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IFRS Update for Financial Services

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An unserer Veranstaltung diskutierten wir über die neuesten Entwicklungen und Erfahrungen für eine erfolgreiche Implementierung von IFRS 9.

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IFRS Update for Financial Services

  1. 1. IFRS Update for Financial Services 29 October 2015 KPMG AG, Zurich
  2. 2. IFRS Update for Financial Services IFRS 13 Fair Value Measurement - Application issues IFRS 9 Financial Instruments - Implementation Issues
  3. 3. IFRS Update for Financial Services IFRS 13 Fair Value Measurement - Application issues IFRS 9 Financial Instruments - Implementation Issues
  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. IFRS 13 Fair Value Hierarchy Typical Points of Discussion Asset Type Corporate /Government Bonds Exotic OTC Derivatives Securitizations Listed Options Level 1 vs. Level 2 based on activity of OTC broker market Level 2 vs. Level 3 based on types of market inputs Level 2 vs. Level 3 based on significance of unobservable inputs Level 1 vs. Level 2 based on trading activity Points of Discussion 1 2 3 4 Mortgage loans, loans5 Level 2 vs. Level 3 based on significance of unobservable inputs
  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. IFRS 13 Fair Value Hierarchy Fair Value Levelling Perspective Market Selection/ use of broker quotes2 Criteria1 Areas of judgement Active Market Regular price quotations Small Bid-Ask spreads Multiple pricing contributors Small deviations in prices “Executable”3/ “firm” broker quotes noyes 1 must be fulfilled cumulatively for the respective level classification 2 whether the quote is derived directly from the broker or from an information provider, such as Bloomberg or Reuters, is not relevant for the level classification 3 executable quotes are generally non-binding. Consequently, they can only represent a Level 1 input parameter if the underlying market is active and multiple pricing contributors stand ready to trade. Levelling Level 1 Level 2/3 Weighted average price of broker quotes OR broker quote as input parameter of a consensus price Approach for verification as well as the application of quantitative thresholds Sufficient volume Process of selecting a broker quote and how quotes are used for pricing purposes “Executable” 3/ “firm” broker quotes Quoted price
  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. IFRS 13 Fair Value Hierarchy Case: Active Market Company A holds a total 20,000,000 shares issued by company X. The shares are traded on SIX. The average daily trading volume on this exchange is currently at 100,000 shares. Is this an active market? Sufficient frequency and volume Even if a single transaction affects quoted price Situatuion Question
  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. Conditions for an Active Market Continuous price quotations Small Bid / Ask Spread Multiple Price Contributors Small Price Fluctuation Price quotation of a bond IFRS 13 Fair Value Hierarchy How to assess whether the relevant Market is an Active Market
  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. 30 32 34 36 38 40 42 44 46 8-Sep 18-Sep 28-Sep 8-Oct 18-Oct Price Morgan Stanely (MS) Bank of America (BAML) Carlyle Group (CG) Goldman Sachs (GS) Bid/Ask Prices of executable quotes for one Corporate Bond IFRS 13 Fair Value Hierarchy Active Market: Corporate Bond Criteria Criteria met? Number of different brokers Narrow bid-offer spreads Variance between quotes Frequency of quotes Overall conclusion     
  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. Percentage of days with traded volume in August 2014 for Nikkei Call Strike in 1000 Maturity 9 10 11 12 13 14 15 15.5 16 17 18 19 20 21 Sep-14 0% 14% 0% 0% 5% 57% 100 % 100 % 100 % 100 % 67% 0% 0% 0% Oct-14 0% 10% 0% 0% 19% 24% 57% 95% 100 % 100 % 81% 24% 5% 0% Nov-14 0% 14% 0% 0% 0% 0% 57% 71% 71% 90% 90% 43% 0% 0% Dec-14 10% 5% 5% 0% 0% 5% 38% 90% 86% 100 % 100 % 100 % 43% 0% Mar-15 0% 19% 0% 0% 0% 0% 10% 48% 43% 38% 33% 10% 10% 0% Jun-15 0% 0% 0% 0% 0% 5% 19% 33% 33% 10% 24% 14% 5% 0% Sep-15 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 10% 0% 0% Dec-15 0% 0% 0% 5% 14% 0% 29% 71% 33% 29% 29% 10% 5% 0% Dec-16 5% 5% 0% 0% 5% 10% 14% 29% 19% 0% 0% 0% 0% 0% Put Strike in 1000 Maturity 9 10 11 12 13 14 15 15.5 16 17 18 19 20 21 Sep-14 0% 81% 90% 100 % 100 % 100 % 100 % 100 % 100 % 67% 10% 0% 10% 0% Oct-14 0% 100 % 95% 95% 100 % 100 % 100 % 86% 33% 52% 0% 0% 0% 0% Nov-14 0% 86% 52% 81% 90% 90% 71% 33% 5% 0% 0% 10% 0% 0% Dec-14 48% 81% 95% 86% 100 % 100 % 81% 43% 0% 0% 0% 0% 0% 0% Mar-15 0% 5% 10% 29% 29% 62% 24% 38% 0% 0% 0% 0% 10% 0% Jun-15 10% 14% 5% 33% 14% 29% 43% 14% 0% 0% 0% 0% 10% 0% Sep-15 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Dec-15 10% 10% 5% 19% 33% 19% 29% 43% 5% 0% 0% 0% 0% 0% Dec-16 0% 0% 10% 14% 10% 52% 19% 29% 0% 0% 0% 0% 0% 0% For Calls, sufficient volume for strikes between 15,000 and 19,000 and maturities in December 2014 or earlier. IFRS 13 Fair Value Hierarchy Active Market: Exchange Traded Options For Puts the equivalent area is for strikes from 10,000 to 16,000 and again maturities in December 2014 or earlier.
