IFRS Aktualizácia: IAS 39 Zmien na prvý Pohľad

New directives to ensure a more realistic view of risks in the balance sheet

On 12 November 2009, the International Accounting Standards Board (IASB) issued a new International Financial Reporting Standard (IFRS) for the recognition and measurement of financial instruments. This publication rounds off the first part of a three-phase project to replace ‘IAS 39 Financial Instruments: Recognition and Measurement’ with a new standard. IFRS 9 lays out new requirements for recognising and measuring financial assets. The regulations have to be applied from 01 January 2013 although adoption prior to this date is permitted, even for 2009 statements. The IASB intends to extend IFRS 9 in phases in 2010 to include new standards on the recognition and measurement of financial liabilities, the charge-off of financial instruments as well as impairment and hedge accounting. IFRS 9 should be available in full to replace IAS 39 before the end of 2010.

What Exactly is Going to Change?

1. Recognition and Measurement

New, simpler directives for categorising and valuing financial assets

IFRS 9 replaces the recognition approaches and measurement processes laid out in IAS 39. At initial recognition, all financial assets are measured at fair value. Subsequent valuation is conducted at amortised cost or fair value. For this purpose, assets will be divided in future into two categories: ‘Amortised Cost’ or ‘Fair Value’. The categories ‘AFS’ and ‘HTM’ no longer exist and will not be replaced.

A financial asset shall be selected for the category ‘Amortised Cost’ and measured at amortised cost if both of the following conditions are fulfilled:

• The objective of the entity’s business model is to hold the financial asset in order to collect the contractual cash flows.
• The contractual terms and conditions governing a financial asset give rise on specified dates to cash flows that are solely payments of the principal and interest on the principal outstanding.

In principle, this does not entail a change in the existing measurement approaches.

Fair Value Option

Even if an instrument meets both conditions for amortised cost, an option is contained in IFRS 9 that enables entities to designate financial instruments as at fair value through profit or loss if this eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on a different basis. At the time of initial adoption, IFRS 9 contains a de facto right to choose to newly exercise the fair value option in its entirety for financial assets and liabilities.

Equity Instruments

All investments in equity instruments that come under the scope of IFRS 9 are to be recorded on the balance sheet at fair value; changes in value are classified through profit or loss. Exceptions are investments in equity instruments which the entity has decided to recognise at fair value through other comprehensive income (FVTOCI). There is no longer an ‘amortised cost exception’ for unquoted equities.

Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value.

Derivatives

All derivatives, including those linked to unquoted equity investments, are to be measured at fair value. Value changes are recognised in profit or loss unless the entity has decided to treat the derivative as a hedging instrument in accordance with IAS 39. In this case, the requirements set out in IAS 39 apply.

Embedded Derivatives

An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.

A derivative that is attached to a financial instrument but is contractually transferable independent of that instrument, or has a different counterparty, is not an embedded derivative, but rather a separate financial instrument.

The embedded derivative concept of IAS 39 is not included in IFRS 9. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at fair value through profit or loss because they were not closely related to the host contract will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at fair value through profit or loss if any of its cash flows do not represent payments of principal and interest.

Even if the future approach leads, in theory, to a more simplified procedure, many financial institutions will be confronted with the task of combining a host contract and embedded derivative, which are stored and processed in different transaction processing systems, for valuation purposes. This will place even more weight on the importance of the FlexFinance Product Builder which is available at present.

Reclassification

For debt instruments, reclassification is required between ‘fair value through profit or loss’ and ‘amortised cost’, or vice versa, if and only if the entity’s business model objective for its financial assets changes so its previous model assessment would no longer apply.

If reclassification is appropriate, it must be done prospectively from the reclassification date. An entity does not restate any previously recognised gains, losses, or interest.

Disclosures

IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures. It also includes additional disclosures about investments in equity instruments designated as at ‘fair value through other comprehensive income’.

Financial Liabilities

IFRS 9 (2009) does not address financial liabilities. The IASB has begun the process of giving further consideration to the classification and measurement of financial liabilities in its project on Credit Risk in Liability Measurement. It expects to issue final requirements for financial liabilities in 2010.

