The latest IFRS 9 and IFRS
16 Standards - Including
Financial Impairment Assets

• Classification of financial assets based on
  • Business model for managing the asset (“the Business Model test”)
  • Asset’s contractual cash flows, whether they are solely payments of principal and interest (SPPI) (“the SPPI test”)
• Classification and measurement of financial assets at
  • Amortised costs
  • Fair value through Profit & Loss (FVPL)
  • Fair value through Other Comprehensive Income (FVOCI)
• Decision tree to decide on classification of financial instruments
• Case study 1: Classify financial instruments to the relevant categories
• Steps involved in applying the Business Model test
• Factors to consider in applying the SPPI test, including:
  • Whether payment terms are “not genuine” or “de minimis”
  • Rights in bankruptcy or when non-payment happens
  • Prepayment and term extending options
  • Non-recourse arrangements
• Fair value hierarchy that categorises the inputs to valuation techniques
  • Level 1 inputs are unadjusted quoted prices in active markets for identical assets
  • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable either directly or indirectly
  • Level 3 inputs are unobservable inputs
• Reclassification of financial assets when an entity changes its business model
• Amendment on “Prepayment with negative compensation” and the definition of “reasonable” compensation?
• Case study 2: The impact on financial statements for different types of debt & equity instruments

  Introduction to Impairment

  1. • Definition and objectives
     • Types of assets prone to impairment

  Recognition and Measurement

  1. • Identifying indicators of impairment
     • Measurement of impairment loss
     • Reversal of impairment loss

  Impairment Testing

  1. • Cash-generating units (CGUs) and their identification
     • Recoverable amount and its calculation
     • Carrying amount and its determination

  Disclosure Requirements

  1. • Presentation of impairment losses in financial statements
     • Disclosures about impairment testing

   IFRS 9

   Overview

  • What is IFRS 9? What are the differences between IFRS 9 with IAS 39?
  • The definition of financial assets and financial liabilities
  • The history and implementation overview of IFRS 9

  Financial Assets Classification and Measurement 

 Financial Assets Impairments – Expected Credit Losses

• Impairment requirements applies to:
  • Debt instruments measured at amortised costs, eg. trade receivables, loan receivables from related parties, intercompany loans
  • Debt instruments measured at FVOCI, eg long dated government or corporate bond
  • Issued loan commitments and financial guarantee contracts (except those measured at FVPL)
  • Lease receivables within the scope of IFRS 16 Leases
  • Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers
• Three stages process to determine impairments
  • Stage 1: Credit risk has not increased significantly since initial recognition – recognise 12 months ECL, and recognise interest on a gross basis
  • Stage 2: Credit risk has increased significantly since initial recognition – recognise lifetime ECL, and recognise interest on a gross basis
  • Stage 3: Financial asset is credit impaired – recognise lifetime ECL, and present interest on a net basis
• How to estimate lifetime ECL
• Intercompany loans impairment
• Accounting treatment for financial instruments already impaired when acquired
• Case study 3: Assess the credit deterioration of a Greek bond throughout the crisis and its different stages
• INT FRC agenda on
  • Credit enhancement in measuring ECL
  • Curing of credit impaired asset

Financial Liabilities and Own Credit Risk  

• Financial liabilities classified at amortised cost unless
  • The financial liability is held for trading
  • The entity elects to measure the financial liability at FVPL
• Changes in own credit risk is recognised in OCI, with no recycling
• Two-step approach:
  • Determine changes in fair value of the financial liability as a whole
  • Perform a separate calculation to determine the change in fair value due to changes in entity’s own credit status
  • Difference in the two-step approach above recognised in P&L
• Own credit deterioration reduces entities’ liabilities
• Liability reduction due to rating downgrade to be now classified in OCI
• Case study 4: Assess the impact on credit deterioration on entities’ own bonds

