1. IFRS 9: Impact on Sri Lankan Banks
August 2014
Sujeewa Mudalige
Managing Partner - PwC
The presentation summarises the key provisions of the new IFRS 9. The Standard was issued in July 2014 and is effective for annual periods commencing on or after 1 January 2018.

2. Expected credit losses
Agenda
IFRS 9 overview
Expected credit losses
Challenging times ahead
This slide deck is intended to help engagement teams to discuss the IFRS 9 requirements with their clients. Please note that this slide deck covers Classification and Measurement of debt instruments and Expected credit losses. It will not include aspects of IFRS 9 that have not changed such as equity instruments. A separate slide deck is available on PwC Inform for the hedging section in IFRS 9. The own credit requirements for financial liabilities that were issued with the Hedging section are also included in this guidance at the end of the classification and measurement section.
In Depth publications are available on PwC Inform which address the three sections of IFRS 9:
Classification and measurement (
Expected credit losses ( and
Hedging (

3. IFRS 9 Overview 1
IFRS 9: Financial Instruments
August

4. Timeline of IFRS 9 July 2014 Final Standard 2018 Effective date
Nov 2009
IASB issues IFRS 9 (2009) – classification and measurement of financial assets
Oct 2010
IASB issues IFRS 9 (2010) – financial liabilities and derecognition
Nov 2013
General Hedging amendments to IFRS9
July 2014
Final Standard
During the financial crisis, the G20 tasked global accounting standard setters to work intensively towards the objective of creating a single set of high-quality global standards. As a response to this request, the IASB and the FASB began to work together on the development of new financial instruments standards. The IASB decided to accelerate its project to replace IAS 39, and sub-divided it into three main phases: classification and measurement; impairment; and hedging. Macro hedging is being considered as a separate project
In Nov 2009 the IASB issued IFRS 9 (2009), the first milestone in the replacement of IAS 39 project. This Standard dealt with the classification and measurement of financial assets primarily including only 2 categories: amortised cost and fair value through profit or loss (FVPL).
Later on, in October 2010 the IASB published the updated IFRS 9, ‘Financial instruments’ to include guidance on financial liabilities and derecognition of financial instruments. This confirmed the current treatment under IAS 39 with the exception of the treatment of own credit risk in financial liabilities designated at FVPL.
The IASB issued the new hedging requirements in November 2013.
As a consequence of the public demand for convergence, the FASB and IASB worked jointly on both the classification and measurement and the impairment projects. However, due to lack of support for a three-stage approach for the recognition of impairment losses in the US, the FASB developed a single measurement model, while the IASB decided to continue with the three-stage model. In addition, the FASB decided it would not continue to pursue a classification and measurement model similar to the IASB. As a consequence, IFRS 9 is not a converged standard and it is the result of two EDs and one joint SD.
This final version includes all phases of IFRS 9. The changes included from previous standards is the classification and measurement of debt instruments and impairment.
The effective date of the new Standard is for annual periods beginning on after 1 January 2018.
Nov 2009
IASB issues ED on impairment
Jan 2011
FASB and IASB issue supplementary document on impairment
March 2013
IASB re-exposes impairment and issues limited amendments to IFRS 9 (2010)
2018
Effective date
IFRS 9: Financial Instruments
August

5. Key Highlights of IFRS 9 IFRS 9: Financial Instruments
Example is taken from the Standard. Refer to appendix for full example and analysis from the Standard.
The objective of this slide is to provide the audience with a short fact pattern and point out that the discussion of the example is focused on the key take always and considerations. No one size fits all, so every situation needs to be evaluated on a case by case basis.
Analysis
Although the entity considers, among other information, the financial assets’ fair values from a liquidity perspective (i.e. the cash amount that would be realised if the entity needs to sell assets), the entity’s objective is to hold the financial assets in order to collect the contractual cash flows. Sales would not contradict that objective if they were in response to an increase in the assets’ credit risk, for example if the assets no longer meet the credit criteria specified in the entity’s documented investment policy. Infrequent sales resulting from unanticipated funding needs (e.g. in a stress case scenario) also would not contradict that objective, even if such sales are significant in value
IFRS 9: Financial Instruments

