Classification Flashcards
Auf welcher Basis wird die Klassifizierung durchgeführt?
IFRS9_4_1_1
- Business Modell
- Cashflow Criteria
Welche 4 Bewertungsvorschriften gibt es im IFRS9?
- Amortised Cost
- FVtOCI mit recycling
- FVtPL
- FVtOCI ohne recycling
How do you classify Debt instruments?
- Business Model test or Cashflow test fail? -> FVtPL
- Business Model test and CF Test dont fail
- HtC: Am Cost #IFRS9_4_1_2
- mixed: FVtOCI with recycling #IFRS9_4_1_2A
- FV Option: FVtPL #IFRS9_4_1_5
How do you classify Derivatives?
always FVtPL #IFRS9_4_1_1
How do you classify equity instruments?
- Held for Trade yes = FVtPL #IFRS9_4_1_1
- Held for Trade no and exercise FVOCI Option –> FVtOCI without recycling ##IFRS9_5_7_5
- no option -> FVtPL
How is the Business Model Test conducted?
IFRS9_B4_1_1f iVm #IAS24
- auf Ebene des Portfolios von gemeinsam gemanageten FA vergl. Strategie
Faktoren:
- zukünftige Strategie MGT #IFRS9_B4_1_2a
- past practise MGT
- management reporting performance (daily: trading)
- risk and management of risk: langfr. Zinsswap –> HtC
- payment of manager: FV oriented –> trading
How are Portfolios determined?
- Identify Business/reporting units
- Check if completely homogenous strategy/objectives
- subdivision until homogenous
What is business modell Held to Collect?
- no necessity to hold all assets until maturity #IFRS9_B4_1_3
- Intention to hold cannot be implied if #IFRS9_B4_1_5 / #IFRS9_B4_1_6
- Cashflow intent maximize through sale of the instrument
- portfolio managed/evaluated on FV basis
- Portfolio meets criteria “held for trading”
- Measurement
- if SPPI yes and no FV option –> Am. Cost
- otherwise: FVtPL
- Time horizon for holding
- need not holf all assets until maturity under certain conditions
- frequency, timing, volume, reason to be considered
- may sell if
- increase in credit risk #IFRS9_B4_1_3A
- sale is close to maturity (ca. 3 months) and proceeds approximate collection of remaining Cashflows #IFRS9_B4_1_3B
- infrequent sales (even if single sale significant) or frequent and insignificant #IFRS9_B4_1_3B
What is business modell mixed?
- intention
- used for portfolios of Financial Assets that ar managed to both collect cashflow and selling #IFRS9_4_1_2a
- Differentiation #IFRS9_B4_1_4B
- sales part of strategy
- greater frequency
- trading books/portfolios solely managed on FV is NOT enough
- Measurement #IFRS9_B5_7_1A
- FVtOCI with recycling if SPPI met, no use of FV Option
- otherwise FVtPL
What is business modell other?
- no specific intention #IFRS9_B4_1_5
- examples:
- financial assets held for trading
- Differentiation
- model assigned not Held for sale nor mixed
- held for trading maintained from IAS39
- residual business model
- Measurement: FVtPL
How are Business models changed?
IFRS9_4_4_1
What happens when the Financial instruments were erroneously assigned?
Restatement acc. to #IAS8_41ff
How did Standardsetter treat financial Liabilities in IFRS9 in general?
- standard setter focused on asset
- liability not linked to asset side, follows different structures and principles
- Anleihe is on passive side when Bankspeciality is happening, in praxis nearly 0
- # Klausur Basic Derivate: ZINSSWAP!
- variables Leg
- Festes Leg –> abzuzinsen mit Marktwert der Zinsen
- Leerverkäufe: Ich verkaufe Produkt zu Termin X in Zukunft zu Preis Y –> Spekulation, das Kurs sinkt
How are Financial liabilities classified?
IFRS9_4_2_1
- grds. Am. Cost
Ausnahmen: - Model Held for trading: FVtPL
- FV Option
- changes due to own credit, except mismatch -> OCI
- other FV changes -> P&L
- embedded derivatives -> separation to be checked
When are financial liabilities treated as amortised cost?
- this is standard treatment acc to IFRS9_4_2_1
- example: bond issued, loan taken out
When are financial liabilities treated as FVtPL?
- normally not as debt, however if market value negative
- only possible for interest swap or short selling
- fixed part of interest swap needs to be measured at market value and discounted with current interest rate -> negative SWAP on credit
- option not possible as minimum value 0
When are Financial liabilities treated as FVtOCI?
- if credit risk changes Financial Liability Fair Value -> OCI
- if Fair Value changes due to other factors -> P&L
How are embedded derivatives treated?
