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IFRS 9

Financial Instruments

Designated to replace IAS 32 and IAS 39

Response to the financial crisis:

Beginning of crisis in August 2008, decrease of market

values of securitized financial instruments (e.g. ABS), increasing consumption of Equity Capital

Request by G20 to contribute to limit impact of crisis

through change of accounting procedures

Amendment to IAS 39: If FV Instruments are not intended

to be traded on short view, reclassification may be allowed, values “frozen” on 01.10.2008

Decision taken to “reconstruct” regulation on Financial

Instruments and to summarize in one standard: IFRS 9 IFRS 9: Financial instruments

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3 Dr. Th. Goswin International Accounting Standards

Situation at the peak of the crisis (I):

Asset Liability

Credit Derivative: 100 Equity: 50

Cash: 50 Liabilities: 100

Situation at the peak of the crisis (II):

IFRS 9: Financial instruments

Asset Liability Credit Derivative: 100 Loss on M.V.: -20 New M.V.: 80 Equity: 50 Retained earnings -20 Total Equity: 30 Cash: 50 Liabilities: 100

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5 Dr. Th. Goswin International Accounting Standards

Solution to “solve” the crisis (III):

Asset Liability

„Frozen“ value of CD 80 „Frozen“ Equity: 30

Cash: 50 Liabilities: 100

IFRS 9 originally issued in November 2009, reissued in

October 2010, intended to be applicable originally from 01.01.2013 onwards, new date of application now 01.01.2018

IFRS 9 consisting of 3 parts (improvements):

Classification and Measurement

Amortized cost and impairment

Hedge Accounting

Greatest improvement is, that “expected loss model” now

acceptable

Clear procedure defined with steps of implementation

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7 Dr. Th. Goswin International Accounting Standards

New regulation on classification:

 Classification according to IAS 39:

 Rule based

 Complex and difficult to apply

 Multiple impairment models

 Own credit gains and losses recognized in profit or loss for fair value option liabilities (not applicable in the EU)

 Complicated reclassification rules  Classification according to IFRS 9:

 Principle based

 Based on business model and nature of cash flow

 One impairment model

 Own credit gains and losses presented in OCI for FVO

liabilities

 Business model driven reclassification

New regulation on classification:

Consecutive measurement depends on the intended use of

the financial instrument: The business model

Target of the investment is to keep the asset in order to

generate consecutive and regular cash-flow

Contract details of the asset lead to payment flows at fixed

moments in time, these flows consist of coupon payment and repayment of principals only.

Both conditions have to be fulfilled simultaneously

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9 Dr. Th. Goswin International Accounting Standards

Financial Assets

Business Model

Test

Measurement

according to

amortized cost

Measurement

according to

Fair Value

Recognition of

coupon in I.S.

Recognition of F.V.

change in I.S.

IFRS 9: Financial instruments

Instrument within the scope of IFRS 9

Contractual cash flows are solely principal and interest?

Held to collect contractual cash flows only? Fair value Option?

Amortized cost Fair value through profit and loss

(Presentation option for equity investments to present fair value changes in OCI)

Held to collect contractual cash flows and for sale?

Fair value Option?

Fair value through OCI no no no yes yes yes no yes no yes yes no other standard

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11 Dr. Th. Goswin International Accounting Standards

In detail: DEBT INSTRUMENTS

Classification is made at the time, when financial

instrument is recognized the first time

Financial instrument can be measured at amortized cost

(net of any write-down for impairment), if the two following conditions are met:

Business model test: Objective of entity’s business

model is to collect contractual cash-flow rather than to sell the instrument prior to its contractual maturity to realize fair value changes

Cash-flow characteristics test: Contractual terms of

asset give rise on specified dates to cash-flows that consist of repayment of principal and interest on amount outstanding

In detail: DEBT INSTRUMENTS

What is a business model?

Refers to how an entity manages its financial assets in

order to generate cash-flows, selling financial assets or both

Business model should be determined on a level that

reflects how financial assets are managed to achieve a particular business objective (i.e. what do we want to achieve?)

Business model can be observed through activities, that

an entity undertakes to achieve business objective. So no evaluation on individual level (no assertion) but objective facts to be considered

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13 Dr. Th. Goswin International Accounting Standards

In detail: DEBT INSTRUMENTS

What is a business model?