6. Audit Committees need to be active now
Example is taken from the Standard. Refer to appendix for full example and analysis from the Standard.
The objective of this slide is to provide the audience with a short fact pattern and point out that the discussion of the example is focused on the key take always and considerations. No one size fits all, so every situation needs to be evaluated on a case by case basis.
Analysis
Although the entity considers, among other information, the financial assets’ fair values from a liquidity perspective (i.e. the cash amount that would be realised if the entity needs to sell assets), the entity’s objective is to hold the financial assets in order to collect the contractual cash flows. Sales would not contradict that objective if they were in response to an increase in the assets’ credit risk, for example if the assets no longer meet the credit criteria specified in the entity’s documented investment policy. Infrequent sales resulting from unanticipated funding needs (e.g. in a stress case scenario) also would not contradict that objective, even if such sales are significant in value
IFRS 9: Financial Instruments

7. Key Highlights of IFRS 9 IFRS 9: Financial Instruments
Example is taken from the Standard. Refer to appendix for full example and analysis from the Standard.
The objective of this slide is to provide the audience with a short fact pattern and point out that the discussion of the example is focused on the key take always and considerations. No one size fits all, so every situation needs to be evaluated on a case by case basis.
Analysis
Although the entity considers, among other information, the financial assets’ fair values from a liquidity perspective (i.e. the cash amount that would be realised if the entity needs to sell assets), the entity’s objective is to hold the financial assets in order to collect the contractual cash flows. Sales would not contradict that objective if they were in response to an increase in the assets’ credit risk, for example if the assets no longer meet the credit criteria specified in the entity’s documented investment policy. Infrequent sales resulting from unanticipated funding needs (e.g. in a stress case scenario) also would not contradict that objective, even if such sales are significant in value
IFRS 9: Financial Instruments

8. Classification; Measurement Impairment Hedge Accounting
IFRS 9 – Key changes
It will replace the existing standard IAS 39 in 2018 and will introduce important changes to accounting rules for financial instruments in three main areas:
Classification;
and
Measurement
Impairment
Hedge
Accounting
The above table compares the key factors that define each category that were covered in the slide before. The objective of the slide is to stress the fact that determining the category for each financial asset requires judgement and in some cases the category may not be clear.
The key issue is to determine the business model properly. A single entity may have more than one business model for managing its financial instruments. For example, an entity may hold a portfolio of investments that it manages in order to collect contractual cash flows and another portfolio of investments that it manages in order to trade to realise fair value changes. Similarly, in some circumstances, it may be appropriate to split a portfolio of financial assets into sub-portfolios to reflect how an entity manages those financial assets. For example, that may be the case if an entity originates or purchases a portfolio of mortgage loans and manages some of the loans with an objective of collecting contractual cash flows and manages the other loans with an objective of selling them.
It is important to understand which factors to consider when assessing the business model in order to understand at which level this assessment should be made and understand the differences between categories. More information is provided on the next slide.
The largest impact is likely to be due to the new approach in measuring impairment
IFRS 9: Financial Instruments
August

9. Key Highlights of IFRS 9 Background
It will change the way banks book provisions on financial assets like loans and bonds.
Key considerations
IFRS 9 requires banks to make appropriate provisions in anticipation of future potential losses, rather than the current practice of providing only when losses are incurred.
This means that banks will have to recognise provisions from the day they extend any loan, including undrawn commitments.
Example is taken from the Standard. Refer to appendix for full example and analysis from the Standard.
The objective of this slide is to provide the audience with a short fact pattern and point out that the discussion of the example is focused on the key take always and considerations. No one size fits all, so every situation needs to be evaluated on a case by case basis.
Analysis
Although the entity considers, among other information, the financial assets’ fair values from a liquidity perspective (i.e. the cash amount that would be realised if the entity needs to sell assets), the entity’s objective is to hold the financial assets in order to collect the contractual cash flows. Sales would not contradict that objective if they were in response to an increase in the assets’ credit risk, for example if the assets no longer meet the credit criteria specified in the entity’s documented investment policy. Infrequent sales resulting from unanticipated funding needs (e.g. in a stress case scenario) also would not contradict that objective, even if such sales are significant in value
IFRS 9: Financial Instruments