IFRS9_4_3_1
- separation of underlying and derivative
- example: Wandelanleihe / convertible bond
- Aktiva: FVtPL, not SPPI conform
- Passiva:
- Derivative (convertible right) -> FVtPL
- Bond -> am. Cost
How to differentiate Equity and Liability?
- Redemption Obligation / Rückzahlungsverpflichtung&Sonderkündigungsrecht
- Equity instruments generally no possibility
- ongoing payments / Zahlungsverpflichtungen
- Zinsen dauerhaft –> financial liability (unavoidable payment obligation)
- Dividend –> avoidable –> equity instrument (dividends decided emittent)
- mixed: need to be separated
What is SPPI?
solely payments of principal and interest
What are parts of interest?
- Time Value of Money
- Default risk
- other general lending risks
- internal Cost
- margin
How do you assess time value of money?
- benchmark instrument (=Standard instrument as loan) to be assessed how interest payments change over time #IFRS9_B4_1_9A-D
–> benchmark test acc to realistic scenarios - look at complete time to maturity
Factors - Denomination Currency
- link interest rate and period rate
-
positive examples
- asset with right to chose market rate on ongoing basis: at each interest rate reset date, borrower can chose between three-month-LIBOR for three months or one-month-LIBOR for one month
-
negative examples
- CMS Spread coupon (10y CMS - 2y CMS) –> coupon payments depend on difference of to interest rated rather than movements on market rate –> therefore possible that movements are opposite directions –> CF on bonds increase even if LIBOR decreases and vice versa
- Zinssatz steigt mit Laufzeit
- Spekulation: Zinsschere weitet sich
- nicht mehr nur TVM
- bond in USD but paying floating coupon with reset based on EURIBOR –> USD market changes not always captured with EUR interest rates
- CMS Spread coupon (10y CMS - 2y CMS) –> coupon payments depend on difference of to interest rated rather than movements on market rate –> therefore possible that movements are opposite directions –> CF on bonds increase even if LIBOR decreases and vice versa
- significant deviation:
- does not meet conditions in #IFRS9_4_1_2b and #IFRS9_4_1_2Ab
- FVtPL #IFRS9_B4_1_9D
- insignificant deviation:
- meets conditions in #IFRS9_4_1_2b and #IFRS9_4_1_2Ab
- AmCost or FVtOCI
- what is significant –> case based decision
How are Interest rate Agreements assessed in regards to TVM?
- Bank’s published rates applied across a range of retail products and contracts
- General market framework constrains lender –> may conclude SPPI criterion is generally met without significant judgement
- Variations in rates on specific loans dependent on specified contingent events
- consider nature of contingent events and resulting CF changes –> contract by contract analysis may be required
- Bank has full discretion to increase the rate on specific loans to borrowers
- contract-by-contract analysis
- = Benchmark test
- contract-by-contract analysis
What nature of contingency are covered under TVM?
- Darf nicht 5 Jahre Festzins haben und danach 3x(EUR CMS 10Y - EUR CMS 2Y) until maturity sein
- Zinsschere darf nicht genommen werden
- Auch die Variante 3x EURIBOR/LIBOR darf nicht genommen werden weil Hebelwirkung -> automatisch höher wie Benchmark –> nicht mehr nur TVM
- ok wäre z.B.: EURIBOR + 2% weil 2% fixe Marge darstellt, keinen Hebel
How is Credit Risk assessed as part of interest?
- consideration for increase in credit risk
-
positive examples
- CPN STEPS UP/DOWN FOR EA RAT DOWNGRD/UPGRD BY MOODYS/S&P: Baa2/BBB (+25BPS);Baa3/BBB –(+50BPS); Ba1/BB+ OR LOWER (+100BPS) (i.e. coupon increases in case of a rating downgrade and decreases in case of rating upgrade)
- interest rate of a linked note increases in case of rating downgrade
-
negative example
- Interest payment indexed to another variable such as debtors performance or equity index unless indexing to performance leads to adjustment that only compensates for credit risk
- EBIT/EBITDA too far removed from credit risk
- Interest payment indexed to another variable such as debtors performance or equity index unless indexing to performance leads to adjustment that only compensates for credit risk
What is Principla in context of SPPI?
- FV of financial asset at initial recognition
- may change throughout life of financial asset
What are components of Principal Payments in context of SPPI?
IFRS9_4_1_2
- Regular payments
- set forth in contract
- linear, declining, increasing rates or bullet payment at maturity
- extra payment, prepayments, extension options
- agreed upon in original contract, part of legal right in jurisdictions
- appropriate penalty payment (prepayments #IFRS9_B4_1_11b)
- # 489BGB nach 10 Jahren kann Privatkunde zur Bank gehen und Kredit kündigen
- in #Klausur wäre Aufgabe kompliziert –> nur wenn Angaben gemacht werden
What are changes over time due to contracts in context of SPPI?