Consequences for FlexFinance users

The standard must be applied for financial assets for periods beginning on or after
01 January 2013. For existing FlexFinance customers, this means that the new holding categories for assets have to be delivered because of the compulsory period of comparison from 01 January 2012 or the set of rules for automatic classification in FlexFinance have to be adjusted before this date.

In view of the structured implementation of classification and the associated measurement approaches, FlexFinance already offers users the possibility of configuring the two ‘new’ categories in the set-up. At the beginning of 2010, FERNBACH will support the automatic adjustment of financial instruments and the successful accounting logic to comply with the new categories. This will provide multiple benefits to existing and new customers: it is not necessary to buy new software or to change existing programs on a large scale. Furthermore, a financial institution can also benefit from the cost-effective transitional arrangements of IFRS 9: the ‘Comparative Restatement’ of previous years’ figures for the periods 2009 to 2011 is not required if IFRS 9 is adopted early. ‘Restatement’ is only necessary from 01 January 2012. Moreover, early adoption of the new standard does not entail early adoption of the following regulations on impairment and hedging.

2. Impairment

Expected losses must be recognised earlier on

On 05 November 2009, the IASB published an exposure draft (ED) on the second phase of the replacement of IAS 39 ‘Financial Instruments: Amortisation and Impairment’. It includes a proposal to replace the ‘incurred loss’ impairment model with an ‘expected loss’ model.

The current IAS 39.59 requires only impairment losses that have already been incurred to be recognised. Losses that are the result of future events are explicitly excluded. The proposed new model requires an entity to estimate expected credit losses at the time of acquisition of the asset, to recognise contractual interest minus expected credit losses over the life of the instrument, to build a provision for the expected losses, to continuously reassess them and to recognise changes in the expected losses immediately. This is required for all assets measured at amortised cost and can be done on a portfolio basis or on a single asset. Contractual interest, expected credit losses as well as economic interest income after allocation of these credit losses have to be disclosed separately.

FlexFinance already contains the modelling techniques proposed for this approach:

• Its powerful cash flow generator was specifically designed to segregate all individual cash flows for a financial instrument, including effects based on statistics for expected cash flows from a portfolio of similar instruments. FlexFinance knows when to recalculate the cash flow plan (for example, when estimations on expected loss change) and executes this at any posting date required.
• For collective impairment, FlexFinance continues to post a collective provision based on PD and LGD which can be delivered by the bank or calculated in FlexFinance Analytix. Only the time horizon, which is covered by the LIP (loss identification period) and integrated in the loss provision formula, differs from the IBNR approach.

The Exposure Draft proposes separate disclosure of:

• contractual interest
• allocation of initial expected credit losses
• economic interest income after allocation of initial expected credit losses

Consequences for FlexFinance users

If the impairment model is implemented as planned, mapping can be performed directly in FlexFinance using functions that are available today. This also applies to the extended requirements for disclosures: requirements for separate disclosure are also covered because FlexFinance always posts value changes to separate accounts.

Therefore, FlexFinance users will be the first to benefit from the advantages of the amended impairment approach immediately from its first possible adoption: when the proposed impairment model is applied, expected credit losses will be updated each period. Any changes to initial expectations for credit loss will be recognised immediately in the P&L. Hence, ‘jumps’ in the profit and loss account caused by the ‘incurred but not reported loss model’ can be avoided.

3. Hedging

New approach to simplifying accounting requirements

The Board is currently in negotiations with its members and plans to issue an Exposure Draft on Hedge Accounting in the first quarter of 2010.

For the time being, the Board has decided to simplify current hedge accounting requirements by replacing fair value hedge accounting with an approach that is similar to cash flow hedge accounting. At the same time, the existing cash flow hedge accounting model will be simplified to reduce complexity.

The Board has also decided to address general hedge accounting before considering the implications for portfolio hedge accounting.

Implications for hedge accounting with regard to net investments in foreign operations will be considered separately because there is also interaction with IAS 21.

Consequences for FlexFinance users

It would be premature to comment on implementation in FlexFinance at this point. Several variants for effectiveness testing are currently available as encapsulated functions. Mapping of value changes outside of the P&L account is also supported. In this respect, the expected changes associated with hedging relationships are mapped by FlexFinance.