IFRS 9 Financial Instruments & Impairment: Key Principles and Impact

Explore the key principles of IFRS 9 Financial Instruments, focusing on classification, measurement, impairment, and expected credit loss overview. Gain insights into the impact on financial statements across different stages, accounting for modifications, and identifying impairment in various financial assets and liabilities.

• IFRS 9
• Financial Instruments
• Impairment
• Key Principles
• Expected Credit Loss

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1. IFRS 9 Financial Instruments

2. IFRS 9 - Key Principles and Areas of Difference Impact on the financial statements could be pervasive Classification & Measurement Hedge Accounting Impairment

3. Classification & Measurement - Financial Liabilities Non-substantial modifications accounted for differently Amortized Cost Financial Liabilities FVTPL Held for trading Own credit risk: FV gains/losses in OCI Measure at FVTPL (specific criteria) FVTPL Fair Value Option Other FV gains/losses presented in P/L

4. Classification & Measurement Financial assets Business Model Held to Collect and Sell Held to Collect Other Any (1-3) Cash Flows SPPI (Solely Payments of Principal and Interest) Not SPPI FVTOCI with recycling Classification Amortized Cost FVTPL FVTPL Equity instrument Fair Value Option FVTPL FVTOCI without recycling

5. Classification & Measurement - Financial Liabilities Accounting for the modification or exchange of debt that does not result in derecognition IAS 39 IFRS 9 No gain or loss recognized Gain or loss recognized VS Amortized cost recalculated by discounting modified contractual cash flows at original EIR, revised for transaction costs only Effect of modified cash flows spread over remaining term by revising EIR

6. Impairment Expected Credit Loss Overview Scope Certain financial guarantees (unless at FVTPL) Written loan commitments (unless at FVTPL) Contract assets (IFRS 15) Lease receivables (IFRS 16) Financial assets in the scope of IFRS 9 Subsequent measurement . FVTPL / FVOCI Option for certain equity instruments AC FVOCI Outside the scope of the impairment model Within the scope of the impairment model

7. Expected Credit Loss Overview Impairment general model Changes in credit risk since initial recognition Significant increase in credit risk? Objective evidence of impairment?? STAGE 1 STAGE 3 STAGE 2 Lifetime ECL Lifetime ECL 12 month ECL Loss allowance Apply effective interest rate to .. Net carrying amount Gross carrying amount Gross carrying amount

8. Expected Credit Loss Overview Expected loss allowance : 12-month vs lifetime Stage 2 Stage 1 12-month expected losses Life time expected losses 12 month ECL reflects the cash shortfalls over the life of the loan arising from a default in the next 12 months Lifetime ECLs are the total expected cash shortfalls arising from all possible default events over the life of the loan Most assets begin in this bucket Assets migrate to this bucket if the credit risk has increased significantly since initial recognition (unless low credit risk ) Effect of the entire credit loss on a financial instrument weighted by the probability that this loss will occur in the next 12 months Examples Loan of CU 10m Loan of CU 10m Expected 12% probability to default over lifetime Expected 2% probability to default in next 12 months Entire loss that would arise on default is 15% Entire loss that would arise on default is 10% Lifetime ECL = CU 180,000 (10m x 12% x 15%) 12 month ECL = CU 20,000 (10m x 2% x 10%) Note: Discounting has been ignored in the simplified example

9. Expected Credit Loss Overview Transfer out of stage 1 significant increases in credit risk Significant increase in credit risk? Stage 1 Stage 2 Relative model Credit risk on initial recognition Current credit risk compare Reporting date Initial recognition

10. Expected Credit Loss Overview Transfer into Stage 3 indicators that an instrument is credit impaired Breach of contract (e.g. past due or default) Lenders grant a concession relating to the borrower s financial difficulty Significant financial difficulty of the borrower Credit impaired Probable bankruptcy or other financial reorganisation Disappearance of an active market for the instrument

11. Hedge Accounting Hedge accounting remains optional under IFRS 9. Entities may choose to apply hedge accounting in order to reduce volatility in the income statement or in OCI. The three types of hedges remain the same under IFRS 9. However, some of the hedge accounting mechanics are different. In particular, IFRS 9 changes the mechanics applied when a hedge of a future transaction results in the recognition of a non-financial item. The hedge effectiveness requirements are very different under IFRS 9 compared to IAS 39. Retrospective hedge effectiveness test no longer required. Prospective test required, but test is whether an economic relationship exists between hedged item and hedging instrument. (no longer an 80-125% numerical threshold to pass). In most cases economic relationship may be demonstrated qualitatively This remains a key requirement under IFRS 9. Hedge accounting is applied prospectively from the point the qualifying criteria are satisfied, notably hedge documentation. Hedge documentation requirements are different under IFRS 9 compared to IAS 39.

12. Q & A