Objective facts:

Business plans

Compensation for managers (i.e. bonus plans)

Amount and frequency of general sales activities

Past sales activities and expectations about future sales activity

Having some sale activity is not necessarily inconsistent with the business model

Same with sales as a result of (e.g.) an increase of credit risk

If sales are more than insignificant, entity, must assess, how these sales are in consistency with business model.

In detail: DEBT INSTRUMENTS

What business model qualifies for fair value through other

comprehensive income (FVOCI)?

Here, business objective is both to collect contractual

cash flows and selling financial assets

In comparison to model, based on contractual

cash-flows (etc.), this model typically has greater frequency and volume of sales

Typical objectives:

Manage liquidity

Maintain particular interest yield profile

Match duration of financial liabilities to duration of assets they are funding

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15 Dr. Th. Goswin International Accounting Standards

In detail: DEBT INSTRUMENTS

What are the characteristics of a contractual cash flow?

In general, contractual cash flows are solely payments of principal and interest (SPPI)

Only financial assets with such cash flows are eligible for amortized cost or FVOCI)

Clarification: interest can comprise not only for time value of many and credit risk

But

Return for liquidity risk, amounts to cover expenses, profit margin

As long as consistency with a basic lending arrangement is given (for instance: if contractual cash flows include a return for equity price risk, this is not in accordance with SPPI)

In detail: DEBT INSTRUMENTS

What are the characteristics of a contractual cash flow?

Basic element of identifying SPPI is „Time Value of

Money“, which determines the contractual payment of interest (and alike elements)

Example: Fixed interest rate (i.e. 10% p.a.) or variable

interest rate (i.e. index, 3 month Libor). In that case time value of money is calculated on that time. However, tenors may be concluded, where determination of

interest rate (i.e. coupon) differs from usual

preconditions of interest rate fixing (e.g. 3 month Libor, re-fixed every week)

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17 Dr. Th. Goswin International Accounting Standards

In detail: DEBT INSTRUMENTS

What are the characteristics of a contractual cash flow?

In this case, individual assessment, if FI fulfill the cash

flow characteristics and if the cash flow represents SPPI.

Objective is to determine, if cash flow differs

significantly from cash flow with unmodified time value of money element

In cases of doubt: Precondition of contractual cash flow

is not given, valuation according to amortized cost not possible

In detail: DEBT INSTRUMENTS

What are the characteristics of a contractual cash flow?

Example:

Pre-payable financial asset to have contractual cash flows that are SPPI (FX bond, bond with an add on). Testing of contractual lending arrangement is given

Regulated interest rates, set by government, not representing time value of money, acceptable as SPPI as long they do not introduce risk or volatility, that is inconsistent with a basic lending arrangement

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19 Dr. Th. Goswin International Accounting Standards

In detail: DEBT INSTRUMENTS

 All other debt instruments, which do not pass the two tests

have to be measured by Fair Value through profit and loss

 Transaction costs are part of the Fair Value at first time

recognition

 Amortization of transaction costs until maturity via effective interest method

 Fair Value option:

 An entity can voluntarily measure a debt instrument by Fair

Value, if otherwise an “accounting mismatch” would occur

 In this case, transaction costs are to be expensed

immediately via profit and loss

In detail: EQUITY INSTRUMENTS

 All Equity instruments to be measured at fair value though

profit and loss

 Transaction costs to be expensed immediately via profit and

loss

 No “cost exception” for unquoted equities:

 IAS 39 has an exception for investments in unquoted equity

instruments (and some related derivatives). The exception requires that these instruments be measured at cost (less impairment) if fair value cannot be determined reliably.