  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. IFRS 13 Fair Value Hierarchy Significant Inputs: Mortgage loans SIX Circular No 2 IFRS, 19 September 2014: measurement of fair value, using all assumptions that market participant would use Basis spread Individual spread Risk free rate Discount Rate Significant inputs?
  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. Observable inputs Inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability. Examples:  Transaction prices from exchanges;  Published data from OTC market;  Reported trades; and  Derived data from observable inputs. Unobservable inputs Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. Examples:  Internal ratings (PD, LGD);  Cash flow estimates based on own projections; and  Definition of peer groups for multiple valuation. Observable and unobservable inputs have to be defined and documented as they are not sufficiently defined in IFRS 13 IFRS 13 Fair Value Hierarchy Observable vs. Unobservable Parameters
  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. IFRS 13 Fair Value Hierarchy Instrument Benchmarking Instrument Type Number of Positions Number of Classifications Average Level Standard Deviation Equity/Funds 4,219 11,758 1.04 0.05 Corp 4,384 10,963 1.81 0.24 Gov 1,927 5,833 1.48 0.50 Structured Notes 168 382 2.01 0.11 ABS 57 124 2.06 0.25 CMBS 76 168 2.30 0.44 RMBS 91 196 1.85 0.42 CDO/CLO 35 73 2.61 0.36 Total 10,957 29,497 1.47 0.22  Wide dispersion for Corp/Gov Bonds as well as Securitizations
  13. 13. IFRS Update for Financial Services IFRS 13 Fair Value Measurement - Application issues IFRS 9 Financial Instruments - Implementation Issues
  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. 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 Other Business Model Fair Value through Profit and Loss FV YesYes Equity Instruments Derivatives Debt Instruments IFRS 9 Classification and Measurement Financial Assets Verification of the business model and the cash flow criteria are the essential steps for classifying financial assets in accordance with IFRS 9
  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. IFRS 9 Classification and Measurement SPPI Test Examples of critical terms  Variable interest rate is reset quarterly to 12m Libor. Benchmark test required.  Call/Put price significantly not equal to unpaid principal and interest plus reasonable compensation.  Tier 1 bonds classification according to counterparty assessment.  Convertible bonds.  Interest deferral but further interests may not be calculated on deferred amount. The contractual terms may only give rise to cash flows that are solely payments of principal and interest Payment of interest Payment of principal Interest consists of consideration for:  Time value of money; and  The associated credit risk. The basis is the the principal amount outstanding in the during a particular period of time. Payment of principal consists of:  Contractual repayments;  Unscheduled repayments; and  Mandatory unscheduled repayments. Verification of the SPPI Criteria is to be made for the currency in which the financial asset is denominated Cash Flows = Interest and Principal Cash Flows ≠ Interest and Principal AC FVOCI FV
  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. IFRS 9 Classification and Measurement SPPI Test: Implementation challenges Interest: One-year GBP LIBOR + 2.5%, the LIBOR component resets every three months and applies for the following three months Early repayment: par plus accrued (but unpaid) interest plus a fee equal to 1% of the outstanding principal and interest Covenants: in case of breach the interest rate is increased by 50 basis points (0.5%), breach for two consecutive years, then B may demand repayment of the loan before maturity at an amount equal to the principal amount outstanding and accrued (but unpaid) interest GBP 10 million Floating-rate loan (at par) Terms & Conditions
  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 SPPI-Tests will be very time consuming…. Furthermore the debt instruments in our portfolio will probably not pass it anyway……» «I propose a shortcut: Why don’t we just measure it at FVTPL…???» IFRS 9 Classification and Measurement SPPI Test – Simplified approach
  18. 18. 17© 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 9 Classification and Measurement Investment Funds - Equity vs Liability Classification Equity as per IAS 32 Issuer view (Investment fund) Equity as per IAS 32.16A (puttable instruments) Liability Investor view under IFRS 9 Equity FVtOCIFVtPL Debt instrument SPPI criteria of the shares/units SPPI criteria of the underlyings FVtOCI / AC FVtPL NoYes Yes No Disclosure requirements? FVtPL
