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Financial Risk Management

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Title: Audit Risk and Sampling Author: David Chopping Created Date: 1/21/2008 12:05:15 PM Document presentation format: On-screen Show (4:3) Company – PowerPoint PPT presentation

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Title: Financial Risk Management


1
Financial Risk Management A New Accounting
Perspective
Chay Yiowmin Partner and Head of Financial
Services Moore Stephens LLP Singapore DID (65)
63292709 Fax (65) 62213815 chayyiowmin_at_mooresteph
ens.com.sg
2
Agenda
  • Introduction
  • Introduction to IFRS 9
  • Question Answer

3
Introduction
4
Introduction
  • In a major project to replace IAS 39 in its
    entirety by the end of 2010, the International
    Accounting Standards Board issued International
    Financial Reporting Standard (IFRS) 9 in November
    2009.
  • IFRS 9 incorporates Phase 1 of the financial
    instruments project to replace the
    classification and measurement requirements on
    financial assets in IAS 39 Financial Instruments
    Recognition and Measurement.

5
Introduction
  • The new standard, when adopted in Singapore, will
    have major implications for reporting entities,
    auditors, analysts and investors.

6
Introduction to IFRS 9
7
Introduction to IFRS 9
  • Introduction
  • New classification and measurement requirements
    for financial assets.
  • New criteria for amortised cost measurement.
  • New measurement category fair value through
    other comprehensive income.
  • No more available-for-sale and held-to-maturity
    assets.

8
Introduction to IFRS 9
  • Introduction (continued)
  • No more embedded derivatives in financial assets.
  • No more unquoted equity investments measured at
    cost less impairment.

9
Introduction to IFRS 9
  • Effective Date
  • Effective from 1 January 2013 with early adoption
    permitted.
  • Expected to be applied retrospectively.
  • Entities adopting the new Standard, with an
    initial application date before 1 January 2012,
    will be exempt from the requirement to restate
    prior periods.

10
Introduction to IFRS 9
  • Debt Instrument
  • Conditions for measurement at amortised cost
  • Business model test Hold financial asset to
    collect contractual cash flows, rather than to
    sell the asset prior to contractual maturity and
  • Cash flow characteristics tests Contractual
    terms of financial assets give rise on specified
    dates to cash flows that are solely payment of
    principal and interest on the principal
    outstanding.
  • All other debt instruments must be measured at
    fair value through profit or loss (FVTPL).

11
Introduction to IFRS 9
  • Debt Instrument (continued)
  • Examples that satisfy this criterion
  • A variable rate loan with a stated maturity date
    that permits the borrower to choose to pay three
    months LIBOR for a three month term or one month
    LIBOR for a one month term
  • A fixed term variable market interest rate bond
    whereby the variable interest rate is capped and
  • A fixed term bond whereby the payments of
    principal and interest are linked to an
    unleveraged inflation index of currency in which
    the instrument is issued.

12
Introduction to IFRS 9
  • Debt Instrument (continued)
  • Examples that do not satisfy this criterion
  • A bond that is convertible into equity
    instruments of the issuer and
  • A loan that pays an inverse floating interest
    rate (e.g. 8 minus LIBOR).
  • Available-for-Sale and Held-to-Maturity
    categories excluded in IFRS 9.

13
Introduction to IFRS 9
  • Equity Instruments
  • To be measured at fair value in the balance
    sheet.
  • All fair value changes recognised in profit or
    loss.
  • No cost exception for unquoted equities.
  • If equity not held for trading, irrevocable
    election at initial recognition to measure at
    fair value through other comprehensive income
    (FVTOCI).
  • Dividend income recognised in profit or loss.

14
Introduction to IFRS 9
  • Derivatives
  • All derivatives, including those linked to
    unquoted equity investments, are measured at fair
    value.
  • Embedded derivatives, previously separately
    accounted for at FVTPL under IAS 39, will no
    longer be separately accounted for under IFRS 9.
  • Instead contractual cash flows are assessed in
    their entirety, and the financial asset is
    measured at FVTPL as a whole if any cash flows do
    not represent payments of principal and interest.

15
Introduction to IFRS 9
  • Impact of IFRS 9
  • Ability to measure certain debt instruments (e.g.
    Government and Corporate Bonds) at amortised
    cost, which under IAS 39 would have been measured
    at fair value, due such bonds quoted in an active
    market.
  • Hybrid financial assets with separated embedded
    derivatives at FVTPL, will instead be measured at
    FVTPL in their entirety.

16
Introduction to IFRS 9
  • Overall Summary

Financial Asset IAS 39 Classification Impairment Testing Required? IFRS 9 Classification Impairment Testing Required?
Debt Instrument Available-for-Sale Yes Amortised Cost Yes
Loan and Receivable Yes FVTPL No
Held-to-Maturity Yes
FVTPL No
17
Introduction to IFRS 9
  • Overall Summary (continued)

Financial Asset IAS 39 Classification Impairment Testing Required? IFRS 9 Classification Impairment Testing Required?
Equity Investment Available-for-Sale Yes FVTOCI No
Cost less Impairment Yes FVTPL No
FVTPL No
18
Introduction to IFRS 9
  • In the Pipeline
  • Phase 1 - Classification and Measurement
  • IFRS 9 Financial Instruments for financial assets
    was published in November 2009.
  • The IASB is now addressing the classification and
    measurement of financial liabilities.
  • An exposure draft on the topic Fair Value Option
    for Financial Liabilities was published in May
    2010.

19
Introduction to IFRS 9
  • In the Pipeline (continued)
  • Phase 2 Impairment Methodology
  • The exposure draft Amortised Cost and Impairment
    was published in November 2009, awaiting for
    comments.

20
Introduction to IFRS 9
  • In the Pipeline (continued)
  • Phase 3 Hedge Accounting
  • IASB expects to publish an exposure draft in time
    to allow for finalisation by the second quarter
    of 2011.

21
Question Answer
22
Financial Risk Management A New Accounting
Perspective
Chay Yiowmin Partner and Head of Financial
Services Moore Stephens LLP Singapore DID (65)
63292709 Fax (65) 62213815 chayyiowmin_at_mooresteph
ens.com.sg
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