IFRS For Banks: Benny Verhelst Bangkok, July 2009

IFRS for banks
Benny Verhelst
Bangkok, July 2009

Agenda
Topics start end

Introduction to IFRS and categories of
financial instruments 13h30 14h45
break 14h45 15h15
exposure draft on classification, revenue
recognition and exposure draft on fair value 15h15 16h30
© 2009 finarch. All rights reserved. 29 October, 2009 2

Introduction
to IFRS/IAS
IASB
Principle-based standards
Standards IFRS International Financial Reporting

Standards
IAS International Accounting Standards
Interpretation IFRIC International Financial Reporting
of standards Interpretations Committee
SIC Standards Interpretation Committee
Newest standards
IFRS(newest standards)
IFRS1 First-time Adoption of International Financial
Reporting Standards
IFRS2 Share-based Payment
IFRS3 Business Combinations
IFRS4 Insurance Contracts
IFRS5 Non-current Assets Held for Sale and Discontinued
Operations
IFRS6 Exploration for and evaluation of Mineral Resources
IFRS7 Financial Instruments: Disclosures
IFRS8 Operating Segments
Older standards
IAS(older standards)
IAS1 Presentation of Financial Statements IAS26 Accounting and Reporting by Retirement Benefit Plans
IAS2 Inventories IAS27 Consolidated and Separate Financial Statements
IAS7 Statement of Cash Flows IAS28 Investments in Associates
IAS8 Accounting Policies, Changes in Accounting Estimates
and Errors IAS29 Financial Reporting in Hyperinflationary Economies
IAS10 Events After the Balance Sheet Date IAS31 Interests in Joint Ventures
IAS11 Construction Contracts IAS32 Financial Instruments: Presentation
IAS12 Income Taxes IAS33 Earnings per Share
IAS16 Property, Plant and Equipment IAS34 Interim Financial Reporting
IAS17 Leases IAS36 Impairment of Assets
IAS18 Revenue IAS37 Provisions, Contingent Liabilities and Contingent Assets
IAS19 Employee Benefits IAS38 Intangible Assets
IAS20 Accounting for Government Grants and Disclosure
of Government Assistance IAS39 Financial Instruments: Recognition and Measurement
IAS21 The Effects of Changes in Foreign Exchange Rates IAS40 Investment Property
IAS23 Borrowing Costs IAS41 Agriculture
IAS24 Related Party Disclosures
IFRS Framework notions
Framework sets out concepts

that underlie the preparation
and presentation of financial
statements
the IASB likes to

Objective of financial statements achieve transparency
= through:
provide information on the financial
position, performance and changes in 1.Fair Value
financial position
2.Disclosures

IFRS Framework notions
Underlying assumptions
Relevance Comparability Completeness
Accrual basis:
effects of transactions
Understandability Reliability Prudence
are recognised when they occur
+ reported in the periods
to which they relate Neutrality Materiality Timeliness
True and fair Faithful Substance
Going concern: view representation over form
Entity will continue operation in
the foreseeable future Qualitative characteristics

Talk the talk
to RECOGNISE: to DISCLOSE:
incorporate in the balance sheet or give details on
income statement (text and/or figures)
Comprehensive income
Decreases in economic (P&L) Increases in economic benefits during the
benefits during the accounting period in the form of inflows or
Expense Income
accounting period in enhancements of assets or decreases in
the form of outflows or liabilities that result in increases in equity,
depletions of assets or Expenses Income other than those relating to contributions from equity participants
incurrences of liabilities Residual interest in

that result in decreases the assets of the
in equity, other than those entity after
relating to distributions to equity Statement of financial deducting all its
participants
position liabilities
Assets Liabilities to DERECOGNISE:
removal of a previously
Equity recognised asset or liability
Assets from the statement of
Liability financial position
Resource controlled by (balance sheet)
the entity as a result of
past events and from Present obligation of the entity
which future economic arising from past events, the
benefits are expected settlement of which is expected to
result in an outflow of resources
USGaap
rules-based standards
• FASB: issues United States Generally Accepted