10. SL Banks may have higher provisions
It will lead to banks, in some cases, having to make substantially higher provisioning, which could hurt earnings and weigh on their capital. It could also potentially affect dividend payouts.
The day 1 impact of IFRS 9 adoption, provisioning could potentially jump by more than 50% for some of the banks!!
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

11. SL Banks may have many challenges
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

12. Impact on SL Banks
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

13. Expected credit losses2
IFRS 9: Financial Instruments
August

14. IAS 39 vs IFRS 39
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

15. From incurred loss to expected loss model
• Used by IAS 39
• An entity is not permitted to consider the effects of future expected losses
Credit losses recognised when an event has occurred that has a negative effect on
future cash flows & the
effect can be reliably
estimated
Used by IFRS 9
Requires earlier
recognition of credit
losses in many cases
Requires an entity to
make an ongoing
assessment of expected
credit losses
This example is taken from the application guidance in the Standard.

16. Financial Assets - A principles based approach
IAS 39 Classification
IFRS 9 Classification
Rules based
Complex and difficult to apply
Multiple impairment models
Complicated re- classification rules
Principles based
Classification based on business model and the nature of the contractual cash flows
One impairment model
Business model driven classification
This example is taken from the application guidance in the ED.
IFRS 9: Financial Instruments
August

17. Expected credit losses General model
Change in credit quality since initial recognition
Recognition of expected credit losses
12 month expected credit losses
Lifetime expected credit losses
Lifetime expected credit losses
Interest revenue
Effective interest on gross carrying amount
Effective interest on gross carrying amount
Effective interest on amortised cost carrying amount
Stage 1
Stage 2
Stage 3
The slides illustrates the key provisions of the model.
There are three stages in the Standard to reflect the general pattern of credit deterioration of a financial instrument. The differences in accounting relate to the recognition of expected credit losses and, for financial assets, the calculation and presentation of interest revenue.
Stage 1: includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses (‘ECL’) are recognised and interest revenue is calculated on the gross carrying amount of the asset (that is, without deduction for credit allowance). 12-month ECL are the expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months.
Stage 2: includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest revenue is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted average credit losses with the probability of default (‘PD’) as the weight.
Stage 3: 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised and interest revenue is calculated on the net carrying amount (that is, net of credit allowance).
Financial assets that meet the definition of purchased or originated credit impaired assets are covered on the following slides.
12- month expected credit losses and lifetime expected credit losses are defined on the next slide.
An entity would generally present and calculate interest revenue using the effective interest method on the gross carrying amount. However, the way in which that interest revenue is calculated and presented changes if objective evidence of impairment (Stage 3). An entity would then present and calculate interest revenue using the effective interest method on the net carrying amount (i.e. the gross carrying amount less allowance for the ECL).
*CLICK*
This analysis can be done on an individual or portfolio basis. Financial assets should bear similar risks in order to group them in a portfolio. Examples of financial assets that would bear similar risks would be:
(a) instrument type;
(b) credit risk ratings;
(c) collateral type;
(d) date of origination;
(e) remaining term to maturity;
(f) industry;
(g) geographical location of the borrower; and
(h) the value of collateral relative to the commitment if it has an impact on the probability of a default occurring (for example, non-recourse loans in some jurisdictions or loan-to-value ratios).
Performing
(Initial recognition*)
Underperforming
(Assets with significant increase in credit risk since initial recognition*)
Non-performing
(Credit impaired assets)
*Except for purchased or originated credit impaired assets

18. Lending landscape may change
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.
IFRS 9: Financial Instruments
August