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21 Dr. Th. Goswin International Accounting Standards

In detail: EQUITY INSTRUMENTS

 “Other comprehensive income option”: If equity investment is

not held for trading, entity can make irrevocable decision at initial recognition to measure it at “fair value through other comprehensive income”

 Dividend income recognized in profit and loss

 FV changes recognized in Equity via “other comprehensive

income”

Treatment of Financial Liabilities according to IFRS 9

Similar to IAS 39, two categories of liabilities exist:

Fair value through profit or loss (FVTPL): Liabilities held with the intention (and possibility) of trading (i.e. callable bond)

Amortized cost (AC): Liabilities, which are paid back at maturity (other liabilities)

Fair Value Option: Entity can voluntarily measure according

to Fair Value, if

By doing so an “accounting mismatch” is avoided (or)

The liability is part of a group of liabilities and/or assets,

which are (risk-) managed as an appropriate investment strategy and supervised by key management personnel. IFRS 9: Financial instruments

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23 Dr. Th. Goswin International Accounting Standards

Financial

Liabilities

Measurement

according to

amortized cost

Measurement

according to

Fair Value

Other Liabilities

Trading Liabilities

No impact on P&L

Impact on P&L

In principle, the approach of IAS 39 remains unchanged.

Problem:

Approach criticized due to “artificial” creation of profits as

a consequence of deterioration of own credit standing.

Therefore this approach still not applicable within EU

IFRS 9 offers improvement of treatment of liabilities:

Amount of profit, which is attributable to market

movements to be recognized in Income Statement

Amount of profit, which is attributable to deterioration of

own credit standing to be recognized as “other

comprehensive income” IFRS 9: Financial instruments

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25 Dr. Th. Goswin International Accounting Standards

Reclassification:

For Financial Assets reclassification is required between

FVTPL and AC (and vice versa), if and only if the entity’s business model objective for its financial assets changes

In this case the previous model does not apply any more

If reclassification is decided (appropriate), it must be done

from reclassification date. No restating of previous gains, losses or interest

No limitation of reclassifications considered

However: Reclassification is a significant event and

expected to be uncommon

IFRS 9: Financial instruments

Financial Assets

Business Model

Test

Measurement

according to

amortized cost

Measurement

according to

Fair Value

Reclassification

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27 Dr. Th. Goswin International Accounting Standards

Reclassification:

Users of financial statement must be provided with

sufficient information to understand and evaluate the reclassification

Especially how the cash flows on financial assets are

expected to be realized

IFRS 7 requires disclosures about reclassifications:

Amount of financial assets moved out and into different categories

Detailed explanation of the change in business model and its effect on income statement(s)

De-recognition: ASSETS

1ststep: Determine whether asset under consideration is an

Entire asset

Specially identified cash-flows from an asset (e.g. pre-mature repayment of a loan)

Fully proportionate share of a cash-flow (pro rata, e.g. regular repayment of proportion of loan, mortgage, etc)

2nd step: Determine, whether the asset has been transferred

and if so, whether the asset is subsequently eligible for de-recognition:

Entity has transferred the contractual rights to receive

cash-flows

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29 Dr. Th. Goswin International Accounting Standards

De-recognition: ASSETS

2ndstep:

Entity has retained the contractual rights to receive

cash-flows, but has assumed a contractual obligation to pass these cash-flows to someone else under an arrangement that meets the following conditions:

Entity has no obligation to pay amounts unless it collects equivalent amounts on original asset (e.g. sale of an option on secondary market)

Entity is prohibited from selling or pledging the original asset (e.g. a loan/mortgage)

The entity has obligation to remit those cash-flows without material delay (e.g. factoring)

De-recognition: ASSETS

3rd step: Determination whether risk out of investment are

transferred as well.

Substantial transfer of risks: Full de-recognition of asset

Retaining of risks: De-recognition of asset precluded

No full retaining and no full transfer of risks

(“in-between-case”): Determination of control of risks

Entity does not control: De-recognition may be appropriate (IAS 39 requires provision, IFRS 9 does not mention)

Entity still controls risk: Recognition of the asset to the extent of ongoing involvement in the asset

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31 Dr. Th. Goswin International Accounting Standards

De-recognition of Fundamental Financial Assets

Transfer of rights Transfer of risks Transfer of control De-recognition Recognition insofar further involvement De-recognition, maybe provision to be created Recognition no yes yes no no yes  De-recognition: LIABILITIES:

Financial liability to be removed from balance sheet, when

and only when it is extinguished

Obligation specified in the contract is either discharged or

cancelled or expires (e.g. Option)

If there was an exchange between existing borrower and

lender of debt instrument with substantially different terms, or if there was a substantial modification of the terms of existing liability, the previous liability is de-recognized and a new liability is recognized

