Professional and Technical UpdatesDecember 2017:

ACCA Africa MembersConvention: Addis Ababa,Ethiopia.Venue: United NationsEconomic Commission forAfrica Conference Centre(UNECA)

Presented by: Tinashe JerahuniAssociate Director – BDO ZambiaLimitedDate: 07 December 2017

IFRS 9 UPDATES 2017Key objectives of the session

During this session we will cover highlights on IFRS 9 – Financial Instruments;ü New classification and measurement criteriaü Key IFRS 9 – Financial Instruments key highlights of the standardü IFRS 9 Impairment model requirements

ü General Approachü Simplified Approachü Other key considerations when developing the impairment modelsü Financial guarantee contracts and commitments

Professional updates - Key objectives of the session - NOCLAR1. Understand the objectives of the standards2. Reasons why this standard has been implemented3. Key considerations in the application of NOCLAR4. Categories of laws and regulations affecting NOCLAR5. Understand the elements of the NOCLAR framework6. How the standard changes the status quo7. Key aspects of the standard affecting auditors, PAIB’s, other PA in Public Practice, PAs

who are not senior PAIB8. Considerations in determining the appropriate level of management to report

IFRS UPDATESIFRS 9 Financial Instruments

• IASB issued the final version of IFRS 9 Financial Instruments In July 2014• New standard will replace IAS 39 Financial Instruments: Recognition and

Measurement and all previous versions of IFRS 9.• IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with

early application permitted.• IFRS 9 consolidates all three aspects of the accounting for financial instruments:

• Classification and measurement,• Impairment and• Hedge accounting.

• With the exception of hedge accounting, retrospective application is requiredbut providing comparative information is not compulsory.

Limited amendments to the IFRS 9 classification and measurement model • Introduction of fair value through other comprehensive income (FVOCI) measurement

category for debt instruments that:- Pass the ‘contractual cash flow characteristics’ assessment- Are managed within a business model which has particular objective that results in

both collecting contractual cash flows and selling financial assets• Amendment of ‘contractual cash flow characteristics assessment’ to allow instruments

with ‘insignificant’ leverage or interest rate mismatch features to qualify for amortisedcost or the proposed FVOCI measurement categories

• FA measured at amortised cost only if the following conditions are met;- Business model has objectives to collect contractual cash flows- Contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest

Limited amendments to the IFRS 9 classification and measurement model • If the asset passes the contractual cash flows test, the business model assessment

determines how the instrument is classified.• If the instrument is being held to collect contractual cash flows, i.e., it is not expected to

be sold, it is classified as amortised cost.• If the business model for the instrument is to both collect contractual cash flows and

potentially sell the asset, it is reported at FVOCI.• For a FVOCI asset, the amortised cost basis is used to determine profit and loss, but the

asset is reported at fair value on the balance sheet, with the difference betweenamortised cost and fair value reported in OCI.

Limited amendments to the IFRS 9 classification and measurement model • For any other business model, such as holding the asset for trading, the asset is reported

at FVPL.• IFRS 9 retained the concept of fair value option from IAS 39, but revised the criteria for

financial assets.• Under a fair value option, an asset or liability that would otherwise be reported at

amortised cost or FVOCI can use FVPL instead.• IFRS 9 also incorporated a FVOCI option for certain equity instruments that are not held

for trading.• The amended IFRS 9 - FVOCI does not permit "recycling” that is when debt instruments

using FVOCI are sold, the gain or loss on sale is "recycled" from OCI to PL.• For FVOCI equities the gain or loss is never reported in PL, but rather remains in OCI.

Limited amendments to the IFRS 9 classification and measurement model Option to designate a financial asset at fair value through profit or loss• An entity may, at initial recognition, irrevocably designate a financial asset as measured

at fair value through profit or loss if doing so will;• eliminate or• significantly reduce a measurement or recognition inconsistency (sometimes referred

to as an ‘accounting mismatch’)• that would otherwise arise from measuring assets or liabilities or recognising the gains

and losses on them on different bases.

Amendments to the IFRS 9 Impairment of financial assetsImpairment• IFRS 9 requires the entity to record “expected credit losses” on all of its debt securities,

loans and trade receivables, either on a 12-month or lifetime basis. Current IAS 39 –based on “incurred losses”.