19. Expected credit losses General model
Information to take into account for assessment of increased credit risk
Changes in external market indicators
Changes in business
Other qualitative inputs
Changes in internal price indicators
Changes in credit ratings
Changes in operating results
30 days past due rebuttable presumption
Credit risk analysis is a multifactor and holistic analysis, whether a specific factor is relevant and its weight compared to other factors will depend on the type of product, characteristics of the financial instrument and borrower as well as the geographic region. We have included in the Slide some of the factors that could be taken into account, additional examples are included in paragraph [B5.5.17] of the Standard.
This information may include:
Changes in external market indicators of credit risk (e.g. the credit spread, the credit default swap prices for the borrower etc);
Changes in credit ratings (external or internal);
Changes in internal price indicators of credit risk (e.g. credit spread);
Existing or forecast changes in the business, financial or economic conditions that are expected to cause a significant change in the borrower’s ability to meet its debt obligations (such as actual or expected increase in interest rates or unemployment rates);
Changes in operating results of the borrower (e.g. actual or expected decline in revenues or margins, increasing operating risks, working capital deficiencies etc); and
Other qualitative inputs.
However, if information (either on an individual or portfolio level) that is more forward-looking than past due status is not available for particular groups of financial assets (i.e. particular products, regions or borrower-types), there is a rebuttable presumption that credit risk has increased significantly since initial recognition no later than when contractual payments are more than 30 days past due.
However….

20. Lending landscape may change
To deal with the potentially higher provisioning, banks may reprice or restructure the loans, making it more expensive for borrowers with riskier credit profiles. Additional quantitative disclosures are required on transition
Banks will likely be revising their business strategy. For example, they might think twice about extending certain types of loan facilities if they are deemed too risky or no longer profitable. These could include reducing the limit of undrawn facilities such as overdrafts.
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.
IFRS 9: Financial Instruments
August

21. Expected credit losses (ECL) General model
Overview – Stage 1
For accounts that fall under Stage 1, the bank has to provide 12-month forward-looking expected credit losses.
12-month ECL are the expected credit losses that result from default events that are possible within 12 months after the reporting date.
Borrowers with good credit risk profile will likely fall under Stage 1.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.
IFRS 9: Financial Instruments
August

22. Expected credit losses (ECL) General model
Overview – Stage 2
When accounts fall under or get into Stage 2 that it gets more problematic for banks, as this is where the provisioning gets heavier. (could be 4 to 5 times more than that for Stage 1 depending on the product). For Stage 2 accounts, banks have to provide lifetime ECL.
Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the loan. If a mortgage loan has an expected maturity of 20 years and it has gone into Stage 2, you have to provide (over) 20 years ECL, instead of 12 months.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

23. Expected credit losses (ECL) General model
Overview – Stage 2
Accounts generally fall under Stage 2 when there is “significant increase in credit risk” since the loan was extended.
The standard has 16 criteria, including if the borrower is 30 days past due, so if you miss your one-month payment, you come to Stage 2.
But banks can rebut this, with a 30-day rebuttable presumption, if they feel it doesn’t warrant going to Stage 2. Banks have to build a model to argue that even though the borrower is one-month past due, a downgrade is not required.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

24. Expected credit losses (ECL)
A 10-year loan versus a 5-year loan will carry different provisioning. With the longer tenure, provisioning will be higher.
In the past, where banks would give a loan and would like to stretch it because it gives them recurring income, now they will have to think it through for borrowers with not a very good rating.
An SME customer, for example, to get a longer tenure loan can be more expensive, going forward.
Banks may have to re-look at the basis on which loans are re-scheduled at present.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

25. Expected credit losses (ECL) General model
Overview – Stage 2
In general, banks are likely to rebut retail loans rather than corporate loans.
If corporates miss a payment, it’s usually not a good sign and an indication that they are underperforming. It would be difficult to rebut corporate and SME accounts.
To avoid having assets fall to Stage 2 because of a missed payment, the banks’ collection department is going to play an increasingly important role, going forward. Early payment alert will become a key strategy for banks.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