- Nature of contingency #IFRS9_B4_1_10
- eg. prepayment before maturity, extension of terms
- determined if only SPPI
- Prepayment option #IFRS9_B4_1_11b
- permits issuer to prepay instrument / permits holder to put debt instrument back to issuer
- before maturity and prepayment amount is substantially unpaid amounts of principal and interest incl. reasonable compensation for early termination
- Guidance to accept AmCost #IFRS9_B4_1_12
- eligible to be measured at AmCost or FVtOCI only if
- entity acquires/originates financial asset at premium/discount to the contractual par amount
- prepayment amount = contractual par amount and accrued (but unpaid) contractual interest (may include reasonable compensation for early termination)
- entity initial recognition of financial asset, the fair value of the prepayment feature is insignificant
- eligible to be measured at AmCost or FVtOCI only if
Was ist die Definition von Non-Recourse Assets?
- creditor claim limited to
- specified assets
- cashflows from specified assets #IFRS9_B4_1_16
- recourse to debtor itself, other assets not possible
- financial asset represent investment in particular assets/cashflow
- contractual cashflows not solely SPPI
- example:
- mortgage loans wich creditor has no right of recourse against debtor but only against real estate collateral in case of default
- financing of toll road –> cash flow from fin.Ass. increase the more cars use it
- most significant risk: Asset or project –> SPPI not fulfilled
- non-recourse itself not necessary exclusion of SPPI #IFRS9_B4_1_17
- creditor needs to assess if particular underlying assets or cashflows to determine SPPI conformity
- examination if:
- terms of financial asset give rise to other cashflows OR
- limit cashflows in manner inconsistent with payment representing principal and interest
- Was ist Asset in SPE (e.g. aircraft)
- Problem: Geben Kredit an SPE
- Rückzahlungen sind fix
- SPE nur ein Asset
- praktisch: ökonomisch abhängig von Performance dieses einen Assets
- Tilgung nur über Gesamtgeschäft
- Non recourse asset -> Geld kommt nur aus non-recourse asset
- hoher Zins als gegenleistung
What steps are involved in the Look through approach?
- Step 1:
- CF equals Principal and interest –> Step 2
- contractually fixed cash flows and maturity
- interest = compensation for time value of money and credit risk ( #IFRS9_B4_1_7 ff)
- performance of the financed asset does not influence the installments
- no contractual terms that give rise to any other cash flows or limit the cash lows in a manner inconsistent with payments of principal and interest on the principal amount oustanding ( #IFRS9_B4_1_16 f)
- CF =/= Principal and interest –> Fair Value
- interest contains compensation for asset risk
- contractual terms refer to cash flows dependent on asset performance
- contractual terms that give rise to any other cash flows or limit the cash flows in a manner inconsistent with payments of principal and interest on the principal amount oustanding (e.g. disposal of assets, participation in a positive performance of assets)
- CF equals Principal and interest –> Step 2
- Step 2:
- Credit risk: Am Cost
- According to the terms of the lending arrangement credit risk is the substantial risk (by stipulations regarding the adherence of an appropriate equity base or other covenants)
- Possible indicators
- Redemption of a loan is independent of the asset‘s performance
- Creditor‘s claims are hedged by appropriate collaterals (adequate loan to value)
- Asset Risk: Fair Value
- Based on the fact that the financial asset is a non recourse financial asset the creditors claim is limited to specified assets of the debtor or the cash flows from specified assets
- Hence substantial risk is an asset specific risk
- Possiple indicators
- Redemption of a loan depends on the asset‘s performance
- Financial asset of a special purpose entity (SPE) is debtor‘s essential source of income, there are no relevant collaterals and equity base is low
- Credit risk: Am Cost
What is the definition for contractually linked notes?
Definition #IFRS9_B4_1_20
- In some types of transactions, an issuer may prioritise payments to holders of financial assets using multiple contractually linked instruments that create concentration of credit risk (tranches)
- each trench has own ranking
- holders of tranche have rights to payment of principal and interest on principal amount outstanding only if issuer generates sufficient cashflows to satisfy higher tranches
- Application for securities - Securitization #IFRS9_B4_1_21
- Cash flows generated by the underlying pool of assets are allocated to tranches of different subordination applying cash flow tests based on tranche specific thresholds
- If one or more of the thresholds are breached in a given period, the relevant tranche will be cut off from interest and/or principal payments for this period (no amortised cost)
- Through this mechanism, it is ensured that higher ranking tranches have priority of the cash flows generated by the pool if these cash flows may not be sufficient to satisfy all interest and/or principal payments due on all tranches (waterfall principle)
Ist ESG SPPI konform?
