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IFRS9 > Measurement > Flashcards

Measurement Flashcards

1
Q

How is the initial measurement of financial assets regulated?

A

IFRS9_5_1_1

Fair Value plus/minus transaction costs

Exceptions see #IFRS9_5_1_1A-5_1_3

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2
Q

How are the subsequent Measurements of Financial Assets regulated?

A

IFRS9_5_2_1

According to Classification
- Am Cost
- FVtPL
- FVtOCI

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3
Q

How are subsequent measurements of Financial Liabilities regulated?

A

IFRS9_5_3_1

According to Classification
- Am Cost
- FVtPL
- FVtOCI

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4
Q

When are Impairments done?

A
  • Expected Losses to be recognized at all times for: #IFRS9_5_5_1
    • Debt instruments measured at amortised cost - business modell held to collect
    • Debt instruments measured at FVtOCI - business model mixed
  • Additionally
    • Trade receivables and lease receivables (seperate model for calculation)
    • Other financial instruments subject to credit risk such as
      • irrevocable loan commitments
      • financial guarantee contracts
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5
Q

What is the theoratical background for impairment?

A
  • Basis for proposal of new impairment rules - alignment of credit risk calculation and accounting treatment of expected losses
  • interest rate reflects initial credit loss expectations
  • when expected credit losses exceed those initially expected an economic loss is suffered
  • final standard
    • recognition of portion of expected credit losses initially
    • recognizing lifetime expected losses when significant deterioration in credit risk occurs
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6
Q

What is the 12-month-ECL?

A
  • Portion of lifetime expected credit losses and representation of amount of expected credit losses resulting from default events that are possible within 12 months after reporting date
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7
Q

What is the Lifetime ECL

A

Expected Credit Loss resulting from all possible default events over the life of the financial instrument

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8
Q

What ist the credit loss?

A

Difference between all principal and interest cash flows that are due to an entity in accordance with the contract and all cash flows the entity expects to receive discounted at original effective interest rate (EIR)

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9
Q

What ist the general requirement for impairment?

A
  • Determination of (Lifetime) Expected Loss for maximum contractual period (including prolongation options) an entity is exposed to credit risk
  • Combination of detailed estimates and extrapolation of current data allowed
  • Expected Credit Losses weighted average of credit losses with respective risks of a default occurring as weights
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10
Q

What are the three stages of Impairment?

A

Stage 1
- No significant deterioration in credit quality
- Rating investment grade
### Stage 2
- Significant deterioration in credit quality
- Rating non investment grade
- Rebuttable presumption met if more than 30 days past due
- z.B. Restaurant während Covid, 30 Tage Zahlungsausfall aber generell gut gehend
### Stage 3
- Credit impaired or incurred loss has occured
- ECL to be updated at each reporting date for new information irrespective of whether financial instrument stays at the same stage

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11
Q

What are the details regarding the first stage of impairment?

A
  • 12 month expected credit losses #IFRS9_5_5_17b
    • Proxy for adjusting interest rate for initial expected credit losses
    • Expected shortfall in all contractual cash flows given probability of default occurring in next 12 months
    • Not meaning
      • Expected cash shortfalls in the next 12 months
      • Credit losses on assets expected to default in next 12 months
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12
Q

What are the details regarding the second stage of impairment?

A
  • Assessment of (significant ) deterioration in credit quality - to be included #IFRS9_5_5_17a
    • Change in probability of default occurring (not change in expected losses) compared with initial recognition
    • Maturity to be included
    • Particular measurement methods not prescribed nor is it necessary to explicitly include PD as input
  • Operational simplifications
    • Recognize 12 month ECL if investment grade
    • Rebuttable presumption significant deterioration when payments are more than 30 days past due
    • Not necessary to assess for trade and lease receivables - special rules
  • Stage 2 kann ggf. auch übersichert sein
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13
Q

What are the details regarding the third stage of impairment?

A
  • Credit impaired financial asset (Appendix A, defined terms ) objective evidence after occurance of one or more of the following events #Klausur
    • Significant financial difficulty of the issuer or the borrower
    • Breach of contract (default or past due event)
    • Concessions of the lender due to financial difficutlies of the issuer or borrower
    • Probability of bankruptcy or other financial reorganisation
    • Disappearance of an active market for the asset (due to financial difficulties)
    • Purchase or origination of a financial asset at a deep discount
  • Change in calculation interest from gross to net interest
    • Interest usually calculated on gross carrying amount before the loss allowance
    • Change to calculation on a net basis (on the amortised cost amount that is net of the loss allowance
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14
Q

What information is to be used in Impairment?

A
  • # IFRS9_5_5_17c
    • Available without undue cost or effort
    • Historical, current and reasonable and supportable forward looking information
    • Historical information to be updated
  • includes:
    • Borrower specific
    • Macro economic
    • Internal default rates and probabilities of default
    • External pricing
    • Credit ratings
  • estimation of credit losses
    • probability weighted outcome
    • time calue of money
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15
Q

How is ECL calculated?