Gain and loss of the exchange to be considered directly and

immediately in the income statement. IFRS 9: Financial instruments

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33 Dr. Th. Goswin International Accounting Standards

Derivatives:

All derivatives, including those unquoted, are measured a

fair value

Fair Value changes are recognized in profit and loss,

unless the entity has decided to classify the derivative as a hedging instrument, Requirements of IAS 39 to apply

If fair value not available, best estimates to be applied (i.e.

certified valuers, Option price models)

Transaction costs to be expensed immediately via income

statement

Embedded Derivatives:

Hybrid contract, which is a combination of derivative

element with non-derivative host

Consequence: Cash-flow not entirely applicable to

business model and cash-flow characteristics test, having strong elements of “stand-alone-derivative”.

Derivative, which is attached to an other financial

instrument and is contractually transferable independently to third party is not an embedded derivative, but a separate financial instrument, to be accounted separately

No risk attachment/risk separation testing required (as in

IAS 39)

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35 Dr. Th. Goswin International Accounting Standards

Embedded Derivatives:

Embedded derivatives, that under IAS 39 would be

accounted separately, due to different risk structure (not closely related), will not be separated any more

Categorization into FVTPL of the entire instrument, even if

only a part of contractual cash-flow do not represent payment of interest and repayment of principal (e.g. convertible bond)

Financial Instrument

Financial asset Financial liability Equity instrument

Fundamental Financial asset Derivatives Hedging Instruments Amortized Cost Fair Value Plain Derivatives Embedded Derivatives

Fair Value Hedge Cash-flow Hedge Hedge of a net investment in a foreign operation Liabilities Held for Trading Other liabilities Plain Equity Capital Compound Equity Instrument Synthetic Equity Instrument Insurance Contract

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37 Dr. Th. Goswin International Accounting Standards

Financial assets

Traded at spot market Traded at forward market Conclusion and settlement of

contract at the same time

Conclusion and settlement of contract at different times Interest Instruments Shares (Equity Instruments) conditional forwards unconditional forwards Buyer acquires right,

seller accepts commitment

Buyer and seller accept commitment

- Options

-Instruments similar to Options (Caps, Floors etc.) - Forwards - Futures -Swaps - Money Market instruments - Capital Market instruments - Common shares -Preferred Stock (Premium sh.)

Summary: Treatment of the different financial instruments

First time recognition in every case by Fair Value

Interest instruments: Testing of Business Model and

Cash-Flow Characteristics, categorization to AC and FVTPL, application of Fair Value Option

Shares: Application of FVTPL, “Other Comprehensive

Income Option, no “Cost Exemption” in case of absence of price quotation

Derivatives: Application of FVTPL, no accounting options

Hedging instruments: According to IAS 39, changes and

simplifications promised, but not disclosed so far IFRS 9: Financial instruments

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39 Dr. Th. Goswin International Accounting Standards

Summary: Treatment of the different financial instruments

Embedded Derivatives: in general accounting procedure as

a whole (as one Financial Instrument, no separation foreseen), application of FVTPL, no “cost exemption” applicable, simplification of procedures in comparison to IAS 39

Own Equity: No changes so far, IAS 39 applicable

Own liabilities: categorization into “Trading Liabilities” and

“Other Liabilities”, treatment according to EFRAG

proposal:

Profit, out of market movements to be recognized in Income Statement

Profit, attributable to deterioration of own credit standing to be recognized as “other comprehensive income”

Open issue:

Asset and Liability offsetting: US-GAAP allows the

offsetting of assets and liabilities, if there is a

master-netting-agreement available: In case of default of

bankruptcy all and asset and liability contracts are netted into a single payable or receivable amount. IFRS does not allow this procedure

IASB and FASB were unable to agree on a compromise, as a result an amendment to IAS 32 was agreed on special disclosures, which allow analysts to more easily compare credit exposure

The said amendment is still under preparation IFRS 9: Financial instruments

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41 Dr. Th. Goswin International Accounting Standards

Impairment

IAS 32 required an impairment model, based on “incurred

losses”.

Incurred loss model assumes that all loans will be repaid, until evidence to the contrary (Loss trigger event). Only at that point, an impaired loan (or portfolio) is written down

Basel II requires a proactive approach, creation of

provisions and reserves for credit event.

