This document discusses key aspects of the IFRS 9 accounting framework for financial instruments, including: 1) It distinguishes between price, value, market value, model value, and book value as ways of determining the worth of financial assets. 2) It explains how book value, credit provisions, and interest income are calculated under IFRS 9 based on factors like credit risk and expected losses. 3) It provides examples and outlines how the principles of IFRS 9 can be extended to different types of financial instruments.

1. Copyright © 2018 CapitaLogic Limited
Chapter 16
The IFRS 9
This presentation file is prepared in accordance with
Chapter 16 of the text book
“Managing Credit Risk Under The Basel III Framework, 3rd ed”
Website : https://sites.google.com/site/crmbasel
E-mail : crmbasel@gmail.com

2. Copyright © 2018 CapitaLogic Limited 2
Declaration
 Copyright © 2018 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Director, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.

3. The IFRS 9
 An accounting framework set out by the
International Accounting Standards Board
 To address the major accounting issues of
financial instruments through a set of unified
practices
 Applicable to major financial instruments
 To ensure the level playing field among
financial institutions
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4. Copyright © 2018 CapitaLogic Limited 4
Outline
 Book value
 Credit provision and interest income

5. Price and value
 Price
 The amount of cash that
 Somebody is willing to receive for selling
 Somebody is willing to pay for buying
 Value
 The amount of cash to be received, assuming that
immediately
 Somebody will receive for selling
 Somebody will pay for buying
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6. Market value
 Market value = Market price
 For a financial instrument traded liquidly in
the market
 Assuming that the current holding of an
equity can be disposed in the very near future
at the same price
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7. Model value
 Value calculated by a quantitative model
 with some independent variables observable directly
or indirectly from the market
 On-the-run US treasuries
 Of-the-run US treasuries
 Discount rate = IRR
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 
 
N
N
k
k=1
N
N
k
k=1
IRR
Model
CF
Market price =
1 +
CF
=
1 + Discount rat
val e
e
u



8. Credit risky debts
 No liquid trading market
 No market price
 Market value not applicable
 No market price of similar debt
 IRR cannot be derived
 Model value not applicable
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9. Book value
 Value calculated by the IFRS 9 rules
 Loan
 Book value = Outstanding principal
 Corporate bond acquired at principal
 Book value = Principal
 Book IRR
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Interest rate
Book IRR =
Interest frequency

10. Premium/discount corporate bond
 Book IRR
 Book value
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 
 
N
N
k
k=1
1 2 3 N
0
1
CF
Acquisition cost =
1 + Book IRR
Book IRR = IRR -Acquisition cost, CF , CF , CF , ... CF
Interest rate
Interest amount = Principal ×
Interest frequency
Book value = Acquisition cost
Book value =

 
 
 
0
2 1
k k-1
Book value × 1 + Book IRR - Interest amount
Book value = Book value × 1 + Book IRR - Interest amount
Book value = Book value × 1 + Book IRR - Interest amount
Example 16.2
Example 16.1

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Outline
 Book value
 Credit provision and interest income

12. Present value of expected loss
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 
   k-1 k
k k
T T
k
k k
Default loss = EAD × LGD
Interest rate
= Principal × 1 + × LGD
Interest frequency
1
Discount factor =
1 + Book IRR
Default chance = 1 - PD - 1 - PD
PVEL = Default loss × Discount factor × D
 
 
 
k
N
k
k=1
efault chance
Total PVEL = PVEL

13. Credit provision
 Lower credit risk at origination
 General provision = 1-year PVEL
 Cost has incorporated the prevailing credit risk
 Moderate credit risk
 General provision = RM-year PVEL
 Cost has NOT incorporated the additional credit risk
 Higher credit risk
 Specific provision = RM-year PVEL
 Cost has NOT incorporated the additional credit risk
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14. Interest income
 Lower credit risk at origination
 Book value × Book IRR
 Moderate credit risk
 Book value × Book IRR
 Higher credit risk
 (Book value - Specific provision) × Book IRR
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Example 16.3

15. Extensions
 CDOs and government bonds
 intended to be held until maturity
 similar cash flow pattern
 Model value
 Credit provision
 Interest income
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