Classification Flashcards

Question

How is Credit Risk assessed as part of interest?

Answer 1

- 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

Answer 2

- FV of financial asset at initial recognition - may change throughout life of financial asset

Answer 3

#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

Answer 4

- 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

Answer 5

- 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

Answer 6

- 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) - 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

Answer 7

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)

Answer 8

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

Answer 9

1. Erfüllt Vertrag ohne Look through approach Kriterium? 2. Jetzt in SPE reinschauen -> erfüllen Underlying assets das Kriterium? - wenn nein dann dürfen sie nur der RIsikominimierung dienen 3. Können sich Underlyings über laufzeit ändern? 4. Wenn Kreditrisiko der Tranche > Kreditrisiko der Underlying Assets dann KEIN SPPI, wenn <= SPPI konform - Senior Tranche Immer SPPI konform - Junior Tranche nie SPPI konform

Answer 10

- 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

Answer 11

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**

Answer 12

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