26. Expected credit losses (ECL) General model
Overview – Stage 2
If you’ve gone to Stage 2, banks may seek legal advice on whether, based on the existing contract with the borrower, they can ask for additional interest or additional collateral.
Banks should explore what else they can do when accounts go to Stage 2.
It is important to ensure that customers don’t go from Stage 1 to Stage 2.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

27. Expected credit losses (ECL) General model
Overview
Banks now have to make a provision for un-utilised credit lines.
Overdraft limit and bank guarantees — which are all off the balance sheet — will need to be provided for.
Your credit card limit will now carry a provision. This means banks are going to be very careful about credit card customers and some may consider reducing the limit.
Interestingly, apart from loans, banks will now also have to make provisions for bonds that they invest in. Bonds also have to be put in Stage 1, 2 or 3. That means that the treasury department also gets affected.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

28. IFRS 9 – Implementation projects
Scope
Development of ECL Model for the Loans & Advances Portfolio
• months Expected Credit Loss (ECL)
• Lifetime Expected Credit Loss (ECL)
• Multiple economic scenarios
• Exposure at Default
• LGD Computation
• Disclosure requirements
• Establish the financial asset classification for financial instruments
Training of Staff members :
Financial Asset Classification
Expected Credit loss modelling •
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

29. IFRS 9 – Rank the following in order of difficulty (encountered or expected) when designing and implementing your IFRS 9 provision and impairment solution.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

30. Expected credit losses Disclosures
Quantitative
Qualitative
Reconciliation of opening to closing amounts of loss allowance showing key drivers of change
Write off, recovers and modifications
Reconciliation of opening to closing amounts of gross carrying amounts showing key drivers of change
Gross carrying amounts per credit risk grade
Inputs, assumptions and estimation techniques for estimating ECL
Write off policies, modification policies and collateral
Inputs, assumptions and estimation techniques to determine significant increases in credit risk and default
Inputs, assumptions and techniques to determine credit impaired
The Standard includes robust disclosure requirements. An entity shall disclose information that identifies and explains:
the amounts arising from expected credit losses
the effect of the deterioration and improvement in the credit risk of financial instruments.
To meet these requirements, an entity should disclose:
Reconciliation of the gross carrying amounts and allowance balances;
Disclosures on credit risk grading
Disclosures on techniques, assumptions and policies (e.g. write off policy)
This is a summary of the overall disclosures, nevertheless extensive disclosures are proposed to identify and explain the amounts in the financial statements that arise from expected credit losses and the effect of deterioration and improvement in credit risk. Sufficient information should be provided to allow users to reconcile line items that are presented in the statement of financial position. For disclosure purposes, financial instruments should be grouped into classes that facilitate the understanding for users. Examples of the disclosures that could be provided are included in the Standard.
On the date of initial application of IFRS 9 the entity should disclose a reconciliation of the ending impairment allowances under IAS 39 and IAS 37 to the opening impairment allowances under IFRS 9 by measurement category, showing separately the effect of reclassifications on the allowance balance at that date.
IFRS 9: Financial Instruments
August

31. IFRS 9 – Rank the following in order of difficulty (encountered or expected) when designing and implementing your IFRS 9 provision and impairment solution.
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

32. IFRS 9 – Data requirements
As opposed to the incurred loss impairment model of IAS39, IFRS 9 establishes an expected loss model in line with the objective of taking into account more forward looking information and capturing impairment losses earlier.
The objective of the model is to recognise lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk (whether on an individual or portfolio basis) and that all reasonable and supportable information, including forward-looking information that is available without undue cost or effort needs to be considered. In the IASB’s view, recognising a loss allowance at an amount equal to lifetime expected credit losses at initial recognition does not faithfully represent the underlying economics of financial instruments. 12-month expected credit losses provision (‘ECL’) should be recognised for those financial assets for which there has not been a significant increase in credit risk. There is an exception for lease receivables and trade receivables or contract assets for which an entity is required/may elect to calculate ECL on initial recognition. The exception is explained in the following slides.
However, when there is a significant increase in credit risk, recognition of lifetime expected losses is required.
The key provisions of the model are described on the following slides.

