IFRS 9 Financial Instruments IFRS 9 Key Principles

IFRS 9 – Financial Instruments

IFRS 9 - Key Principles and Areas of Difference Impact on the financial statements could be pervasive Classification & Measurement Hedge Accounting Impairment

Classification & Measurement - Financial Liabilities Amortized Cost Financial Liabilities Non-substantial modifications accounted for differently Not recycled FVTPL Held for trading FVTPL Fair Value Option Measure at FVTPL (specific criteria) Own credit risk: FV gains/losses in OCI Other FV gains/losses presented in P/L

Classification & Measurement – Financial assets Business Model Cash Flows Classification Held to Collect and Sell Other Any (1 -3) SPPI (Solely Payments of Principal and Interest) Not SPPI FVTOCI FVTPL Amortized Cost with recycling Fair Value Option FVTPL No longer separa te non-closely relat ed EDs FVTPL Equity instrument FVTOCI without recycling

Classification & Measurement - Financial Liabilities Accounting for the modification or exchange of debt that does not result in derecognition IAS 39 IFRS 9 No gain or loss recognized Gain or loss recognized Effect of modified cash flows spread over remaining term by revising EIR VS Amortized cost recalculated by discounting modified contractual cash flows at original EIR, revised for transaction costs only

Impairment – Expected Credit Loss Overview Scope Financial assets in the scope of IFRS 9 Contract assets (IFRS 15) Lease receivables (IFRS 16) Certain financial guarantees (unless at FVTPL) Subsequent measurement …………. FVTPL / FVOCI Option for certain equity instruments Outside the scope of the impairment model AC FVOCI Within the scope of the impairment model Written loan commitments (unless at FVTPL)

Expected Credit Loss Overview Impairment – general model Changes in credit risk since initial recognition Objective evidence of impairment? ? Significant increase in credit risk? STAGE 1 Loss allowance Apply effective interest rate to ……. . STAGE 2 STAGE 3 12 month ECL Lifetime ECL Gross carrying amount Net carrying amount

Expected Credit Loss Overview Expected loss allowance : 12 -month vs lifetime Stage 1 Stage 2 12 -month expected losses Life time expected losses • 12 month ECL reflects the cash shortfalls over the life of the loan arising from a default in the next 12 months • Lifetime ECLs are the total expected cash shortfalls arising from all possible default events over the life of the loan • Most assets begin in this bucket • • Effect of the entire credit loss on a financial instrument weighted by the probability that this loss will occur in the next 12 months Assets migrate to this bucket if the credit risk has increased significantly since initial recognition (unless ‘low credit risk’) Examples • Loan of CU 10 m • Expected 2% probability to default in next 12 months • Expected 12% probability to default over lifetime • Entire loss that would arise on default is 10% • Entire loss that would arise on default is 15% 12 month ECL = CU 20, 000 (10 m x 2% x 10%) Lifetime ECL = CU 180, 000 (10 m x 12% x 15%) Note: Discounting has been ignored in the simplified example

Expected Credit Loss Overview Transfer out of stage 1 – significant increases in credit risk Significant increase in credit risk? Stage 1 Stage 2 Relative model Credit risk on initial recognition Initial recognition compare Current credit risk Reporting date

Expected Credit Loss Overview Transfer into Stage 3 – indicators that an instrument is credit impaired Breach of contract (e. g. past due or default) Lenders grant a concession relating to the borrower’s financial difficulty Significant financial difficulty of the borrower Credit impaired Probable bankruptcy or other financial reorganisation Disappearance of an active market for the instrument

Hedge Accounting Hedge accounting remains optional under IFRS 9. Entities may choose to apply hedge accounting in order to reduce volatility in the income statement or in OCI. The three types of hedges remain the same under IFRS 9. However, some of the hedge accounting mechanics are different. In particular, IFRS 9 changes the mechanics applied when a hedge of a future transaction results in the recognition of a non-financial item. The hedge effectiveness requirements are very different under IFRS 9 compared to IAS 39. Retrospective hedge effectiveness test no longer required. Prospective test required, but test is whether an “economic relationship” exists between hedged item and hedging instrument. (no longer an 80 -125% numerical threshold to pass). In most cases economic relationship may be demonstrated qualitatively This remains a key requirement under IFRS 9. Hedge accounting is applied prospectively from the point the qualifying criteria are satisfied, notably hedge documentation. Hedge documentation requirements are different under IFRS 9 compared to IAS 39.

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