IFRS 9 accepts now “expected loss approaches” whereby expected losses are recognized throughout the life of a loan/financial asset, even if it is measured at amortized cost, recognition of a potential loss at an “earlier level”

Three stages of impairment: IFRS 9: Financial instruments

Stage 1:

As soon as a financial instrument is originated of purchased, 12 month expected credit losses are recognized in profit or loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses.

For financial assets, interest revenue is calculated on the gross carrying amount (i.e. without

Stage 2:

If the credit risk increases significantly and the resulting credit quality is not considered to be low credit risk, full lifetime expected credit losses are recognized. Lifetime expected credit losses are only recognized, if the credit risk increases significantly from when the entity originates or purchases the financial

Stage 3:

If the credit risk of a financial asset increases to the point, that it is considered credit-impaired, interest revenue is calculated based on the amortized cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be individually assessed.

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43 Dr. Th. Goswin International Accounting Standards

12-month expected credit losses:

Portion of lifetime expected credit losses, that represent

the EXPECTED credit losses, which result from default events on a FINANCIAL INSTRUMENT (in general), which are possible within the 12month after the reporting date

It is not the expected CASH shortfall over the next twelve

month, however, it is the effect of the entire credit loss on an asset weighted by the probability that this loss will occur in the next 12 month.

It is also not the credit losses on assets, that are forecasted

to actually default in the next 12 month

If an entity can identify such assets (or a portfolio), these

are recognized in LIFETIME EXCPECTEDCREDIT LOSS

12 month expected credit loss:

Expected risk, “acceptable” damage calculated statistically out of past events

Example: about 600 credit events with different rate of repayment/default

50 enterprises created 0% default 70 enterprises created 0.25% default 95 enterprises created 0.5% default …..

1 enterprise created 4.75% default 0 enterprise created 5% default and more

Average loss of credit: 1% i.e. 1% of all credits default

1% expected risk, part of

Loss-rate Number of cases creating loss rel. Freqeuncy of cases weighted loss 0,00% 50 0,0% 0,0% 0,25% 70 11,2% 0,0% 0,50% 95 15,2% 0,1% 0,75% 100 16,1% 0,1% 1,00% 90 14,4% 0,1% 1,25% 80 12,8% 0,2% 1,50% 70 11,2% 0,2% 1,75% 50 8,0% 0,1% 2,00% 30 4,8% 0,1% 2,25% 20 3,2% 0,1% 2,50% 10 1,6% 0,0% 2,75% 5 0,8% 0,0% 3,00% 3 0,5% 0,0% 3,25% 2 0,3% 0,0% 3,50% 1 0,2% 0,00% 3,75% 1 0,2% 0,00% 4,00% 1 0,2% 0,00% 4,25% 1 0,2% 0,00% 4,50% 1 0,2% 0,00% 4,75% 1 0,2% 0,00% 5,00% 0 0,0% 0,00% Over 5% 0 0,0% 0,00%

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45

12 month expected credit loss:

 Example: Investment in

interest rate swap

 Consideration of counterparty

risk

 Calculation of credit value adjustment at the beginning of swap arrangement

Dr. Th. Goswin International Accounting Standards 0 9 16 21 24 25 24 21 16 9 0 0 ‐9 ‐16 ‐21 ‐24 ‐25 ‐24 ‐21 ‐16 ‐9 0 ‐30 ‐20 ‐10 0 10 20 30 0 1 2 3 4 5 6 7 8 9 10 EPE ENE

Period potential exposures Credit Spread credit charges with 50% probability Discount Factor Cash value EPE ENE counterparty own counterparty own difference 4,00%

0 0 0 0,80% 0,40% 0,000 0,000 0,000 1,000 0,000 1 9 -9 0,90% 0,45% 0,041 -0,020 0,020 0,962 0,019 2 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,925 0,037 3 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,889 0,047 4 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,855 0,051 5 25 -25 1,00% 0,50% 0,125 -0,063 0,063 0,822 0,051 6 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,790 0,047 7 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,760 0,040 8 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,731 0,029 9 9 -9 1,00% 0,50% 0,045 -0,023 0,023 0,703 0,016 10 0 0 1,00% 0,50% 0,000 0,000 0,000 0,676 0,000 explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%

Summ 0,338

credit value adjustment

Lifetime expected credit losses:

Expected present value measure of losses, that arise, if a

borrower defaults on his obligation throughout the life of the financial instrument. They are the weighted average credit losses, with the probability of default as the weight.