33. Challenging times ahead3

34. Adjusting portfolio strategy to prevent an increase in P&L volatility
A silent revolution in banks’ business models What should banks do to get ahead??
Adjusting portfolio strategy to prevent an increase in P&L volatility
Revising commercial policies as product economics and profitability change
Reforming credit-management practices to prevent exposures from deteriorating
Rethinking deal origination to reflect changes in risk appetite
Providing new training and incentives to personnel to strengthen the commercial network
This slide highlights the key provisions of IFRS 9. Additional information on the main differences with the previous version of IFRS is included below:
Key highlights
Hedging chapter was issued in 2013: The hedging chapter aligns the hedging requirements more closely with risk management. The chapter has been well received by a number of corporates that prefer it over the strict hedging requirements in IAS 39.
Three categories for classifying debt instruments:
Amortised cost: consists of debt investments whose objective it is to hold the assets in order to collect the contractual cash flows (insignificant and/or infrequent sales may not be inconsistent with the hold to collect business model) and have contractual cash flows that are solely P&I.
Fair value through other comprehensive income (FVOCI): consists of debt investments in which assets are managed to a achieve a particular objective by both collecting contractual cash flows and selling financial assets, and have contractual cash flows that are solely P&I.
Fair value through profit or loss (FVPL): Is the residual category, nevertheless the IASB decided to define this category as the one that consists of financial assets managed with the objective of realising the assets’ fair value.
Details on how to distinguish each category are included in the following slides.
Equities recognised at fair value through profit or loss (FVPL) or fair value through other comprehensive income (FVOCI) without recycling: At initial recognition entities can choose to recognise equity instruments at FVPL or FVOCI. If the latter is chosen, the fair value gains and losses that are recognised in OCI will not be recycled. This will not be considered further in this slide deck as it has not changed from previous versions of IFRS 9.
12 month expected credit losses for assets at amortised cost (AC) or FVOCI except where significant increase in credit risk (lifetime expected credit losses): The standard introduces a new model for the recognition of impairment losses which is based on using more forward looking information. The Standard establishes 3 stages for the recognition of ECL: performing (12-month ECL), under performing (lifetime ECL but interest recognised on a gross basis), non-performing (lifetime ECL but interest recognised on a net basis). More information is included in section 3. If a financial instrument has experienced a significant increase in credit risk since initial recognition or is credit impaired, the entity will recognise lifetime ECL for that instrument. For instruments for which the entity has not experienced a significant increase in credit risk, the entity needs to recognise only 12-month ECL. More information is included in Section 3
Application of the Standard as a whole: Upon initial application an entity shall apply all the provisions in the Standard including hedging and own credit risk. An entity is not permitted to apply the Standard ‘in phases’. Nonetheless, entities applying the standard before 1 February 2015 continue to have the option to apply the standard in phases.
Changes from previous version of IFRS 9
Introduction of the FV-OCI category: IFRS 9 has introduced a third category in the classification of financial assets. Unlike IAS 39, the FVOCI is not the residual category but a distinct business model within the business model approach. More information is included within the following slides.
Clarification of hold to collect business model and of solely payments of principal and interest (SPPI) for certain instruments: IFRS 9 has incorporated some guidance on how to assess certain instruments to see if the meet the hold to collect business model objective. Additionally the Board has clarified the meaning of SPPI, and provides guidance in order to determine whether the consideration for the time value of money has been modified (modification test). More information is included within the following slides.
Three stage approach for the determination of ECL based on monitoring significant increases in credit risk since initial recognition: The standard introduces a new model for the recognition of impairment losses which is based on expected credit losses rather than incurred. The Standard establishes 3 stages for the recognition of ECL: performing (12-month ECL), under performing (lifetime ECL but interest recognised on a gross basis), non-performing (lifetime ECL but interest recognised on a net basis). More information is included in section 3.
Recognition of lifetime ECL or 12-month ECL for all financial instruments within the scope of the Standard: if a financial instrument has experienced a significant increase in credit risk since initial recognition, the entity will recognise lifetime ECL for that instrument. For instruments for which the entity has not experienced a significant increase in credit risk, the entity needs to recognise only 12-month ECL. This will imply a 1 day loss on the initial recognition of financial assets in scope of these requirements. More information is included in Section 3.
(source:McKinsey)

