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IFRS 9 Financial Instruments for corporates | Are you good to go?

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Practical guidance for corporates on implementing the new financial instruments standard. Find out more at kpmg.com/ifrs9.

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IFRS 9 Financial Instruments for corporates | Are you good to go?

  1. 1. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. September 2017 kpmg.com/ifrs IFRS9Financial instruments for corporates – Are you good to go?
  2. 2. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Areyougoodtogo? 2 IFRS 9 will change the way many corporates account for their financial instruments. You’ll need to consider the new requirements for… To help you drive your implementation project to the finish line, we’ve pulled together a list of key considerations that many corporates need to focus on. Classification and measurement Impairment Hedge accounting
  3. 3. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 3 For each of the following, documenting your analysis and the conclusions drawn will be essential
  4. 4. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Classificationand measurement
  5. 5. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. How will you classify your trade receivables and debt investments? Classification Amortised cost FVTPL Solely principal and interest? Holding to collect contractual cash flows? No YesYes What are the asset’s contractual cash flows? How is the business model’s objective achieved? FVOCI Collecting contractual cash flows and selling financial assets? No Yes No Classification 5
  6. 6. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Businessmodel Have you determined the business model at a level that reflects how groups of financial assets are managed together? ― Objectives: Are collecting contractual cash flows and/or selling financial assets integral to the business model? ― Sales: What are the actual and expected frequency, value and timing? ― Performance: How is it evaluated and reported? ― Risks: How are they managed? ― Compensation: How are managers incentivised? Think about… 6
  7. 7. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Factoringandsecuritisation 7 Do you sell trade receivables in factoring agreements or sell loans in securitisation arrangements ? Think about… Consolidated vs separate financial statements | Guarantees given to the factor Company D Securitisation vehicle Investors D loans SV notes
  8. 8. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. AssessingtheSPPIcriterion 8 Do the asset’s contractual terms give rise to cash flows that are SPPI – solely payments of principal and interest ? Time value of money Credit risk Consider… Profit margin Other basic lending risks Other associated costs ― Embedded derivatives are not separated from financial assets ― Exposure to risks or volatility unrelated to a basic lending arrangement is not SPPI Remember…
  9. 9. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 9 Prepaymentfeatures Do any prepayment features meet the SPPI criterion? ― The amount can include reasonable compensation for early termination ― There’s an exception for certain prepayment features at par it permits or requires prepayment at an amount substantially representing unpaid principal and interest A contractual term meets the criterion if… Remember…
  10. 10. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 10 Otherfeatures Do other features in the contract mean that the SPPI criterion is not met? Non-recourse loans Extension features Modified time value of money Consider…
  11. 11. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Equityinvestments 11 Does your accounting policy meet IFRS 9’s requirements? Measure non-trading investments at FVTPL, unless you make an irrevocable policy choice on initial recognition to measure them at FVOCI Measure all other equity investments at FVTPL Measure investments at cost Recognise impairment in profit or loss on FVOCI investments Reclassify gains or losses on FVOCI equity instruments You’ll need to… You can no longer…
  12. 12. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. FinancialliabilitiesdesignatedatFVTPL 12 Do you know how new rules for presenting gains or losses attributable to own credit risk will affect your financial statements? Gains or losses attributable to changes in own credit risk Remaining change in fair value Designation criteria are unchanged from IAS 39 =
  13. 13. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Modificationorexchangeoffinancialliabilities Do you have modifications or exchanges of fixed rate financial liabilities that do not result in derecognition? 13 Recalculate amortised cost Discount the modified contractual cash flows using the original effective interest rate (EIR) Recognise any adjustment in profit or loss You’ll need to… and Remember… This is a change from current practice | Retrospective application is required
  14. 14. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Impairment
  15. 15. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Scopeofimpairmentrequirements 15 Have you identified all the instruments that are subject to the impairment requirements? ― Debt instruments measured at amortised cost or at FVOCI – e.g. trade receivables ― Financial guarantees and loan commitments not measured at FVTPL ― Lease receivables ― Contract assets in the scope of the revenue standard – IFRS 15 ― Equity investments ― Financial instruments measured at FVTPL In scope Out of scope
  16. 16. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. SimplifiedapproachtomeasuringECL 16 Will you choose to extend the simplified approach for measuring ECL? Loss allowance = 12-months’ ECL Loss allowance = lifetime ECL Yes Which approach will you apply? Has there been a significant increase in credit risk (SICR)? Simplified NoGeneral Choice applies to… Trade receivables and contract assets with a significant financing component | Lease receivables
  17. 17. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Loss rate Age analysis: days past due Current 1-30 31-60 61-90 >90 IFRS 9 0.3% 1.6% 3.6% 6.4% 10.5% Example Based on: ― Historical credit loss exposure ― Adjustment for current conditions and forward- looking estimates Remember… All receivables balances need an ECL provision, including those in the current column 17 Practicalexpedient Will you use a provision matrix to measure ECL for trade receivables?
  18. 18. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Assessingsignificantincreaseincreditrisk 18 If you are applying the general approach, have you designed the criteria for assessing a SICR for each asset type? Quantitative measure of probability of default (PD) Qualitative factorsvs Remember… Low credit risk exception | ‘30 days past due’ rebuttable presumption
  19. 19. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 19 Definitionofdefault Have you defined ‘default’ for assessing SICR and measuring impairment where relevant? Rebuttable presumption that default does not occur later than 90 days past due The definition should be consistent with that used for internal credit risk management