• Entities will be expected to record lifetime expected losses on all trade receivables.• IFRS 9 will have a significant impact on equity (retained earnings) if an entity has

unsecured loans and receivables.• IFRS 9 requires an impairment allowance against the amortised cost of financial assets

held at amortised cost or FVOCI.• The change in this allowance is reported in profit and loss.

Amendments to the IFRS 9 Impairment of financial assets• For most such assets, when the asset is acquired the impairment allowance is measured

as the present value of credit losses from default events projected over the next 12months.

• The allowance remains based on the expected losses from defaults over the next 12months unless there is a significant increase in credit risk.

• If there is a significant increase in credit risk, the allowance is measured as the presentvalue of all credit losses projected for the instrument over its full lifetime.

• If the credit risk recovers, the allowance can once again be limited to the projectedcredit losses over the next 12 months.

IFRS 9 Impairment Model – Key termsTERM TERM DEFINED CONTEXTECL Expected credit losses The concept of expected credit

losses is required under IFRS 9.PD Probability of default PD is a parameter used in the

calculation of expected losses.EAD Exposure at default EAD is a parameter used in the

calculation of expected losses.LGD Loss given default LGD is a parameter used in the

calculation of expected losses.DCF Discounted cash flows DCF analysis uses cash flow

projections and discounts themto arrive at a present valueestimate.

IFRS 9 Impairment Model – Key terms cont’dTERM TERM DEFINED CONTEXTPiT Point in Time That is, probability of default in

current economic conditions) anddo not contain adjustment for“prudence”. However, regulatoryPDs might be a good starting point,provided they can be reconciled toIFRS 9 PDs

TTC Through the Cycle Process requires assessment of theborrower’s riskiness based on aworst-case, “bottom of the cyclescenario” (i.e. its conditionunder stress). In this case, aborrower’s rating would tend tostay the same over the courseof the credit/business cycle.

IFRS 9 Impairment Model – Key terms cont’dTERM TERM DEFINED CONTEXTRR Recovery Rate Value of the collateral divided

by Exposure at Default.CV Collateral value Risk adjusted value of

collateral held by theinstitution, based on riskfactors.

IRB Internal Risk Based Models These are internal risk basedmodels applied by theorganisation in themanagement of capital andcredit risk

IFRS 9 Impairment ModelUsing the IFRS 9 Impairment frameworkStage 1: - Estimate 12-month expected credit loss

Stage 2: - Estimate lifetime expected credit loss

Stage 3: - Use available macro-economic and firm level information to assess whether anysignificant increase in credit risk has occurred or reversed.

Stage 3 requires reporting entity to use a model to measure the credit risk at an account (orgroup) level unless external credit rating information is available.

IFRS 9 Impairment Model

IFRS 9 Impairment ModelMeasuring Expected Credit Loss• Expected credit loss are probability weighted estimate of credit losses over the expected

life of the financial instrument. Credit losses include present value of expected cashshortfall over the estimation period.

• Expected credit loss measurement should consider;• An unbiased and probability-weighted amount• Time value of money• Information that are reliable, supportable. and available without undue cost or

effort at the reporting date about past events,• current conditions and forecasts of future economic conditions.

• Cash shortfall is the difference between contractual cash flow and cash flow that theentity expects to receive.

IFRS 9 Impairment ModelBuilding In-house Loss Estimation Models• One major challenge for small and medium size business is to have a mechanism in place

to make assessment of credit loss provision.• In addition to using the simplified provision norms for trade and lease rent receivables, a

SME can build in-house model for assessment of PD using common spreadsheet packageslike Excel.

• Using past transaction data and relating them to behaviour pattern, the financialinstruments can be grouped into various risk classes with associated PD or linked withprovision matrix.

IFRS 9 Impairment ModelDeveloping Credit Risk Assessment Models• Past performance of specific assets• Classifying past performance into behaviour groups – e.g. what is the percentage of loss

on retails loans that are overdue by 60 days?• Develop a probability of default and loss given default reference table for various kinds of

assets and at various points of default.• Determination of stage of financial asset.• Determination of factors that will adjust the PD for future events.• Use of current credit risk management systems for setting ECL parameters.

