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Disclaimer
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International Accounting Standards Board(IASB) disclaimer
Expressions of individual views by members of the IASBand its staff are encouraged. The views expressed in this
webcast are those of the presenter. Official positions of
the IASB on accounting matters are determined only after
extensive due process and deliberation.
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Todays moderator
Wei Li Chan
Ernst & YoungGlobal IFRS Financial
Instruments Working Group
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Todays agenda
Current status of the IFRS 9 FinancialInstruments project
Key requirements of the IASBs expected
credit loss model
A comparison with the FASBs proposals
Business impacts and implications
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Todays presenters
Sue Lloyd
IASBSenior Director
Technical Activities
Steven Robb
Ernst & Young LLP(UK)
Financial
Accounting and
Advisory Services
Robert Wadley
Ernst & Young LLP(US)
US National
Professional Practice
Group
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Current status of the IFRS 9 FinancialInst rumentsproject
Key requirements of the IASBs expected
credit loss model
A comparison with the FASBs proposals
Business impacts and implications
Todays agenda
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Timeline for financial instruments projects
2009
20102011 2012 2013
Q1
2013
Q2
2013
Q3
2013
Q4
Effective
date
IFRS 9 Financia l instrum ents
(replacement of IAS 39)
Classification and measurement IFRS 2015?
Mandatory effective date and transition
disclosuresIFRS 2015?
Classification and measurement
(limited amendments)ED R ?
Impairment
Comments due 5 JulyED SD ED R ?
General hedge accounting ED RD Target IFRS ?
Macro hedging
Accounting for macro hedging Target DP ?
Note: DP:
discussion
paper
SD:
supplementary
document
ED: exposure
draft
RD: review
draft
IFRS: final
standard
R: Re-
deliberations
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Update on IFRS 9 classification andmeasurement limited amendments
Application issues raised by constituents Interaction with the insurance contracts project
Convergence with US GAAP
Primaryobjectives
The introduction of a mandatory fair value through
other comprehensive income (FVOCI) category
Minor amendments to the contractual cash flow
characteristics assessment
Clarification of the amortised cost business model
assessment
Early adoption only if the entire IFRS 9 package is
applied
But, early adoption of own credit provisions allowed
Key
proposals
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Overview and timeline of IFRS 9 impairmentproject
IASB FASBIASB/
FASB
IASB/
FASBFASB IASB
November 2009
ED
Lifetime losses
built into the
effective interest
rate
April 2011
Three-bucket
expected loss
model
March 2013
ED
Expected credit
loss model
(comments
due 5 July)
January 2011
SD
Good book and
bad book
May 2010
ED
Lifetime expected
losses on
origination
December 2012
ED
Current expected
credit loss model
(comments due
31 May)
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Polling question 1
How much time will your entity require to
implement the IASBs proposals?
A. 01 year
B. 12 years
C. 23 years
D. More than 3 years
E. Does not apply
F. I do not know
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Todays agenda
Current status of the IFRS 9 FinancialInstruments project
Key requirements of the IASBs expected
credit loss model
A comparison with the FASBs proposals
Business impacts and implications
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Scope of IASBs Expected Credi t LossesED
Debt instruments measured at amortised cost Debt instruments mandatorily measured at
FVOCI
Trade receivables and lease receivables Irrevocable loan commitments and financial
guarantee contracts not measured at fair value
through profit or loss
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Summary of the expected credit loss model:general model
Initial recognition(with exceptions)
Allowance:
Criterion:
Interest
revenue
based on:
12-month expected
credit losses
Gross carryingamount
Performing Under-performing Non-performing
Gross carryingamount
Change in credit quality since initial recognition
improvement deterioration
Lifetime expected credit losses
The credit risk has increased significantly since
initial recognition+
Objective evidence
of impairment
Net carryingamount
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Exceptions to the general model: simplifiedapproach
Simplified approach for trade and lease
receivables
Recognise lifetime expected credit losses on
initial recognition and subsequent reporting
periods
Required for short-term trade receivables
Policy election for long-term trade receivablesand lease receivables
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Low vs. high credit risk financialinstruments: how would the model work?
* Probabilities of default are based on S&P Global Corporate Average Cumulative Default Rates By Rating Modifier (1981-2011)
Threshold Investment grade Non-investment grade
S&P AA+ A BBB+ BBB- BB B+ B B- CCC/C D
12-mth PD* 0% 0.08% 0.15% 0.37% 0.76% 2.50% 5.46% 8.64% 26.82% 100%
Allowance 12-month 12-month or lifetime
Implementation challenges
Tracking credit risk measures from origination
Developing practical absolute credit risk thresholds
Mapping internal grading to external rating and/or
probabilities of default (PD) Using delinquency-based approaches and the more than
30 days past due rebuttable presumption
Segmenting the portfolios by shared risk characteristics
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Polling question 2
Does your entity support the operational
simplification of 'investment/non-investmentgrade' and the rebuttable presumption of 'more
than 30 days past due'?
A. Yes to bothB. Yes to only 'investment/non-investment
grade'
C. Yes to only 'more than 30 days past due'D. No to both
E. Does not apply
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Exceptions to the general model: credit-impaired assets
Financial assets that are credit-impaired on initialrecognition
Originated or purchased financial assets
Objective evidence of impairment on initial recognition
Credit-adjusted effective interest rate (EIR)
No Day 1 allowance or credit losses
Allowance based on subsequent changes in lifetime
expected losses
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Estimating expected credit losses (ECL)
Lifetime ECL = present value of all cash shortfalls over the
remaining life of the financial instrument 12-month ECL = a portion of the lifetime ECL that is
associated with the probability of a default occurring in the next
12 months after the reporting date
The time value of money
A probability-weighted outcome
Best available information
Information
about pastevents
Information
about currentconditions
Reasonable
and
supportableforecasts
+ +
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Estimating expected credit losses (ECL):implementation challenges
The time value of money
Choice of discount rate
Best available information
Past Current Future Area of
judgement
Availability of
data
Reliability offorecasts
+ +
A probability-weighted outcome
No prescribed approaches Not best estimate
Defining default
Determining 12-month and lifetime ECL
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Polling question 3
Which would be the most challenging aspect of
estimating the expected credit losses?
