitate sales to customers IFRS 15 Revenue from Contracts with Customers Scope – Financial Services
  22. 22. 21© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. An Asset Manager enters into a contract with a client to provide investment management services. The entity receives 2% management fee based on the client's assets under management at the end of each quarter. In addition, the entity receives a performance-based incentive fee of 20% of the fund’s returns in excess to the benchmark 20% Performance Fee 2% Management Fee Investment ■ Each service is a single performance obligation, because it is a series of distinct services ■ Management fee: at the end of each quarter, the uncertainty about the quarterly management fee is resolved and it can be proceeded with the recognition of revenue ■ Performance fee: the fee depends on the development of the fund in comparison to the benchmark. If it is not highly probable that a significant reversal of revenue recognized would not occur, the asset manager cannot recognize a revenue for the estimate of performance fees 5 4 3 2 1 Revenue IFRS 15 Revenue from Contracts with Customers Example: Asset Managers’ Performance Based Fees
  23. 23. 22© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. 5 4 3 2 1 Revenue ■ Initially estimate the transaction price using either of the following methods – The expected value (probability-weighted amount); or – The most likely amount Variable Consideration ■ Assess whether it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with variable consideration is subsequently resolved Constraint on Variable Consideration ■ The likelihood of a downward adjustment in the estimate of variable consideration, and ■ The magnitude of the possible reversal when the uncertainty is resolved Assessment IFRS 15 Revenue from Contracts with Customers Variable Consideraton and the Constraint
  24. 24. 23© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. IFRS 15 Revenue from Contracts with Customers Potential impact of IFRS 15 on further revenues
  25. 25. 24© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Incremental costs to be capitalized if the entity expects the costs to be recoverable and amortization period is more than 12 months Commissions to agents for new contracts Free services may meet the definition of performance obligation IFRS 15 Revenue from Contracts with Customers Example: Costs of Obtaining a Contract
  26. 26. 25© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Bundled products or services may integrate different services in a single package or contract Mortgage and unemployment protection insurance policy. Mortgages and estate investment services Services related to IPO such as arranging the deal, underwriting and marketing activities IFRS 15 Revenue from Contracts with Customers Example: Bundled Products or Services
  27. 27. Agenda IFRS 9 amends IFRS 7 Financial Instruments: Disclosures Negative Interest: Impact IFRS 15 Revenue from Contracts with Customers
  28. 28. 27© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Swiss Franc Interest Rate Swap Curve is negative for more than 7 years Source: www.six-swiss-exchange.com Date: April 2015 Negative Interest: Impact Negative Interests
  29. 29. 28© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Interest income/expense Commission income/expense Negative Interest: Impact Disclosures
  30. 30. 29© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Loan/Mortgage Interest 6-month Libor (floored at zero) plus 3% Negative Interest: Impact Separation of Embedded Derivatives
  31. 31. 30© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. However … A negative benchmark interest rate may represent a fee of a financial asset Zero rate floor is closely related to the host contract and not separated Loan/Mortgage Interest 3-month Libor (floored at zero) plus 3% View 1 View 2 Derivative is in the money (not closely related) and meets the other separation criteria at inception Separation of embedded derivative and host contract Negative Interest: Impact Separation of Embedded Derivatives
  32. 32. 31© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Hedge Item - loan receive 3-month LIBOR, floored at zero Hedging Instrument - interest rate swap that pays LIBOR and receives fix Note: the swap has no floor ■ Impact of negative interest rates – LIBOR cash flows from the loan are zero – Under the interest rate swap, fixed coupons are received from receive leg and variable cash flows are received from the pay leg due to negative LIBOR Prospective effectiveness test not in range of 80–120% Note: the swap has no floor Negative Interest: Impact Cash Flow Hedge Accounting
  33. 33. 32© 2015 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks. Questions ? Your views? Feedback? Open discussion
  34. 34. Save-the-Date IFRS Update for Financial Services Thursday, 29 October 2015 KPMG AG Save this date for our next Update!
  35. 35. Thank you! Contact details Patricia Bielmann Partner Financial Services Accounting Advisory KPMG AG Badenerstrasse 172 8026 Zurich Phone +41 58 249 41 88 Fax +41 58 249 48 64 pbielmann@kpmg.com Petrik Leutert Manager Financial Services Accounting Advisory KPMG AG Badenerstrasse 172 8026 Zurich +41 58 249 42 07 +41 58 249 48 64 pleutert@kpmg.com
  36. 36. © 2015 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

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