35. Challenging times for SL Banks 2018-2020
Factors to be considered?
Basel III
New
Taxes ?
IFRS 9
S L
Banks
The fair value through profit or loss category is in effect the ‘residual category’ for instruments that do not qualify for the amortised cost or fair value through other comprehensive income categories. Nevertheless the Standard provides a definition for the category:
a. financial assets managed and evaluated on a fair value basis or held for trading purposes must be measured at FVPL; and
b. for financial assets that are measured at FVPL, the entity makes decisions based on changes in—and with the objective of realising—the assets’ fair value.
In addition, the activities that the entity undertakes in the FVPL measurement category are primarily focused on fair value information, and key management personnel uses that fair value information to assess the assets’ performance and to make decisions accordingly. In addition, another indicator is that the users of the financial statements are primarily interested in fair value information of these assets in order to assess the entity’s performance.
It is expected that the following financial assets would be included in FVPL:
Where contractual cash flows do not meet SPPI-criterion.
When managed and performance evaluated on a fair value basis.
With objective of maximising cash flows through sale.
Where collection of contractual cash flows is not integral to achieving business model objective (but only incidental to it).
Held for trading purposes.
Where FV option is applied to eliminate an accounting mismatch.
The distinction between FVOCI and FVPL may be subtle. However, the key to classification is whether the entity achieves the business model objective by both collecting contractual cash flows and selling financial assets in order to qualify for FVOCI versus simply the primary objective under the FVPL category to maximise cash flows through realising the asset’s fair value such that collecting cash flows is only incidental. For example, collecting cash flows might be incidental where the entity holds the financial assets for a period of time due to market conditions with a view to earning a more favourable price in the future.
However, a significant change is not expected from what is measured at FVPL currently under IAS 39 (for example, trading assets or those assets managed and whose performance is evaluated on a fair value basis). The key change is that FVPL will also include those assets that fail the SPPI test, since it is the residual category.
This summarises the introduction of the business model assessment.
Note: the FVO is available both for assets within the hold to collect and FVOCI category and it is only available for avoiding an accounting mismatch
New
IRA
Debt
Repayment
Levy

36. Capital requirements
The banks are expected to disclose the full effects of IFRS 9 on provisions, profitability and capital in their 2017 annual reports
In SL, the change in accounting standards is happening at a time when some banks are struggling to meet progressive increases in minimum capital requirements as Basel III is phased in.
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

37. What are the challenges for SL banks?
Sri Lanka does not have enough instruments that qualify for Additional Tier I capital (AT 1) apart from Common Equity Tier 1 (CET 1) capital.
This means that banks will depend heavily on the capital market to raise additional capital and this can pose some challenges.
This can be aggravated where existence of common shareholders prevail in a shallow capital market.
The Standard includes several requirements regarding disclosure at the time of initial application of IFRS 9. Upon transition, an entity needs to disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:
The original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity had previously applied an earlier version of the Standard);
The new measurement category and carrying amount determined in accordance with IFRS 9;
The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.
An entity should also disclose qualitative information to enable users to understand: (i) how it applied the classification requirements in the Standard; (ii) the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss at the date of initial application.
In addition, in the reporting period that includes the date of initial application of IFRS 9, an entity shall disclose qualitative information to enable users to understand:
The changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 and the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
For financial assets that are measured at amortised cost as a result of transition and financial assets measured FVOCI that have been reclassified out of the FVPL category,
the fair value of the financial assets or financial liabilities at the end of the reporting period; and
the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.
For financial assets reclassified out of the FVPL category:
the effective interest rate determined on the date of initial application; and
the interest revenue or expense recognised.
There has been no significant changes to the disclosure requirements for on-going reporting, except for the disclosures on reclassifications.