A. Creating lifetime estimates
B. Determining a probability-weighted
outcome
C. Incorporating forward looking forecasts
D. Discounting the expected credit losses
E. I do not know
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Illustrative example: PD approach
Correlating PD and LGD
Relying on rating agencies data
Individual vs. collective assessment
Challenges
0.15% x 25% x CU1mn = CU375
Loan originated at CU1mn, i.e., exposure at
default (EAD)
25% gross carrying amount irrecoverable ifloan defaults, i.e., loss given default (LGD)
0.15% probability of a default (PD) in the
next 12 months
12-month
ECL
allowancePD x LGD x EAD
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Illustrative example: provision matrix
Portfolio of trade receivables categorised by
common risk characteristics
Lifetime
ECL
allowance
Adjusting historical loss rates with forward-
looking estimates
Challenges
Days past
due (DPD)
030 3190 Over 90
Carrying
amount
CU800,000 CU200,000 CU50,000
Lifetime ECL
rate
1% 5% 10%
Lifetime ECL CU8,000 CU10,000 CU5,000
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Disclosures
Reconciliation of opening and ending gross carrying amount and
credit loss allowance or provision
Financial instruments measured at 12-month ECL
Financial instruments measured at lifetime ECL
Financial instruments with objective evidence of impairment
Credit-impaired financial assets
Inputs, assumptions and techniques
Collateral information
Disaggregation by credit risk rating grades
Modified assets
Write-off policy
Assets evaluated on individual basis
Objective: Enable users to understand an entitys estimate of
expected credit losses and changes in credit risk
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Transition
Retrospective application is required; however, transition relief
is proposed.
Recognise 12-month ECL if credit risk is low; otherwise, lifetime
ECL are recognised
If determining initial credit risk requires undue cost or effort
Except when days-past-due is used as the only borrower-specific indicator of credit quality deterioration
Does not require restatement of comparatives, but permitted to
do so unless this requires the use of hindsight
Adjust opening retained earnings balance
Does not require disclosure of the effect of IFRS 9 on prior
period or IAS 39 on current period
Reconciliation of IAS 39 and IAS 37 ending balances and IFRS 9
opening balance
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Current status of the IFRS 9 FinancialInstruments project
Key requirements of the IASBs expected
credit loss model A comparison with the FASBs
proposals
Business impacts and implications
Todays agenda
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A comparison with the FASBs proposals:similarities
Single impairment model for debt instruments, trade andlease receivables and loan commitments
Change from incurred to expected credit loss model
The same information is used to estimate ECL
The measurement of ECL is the same for financial
instruments with lifetime ECL
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A comparison with the FASBs proposals:key differences
Topic IASB FASB
Measurement
bases
Dual measurement
(12-month and lifetime ECL)
Single measurement
(current ECL)
Simplified
approach
Available for trade and lease
receivables
Not necessary
FVOCI assets Investment grade simplifcation Practical expedient not to
recognise ECLCredit-
impaired
assets
Originated or purchased
assets with objective
evidence of impairment
No allowance on initial
recognitionCredit-adjusted EIR
Purchased assets with
significant deterioration in credit
quality since origination
Gross up balance sheet with an
allowance based on lossexpectations at time of purchase
Interest
income
Based on gross or net carrying
amount
Based on gross carrying amount
Non accrual guidance
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Polling question 4
Would you prefer an impairment model that is
based on:
A. 12-month and lifetime dual measurement
ECL approach
B. Other dual measurement ECL approach(e.g., foreseeable future and lifetime)
C. Single measurement lifetime
ECL approachD. Existing incurred loss approach
E. None of the above
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Current status of the IFRS 9 FinancialInstruments project
Key requirements of the IASBs expected
credit loss modelA comparison with the FASBs proposals
Business impacts and implications
Todays agenda
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How will the IASBs proposals impactentities?
More judgement and diversity of application Estimating ECL
Assessing when lifetime ECL are required
Likely to result in earlier recognition of credit losses
May increase the credit loss allowance or provision Depends on duration and quality of financial instruments
Depends on application of the current IAS 39 model
Potential volatility due to change in estimates
Cliff effect when financial instruments move between 12-monthECL and lifetime ECL and vice versa
Modification of current credit risk management and
financial reporting systems
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Next steps: what will entities need to do toimplement the IASBs proposals?
Establish governance structure and senior stakeholders involvement Conduct high level impact assessment
Define accounting policy and identify areas of judgement
Evaluate data availability and reconcile risk and finance data and
information sources
Examine IT dependencies
Leverage existing models (Group vs. legal entities)
Assess existing impairment model(s) and develop and validate new
impairment model(s)
Determine disclosure requirements Consider dependencies with other Groups projects and impacts on
capital and budgets
Think about communications to users
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Recap
One-minute
recap
R
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Resources
IFRS Development,Issue 54
(March 2013):IASB proposes new expected
credit loss model
www.ey.com/ifrs
Applying IFRS
IFRS Outlook
IFRS Practical Matters
Core Tools
Good Group Illustrative Financial Statements
International GAAP
Disclosure Checklist IFRS Update
EY International GAAP
IFRS Q&As (internal only)
Th k f ti i ti !
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Tuesday, 30 April 2013
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