IFRS 9 Impairment ModelOTHER KEY CONSIDERATIONS• Need to assess if the PD and the LGD are correlated.• Should the PD and LGD be correlated, appropriate adjustments should be made to the PD

and LGD respectively by determining;• Standard deviation of the PD and LGD’s.• Co-variance as a function of the correlation, standard deviation of the PD and LGD.

• Discount rate should ideally be based on the effective interest rate, where the effectiverate can not be determined, the market rate should be applied.

• Consider risk weight adjustments on assets held as security.• Significant judgements required in determining PD’s, risk weights applied to assets etc.• Consideration of undrawn loan commitments in determining the EAD.• Determination of effective interest with a portfolio with diverse interest rates.

IFRS 9 Impairment ModelOTHER KEY CONSIDERATIONS (CONT’D)• Write offs - An entity shall directly reduce the gross carrying amount of a financial asset

when the entity has no reasonable expectations of recovering a financial asset in itsentirety or a portion thereof.

• A write-off will constitute a de-recognition event.• The maximum period to consider when measuring expected credit losses is the maximum

contractual period (including extension options).• Consider present regulator requirements in determining provisions, in line with PiT

economic cycle IFRS 9 versus the Basel II/III TTC (PD calibration).• PD used for IFRS 9 should be ‘point in time’ (‘PiT’) probabilities (that is, probability of

default in current economic conditions) and do not contain adjustment for “prudence”.• However, regulatory PDs might be a good starting point, provided they can be reconciled

to IFRS 9 PDs.

IFRS 9 Impairment ModelImplementing a rigorous workflow • Financial institutions should ensure that their systems can handle such granularity of data

while maintaining high quality standards. • They should use a rigorous workflow to produce these outputs consistently. • The calculation workflow below demonstrates this;

IFRS 9 Impairment Model - CALCULATION PROCESS WORKFLOW (BANKING SYSTEM’S)

IFRS 9 Impairment ModelFINANCIAL GUARANTEES AND COMMITMENTS• Financial guarantee contract meets the definition of an insurance contract in IFRS 4 if the

risk transferred is significant, the issuer applies IFRS 9.• However, if the issuer has previously asserted explicitly that it regards such contracts as

insurance contracts and has used accounting that is applicable to insurance contracts, theissuer may elect to apply either IFRS 9 or IFRS 4 to such financial guarantee contracts.

• IFRS 9 requires the issuer to recognise a financial guarantee contract initially at fairvalue.

• If the financial guarantee contract was issued to an unrelated party in a stand-alonearm’s length transaction, its fair value at inception is likely to equal the premiumreceived, unless there is evidence to the contrary.

IFRS 9 Impairment ModelKey implementation issues/challenges• Insurance sector in a group consolidation arrangement with the option to defer

implementation to 2021.• Making appropriate adjustments to Basel II/III inputs to suite IFRS 9 requirements.• Developing models that will respond to the granular requirements for IFRS 9.• Development and modifications of current systems to accommodate the IFRS 9

requirements.• The skills set available in organisations to be able to develop IFRS 9 compliant

impairment models.• Impact of restructured loans due to non performance of facilities.

IFRS 9 Impairment ModelConclusions• Applying IFRS 9 will put more reliance on good quality and detailed data sources.• Without data and judgement, IFRS 9 application could be affected.• There are adjustments between IFRS 9 and Basel II/III expected losses.• There are many practical issues to consider and the impact on own funds.• IFRS 9 based on “Expected” loss model and not “Incurred” loss model.• IFRS 9 is more closely aligned with supervisory concerns and Basel III.• IFRS 9 will still have differences with Basel III, pillar II, stress tests and different scenarios• When measuring expected credit losses, an entity need not necessarily identify every

possible scenario.

NOCLAR

Key Acronyms in the codePAs: Refers to professional Accountants.

PAIBs: Refers to professional Accountants in Business

TCWG: Refers to those charged with governance who are may be directors or equivalents.

NOCLAR: Non Compliance with Laws and Regulation

Objectives of the standardØ To enable professional Accountants to comply with their ethical duty to respond

to NOCLAR in the public Interest.

Ø To stimulate actions that either mitigate the effects on NOCLAR or deter Itscommission.

Ø To stimulate increased reporting of significant NOCLAR to Public Authorities.

Why the new standard?It is about what is reasonable to ask of PAs, given their responsibility to act in the public interest when they encounter or are made

aware of NOCLAR or suspected NOCLAR, when providing a professional service to their

clients or carrying out their duties for their employer.