38. What is the Indian Government doing?
USD 32 billion capital infusion
Indian
State
Banks 1
Government providing USD24 billion. 2
The banks are expected to raise the rest through, fresh equity issuance,
The Standard makes no distinction between contingent features or prepayment options. If a financial asset contains a contractual term that changes the timing or amount of contractual cash flows, the entity must determine if contractual cash flows meet the solely SPPI criterion. To make this determination the entity must assess the contractual cash flows that could arise both before, and after the change in contractual cash flows.
While the nature of the event itself does not determine the classification of the financial asset, an entity may also need to assess the nature of any contingent event (i.e. trigger) that would change the timing or amount of contractual cash flows (i.e. it should be taken as an indicator).
An example of a contractual provision that would meet the solely SPPI criterion would be a prepayment option, this will be discussed on the next slide.
Features that fail SPPI could still be consistent with the SPPI condition if the feature is non genuine (i.e. it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur) or has ‘de minimis’ effect on the contractual cash flows (an entity must consider the possible effect of the contractual cash flow characteristic in each reporting period and cumulatively over the life of the financial instrument). 3
Indian Government willing to accept a dilution of its ownership to 52%

39. What are the SL banks doing?
Developments: SL
Banks 1
Government willing to broad base ownership of BoC and PB 2
Some licensed commercial banks have raised capital through rights issues in 2017
The Standard makes no distinction between contingent features or prepayment options. If a financial asset contains a contractual term that changes the timing or amount of contractual cash flows, the entity must determine if contractual cash flows meet the solely SPPI criterion. To make this determination the entity must assess the contractual cash flows that could arise both before, and after the change in contractual cash flows.
While the nature of the event itself does not determine the classification of the financial asset, an entity may also need to assess the nature of any contingent event (i.e. trigger) that would change the timing or amount of contractual cash flows (i.e. it should be taken as an indicator).
An example of a contractual provision that would meet the solely SPPI criterion would be a prepayment option, this will be discussed on the next slide.
Features that fail SPPI could still be consistent with the SPPI condition if the feature is non genuine (i.e. it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur) or has ‘de minimis’ effect on the contractual cash flows (an entity must consider the possible effect of the contractual cash flow characteristic in each reporting period and cumulatively over the life of the financial instrument). 3
Most banks would require to raise capital on an annual basis for the next 3-4 years.

40. Bank Equity (Rs Mn) Debt (Rs Mn) Raised Proposed
How much is enough?
Bank
Equity (Rs Mn)
Debt (Rs Mn)
Raised
Proposed
HNB
14,545
Com Bank
10,143
Sampath
7,602
*6,000
Seylan
**10,000
NTB
3,208
   3,500
The Standard makes no distinction between contingent features or prepayment options. If a financial asset contains a contractual term that changes the timing or amount of contractual cash flows, the entity must determine if contractual cash flows meet the solely SPPI criterion. To make this determination the entity must assess the contractual cash flows that could arise both before, and after the change in contractual cash flows.
While the nature of the event itself does not determine the classification of the financial asset, an entity may also need to assess the nature of any contingent event (i.e. trigger) that would change the timing or amount of contractual cash flows (i.e. it should be taken as an indicator).
An example of a contractual provision that would meet the solely SPPI criterion would be a prepayment option, this will be discussed on the next slide.
Features that fail SPPI could still be consistent with the SPPI condition if the feature is non genuine (i.e. it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur) or has ‘de minimis’ effect on the contractual cash flows (an entity must consider the possible effect of the contractual cash flow characteristic in each reporting period and cumulatively over the life of the financial instrument).
* Rs 4 Bn in sub convertible debentures with an option to issue a further Rs 2 Bn
** Rs 6 Bn in subordinated debentures with an option to issue a further Rs 4 Bn

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