Difference to 12-month expected credit losses:

12-month expected losses are proportion of lifetime expected losses, limited to an expectation within 12month.

Lifetime expected credit losses consider both amount and timing of payments, this means, that a credit loss has to be recognized eve, when the entity expects to be paid in full but at a later moment.

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47 Dr. Th. Goswin International Accounting Standards

Lifetime expected credit losses:

Example: Portfolio of home loans originated in a country:

Stage 1: 12-month expected credit losses are recognized for all loans on initial recognition

Stage 2: information emerges, that one region in the country is experiencing tough economic conditions. Therefore it is expected, that the loans in that region may be more exposed to default. Lifetime expected credit losses are recognized for those loans within that region additionally to the 1-month expected credit losses.

Stage 3: more information emerges and the entity is able to identify some particular loans which have already defaulted or will imminently default. Lifetime expected cedit losses continue to be recognized, but interest revenue switches to a net interest basis.

Lifetime expected credit loss:

 Example: Investment in interest rate swap

 Consideration of change of risk if an (even remote) event is triggered (e.g. change of interest rate

 Calculation of credit value adjustment in course of time.

IFRS 9: Financial instruments

0 9 16 21 24 25 24 21 16 9 0 0 ‐9 ‐16 ‐21 ‐24 ‐25 ‐24 ‐21 ‐16 ‐9 0 ‐30 ‐20 ‐10 0 10 20 30 0 1 2 3 4 5 6 7 8 9 10 EPE ENE 9 16 21 24 25 24 21 16 9 0 9 0 0 -5 0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 8 9 EPE ENE Beginning of contract

Change of interest rate after one year

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49 Dr. Th. Goswin International Accounting Standards

Period EPE ENE counterparty own counterparty own difference Discount Factor 4,00% Cash value 0 0 0 0,80% 0,40% 0,000 0,000 0,000 1,000 0,000 1 9 -9 0,90% 0,45% 0,041 -0,020 0,020 0,962 0,019 2 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,925 0,037 3 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,889 0,047 4 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,855 0,051 5 25 -25 1,00% 0,50% 0,125 -0,063 0,063 0,822 0,051 6 24 -24 1,00% 0,50% 0,120 -0,060 0,060 0,790 0,047 7 21 -21 1,00% 0,50% 0,105 -0,053 0,053 0,760 0,040 8 16 -16 1,00% 0,50% 0,080 -0,040 0,040 0,731 0,029 9 9 -9 1,00% 0,50% 0,045 -0,023 0,023 0,703 0,016 10 0 0 1,00% 0,50% 0,000 0,000 0,000 0,676 0,000 explanation from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%

Summ 0,338

credit value adjustment

Period potential exposures Credit Spread credit charges with 50% probability Discount Factor Cash value EPE ENE counterparty own counterparty own counterparty own difference 4,00% 0 9 9 18 0 0,80% 0,40% 0,072 0,000 0,072 1,000 0,072 1 16 0 16 0 0,90% 0,45% 0,072 0,000 0,072 0,962 0,069 2 21 -7 21 -7 1,00% 0,50% 0,105 -0,018 0,088 0,925 0,081 3 24 -12 24 -12 1,00% 0,50% 0,120 -0,030 0,090 0,889 0,080 4 25 -15 25 -15 1,00% 0,50% 0,125 -0,038 0,088 0,855 0,075 5 24 -16 24 -16 1,00% 0,50% 0,120 -0,040 0,080 0,822 0,066 6 21 -15 21 -15 1,00% 0,50% 0,105 -0,038 0,068 0,790 0,053 7 16 -12 16 -12 1,00% 0,50% 0,080 -0,030 0,050 0,760 0,038 8 9 -7 9 -7 1,00% 0,50% 0,045 -0,018 0,028 0,731 0,020 9 0 0 0 0 1,00% 0,50% 0,000 0,000 0,000 0,703 0,000

explanation from yield curve from yield curve from yield curve from yield curve given given EPE*Cr.Sp*50% ENE*Cr.Sp*50%