General consensus – That the proposed framework should assist PAs in responding to

NOCLAR in jurisdictions where the law or regulation merely contains a reporting

requirement but does not include guidance to assist the PA in discharging that responsibility.

Key consideration in the application of NOCLARØ Are there relevant laws and regulations that preclude the disclosure of the non

compliance discovered?Ø If there are laws and regulations that prohibit the PA should not make such a

disclosure.Ø If there is a law and regulation requires disclosure, consider;

Ø Is there an appropriate authority to report to?Ø Are there protections in place?Ø Are there any risks to personal harm and safety to the PA?

Key element of the framework (1)

Out of scope of

the NOCLAR

framework:

Matters that are clearly

inconsequential.

Personal misconduct

unrelated to the business

activities of the client or

employer.

Non-compliance other than by the client or employer, or TCWG,

management or other individuals working for

or under the direction of the client or employer

Key element of the framework (2)Responding to Non-compliance with Laws and Regulations is an

international ethics standard for auditors and other professional accountants (PAs).

Covers all Professional Accountants not just Auditors.

Covers non-compliance in corporations, companies and organisations. These non-compliance can cover – Tax fraud,

Securities Fraud, non-compliance with environmental or health regulations.

Covers very serious and harmful non-compliance.

Key elements of the framework (3)Ø It sets out a first-of-its-kind framework to guide PAs in what actions to take

in the public interest (How to respond) when they become aware of apotential illegal act, known as non-compliance with laws and regulations, orNOCLAR, committed by a client or employer.

Ø Important point to note is that it guides (not prescribes) the judgement of aProfessional Accountant in the direction of public interest.

Ø Effective JULY 15, 2017.

Key elements of the framework (4)Ø It raises the bar for the ethical conduct of all AccountantsØ It is a balanced standard because it takes into account the role of

Accountant, be it an Auditor, Senior Member of Management in a Companyor mid-level person.

Ø The standard graduates the requirements depending on the role of aprofessional Accountant.

Key elements of the framework (5)It establishes a pathway enabling PAs to disclose NOCLAR to public Authority.

• First inform management or those charged with governance in theorganisation, where NOCLAR takes place.

• If management or those charged with governance do not respondeffectively to the matter, then the Accountant is enabled to disclose topublic Authority.

There are circumstances under which this can happen;

How does the standard change the status quoØ An Ethical consideration not to turn a blind eye to NOCLAR was always implied

and mentioned in the code.Ø What is new is that, now;

Ø There are requirements that were previously not in the standard.Ø There is now guidance and application for this, on how to respond, on what to do in

the face of NOCLARØ The fundamental principle of confidentiality always got in the way of Accountants

who encountered cases of non-compliance. Accountant had conflict to respond toNOCLAR.

Ø The standard enables the Accountant to set aside the principle of confidentialitywhen there is a strong public interest reason for it.

Key Aspects of the Standard for Auditors (1)Ø Raise the identified or suspected NOCLAR with management/TCWG?Ø To clarify their understanding of the matter,Ø To substantiate/dispel their concerns,Ø And to enable management/TCWG to investigate it.Ø To advise management/TCWG to:

Ø Address the consequencesØ Deter the NOCLARØ Disclose the matter to an appropriate authority where required by law or regulation or where

necessary in the public interest

Key Aspect of the Standard for Auditors (2)Ø Fulfilling professional responsibilitiesØ Understand and comply with applicable laws and regulations, including

requirements regarding reporting to an appropriate authority and prohibitionsagainst “tipping off”.

Ø Comply with applicable auditing standardsØ Communicate the matter appropriately in the context of a group.

Key Aspect of the Standard for Auditors (3)Ø Determining if further action is neededØ Assess appropriateness of the response of management/TCWG.Ø In light of that response, determine objectively if further action needed in the

public interest.Ø The nature and extent of further action needed will depend on various factors,

on the following;Ø Credible evidence of substantial harm to the entity or stakeholders.Ø Considerations of any law prohibiting disclosure of confidential information to an outside party.

