Slideshare Ifrs9 Are You Good To Go Corporates

IFRS 9
Financial instruments for corporates – Are you good to go?

September 2017
kpmg.com/ifrs
© 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved.
Are you good to go?
IFRS 9 will change the way many corporates account
for their financial instruments. You’ll need to consider
the new requirements for…
Classification and Hedge

Impairment
measurement accounting
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.
2
For each of the following,
documenting your analysis
and the conclusions drawn
will be essential
3
Classification and
measurement
Classification
How will you classify your trade receivables and debt investments?
What are the asset’s How is the business model’s

Classification
contractual cash flows? objective achieved?
Yes Holding to collect Yes

Solely principal and
contractual cash Amortised cost
interest?
flows?
No
FVOCI
No Collecting contractual Yes
cash flows and selling
financial assets? No
FVTPL
5
Business model
Have you determined the business model at a level that reflects
how groups of financial assets are managed together?
Think about…
― Objectives: Are collecting contractual ― Performance: How is it evaluated

cash flows and/or selling financial and reported?
assets integral to the business model?
― Risks: How are they managed?
― Sales: What are the actual and
expected frequency, value and timing? ― Compensation: How are managers
incentivised?
6
Factoring and securitisation
Do you sell trade receivables in factoring agreements or
sell loans in securitisation arrangements ?
Securitisation Investors
vehicle
Company D
D loans SV notes
Think about…
Consolidated vs separate financial statements | Guarantees given to the factor
7
Assessing the SPPI criterion
Do the asset’s contractual terms give rise to cash flows that are SPPI
– solely payments of principal and interest ?
Consider…
Other basic Other

Time value Profit
Credit risk lending associated
of money margin
risks costs
Remember…
― Embedded derivatives are not separated from financial assets
― Exposure to risks or volatility unrelated to a basic lending arrangement is not SPPI
8
Prepayment features
Do any prepayment features meet the SPPI criterion?
A contractual term meets the criterion if…
it permits or requires prepayment at an

amount substantially representing unpaid
principal and interest
Remember…
― The amount can include reasonable compensation for early termination
― There’s an exception for certain prepayment features at par
9
Other features
Do other features in the contract mean that
the SPPI criterion is not met?
Consider…
Non-recourse Extension Modified time

loans features value of money
10
Equity investments
Does your accounting policy meet IFRS 9’s requirements?
You’ll need to… You can no longer…
Measure non-trading investments at Measure investments at cost

FVTPL, unless you make an irrevocable
policy choice on initial recognition to Recognise impairment in profit or loss
measure them at FVOCI on FVOCI investments
Measure all other equity Reclassify gains or losses on FVOCI

investments at FVTPL equity instruments
11
Financial liabilities designated at FVTPL
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
Designation criteria
are unchanged
Remaining change in from IAS 39
fair value
12
Modification or exchange of financial liabilities
Do you have modifications or exchanges of fixed rate financial
liabilities that do not result in derecognition?
You’ll need to…
Recalculate amortised cost

Discount the modified contractual Recognise any adjustment in
and
cash flows using the original profit or loss
effective interest rate (EIR)
Remember…
This is a change from current practice | Retrospective application is required
13
Impairment
Scope of impairment requirements
Have you identified all the instruments that are subject to the
impairment requirements?
In scope Out of scope
― Debt instruments measured at ― Equity investments

amortised cost or at FVOCI – e.g. trade
― Financial instruments measured
receivables
at FVTPL
― Financial guarantees and loan
commitments not measured at FVTPL
― Lease receivables
― Contract assets in the scope of the
revenue standard – IFRS 15
15
Simplified approach to measuring ECL
Will you choose to extend the simplified approach for measuring ECL?
General Has there been a No

Which approach will Loss allowance =
significant increase
you apply? 12-months’ ECL
in credit risk (SICR)?
Yes Loss allowance =

Simplified
lifetime ECL
Choice applies to…

Trade receivables and contract assets with a significant financing component | Lease receivables
16
Practical expedient
Will you use a provision matrix to measure ECL for trade receivables?
Example
Age analysis: days past due Based on:

Loss ― Historical credit loss
rate Current 1-30 31-60 61-90 >90 exposure
― Adjustment for current
IFRS 9 0.3% 1.6% 3.6% 6.4% 10.5% conditions and forward-
looking estimates
Remember…
All receivables balances need an ECL provision, including those in the current column
17
Assessing significant increase in credit risk
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) vs Qualitative factors
Remember…
Low credit risk exception | ‘30 days past due’ rebuttable presumption
18
Definition of default
Have you defined ‘default’ for assessing SICR and
measuring impairment where relevant?
The definition should be consistent

with that used for internal credit risk
management
Rebuttable presumption that default does not occur

later than 90 days past due
19
Measuring expected credit losses
What data and analysis will you use for measuring ECL
for different asset types?
Probability weighted Present value Cash shortfalls
Unbiased and Discount rate = Cash flows due under the

probability- Original EIR or an contract less cash flows
weighted amount approximation you expect to receive
Remember…
Incorporate forward-looking economic scenarios
20
Hedge
accounting
Accounting policy
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
Yes all hedging relationships
Will you choose to defer
application of IFRS 9’s
general hedging model?
No Apply 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
22
Alignment with risk management objectives
Have you formally documented the risk management strategy and
objective for undertaking the hedge?
Hedge documentation should…
Demonstrate how the

hedge relationship is Include an analysis of
more closely aligned sources of hedge
with the actual risk effectiveness
management objective
23
Costs of hedging
Have you considered the ‘costs of hedging’ elements that may be
excluded from certain designated hedging instruments?
Excluded elements Accounting
Time value of purchased options