  20. 20. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 20 Measuringexpectedcreditlosses What data and analysis will you use for measuring ECL for different asset types? Unbiased and probability- weighted amount Probability weighted Present value Cash shortfalls Discount rate = Original EIR or an approximation Cash flows due under the contract less cash flows you expect to receive Remember… Incorporate forward-looking economic scenarios
  21. 21. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Hedge accounting
  22. 22. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Accountingpolicy 22 Will you adopt IFRS 9’s hedge accounting requirements or continue to apply IAS 39? Continue to fully apply IAS 39’s hedge accounting requirements to all hedging relationships Apply IFRS 9’s general hedging model Yes No Will you choose to defer application of IFRS 9’s general hedging model? Remember… You can choose to defer until the standard resulting from the IASB’s dynamic risk management project is completed
  23. 23. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Alignmentwithriskmanagementobjectives 23 Have you formally documented the risk management strategy and objective for undertaking the hedge? Hedge documentation should… Demonstrate how the hedge relationship is more closely aligned with the actual risk management objective Include an analysis of sources of hedge effectiveness
  24. 24. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Costsofhedging 24 Have you considered the ‘costs of hedging’ elements that may be excluded from certain designated hedging instruments? Change in fair value Affects profit or loss at the same time the transaction does or amortises over time Time value of purchased options Excluded elements Forward element of forward contracts Foreign currency basis spreads of financial instruments Accounting
  25. 25. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Riskcomponents 25 Have you determined whether any risk components may be designated as hedged items? +Contractually and non- contractually specified Separately identifiable Sufficient observable forward transactions Reliably measurable Designation criteria for financial and non-financial risk components Think about… Particular market structure the risk relates to | Location of hedging activity
  26. 26. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Hedgeditems 26 Aggregated exposures Equity instruments at FVOCI Groups of items including net positions Components of a nominal amount Have you considered what additional exposures may qualify as hedged items ?
  27. 27. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 27 Assessinghedgeeffectiveness Have you updated your systems, tools and documents to meet the hedge effectiveness requirements ? Economic relationship between hedged item and instrument Credit risk does not dominate value changes Hedge ratio = Actual ratio used for risk management
  28. 28. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Transitionand disclosures
  29. 29. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Transitionrequirements 29 Is your implementation plan aligned with the transition requirements? Use the helpful guidance in our First Impressions and Insights into IFRS publications Visit kpmg.com/ifrs9 There are significant exemptions from restating comparatives and retrospective application
  30. 30. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Disclosurerequirements 30 Have you identified the additional information and processes needed to meet the disclosure requirements? Read our Guide to annual financial statements – IFRS 9 appendix You’ll need to provide specific transitional disclosures and more detail about credit risk management and hedge accounting
  31. 31. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Checklistsand nextsteps
  32. 32. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Checklist(1/2) Have you…?  Determined how you will classify your trade receivables and debt investments?  Assessed whether collecting contractual cash flows and/or financial assets are integral to your business model?  Considered the impact of factoring or securitisation arrangements?  Reviewed contractual terms to assess whether cash flows are SPPI?  Considered whether prepayment features meet the SPPI criterion?  Determined whether other contract features mean that the SPPI criterion is not met?  32 Have you…?  Checked that your accounting policy for equity investments meets IFRS 9’s requirements?  Assessed what the effect of applying the new rules for presenting financial liabilities designated at FVTPL will be?  Determined whether you have modifications or exchanges of fixed rate financial liabilities that do not result in derecognition?  Identified all the instruments that are subject to the impairment requirements?  Decided whether you will extend the simplified approach to measure ECL?  Decided whether you will use the practical expedient to measure ECL for trade receivables? 
  33. 33. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Checklist(2/2) 33 Have you…?  Designed the criteria for assessing a SICR for each asset type under the general approach?  Defined ‘default’ for assessing SICR and measuring impairment where relevant?  Considered what data and analysis you will use for measuring ECL for different asset types?  Decided whether to adopt IFRS 9’s hedge accounting requirements?  Formally documented your hedge accounting policy and aligned it with your risk management objectives?  Have you…?  Considered the ‘costs of hedging’ elements that may be excluded from certain designated hedging instruments?  Determined whether any risk components or additional exposures may qualify, or be designated, as hedged items?  Updated your systems and documents to meet the hedge effectiveness requirements?  Aligned your implementation plan with the transition requirements?  Identified the additional information and processes needed to meet the disclosure requirements? 
  34. 34. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Howdidyoudo? 34 How many of our 22 questions have you answered ‘yes’? All 22 – You’re good to go! 7–21 – You’re on your way 0–6 – You really need to engage
  35. 35. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Don’tforgetthebroaderbusinessimpacts Have you… ― updated your management reporting, including KPIs? ― developed a transition plan for parallel runs, including reconciliations? ― thought about the tax implications? ― calculated the impact on bonus schemes? ― compared your approach with peers? Financial Instruments Accounting Change Accounting, tax and reporting Data, systems and processes Business People and change 35
  36. 36. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Findoutmore 36 Talk to your usual KPMG contact Find out more at kpmg.com/ifrs9 Follow the discussion on LinkedIn
  37. 37. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. KPMG International Standards Group is part of KPMG IFRG Limited. KPMG International Cooperative (“KPMG International”) is a Swiss entity that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMG International (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind KPMG International or any other member firm, in any manner whatsoever. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. kpmg.com/socialmedia

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