2013 pwc ireland next steps ifrs december

8/11/2019 2013 Pwc Ireland Next Steps IFRS December

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Financial Instruments:

Expected Credit Losses

www.pwc.ie/banking

Impairment briefing

December, 2013


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PwC

Agenda

1. Accounting Implications2. Practical Implications and next steps

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Accounting Implications Timeline

Nov 2009

IASB issuesED onimpairment

Jan 2011

FASB and IASB issuesupplementary document onimpairment

2017

Effective datenot before

Slide 3

March 2013

IASB re-exposesimpairment

H1 2014

Final Standard


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Expected loss model.

Responsive to changes in information that impact creditexpectations.

It is inappropriate to recognise full lifetime losses on initialrecognition of financial instruments priced at market.

Significant increase in the credit risk leads to recognition of lifetimelosses.

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Accounting Implications - General model


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Accounting Implications - General model (cont)

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Effective interest ongross carrying amount

Lifetime expectedcredit losses

12 month expectedcredit losses

Recognition of expected credit losses

Interest revenue

Change in credit quality since initial recognition

Stage 1 Stage 2 Stage 3Initial recognition* Assets with significant

increase in credit risk since initial recognition*

Credit impaired assets

*except for purchased or originated credit impaired assets

Lifetime expectedcredit losses

Effective interest ongross carrying amount

Effective interest onamortised cost carrying

amount (i.e. net of creditallowance)


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12-monthexpected creditlosses

The expected credit losses that result from those defaultevents that are possible within the 12 months after thereporting date.

Lifetime

expected creditlosses

The expected credit losses that result from all possible

default events over the life of the financial instrument.

Credit Loss The present value of the difference between all principaland interest cash flows that are due to an entity inaccordance with the contract and all the cash flows theentity expects to receive.

Expected CreditLosses

The weighted average of credit losses with the respectiveprobabilities of default as weights.

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Basis for an estimate of expected credit losses:

An entitys estimate of expected credit losses shall reflect:

a) the best available information;

b) an unbiased and probability-weighted estimate of cashflows associated with a range of possible outcomes(including at least the possibility that a credit lossoccurs and the possibility that no credit loss occurs);and

c) the time value of money.

Various approaches can be used.

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Assessment whether credit risk has increased significantly:

An entity shall base this assessment on change in probability of adefault rather than the change in expected credit losses.

An entity shall compare the probability of a default occurring over

the remaining life of a financial instrument as at the reporting date with the probability of a default occurring on the financialinstrument over its remaining life as at initial recognition.

A simple comparison of the absolute probabilities of a defaultoccurring is not sufficient.

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Information to be considered when determining whetherthe recognition of lifetime expected losses is required:

Changes in external market indicators of credit risk;

Changes in credit ratings (external or internal);

Changes in internal price indicators of credit risk;

Existing or forecast changes in the business, financial or economicconditions;

Changes in operating results of the borrower.

Delinquencies (rebuttable presumption: the criteria for recognitionlifetime expected losses is met when contractual payments are morethan 30 days past due);

Other qualitative inputs.

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Discount rate for calculating the expected credit losses:

Exposure draft provided a choice of discount rate - any rate between, and including, the risk-free rate and the effective interestrate.

Board now agreed that effective interest rate must be used.

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Some loan commitments and financial guarantee contracts are inscope.

Consider the maximum contractual period when estimating expectedcredit losses.

The usage behaviour shall be factored into the calculation of expectedcredit losses.

Discount rate: should reflect the current market assessment of thetime value of money and the risks that are specific to the cash flow.

Board now agreed EIR must be used for drawn and undrawn

portions of rollovers.

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Accounting Implications - Loan commitmentsand financial guarantees


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Robust disclosure requirements.

Overall principle: an entity should disclose information thatidentifies and explains:

- The amounts in the financial statements that arise from expectedcredit losses; and

- The effect of deterioration and improvement in the credit risk of financial instruments that are within the scope of the ED.

