1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA (ICAN)
IFRS 9 – Requirements, Transition and Application By
Jamiu Olakisan
B.Sc, ACS, ACA, FCCA

2. IFRS 9 Financial Instruments
Content
The accounting and financial reporting requirement of IFRS 9
From IAS 39 to IFRS 9: the major changes
Managing the impact of IFRS 9 adoption
Recommendations for parties in the financial reporting supply chain
IFRS 9 Financial Instruments

3. Introduction – IASB issues IFRS 9
16 February 2019
Introduction – IASB issues IFRS 9
On 24 July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9, bringing together all three phases of the financial instruments project
Classification and measurement
Impairment (expected credit losses)
Hedge accounting
Accounting for dynamic risk management (macro hedging) is not included and forms a separate project
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted
IFRS 9 Financial Instruments

4. Classification and measurement

5. IFRS 9 classification and measurement model – main changes from IAS 39
16 February 2019
IFRS 9 classification and measurement model – main changes from IAS 39
Financial instruments in the scope of IFRS 9
Financial assets
Financial liabilities
New classification criteria
New presentation: ‘own credit’ related FV changes in OCI (for liabilities under the FVO)
New categories that use OCI
IFRS 9 Financial Instruments

6. The new classification and measurement model for financial assets
16 February 2019
The new classification and measurement model for financial assets
Debt (including hybrid contracts)
Derivatives
Equity
‘Contractual cash flow characteristics’ test (at instrument level)
Pass
Fail
Fail
Fail
‘Business model’ test (at an aggregate level)
Held for trading?
Hold-to-collect contractual cash flows 1 2
BM with objective that results in collecting contractual cash flows and selling financial assets
Neither (1) nor (2) 3
Yes No No
FVOCI option elected ?
Conditional fair value option (FVO) elected?
Yes
Yes No No
Amortised cost
FVOCI
(with recycling)
FVTPL
FVOCI
(no recycling)
IFRS 9 Financial Instruments

7. FVOCI measurement category
16 February 2019
FVOCI measurement category
Examples of business models likely to result in OCI
Liquidity buffers subject to significant churning
Liquidity buffers for everyday liquidity needs
Assets to fund insurance liabilities
FVOCI mechanics
Fair value gains and losses of the asset are recorded in OCI
Cumulative gains and losses recycled to P&L upon derecognition
ECLs are derived using the same model as amortised cost instruments and are recorded in P&L with offseting entry in OCI
Interest income is calculated using effective interest method and recorded in P&L
IFRS 9 Financial Instruments

8. Expected credit losses (ECL)

9. Scope and variation of the expected credit loss model
16 February 2019
Scope and variation of the expected credit loss model
Scope of ECL requirements
General approach
Simplified approach
IFRS 9 Financial Instruments
Trade receivables that do not contain a significant financing component 
Trade receivables that contain a significant financing component
Policy election at entity level
Other debt financial assets measured at AC or at FVOCI
Loan commitments and financial guarantee contracts not accounted for at FVPL
IFRS 15 Revenue from Contracts with Customers
Contract assets that do not contain a significant financing component
Contract assets that contain a significant financing component
IAS 17 Leases
Lease receivables
IFRS 9 Financial Instruments

10. Expected credit loss model – general approach
16 February 2019
Expected credit loss model – general approach
Stage 2
Stage 3
Stage 1
Loss allowance updated at each reporting date
12-month ECL
Lifetime ECL
(credit losses that result from default events that are possible within the next 12-months)
Lifetime ECL criterion
Credit risk has increased significantly since initial recognition
(whether on an individual or collective basis) +
Credit-impaired
Interest revenue recognised
Effective Interest Rate (EIR) on gross carrying amount
EIR on gross carrying amount
EIR on amortised cost
(gross carrying amount less loss allowance)
Change in credit risk since initial recognition
Improvement Deterioration
IFRS 9 Financial Instruments

11. 16 February 2019
General approach - simplifications and presumptions for assessing deterioration
‘Low’ credit risk – equivalent to ‘investment grade’
Assessing significant increases in credit risk
30 days past due ‘backstop’
Use change in
12-month risk as
approximation for change in lifetime risk
Assessment on a collective basis or at counterparty level
Set transfer threshold by determining maximum initial credit risk
IFRS 9 Financial Instruments

12. 16 February 2019
General approach – significant increase in credit risk at portfolio level
Bottom-up approach
Common borrower characteristics
Sub-portfolios
Region A
Region B
Region C
Region D
Region E
Regions
LTV
Scoring
LTV<50%
50%<LTV<80%
80%<LTV<100%
100%<LTV 1 2 3 4 5 6 7 8
Forward-looking information
House prices (e.g. falling house prices)
Interest-rate (e.g. interest rate rise)
Unemployment
GDP
Top-down approach
No individual identification
% of loans
Marginal impact of macroeconomic changes?
IFRS 9 Financial Instruments