  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. Source: KPMG Accelerator IFRS 9 Data Taxonomy IFRS 9 Classification and Measurement Equity vs Liability Classification – Consideration of Disclosures Maximum exposure to credit risk and Quantitative information about collateral arrangements and other credit enhancements of financial instruments not subject to the impairment requirements of IFRS 9. Maximum exposure to credit risk Of which secured by collateral and other credit enhancements Collateral Other credit enhancement Cash Securities Guarantees Credit derivatives Other Financial assets measured at FVTPL Trading assets x x x x x x Derivatives x x x x x x Financial assets designated at fair value x x x x x x
  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. IFRS 9 ECL Model Implementation challenges Implementation challenges Portfolio segmentation Simplifications Significant increase in credit risk Transfer Criteria ECL Model Inputs 1 2 3 ECL input data (PD and LGD) ECL input data (static data) Forward-looking information 4 5 6 Lifetime ECL Methodology 7 Three stage approach Stage 3 EL Lifetime 1yr Stage 2 EL Lifetime 1yr Stage 1 EL Lifetime 1yr IAS 39 Transfer if significant increase in credit risk Objective evidence of impairment Move back if transfer criteria no longer met Move back if transfer criteria no longer met
  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. IFRS 9 ECL Model Impairment debt instruments measured at FVOCI – Recognition of ECL (1/2) IFRS 9 Initial recognition of the instrument Dr Cr Statement of financial position – debt securities Statement of financial position – cash 1,000 1,000 Profit or loss – impairment loss OCI 30 30 Purchase of debt instrument recognition as FVOCI Determination of ECL on day 1 - ECL 12-months amounting to 30
  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. Fair value decreases from 1,000 to 950 Dr Cr OCI Statement of financial position – debt instrument 50 50 Net amount in OCI 20 Sale of the instrument Dr Cr Statement of financial position – cash Statement of financial position – debt securities 950 950 Profit or loss – Loss from sale of debt security FVOCI OCI 20 20 Recycling of fair value changes recognised in OCI of 20 to profit or loss IFRS 9 ECL Model Impairment debt instruments measured at FVOCI – Recognition of ECL (2/2)
  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. IFRS 9 ECL Model Basel Committee’s perspective on IFRS 9 impairment Removal of some simplifications of the IASB, e.g.  Low credit risk exemption.  Requirement to use reasonable and supportable information that is available without undue cost or effort. New rebuttable presumption  Lending to same customer at a higher rate indicates that there has been a significant increase in credit risk. Proportionate approach  Commensurate with the size, nature and complexity of the banks. Delinquency data  Generally backward- looking, non-appropriate. Definition of default  Alignment of definitions of default for the purposes of IFRS 9 with the regulatory definition. Higher implementation cost!
  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 9 Transition Interaction between IFRS 9 and the insurance contracts project Stakeholders asked the IASB to defer the effective date of IFRS 9 for insurance companies and to align it with that of the forthcoming insurance contracts standard Deferral Approach Overlay Approach Disclosure of  the fair value of all financial assets that do not fullfil the SPPI test and  credit risk information Upon adoption of IFRS 9, insurers  Adjustment to profit or loss to offset the effect of financial assets at FVtPL under IFRS 9 that were previously classified as amortised cost or AFS und IAS 39  Exclusion from profit or loss, and recognition in OCI instead, of the difference between amounts recognised in profit or loss in accordance with IFRS 9 and the equivalent amounts under IAS 39 Latest implementation of IFRS 9 for Insurers as of 1 January 2021!
  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. Questions ? Your views? Feedback? Open discussion
  26. 26. Save-the-Date IFRS Update for Financial Services Thursday, 28 April 2015 KPMG AG Save this date for our next Update!
  27. 27. 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 Jana Engelmann Manager Financial Services Accounting Advisory KPMG AG Badenerstrasse 172 8026 Zurich +41 58 249 35 56 +41 58 249 48 64 jengelmann@kpmg.com
  28. 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.

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