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Accounting Implications - Disclosures


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The Board have yet to decide on the effective date, but haveconfirmed it will not be before 1 January 2017.

Retrospective application by using the credit risk at initialrecognition is required except:

If on transition such application requires undue cost or effort, then

loss provision shall be determined only on the basis of whether thecredit risk is low at each reporting period.

No requirement to restate comparatives.

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Accounting Implications - Effective date and transition


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2. Practical Implications

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Deterioration CriteriaThe IASB proposed some methods and information to assess the deterioration criteria:

Probability of Default Models Using the 1 year PD as a proxy for lifetime PD to assess the transfercriterion

Prices for credit Credit spread that would result if a proxy instrument were newlyoriginated or issued at the reporting date

External/internal credit ratingand scores

If internal, should be mapped to external or supported by default studies

Delinquencies Rebuttable presumption that the credit risk on a financial asset hasincreased when contractual payments are 30 DPD

Qualitative Assessment Qualitative factors (e.g., business, technological, economic, and political factors) that may affect loss rates or other lossmeasurements

Rates or terms of existinginstruments

Significantly different if issued at reporting date (e.g. Morestringent covenants, increased collateral, or higher incomecoverage)

Operating results of the borrower

Significant changes including declining revenues or margins,increasing operating risks, and increased balance sheet

Value of collateral or reductionof financial support

Expected to reduce the borrowers economic incentive to makescheduled contractual payment

Expected performance and behaviour of the borrower

e.g. An increase in the expected number of credit card borrowerswho are expected to approach or exceed their credit limit

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Challenges Considerations

Gaining an understanding of new standard Training programme Gaining insights from IASB

Impact on profit and capital Initial assessment using simulation tool Understand what the results are sensitive to Impact on both back book and front book volumes

with knock-on impact on lending and restructuringpolicies

Pricing implications

Definitions default/significant Judgmental considerations May consider what your peers are doing Policy will be required

Using existing suite of models Key adjustment required Forward looking assumptions e.g. future collateral

values Dealing with data gaps. Fit for purpose assessment

Financial results and disclosure impact Extensive disclosure requirements

Organisational impact Appropriate skills Ownership of models Interaction between finance, risk and credit

Key stakeholder (both internal and external)messaging

Need to manage message to stakeholders Changes to key MIS Forecasting results

Challenges

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Project Outline

Roadmap for IFRS 9

Assessment phase

Undertaking the new orproposed accounting

standards. Establish steering committee

and governance

Communicate to the key stakeholders (consider bothinternal and external

Consider using a simulatorto assess potentialquantative impact andunderstand the key factors.

Use simulator to assess datarequirements.

Consider resourcing impacts.

Detailed assessment

Agree key definitions fordefault /significant.

Consider detailed model(both IAS39 and Basel)inventory and assess whichmodels to leverage

Assess the financialreporting implications.

Agree model point in timeadjustments.

Consider estimatedpotential impact.

Communicate with key.

stakeholders and considerimpact on credit policy andpricing. Consider other key projects.

Implementation andtransition phase

Model and data validation.

Implement technology changes.

Finalise control designincluding key reconciliations.

Perform validation onresults.

Training and handoverfrom steering to business

as usual.

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Contacts

John McDonnell Partner Ronan Doyle Partner

[email protected] [email protected]

+353 1 792 8559 +353 1 792 6559

Oonagh Carroll Director Robert Lacey Senior manager

[email protected] [email protected]

+353 1 792 8163 +353 1 792 8131

Fidelma Boyce Senior manager

[email protected]

+353 1 792 8938

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2013 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the Irish firm, PricewaterhouseCoopers, OneSpencer Dock, North Wall Quay, Dublin1 which is authorised by the Institute of Chartered Accountants in Ireland to carry on investment business. As the context requires, "PricewaterhouseCoopers" may also refer to one or more member firms of the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity. PricewaterhouseCoopers does not act asagent of PwCIL or any other member firm nor can it control the exercise of another member firm's professional judgment or bind anothermember firm or PwCIL in any way.

2013 pwc ireland next steps ifrs december

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