Hedge Accounting

• Qualification of hedge accounting
• Different types of hedge accounting, same as IAS 39, except for time value of money and forward points in foreign exchange forward
  • Cash flow hedge
  • Fair value hedge
  • Net investment hedge for foreign subsidiaries
• Accounting treatment for time value of money for options: a 2 step process through OCI
• Accounting treatment for foreign currency forward points in OCI
• IFRS 9 hedge accounting more closely aligned to risk management policy
  • Removal of hedge effectiveness criteria (80% to 125%)
  • Extends eligibility of risk component to include non-financial items
  • Permits aggregate exposure that includes a derivative to be eligible hedged item
  • Group of items and a net position (e.g. assets & liabilities or forecast sales & purchases) hedged collectively as group
• Case study 5: Classify hedge transactions to the relevant categories
• Case study 6: Value an interest rate swap accounted for as a cash flow hedge
• Case study 7: Review and assess different hedge scenarios including risk component hedging, aggregate exposures and net position

 Presentation and Disclosure

• Requirement of the presentation as separate line items in the P&L for
  • Revenue calculated using the effective interest method
  • Gains and losses from derecognition of financial assets measure at Amortised Cost
  • Impairment losses
  • Gain or loss due to reclassification from Amortised Cost to FVPL
• Disclosure due to:
  • Classification and measurement
  • Credit risk

IFRS 16

This session will present a comprehensive analysis of the technical requirements of the IFRS 16/ FRS 116 for Lease Accounting. It provides a detailed understanding of the changes from current Standards to the New Standard, analysing the logic, implications and problem areas to watch out for.

It will enable participants to assess the impact of the New Standard on the business decision to make arrangement to acquire the rights to use resources and the impact of the contractual terms that may have significant impact on the reported financial position, financial performance and cash flows of your company. Discover the best ways to handle the new rules and avoid the pitfalls. Learn what you need to do NOW to prepare for the new changes.

The Overall Technical Issues

• New Principles
  • Scope of coverage and interaction with other Standards
  • Identifying a lease contract
  • Identifying and accounting for short-term lease and low value lease
  • Separating components of a lease contract for lessee and lessor
  • Handling complex lease terms and understanding their impact on financial statements
  • Introduction to the new principles on sale and leaseback transactions

Accounting for Lessee

• Recognition principles
  • When to recognise a “lease liability” and a “right-of-use asset”
• Measurement principles for initial and subsequent accounting
  • Lease obligations and right-of-use assets
  • Reassessment of lease liability
  • Amortization and impairment of the right-of-use assets
• Presentation and disclosure of lease liabilities and right-of-use assets
• Practical illustrations on setting up the ledger accounts
• Examine the impact on financial statements and ratios analysis
• Transitional provisions for lessee

Accounting for Lessor

• Determining whether a lease is a finance lease or an operating lease
• Finance Lease
  • Recognising and measuring the lease receivable assets
  • Initial measurement of the amount of net investment in lease
  • Subsequent recognition of finance income over the lease term
  • Presentation and disclosure of lease receivable assets
• Operating lease
  • How to recognise the income of an operating lease
  • Recognition and measurement of the underlying assets
  • Depreciation or amortisation of the underlying assets
  • Presentation and disclosure of the underlying assets subject to operating lease

Special Consideration for Granting a Lease of Property

• Lessee
  • How to classify and account for right-of-use property
  • Lessee granting a sub-lease of the right-of-use property
• Lessor
  • Granting a head-lease lease of property
  • Granting a sub-lease of property
• Classification consideration for both Lessee and Lessor:
  • Whether to classify in accordance with IAS 40 Investment Property or IAS 16 Property, Plant and Equipment

Sale and Lease Back Transactions for Both Seller-Lessee and Buyer-Lessor

• Deciding whether a transfer of asset is a sale (Application of SB-FRS115 Revenue from contracts with customers)
• Accounting treatments for both seller-lessee and buyer-lessor for:
  • Transfer of an asset that is a sale
    • Accounting treatment where fair value sale consideration does not equal to fair value of the assets
  • Transfer of asset that is not a sale

Latest Development on IFRS 9 and IFRS 16