International Accounting Standards Update

1、International Accounting Standards UpdateInternational Accounting Standards UpdatepwcIAS 39Financial instruments - Practical issues and considerationsCPE Seminar Tuesday 9278 January 2003Fabio Axisa Senior ManagerPricewaterhouseCoopersInvestment portfolio Portfolio acquired on 1/1/2001 consists of:L

2、m and FC bonds acquired on primary marketLm bonds acquired on secondary market designated as HTMLm bonds acquired on secondary market classified as AFSFC bonds acquired on secondary market classified as AFSLm equities and FC equitiesReporting as at 31/12/2001Assumption transaction costs incurred onl

3、y on Lm bonds acquired on secondary market and Lm equitiesPwCIAS 39 Decision tree for categorising assetsDerivative?Is it a hedge?Hedge accounting Held for trading Available-for-sale financial assets (all others)Fixed/determinable payments Fixed maturity Positive intent and ability to hold to maturi

4、tyHeld to maturity investments Loans/receivables originated by enterprisePart of portfolio with a pattern for profit taking?Acquired for short term profit?YesYesYesYesNoNoNoNoBonds acquired on primary marketClassified as Originated loans and receivables (measured and carried at amortised cost)unless

5、 acquired for short term profit takingeven though designated as HTMLm assets acquired at par at Lm100,000 (redeemable at par)carried at Lm100,000Bonds acquired on primary marketFC assetsacquired at par at US$230,000 (redeemable at par)cost of acquisition is Lm92,000 (ROE 2.5)Carried at year-end tran

6、slated amortised cost of Lm100,000 (ROE 2.3)Lm8,000 reported as exchange differences in P/LAmortised cost Amortised cost - amount at which asset was recognised at initial recognition minus principal repayments plus/minus amortisation of difference between initial amount and maturity amount Effective

7、 interest method - used to compute amortised cost EIR - rate that exactly discounts the cash flows associated with the instrument through maturity to net carrying amount at initial recognitionTo allocate interest receipts and initial discount/ premium over the term of the instrument at constant rate

8、 on carrying amount, accruals must be effected at EIRLm bonds bought on secondary marketDesignated as Held-to-maturitybonds purchased with face value of Lm125,000 interest at 4.7% receivable annuallyacquired for Lm95,000 and incurred transaction costs of Lm5,000initial measurement amount is Lm100,00

9、0maturity date - five years from date of purchaseeffective yield of 10% - IR discounting all cash flows to PV of Lm100,000finance income at 10% on carrying amount recognised in each periodCalculation of amortised cost Lm bonds bought on secondary marketDesignated as Held-to-maturitybonds carried at

10、amortised cost of Lm104,100 at 31/12/2001 interest income for the year amounted to Lm10,000 including:coupon interest of Lm5,900amortisation of difference between acquisition amount & maturity amount (Lm30,000) and transaction costs (Lm5,000) net of Lm25,000 of which Lm4,100 has been taken to P/

11、L during the yearLm4,500 (Lm10,400 minus Lm5,900) to P/L in 2002Lm5,000 in 2003, Lm5,400 in 2004 & Lm6,000 in 2005 Lm bonds bought on secondary marketClassified as Available-for-salesame fact pattern and transaction amounts as for H-T-M Lm bondsamortised cost of bonds is Lm104,100 at 31/12/2001f

12、air value of assets is Lm115,000 resultant fair value gain of Lm11,900 reported directly in equityfair value changes are computed by matching amortised cost with the fair value at reporting date interest income in P/L for the year would still amount to Lm10,000 analysed as outlined FC bonds bought o

13、n secondary marketClassified as Available-for-sale Same fact pattern as for FC bonds acquired on primary marketacquired at par at US$230,000 (redeemable at par) - oversimplificationcost of acquisition is Lm92,000 (ROE 2.5)year-end translated amortised cost is Lm100,000 (ROE 2.3)Lm8,000 reported as e

14、xchange differences in P/Lyear-end fair value is US$300,000 with ROE 2.3 amounts to Lm130,500Lm130,500 compared to Lm100,000 fair value gains of Lm30,500 reported directly in equityFC equitiesClassified as Available-for-sale Same transaction amounts as for FC bonds acquired on secondary marketacquir