Change in fair value
Forward element of forward contracts

Affects profit or loss at the
Foreign currency basis spreads of same time the transaction
financial instruments does or amortises over time
24
Risk components
Have you determined whether any risk components may be
designated as hedged items?
Designation criteria for financial and non-financial risk components
Separately identifiable Reliably measurable

Contractually and non- + Sufficient observable
contractually specified forward transactions
Think about…
Particular market structure the risk relates to | Location of hedging activity
25
Hedged items
Have you considered what additional exposures
may qualify as hedged items ?
Groups of items
Aggregated Components of a Equity instruments
including net
exposures nominal amount at FVOCI
positions
26
Assessing hedge effectiveness
Have you updated your systems, tools and documents to
meet the hedge effectiveness requirements ?
Economic relationship Credit risk does not Hedge ratio =

between hedged item dominate value Actual ratio used for
and instrument changes risk management
27
Transition and
disclosures
Transition requirements
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
29
Disclosure requirements
Have you identified the additional information and processes
needed to meet the disclosure requirements?
Read our Guide to annual

financial statements – You’ll need to provide
specific transitional
IFRS 9 appendix
disclosures and more
detail about credit risk
management and hedge
accounting
30
Checklists and
next steps
Checklist (1/2)
Have you…?  Have you…? 
Determined how you will classify your trade Checked that your accounting policy for equity
 
receivables and debt investments? investments meets IFRS 9’s requirements?
Assessed whether collecting contractual Assessed what the effect of applying the new
cash flows and/or selling financial assets are  rules for presenting financial liabilities 
integral to your business model? designated at FVTPL will be?
Considered the impact of factoring or Determined whether you have modifications or
 
securitisation arrangements? exchanges of fixed rate financial liabilities that
do not result in derecognition?
Reviewed contractual terms to assess whether
 Identified all the instruments that are subject to
cash flows are SPPI?

the impairment requirements?
Considered whether prepayment features
 Decided whether you will extend the simplified
meet the SPPI criterion?

approach to measure ECL?
Determined whether other contract features

mean that the SPPI criterion is not met? Decided whether you will use the practical 
expedient to measure ECL for trade receivables?
32
Checklist (2/2)
Have you…?  Have you…? 
Designed the criteria for assessing a SICR for Considered the ‘costs of hedging’ elements
 that may be excluded from certain designated 
each asset type under the general approach?
hedging instruments?
Defined ‘default’ for assessing SICR and Determined whether any risk components or
 
measuring impairment where relevant? additional exposures may qualify, or be
designated, as hedged items?
Considered what data and analysis you will use

for measuring ECL for different asset types? Updated your systems and documents to meet

the hedge effectiveness requirements?
Decided whether to adopt IFRS 9’s hedge

accounting requirements? Aligned your implementation plan with the

transition requirements?
Formally documented your hedge accounting
policy and aligned it with your risk  Identified the additional information and
management objectives? processes needed to meet the disclosure 
requirements?
33
How did you do?
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
34
Don’t forget the broader business impacts
Have you…
― updated your management reporting,
Accounting,
Data, systems
including KPIs?
tax and
and processes
reporting
― developed a transition plan for parallel
Financial
Instruments runs, including reconciliations?
Accounting
Change
― thought about the tax implications?
People and
― calculated the impact on bonus
Business
change
schemes?
― compared your approach with peers?
35
Find out more
Talk to your Find out Follow the

usual KPMG more at discussion on
contact kpmg.com/ifrs9 LinkedIn
36
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IFRS 9

Financial instruments for corporates – Are you good to go?

Classification and Hedge

To help you drive your implementation project to the

What are the asset’s How is the business model’s

Yes Holding to collect Yes

― Objectives: Are collecting contractual ― Performance: How is it evaluated

Other basic Other

A contractual term meets the criterion if…

it permits or requires prepayment at an

Non-recourse Extension Modified time

You’ll need to… You can no longer…

Measure non-trading investments at Measure investments at cost

Measure all other equity Reclassify gains or losses on FVOCI

You’ll need to…

Recalculate amortised cost

― Debt instruments measured at ― Equity investments

General Has there been a No

Yes Loss allowance =

Choice applies to…

Age analysis: days past due Based on:

The definition should be consistent

Rebuttable presumption that default does not occur

Probability weighted Present value Cash shortfalls

Unbiased and Discount rate = Cash flows due under the

Hedge documentation should…

Demonstrate how the

Excluded elements Accounting

Time value of purchased options

Forward element of forward contracts

Designation criteria for financial and non-financial risk components

Separately identifiable Reliably measurable

Economic relationship Credit risk does not Hedge ratio =

Use the helpful guidance in our

There are significant exemptions from restating comparatives

Read our Guide to annual

All 22 – You’re good to go!

Talk to your Find out Follow the

KPMG International Standards Group is part of KPMG IFRG Limited.

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