A
  • EL=EAD * PD * LGD
    • EAL= Exposure at default: book value development
    • PD= Probability at default: explicit requirement for point in time approach, consideration of forward looking developments required determination of multiple year PD
    • LGD= Loss given default: consideration of macro development required; prudent adjustments not permitted, even if used for mgt purposes; collateral type/use to be taken into account
    • DR= Discount rate: Lifetime expected losses using effective interest rate
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16
Q

What is main difference between IFRS9 und IAS39 in impairment?

A

IAS39 basically no stage 2
stage 3 comes later

17
Q

What scenarios are included in ECL?

A

interpretation

  • requires model of economic cycles in countries of operation
  • different scenarios required
  • challenge: find source of macroeconomic models incl. stress testing on national/sub-national/regional basis that are internally consistent
  • ECL calc. probability weighted
  • starting point broad –> fundamental decision –> taking right scenario to start
  • different scenarios –> similar implications regardless
    # interpretation
  • different scenarios –> similar implications regardless
18
Q

What are POCIs?

A
  • Who buys it: specialized banks
  • credit-impaired at initial recognition (Purchased or Originated Credit-Impaired, POCI) ( #IFRS9_5_5_13)
    • Recognition – acquired at discount reflecting incurred credit losses
      • not itself disqualify from being measured at amortised cost
    • Expectation on initial recognition
      • Debtor will not/not fully pay debts
  • Consequence
    • Always outside general model
    • High risk taken into account in FV at initial recognition
  • –> No loss allowance at initial recognition
19
Q

What is the subsequent measurement of POCIs?

A
  • loss allowance depends on (possibly) changing expectations about credit losses compared to expectations at initial recognition
  • Loss allowance recognised directly and only in P&L
  • Possibility to recognise a positive loss allowance if expectations improve compared to the expectations at initial recognition
  • POCI assets mainly expected in connection with modifications of nonperforming loans
    ### credit adjusted effective interest rate
  • obligatory use
  • no day one allowance on balance
  • no day one impairment loss recognised
  • allowance on balance –> changes in lifetime credit loss expectations
20
Q

What is meant with modification?

A
  • two main reasons
    • change of contract due to strong market position
    • change of contrafct due to financial problem
  • also e.g. government moratorium –> 3 month payment pause
  • no sense to have different stages for assets of same borrower
  • accounting rules for derecognition dont deal with modification
21
Q

How to fill a gap in IFRS?

A
  • # IAS8_10 bis #IAS8_12
  • absence of applicable IFRS
  • MGT judgement to develop accounting policy
    1. relevant to the economic decision-making need of users
    2. reliable, in that the financial statements:
      1. represent faithfully the financial position, financial performance and cash flows of the entity;
      2. reflect economic substance of transactions, other events and conditions, not merely the legal form;
      3. neutral, i.e. free from bias;
      4. prudent;
      5. complete in all material respects“ ( #IAS8_10)
  • shall refer to and consider in descending order:
    • requirement in IFRS dealing with similar/related issues
    • definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework “ ( #IAS8_11)
  • may also consider most recent pronouncements of other standard setting bodies with similar conceptual framework when not in conflict with above #IAS8_12
22
Q

What are the conclusions for Modification?

A
  1. No rules reg. modifications of contracts of financial assets in IFRS 9
  2. Rules governing equivalent questions in (other) regulations of IFRS to be applied
  3. IFRS 9 modification of contracts regarding financial liabilities
    –> #IFRS9_3_3_2 to be applied
    - Change of debt instruments with substantially different terms
    - Treatment: repayment of original financial liability, recognition of a new liability
    - Obligation to be applied and taken over for financial assets according to #IAS8_11a
23
Q

How to decide if Modification leads to derecognition?

A

Step 1: Did contractual CF expire?
- if completely yes: complete derecognition
- if partially yes: partial derecognition

Step 2: Applied to
- residual financial assets after partial derecognition
- financial asset before modification
Are Modifications substantial or not?
- if yes: full derecognition
- if no: adjust book value

24
Q

What is defined as substantially different terms?

A

IFRS9_B3_3_6

  • quantitative test -> 10%
  • qualitative test
    • Change of currency
    • Absence of a market for the asset (bond)
    • No conformity with SPPIcriteria after modification (for example equity kicker)
    • Change of nominal/maturity/colalteral
    • Prolongation/New repayment options
      ### Seperate line item
  • # IAS1_82aa
  • no derecognition in P&L
    • adjustment of impairment at date of derecognition
25
Q

How are Loan Comittment and financial Guarantee Contracts regarding Impairment?

A
  • In Scope for Impairment model
    • Remaining contractual period, or shorter, over which entity is exposed to credit risk to be considered (longest period is contractual period exposed to credit risk)
    • Expected credit losses presented as liability on the balance sheet
26
Q

What is meant with the simplified Impairment approach?

A
  • trade receivables / contractual assets –> not contain significant financing component
    • no need to calc. 12-month-ECL when significant increase of credit risk occurs
    • Lifetime ECL calc.
  • Lease rec/trade rec. with significant financing component –> #IFRS9_5_5_15 , #IFRS9_5_5_16 accounting choice to measure loss allowance at lifetime ECL on initial recognition

IFRS9 (8 decks)

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