Bsp: Darlehen für energetische Sanierung
- Voraussetzung: CO2- Minderung 10%
- Wenn Minderung nicht erreicht -> Zins wird erhöht
Analyse:
- Zins wird mit ökologischem Merkmal verknüpft
- kein pure-vanilla Instrument mehr
- keine Abhängigkeit mehr allein SPPI #IFRS9_B4_1_7A
- Banken argumentieren: Wenn Öko Ziele nicht erreicht werden dann müssen Emissionszertifikate gekauft werden, dann weniger Zins, dann weniger Bonität
- laut Löw kein unmittelbarer Zusammenhang mit credit default risk -> ESG NICHT SPPI Konform
Wie werden Contractually linked instruments auf SPPI konformität geprüft?
- Erfüllt Vertrag ohne Look through approach Kriterium?
- Jetzt in SPE reinschauen -> erfüllen Underlying assets das Kriterium?
- wenn nein dann dürfen sie nur der RIsikominimierung dienen
- Können sich Underlyings über laufzeit ändern?
- Wenn Kreditrisiko der Tranche > Kreditrisiko der Underlying Assets dann KEIN SPPI, wenn <= SPPI konform
- Senior Tranche Immer SPPI konform
- Junior Tranche nie SPPI konform
How do you treat liabilities where the repayment is done in own equity instruments?
- repayment in own equity instruments with non-derivative contracts #IAS32_16b_i
- Equity if: instruments without contractual obligation to deliver a variable number of its own equity instruments –> ergo derliver obligation of fixed number of shares
- repayment in own equity instruments with derivative contracts #IAS32_16b_ii, #IAS32_AG27a-d , #IAS32_26
- fulfillment in:
- Net cash settlement; Net share settlement; Gross physical settlement; Variable number of equity instruments / amount based on changes in a variable underlying; Derivative financial asset / financial liabilitiy
- settlement choice of one party
- derivative: financial asset or liability
- settlement exchanging fixed number of own shares for fixed amount of cash
- derivative - equity instrument
- fulfillment in:
How do you treat profit participation rights?
Terms and Conditions
- Financial Instrument
- Bank issues a registered profit participatio right for 100 MEUR
- holder paid whole purchse price
- Repayment: no maturity date
- Termination rights:
- exclusion for holder
- bank: option after 10 years for nominal amount
- ongoing payments:
- coupons 5% p.a. of outstanding amount of PPR
- payment omitted if distribution results in / increases accumulative loss in annual HGB financial statements
- subsequently paid if this does not result in any new accumulated loss
#### Equity or Liability
- Repayment of instrument
- no redemption obligation
- no holder termination right
- –> PPR characterises as Equity
- Termination right of issuer
- termination right (derivative) will be exchanged for fixed amount of cash / other financial asset for fixed number of its equity instruments
- termination right -> equity instrument #IAS32_16b_ii #IAS32_22
Repayment equals equity capital
- ongoing Payments
- contractual obligation to pay interest
- payment obligation omitted if there is an accumulated loss
- Bank-specific reserves provide scope that may result in generation of accumulated loss #340gHGB
- payments subject to discretion of the bank #IAS32_26
- some consequences of #340gHGB otherwise possible to make claim acc. to #242BGB , #313BGB
**Ongoing Payments classified as equity
- Variation: Public statement of bank that no “harmful” reserves will be set up in accordance with #340gHGB
PPR ongoing Payments are financial liability as bank cannot evade payment obligation –> Split Accounting
How do you treat silent partnerships?
Terms and Conditions
- Financial Statement: silent partnership in bank (fully paid)
- Repayment: twenty years to maturity (limited maturity)
- Termination Rights: both silent partner and bank hold termination rights
- Ongoing payments
- contractual fixed percantage of nominal amount + percentage of dividend defined for financial year
- annual payment
- omitted if distribution results in /increases accumulative loss in HGB statement
- omitted distribution subsequently paid if it does not result in any new accumulted loss
#### Equity or Liability
- Repayment of instrument
- limited maturity
- obligation to take back financial instrument and repay capital at end of life of instrument
- termination rights –> holder termination right
redemption obligation and holder termination right –> liability –> puttable instrument acc. to #IAS32_18b –> one fact would be sufficient
- Ongoing payments
- contractual obligations of the bank to pay interest
- payment obligation omitted if there is any accumulated loss
- bank specific reserve provide scope which may result in generation of accumulated loss #340gHGB
- Payments are subject to discretion of bank #IAS32_26
- some consequences of #340gHGB -> otherwise possible claim acc to #242BGB , #313BGB
with regards to payments, Silent partnership are classified as equity
- Result:
- Silent Partnership: compound instrument: #IAS32_28 in conjunction with #IAS32_AG37
- Contractual obligation to repay nominal amount –> financial liability
- ongoing payment at discretion of bank –> equity instrument
- split accounting acc. to #IAS32_31
- Variation
- silent partnership with unlimited maturity and excluded termination right of holder
- classification of silent partnership as equity instrument since it is no puttable instrument #IAS32_18b
