Financial Risk Management A New Accounting Perspective

1
Financial Risk Management A New Accounting
Perspective
Chay Yiowmin Partner and Head of Financial
Services Moore Stephens LLP Singapore DID (65)
63292709 Fax [phone] chayyiowmin_at_mooresteph
ens.com.sg
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Agenda

• Introduction
• Introduction to IFRS 9
• Question Answer

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Introduction
4
Introduction

• In a major project to replace IAS 39 in its
  entirety by the end of 2010, the International
  Accounting Standards Board issued International
  Financial Reporting Standard (IFRS) 9 in November
  2009.
• IFRS 9 incorporates Phase 1 of the financial
  instruments project to replace the
  classification and measurement requirements on
  financial assets in IAS 39 Financial Instruments
  Recognition and Measurement.

5
Introduction

• The new standard, when adopted in Singapore, will
  have major implications for reporting entities,
  auditors, analysts and investors.

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Introduction to IFRS 9
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Introduction to IFRS 9

• Introduction
• New classification and measurement requirements
  for financial assets.
• New criteria for amortised cost measurement.
• New measurement category fair value through
  other comprehensive income.
• No more available-for-sale and held-to-maturity
  assets.

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Introduction to IFRS 9

• Introduction (continued)
• No more embedded derivatives in financial assets.
• No more unquoted equity investments measured at
  cost less impairment.

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Introduction to IFRS 9

• Effective Date
• Effective from 1 January 2013 with early adoption
  permitted.
• Expected to be applied retrospectively.
• Entities adopting the new Standard, with an
  initial application date before 1 January 2012,
  will be exempt from the requirement to restate
  prior periods.

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Introduction to IFRS 9

• Debt Instrument
• Conditions for measurement at amortised cost
• Business model test Hold financial asset to
  collect contractual cash flows, rather than to
  sell the asset prior to contractual maturity and
• Cash flow characteristics tests Contractual
  terms of financial assets give rise on specified
  dates to cash flows that are solely payment of
  principal and interest on the principal
  outstanding.
• All other debt instruments must be measured at
  fair value through profit or loss (FVTPL).

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Introduction to IFRS 9

• Debt Instrument (continued)
• Examples that satisfy this criterion
• A variable rate loan with a stated maturity date
  that permits the borrower to choose to pay three
  months LIBOR for a three month term or one month
  LIBOR for a one month term
• A fixed term variable market interest rate bond
  whereby the variable interest rate is capped and
• A fixed term bond whereby the payments of
  principal and interest are linked to an
  unleveraged inflation index of currency in which
  the instrument is issued.

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Introduction to IFRS 9

• Debt Instrument (continued)
• Examples that do not satisfy this criterion
• A bond that is convertible into equity
  instruments of the issuer and
• A loan that pays an inverse floating interest
  rate (e.g. 8 minus LIBOR).
• Available-for-Sale and Held-to-Maturity
  categories excluded in IFRS 9.

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Introduction to IFRS 9

• Equity Instruments
• To be measured at fair value in the balance
  sheet.
• All fair value changes recognised in profit or
  loss.
• No cost exception for unquoted equities.
• If equity not held for trading, irrevocable
  election at initial recognition to measure at
  fair value through other comprehensive income
  (FVTOCI).
• Dividend income recognised in profit or loss.

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Introduction to IFRS 9

• Derivatives
• All derivatives, including those linked to
  unquoted equity investments, are measured at fair
  value.
• Embedded derivatives, previously separately
  accounted for at FVTPL under IAS 39, will no
  longer be separately accounted for under IFRS 9.
• Instead contractual cash flows are assessed in
  their entirety, and the financial asset is
  measured at FVTPL as a whole if any cash flows do
  not represent payments of principal and interest.

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Introduction to IFRS 9

• Impact of IFRS 9
• Ability to measure certain debt instruments (e.g.
  Government and Corporate Bonds) at amortised
  cost, which under IAS 39 would have been measured
  at fair value, due such bonds quoted in an active
  market.
• Hybrid financial assets with separated embedded
  derivatives at FVTPL, will instead be measured at
  FVTPL in their entirety.

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Introduction to IFRS 9

• Overall Summary

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Introduction to IFRS 9

• Overall Summary (continued)

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Introduction to IFRS 9

• In the Pipeline
• Phase 1 - Classification and Measurement
• IFRS 9 Financial Instruments for financial assets
  was published in November 2009.
• The IASB is now addressing the classification and
  measurement of financial liabilities.
• An exposure draft on the topic Fair Value Option
  for Financial Liabilities was published in May
  2010.

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Introduction to IFRS 9

• In the Pipeline (continued)
• Phase 2 Impairment Methodology
• The exposure draft Amortised Cost and Impairment
  was published in November 2009, awaiting for
  comments.

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Introduction to IFRS 9

• In the Pipeline (continued)
• Phase 3 Hedge Accounting
• IASB expects to publish an exposure draft in time
  to allow for finalisation by the second quarter
  of 2011.

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Question Answer
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Financial Risk Management A New Accounting
Perspective
Chay Yiowmin Partner and Head of Financial
Services Moore Stephens LLP Singapore DID (65)
63292709 Fax [phone] chayyiowmin_at_mooresteph
ens.com.sg