Summ 0,554

credit value adjustment

Increase in credit risk since initial recognition

IFRS 9: Financial instruments

Stage 1 12-month expected credit losses Effective interest on gross carrying amount Stage 2 Lifetime expected credit losses Effective interest on gross carrying amount Stage 3 Lifetime expected credit losses Effective interest on amortized cost

Impairment recognition

Interest revenue

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51 Dr. Th. Goswin International Accounting Standards

Measuring expected credit losses:

Expected credit losses (in general) are an estimate of credit losses over the life of the financial instrument

Factors to be considered:

Probability weighted outcome. Neither best case nor worst case scenario

Estimate should reflect the possibility that credit lost occurs and that no credit loss occurs

Time value of money. Expected credit loss to be discounted to reporting date

Based on reasonable and supportable information that is available without undue cost or effort (i.e not necessary to obtain external rating for all credit exposures)

Measuring expected credit losses:

Examples:

Discriminant analysis

Value at Risk (VAR)

Option pricing theory

IFRS 9: Financial instruments

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53 Dr. Th. Goswin International Accounting Standards

Measuring expected credit losses:

Entity required to use reasonable and supportable information that is available at reporting date and that includes information about past events, current conditions and forecasts of future conditions

No need to use a „crystal ball“ to predict future, everything depends on the availability of the information. As forecast horizon increases, quality of information decreases.

Although model should be forward looking, historical data is an anchor. Adjustment of historical data to current economic trends is may be necessary.

IFRS 9 does not prescribe any model or method. As long as findings and observations are justifiable, preconditions of IFRS 9 fulfilled.

Assessing significant increases in credit risk:

IFRS 9 requires life expected credit losses to be recognized, when there are significant increases in credit risk since initial recognition

At beginning of lifetime of credit entity assesses initial creditworthiness of the borrower. Initial creditworthiness is taken evaluated.

If in course of time a re-valued creditworthiness shows difference to initial expectations (i.e. if when lender is not receiving compensation for the level of credit risk to which he is now exposed), readjustment of expectation has to be done.

This is reflected in the income statement as a financial loss

Important: there is a significant increase of credit risk before a

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55 Dr. Th. Goswin International Accounting Standards

Disclosure:

Explain basis for expected credit loss calculations

How credit losses and changes in credit risk are assessed

Reconciliation from opening to closing of allowance balance for 12-month losses, separately from lifetime losses allowances balance

Balances of carrying amount from opening to closing for financial instruments, subject to impairment

Users of financial statements must be able to understand the reasons for changes in the allowance balances (i.e. if it is caused by changes in credit risk or increased lending).

Additionally: Information on rating grades and modification of contractual cash flows.

Hedge accounting:

Clarification on the eligibility of financial instruments managed on a contractual cash flow basis in a fair value hedge

Target:

Simplification of hedge accounting procedures for fair value hedges

Aligning hedge accounting more with Risk Management and provide more useful information for analysis

Establish a more objective-based approach to hedge accounting

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57 Dr. Th. Goswin International Accounting Standards

Hedge accounting: Aspects considered Hedge accounting Objective Hedging instruments Discontinuation and rebalancing Presentation and disclosure Alternatives to hedge accounting Hedged items Effectiveness assessment Groups and net positions

Hedge accounting: Main questions solved in IFRS 9 (1) Definition of what financial instrument qualify for

designation as hedging instrument

(2) Definition of what items (existing or expected) qualify as hedged items

(3) How should an entity account a hedging relationship (4) Hedge accounting presentation and disclosures

(30)

59 Dr. Th. Goswin International Accounting Standards

Hedge accounting: (1) and(2)

Non-derivative financial assets or liabilities, measured by fair value through profit and loss (FVTPL) may be eligible as a hedging instrument (for derivatives and non-derivatives)

Non-derivative financial assets and liabilities measured not by FVTPL may lead to operational problems and therefore do not qualify as hedging instruments

Non-derivative financial assets or liabilities, measured by fair value through profit and loss (FVTPL) may be eligible as a hedged item