13. Simplified approach and purchased or originated credit-impaired assets
16 February 2019
Simplified approach and purchased or originated credit-impaired assets
Simplified approach
Scope: contract assets, trade receivables and lease receivables
Loss allowance based on lifetime ECL
No tracking of changes in credit risk
Purchased or originated credit-impaired assets
Scope: financial assets that are credit-impaired on purchase or origination
ECL on initial recognition reflected in credit- adjusted EIR (no ‘day one’ 12-month ECL) Loss allowance based on subsequent changes in lifetime ECL
IFRS 9 Financial Instruments

14. Measurement of expected credit losses
16 February 2019
Measurement of expected credit losses
Numerator: Cash shortfalls
The period over which to estimate ECL: maximum contractual period (for revolving credit facilities, this extends beyond contractual period)
Probability-weighted outcomes: possibility that a credit loss occurs, no matter how low that possibility is
Reasonable and supportable information: reasonably available information about the past, current and future forecasts
Expected credit losses
Present value of all cash shortfalls over the remaining life, discounted at the original EIR
Denominator: Discount rate
Discounting period: from cash flows date to reporting date
Assets: EIR or approximate (if credit-impaired on initial recognition, then use credit-adjusted EIR)
Commitments and guarantees: EIR of resulting asset (if not determinable, then use current rate representing risk of the cash flows)
16 February 2019
IFRS 9 Financial Instruments

15. Hedge accounting

16. Hedge accounting: snapshot of key differences
16 February 2019
Hedge accounting: snapshot of key differences
Requirement
IAS 39
IFRS 9
Risk component as eligible hedged item
Financial items
All items
80%-125% test ü X
Retrospective effectiveness testing
Quantitative effectiveness test
Depends
Qualitative effectiveness test
Special accounting for ‘costs of hedging’
Rebalancing of hedge ratio
Dedesignation if ineffective, but risk management objective unchanged
16 February 2019
IFRS 9 Financial Instruments

17. How to achieve hedge accounting
16 February 2019
How to achieve hedge accounting
Define risk management (RM) strategy and objective
Identify eligible hedged item(s) and eligible hedging instrument(s) No
1) Is there an economic relationship between hedged item and hedging instrument?
Yes
Yes
2) Does effect of credit risk dominate fair value changes? No
To avoid ineffectiveness the ratio may need to differ from the one used in RM
Base hedge ratio on the actual quantities used for risk management
Yes
3) Does hedge ratio reflect an imbalance that would create hedge ineffectiveness? No
Formal designation and documentation
16 February 2019
IFRS 9 Financial Instruments

18. Effective date and transition

19. Effective date and transition – early application choices
16 February 2019
Effective date and transition – early application choices
Under IFRS 9 (2009, 2010, 2013)
Under IFRS 9 (2014)
IFRS 9 (2009) Or
Final version of IFRS 9 (2014)
Includes accounting policy choice to apply IAS 39 for hedge accounting
IFRS 9 (2009) and IFRS 9 (2010) Or
IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013) Or Or
Own credit requirements
Own credit requirements
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted
Early application of previous versions of IFRS 9 (2009, 2010, 2013) is permitted if date of initial application is before 1 February 2015
Retrospective application, but restatement of comparatives not required
16 February 2019
IFRS 9 Financial Instruments

20. From IAS 39 to IFRS 9: Major changes
Change in classification of financial assets
IAS 39 classifications: HTM, FVTPL, L&R and AFS
IFRS 9 measurement bases: FVTPL, Amortised Cost (AC), FVTOCI for equity instrument without recycling and FVTOCI for debt instruments with recycling
No tainting rule applicable to financial assets measured at amortised cost similar to HTM under IAS 39
Embedded derivatives – No requirement to separate embedded derivative from financial instrument host under IFRS 9.
IFRS 9 uses expected loss model instead of incurred loss model of IAS 39 for impairment of financial assets
80%-125% test of effectiveness in hedge accounting removed under IFRS 9
Retrospective effectiveness testing in hedge accounting removed under IFRS 9.
IFRS 9 Financial Instruments

21. Managing the impact of IFRS 9 adoption
Mandatory application date of pushed to1 January 2018 to:
Provide sufficient time for entities to develop systems and processes
Gather historical data in order to make the calculations.
Closer alignment of credit risk management systems and financial reporting functions to IFRS 9 requirements
Adopting the IFRS 9 Expected Credit Loss (ECL) requirements will require significant effort and investment for many entities, in particular, banks and insurers.
Financial and non-financial institutions alike need to start planning an initial assessment of the likely impact of the new IFRS 9 ECL requirements to manage a successful transition and implementation.
Financial institutions need to fully understand the complex interactions between the IFRS 9 and regulatory capital requirements in relation to credit losses.
In many cases, it is expected that the new IFRS 9 ECL requirements will result in a reduction in the regulatory capital of financial institutions.
IFRS 9 Financial Instruments

22. Recommendations for parties in the financial reporting supply chain
Knowledge is key
Be proactive
System changes
Process changes
IFRS 9 Financial Instruments

23. Thank You

24. Questions
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25. Contact Jamiu Olakisan jamiu.olakisan @ng.ey.com 08035621311