Ø Courses for an Accountant of further action may include:Ø Disclosing the matter to an appropriate authority even if not required by law

Key Aspect of the Standard for Auditors (4)Ø Courses for an Accountant of further action may include:Ø Withdrawing from the engagement and client relationship.Ø If withdrawing, inform proposed successor of the NOCLAR.Ø In exceptional circumstances, action may include immediately disclosing the

matter to an appropriate authority if imminent breach of a law or regulationthat would cause substantial harm to stakeholders.

Ø Document, among other matters, courses of action considered, judgmentsmade, and decisions taken.

Key Aspects of the standard for PAIBs (1)Ø Overarching Expectations:

Ø Set the right tone at the top within the organisationØ Establish appropriate policies and procedures to prevent NOCLAR,

including whistleblowing procedures as a necessary part of good internalgovernance.

Ø Fulfilling professional responsibilities;Ø Take appropriate steps to:

Ø Raise the identified or suspected NOCLAR with a superior/TCWG,Ø Understand and comply with applicable laws and regulations, including requirements to report

the matter to an appropriate authority,Ø Rectify, remediate, or mitigate consequences,Ø Reduce the risk of re-occurrence, Seek to deter the NOCLAR,

Key Aspects of the standard for PAIBs (2)Ø Also determine whether disclosure to the external auditor, if any, is needed.Ø Determine if further action is needed;Ø Assess appropriateness of the response of superiors, if any, and TCWGØ Raise the identified or suspected NOCLAR with a superior/TCWGØ In light of that response, determine objectively if further action needed in the

public interestØ The nature and extent of further action needed will depend on various factors,

e.g.:Ø Credible evidence of substantial harm to the organization or stakeholders

Key Aspects of the standard for PAIBs (3)Ø Any law prohibiting disclosure of confidential information to an outside partyØ Courses of further action may include:

Ø Informing management of the parent entity in the case of a member of a group.Ø Disclosing the matter to an appropriate authority even if not required by law.Ø Resigning from the employment relationship.Ø In exceptional circumstances, may immediately disclose the matter to an

appropriate authority if imminent breach of a law or regulation that would causesubstantial harm to stakeholders.

Ø Documentation is encouraged.

Key Aspects of the standard for other PAs in Public Practice and other PAIBs (1)Ø PAs in public practice other than auditors in public practice other than auditorsØ Discuss the identified or suspected NOCLAR with management and, if they have

access to them and where appropriate, TCWGØ If the client is also an audit client of the firm, or a component of an audit

client of the firm, communicate the matter within the firm so that the auditengagement partner is informed about it

Ø If the client is an audit client of a network firm, or a component of an auditclient of a network firm, consider communicating the matter to the networkfirm so that the audit engagement partner is informed about it

Ø For any other client, consider communicating the matter to the firm that is theexternal auditor, if any

Key Aspects of the standard for other PAs in Public Practice and other PAIBs (2)Ø Stand back and consider whether further action is warranted.Ø Courses of further action may include:

Ø Disclosing the matter to an appropriate authority even if not required by law.Ø Withdrawing from the engagement and client relationship.Ø The nature and extent of further action will depend on various factors.Ø In exceptional circumstances, may immediately disclose the matter to an

appropriate authority if imminent breach of a law or regulation that would causesubstantial harm to stakeholders.

Key Aspects of the standard for PAIBs who are not senior PAIBs

Escalate the identified or suspected NOCLAR to the

immediate superior or next higher level of authority; or

Use established internal whistle-blowing mechanism.

Documentation is encouraged for both PAs in public practice other than auditors, and PAIBs

who are not senior PAIBs.

Considerations in determining the appropriate level of management to report the matterØ Nature and circumstance of the matter.Ø The individuals actually or potentially involved.Ø The likelihood of collusion.Ø Potential consequences of the matter.Ø Whether that level of management is able to investigate and take appropriate

action.

Considerations in determining whether to report to an the appropriate authorityØ The entity is engaged in bribery.Ø Regulations affecting the entity and significance of the matter and its ability

to have its operating license withdrawn.Ø Listing status of the entity, and the potential consequences to an orderly

market and risk to the financial markets.Ø Public health and safety considerations.Ø Entity promoting a scheme to clients to assist in tax evasion.

Conclusion

• Step approach provided for addressing non compliance.• Veil of confidentiality lifted where breach is significant and harmful.• Improved corporate governance framework.• PA to evaluate all laws and regulations before taking action.• Need to consider local regulations,

THANK YOU!

QUESTIONS?