Hedge accounting: (1) and(2)

Derivatives qualify as a hedged item

Derivatives may qualify as hedging Instrument as well, especially in case of covering interest rate risk and foreign currency risk

Although the two risks can be hedged with one instrument altogether, the board acknowledges the fact that entities often hedge these risks with different instruments

However, derivatives need to be identified formally

(31)

61 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(3) Accounting procedures:

Fair value hedge: Gain and loss from re-measuring hedging instrument to be recognized as other comprehensive income

Hedged gain or loss of hedged item to be recognized separately in income statement (next to gain/loss of the entire asset/liability, that was hedged), and afterwards recognized in other comprehensive income

Ineffective portion of hedging operation to be shown in income statement

Hedge accounting:

(3) Accounting procedures:

Cash flow hedge: Eligible only, if close relation between hedge instrument and hedged item, formal designation, hedge effectiveness given an more than accidental

Gains and losses of hedged itemto show in equity (cash flow hedge reserve), gains and losses of hedging instrument to be shown in other comprehensive income, if ineffective part existing, to be shown in income statement

(32)

63 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(3) Accounting procedures:

Hedge of a net investment in a foreign operation: Gain or losses on the hedging instrument shall be recognized in other comprehensive income if effective, in-effective part to be shown in income statement

For hedging operations prior to first time application of IFRS 9, Cash flow hedge reserve shall be transferred to profit and loss

Hedge accounting:

(4) Disclose information about:

an entity’s risk management and how it is applied to current risk problems

how the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows

the effect of the hedge accounting has on the entity’s statement of financial positions (balance sheet), statement of comprehensive income (income statement) and statement of changes in

(33)

65 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(4) Disclose information on Risk Management strategy, explain

how risks arise

how the entity manages each risk (separately for individual risks or the entirety of risks)

the extent of risk exposure the entity manages

Hedge accounting:

(4) Disclose information on the amount, timing and uncertainty of future cash flow

For each category of risk exposure disclose quantitative information to analyze

- type of risk exposure, which is managed - extend of hedging to every risk exposure - effect of hedging to every risk exposure

(34)

67 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(4) Disclose information on the amount, timing and uncertainty of future cash flow, in particular:

amount or quantity (tons etc.) of risk to which entity is exposed

amount or quantity of risk, which is hedged

how hedging changes the exposure to risk

for each category a description of sources of hedge ineffectiveness (currently and as a future expectation)

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for fair value hedge, cash-flow hedge and hedge of a net investment (…)

- carrying amount of the hedging instruments, and - notional amounts or other quantities (tons etc.) related to hedging instrument

(35)

69 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for hedged items

For fair value hedges

Carrying amount of accumulated gains and losses on the hedged items, presented in separate line in balance sheet (statement of financial positions), separating assets from liabilities

Balance remaining in balance sheet for hedges, where hedging has been discontinued

Hedge accounting:

(4)

Disclose of effects of hedge accounting on

primary financial statement, in tabular form, for

hedged items

For cash flow hedges

Balance in the cash flow hedge reserve (i.e. Equity) for continuing hedges, when there was an effect on income statement

Balance remaining in balance sheet for hedges, where hedging has been discontinued

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71 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk

For fair value-, cash flow-, and hedges of a net investment (...)

Changes in the value of the hedging instrument recognised in other comprehensisve income

Hedge ineffectiveness recognized in profit and loss

A description of the items, where hedge ineffectiveness is included

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk

For fair value hedges

Change of the value of the hedged item

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73 Dr. Th. Goswin International Accounting Standards

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement, in tabular form, for each category of risk

For cash flow-, and hedges of a net investment (...)

For hedges of net positions the hedging gains or losses recognized in a separate line in the income statement

Amount reclassified from cash flow hedge reserve to profit and loss as a reclassification adjustment

Description of the line item in the income statement, affected by reclassification

Hedge accounting:

(4) Disclose of effects of hedge accounting on primary financial statement

A reconciliation calculation shall be given, that

Allows users to identify the different adjustments, classifications and operations, which have an effect on balance sheet, income statement, statement of profit and loss, statement of other comprehensive income and statement of changes of equity

(38)

75 Dr. Th. Goswin International Accounting Standards

References

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