15、ed at US$230,000 - cost of acquisition is Lm92,000 (ROE 2.5)year-end translated cost is Lm100,000 (ROE 2.3)year-end fair value in US$300,000 with ROE 2.3 amounts to Lm130,500Lm130,500 compared to Lm92,000 fair value gains of Lm38,500 reported directly in equityLm8,000 NOT reported as exchange differ

16、ences in P/L equities are not monetary items as per IAS 21Lm equitiesClassified as Available-for-sale acquired at Lm95,000 incurring transactions costs of Lm5,000initial measurement amount is Lm100,000 year-end fair value amounts to Lm105,000fair value gains of Lm5,000 reported directly in equityfai

17、r value reserve is net of unrealised gain of Lm10,000 and transactions costs of Lm5,000reserve recycled to P/L upon disposal/impairment including transaction costs Transaction costsFor instruments carried at amortised cost - costs are included in calculation of amortised cost using effective interes

18、t method - costs amortised to P/L over life of instrumentFor Trading/AFS assets with FV changes reported in P/L - costs included in P/L at initial remeasurement to FVFor AFS assets (debt investments) with FV changes reported directly in equity - costs amortised to P/L using the effective interest me

19、thod For AFS assets (equity investments) with FV changes reported directly in equity - costs recognised in P/L at time of saleFinancial assets/liabilities in foreign currencyMonetary items - follow IAS 21 with forex gains and losses reported in P/L any FV changes apart from forex differences are acc

20、ounted for in accordance with policy adopted under IAS 39exception: hedging instruments in CF hedge Non-monetary items - follow recognition policy under IAS 39all FV changes (including component reflecting changes in exchange rates) are either reported directly in P/L or deferred in equityProposed c

21、lassification changesHeld for tradingCan be designated at initial acquisition of any asset and liabilityTransfers from and to this category will be prohibitedOriginated loans and debt securitiesDebt securities with quoted market price will be excluded from categoryAvailable-for-saleFair value gains

22、and losses only through equity Tainting of HTM portfolio In 2001 further acquisition of bonds designated as HTM disposals effected following downgrade of issuer credit ratingWould this raise doubts about intent to hold other investments to maturity? Could satisfy conditions for exemptionDeterioratio

23、n in creditworthiness must be significantRating downgrade must not have been reasonably anticipated upon original classification Credit downgrade of a notch within a class or from one rating class to the immediately lower rating class often could be considered reasonably anticipatedIAS 39 Decision t

24、ree for categorising financial assets held to maturityPwCIs there positive intent and ability to hold investment to maturity?Was any financial instrument in the portfolio sold or transferred in the current or the two preceding years?Classify as held to maturity and measure at amortised costClassify

25、all as available-for-sale and measure at fair valueNear maturity? Special or isolated event? Collected substantially all the principal? Insignificant amount in relation to the held to maturity portfolio?YesYesYesNoNoTransfer of assets out of HTM categoryTainting of HTM portfolio (change of intent or

26、 ability or reliable measure of FV becomes available) - transfers out of HTM portfolio either to trading assets or AFS category assets remeasured to FVdifference between carrying amount and FV taken to P/L (transfer to trading assets) or either to P/L or into equity (transfer to AFS) in our case Lm5

27、,100 recognised in equityImpairment of Lm equitiesClassified as Available-for-sale acquired at Lm95,000 incurring transactions costs of Lm5,000initial measurement amount was Lm100,000 fair value at 31/12/2001 amounted to Lm105,000fair value gains of Lm5,000 reported directly in equityfair value at 3

28、1/12/2002 drops to Lm90,000fair value reserve becomes negative Lm10,000losses are still reported in equity unless there is objective evidence of impairment Examples of market factors to consider:deterioration in creditworthiness (financial difficulties),high probability of bankruptcy,disappearance o

29、f active market arising from financial difficulty of issuer, breach of contract,granting by lender of particular concessionsAbove factors mainly relate to bonds limited guidance on equity securitiesImpairment indicatorsSignificant changes in technological, market, economic and legal environment indi

30、cating cost may not be recoveredSignificant and prolonged decline in fair value below costDeclines in FV disproportionate to other entities in same industrySignificant unexpected deterioration in earnings, cash flows or net assets on investee since acquisitionReduction or cessation of dividend payme

31、ntsSignificant reduction in credit rating since acquisition Impairment triggers for equitiesFair value measurement considerationsPresumption that FV can be reliably determined for most assets classified as AFS and held for tradingPresumption can be overcome for investment in equity instrument with no quoted market price in active market - other methods of estima