IFRS9

IFRS9: Financial Instruments

→ The Global movement to IFRS
→ Central objectives and principles and how they impact IFRS
→ Key issues relating to fair value and reliable measurement
→ US GAAP core differences in financial instruments
→ Impact on principles vs rules-based approaches for financial instruments and how they are tackled in IFRS and US GAAP for financial instruments

→ Overview of standards used in accounting for financial instruments
→ Discussion of the how and why IFRS 9 replaced IAS 39
→ Financial instruments core definitions and principles
→ Determining cash and cash equivalents
→ Scope of financial instruments vs. insurance products
→ Concept of recycling
→ Trade and settlement date accounting
→ Offsetting of financial instruments

→ What is fair value?
→ Detailed discussion of concepts and principles and the characteristics of fair value
→ What the fair value hierarchy is all about and how it is used
→ Comprehensive coverage of the steps and the “how to” to determine fair value
→ The level 1 -3 valuation hierarchy and how it is used
→ Determining if a market is active
→ How to determine if inputs are observable or unobservable
→ Overcoming the challenges of arriving at fair value in illiquid markets
→ The grey areas and challenges of application for financial instruments that are thinly traded
→ Four step model for the determination of fair value
• Step 1: Selecting the unit of account
• Step 2: Valuation premise and asset grouping
• Step 3: Principal, most advantageous and hypothetical markets
• Step 4: Application of valuation techniques
− Cost approach
− Market approach
− Income approach
→ Tackling credit value and debt value adjustments
→ Concept of reliability in IFRS 13
Case Study: A significant number of exercises and case studies covering the fair value hierarchy, highest and best use concepts, valuations in illiquid markets, and developing the assumptions for the fair value model.

→ Core definitions in financial instruments
→ Determining factors for derivatives and embedded derivatives
→ Scope of financial instrument standards
→ Distinction between debt and equity
→ Compound financial instruments
Case Study: Group discussion on complex example of intercompany / related party debt to determine if it should be accounted for as debt or equity; example on accounting for compound financial instruments.

→ Categories of financial assets and the accounting treatment under IFRS 9: amortised cost, fair value through profit or loss, and fair value through other comprehensive income
• Making sense of the available alternatives
• Valuation issues for non- listed equities and how to overcome them
→ Computational aspects of effective interest rates
• Tackling fees, origination costs, loan servicing fees, and syndication costs
→ Application of the business model test
→ SPPI (solely payments of principal and interest components)
→ Harmful contractual features for amortized cost
→ What to do when contractual features modify the base rate
→ IFRS 9 requirements for valuation of nonlisted equity investments
→ Practical modelling and valuation techniques to overcome those challenges
→ Categories of financial liabilities and the accounting treatment under IFRS 9: fair value through profit or loss, amortised cost and when to bifurcate
IFRS 9 own credit controversy and when fair value to other comprehensive income must be used
→ Reclassifications
Case Study: Short exercises on classification; SPPI scenarios; own credit risk calculation.

→ Transfer of risk and rewards and control test for determining when to derecognise
→ Liabilities quantitative and qualitative tests for derecognition
Case Study: Analysing scenarios to determine if financial instruments should be derecognised.

→ Criteria to assess a derivative
• The underlying
• Low or initial net investment and leverage feature
• Future settlement
→ Recap of core derivative products and how they are valued
Case Study: Valuation and accounting for an interest rate swap.
→ The Embedded derivatives
• How to identify the host and embedded derivative
• Assessment of economic characteristics / closely related factors
• The accounting aspects and the key steps
Case Study: Scenario with caps and floors to assess if closely related and valuation aspects; reviewing contracts for embedded derivatives.

→ Discussion of day one gains and losses
→ Exemption for day one gains and losses
Case Study: Examples on accounting for off market loans.

→ Determining what accounting standard to use
• Derivatives under IFRS 9
• Insurance under IFRS 4
• Revenue standard under IFRS 15
• Contingent liabilities under IAS 37
→ Initial and subsequent recognition and measurement of guarantees
• Derivatives on non-financial underlyings
• Undrawn commitments
→ Fair value considerations
→ Intercompany loan guarantees
Case Study: A couple of scenarios on guarantees and how they are accounted for including numerical calculations.

→ Overview and rationale of the new standard
→ Equity assets at fair value through other comprehensive income
→ Financial assets held at amortised cost
Application of the concept of recycling
→ Moving from the incurred loss model to the expected loss model
• Core concepts and how to apply them in practice including what is default
• Probability of default
• Loss given default
Exposure at default
→ Three stage expected loss model
→ Three methods of impairments
• General model
Simplified model
• Special provisions
→ Differences in the US GAAP FASB model
→ Significant changes in credit risk
• Historical and forward-looking information
• Regulatory and IFRS perspective
• Indicators of changes in risk
Impact of collateral in risk assessment
• Using the top down or bottom up approach
→ Loan modifications (derecognition) and impact on impairment
→ Staging / how to monitor changes in risk
→ Forbearance, rehabilitation and probation
→ Disclosure requirements
Case Study: Numerous case studies on impairment: debt at amortized cost with recycling; assessment of top down bottom up approach; staging scenarios.

→ Hedge accounting concepts
• What can be hedged
Types of hedges
Cash flow hedges
Fair value hedges
• Hedge of net investment in a foreign entity
Highly probable forecast transactions / firm commitments
→ Derivative vs hedge accounting
→ Risk management strategy and risk management objective
→ Hedge documentation
→ Hedge effectiveness / ineffectiveness
Dollar offset method
→ Achieving, continuing and discontinuing hedge accounting
Case Study: Examples on determining the type of hedge / comprehensive example of cash flow and fair value hedge.