Accounting Principles (USGaap)
• Short-term/long-term convergence projects with

IFRS
e.g. IFRS 8 is almost copy/paste of SFAS 131
• Memorandum of Understanding (2008) sets out

priorities and milestones to be achieved on major
joint projects by 2011
What to remember?
IFRS/IAS notions
Convergence with USGaap
Where can I get more information?
www.iasb.org
www.fasb.org

Categories of
financial instruments
July, 2009
Scope
Subsidiaries Leases
IAS 27 IAS 39 IAS 17
all types of financial instruments:
•loans
•deposits Employee
Associates
•bonds benefits
IAS 28
•shares IAS 19
(except when you have significant influence)
•derivatives
(except weather derivatives)
Insurance
Joint ventures
contracts
IAS 31
IFRS 4

Agenda
1. Financial instruments
2. Financial assets
3. Financial liabilities

Financial instruments
Statement of financial
position Financial instrument:
Assets Liabilities
Any contract that gives rise to a
Equity financial asset of one entity and a
financial liability or equity
Assets
Debt instrument of another entity
examples: Contractual right to

exchange financial
Cash assets/liabilities under
(financial asset for holder/ financial liability for central bank)
conditions that are
Shares / baskets of shares
potentially unfavourable
(financial asset for owner/ equity for issuing company)
e.g. Derivatives (options, futures, swaps)
Contractual right to receive cash or (asset if positive fair value/ liability for
counterparty, and vice versa)
other financial asset; e.g. Loans, bonds
(financial asset for owner/ debt for issuer)

Financial instruments
Contract that may be settled in the entity’s own

instruments
(financial asset for holder/ financial liability for central bank)
Non- derivative Derivative

for which the entity may be obliged to (financial asset for holder/ financial
receive a variable number of the entity’s liability for issuing bank)
own equity instruments
e.g. Convertible bonds

e.g. Warrants
(options where new shares are created)
(financial asset for owner of convertible
bond/ financial liability for issuing
company)

Trade date/settlement date
Trade date: date an entity commits to purchase or sell an asset
Settlement date date an asset is delivered to or by the entity
IAS 39 allows trade date or settlement date accounting

for regular way purchase or sale of financial assets
EXCEPT for DERIVATIVES:

always trade date accounting!
delivery of assets is
required within the
timeframe established
by regulation or
convention in the
market place
concerned

Agenda
2. Financial assets

Categories
Financial
ASSETS
Held-to-
Financial assets Available
Loans and Maturity
@ fair value For Sale
receivables Investments
Through P&L (AFS)
(HTM)
Held for Fair value

trading option

fair value at
initial recognition
= Mixed measurement
normally
transaction price
INITIAL SUBSEQUENT
Loans and
receivables Fair
Value
Amortised
+
cost
Held-to- Transaction
Maturity costs
Investments
(HTM)
Financial assets
Fair value
@ fair value Fair Value
Through P&L
Through P&L
if you include
transaction costs in this Fair Value
category they would disappear Available
+ Fair value
in P&L at the
first revaluation
For Sale
Transaction Through equity
(AFS)
costs
Loans and receivables
Tempting to put
Loans and Amortised things in there
receivables because no volatility
cost
in fair value is shown
Non-derivative financial No derivatives, no shares (because

assets with fixed or payments not determinable), no bonds listed
determinable payments that in an active market, no loans that

you intend to sell in the near
are not quoted in an active
future...
market other than:
a.Those that the entity intends to sell immediately
or in the near term, which shall be classified as held
for trading, and those that the entity upon initial What can I put in there?
designates at fair value through p&l;
Mortgages, loans, unlisted bonds...
b.Those that the entity upon initial designation
designates available for sale; or
c.Those for which the holder may not recover

substantially all of its initial investment, other than
through credit deterioration, which shall be
classified as available for sale
Categories
Financial
ASSETS
Held-to-
Loans and Maturity
Through P&L (AFS)
(HTM)
Held for Fair value

trading option

Held-to-maturity
Held-to- Tempting to put

Maturity Amortised things in there
because no volatility
Investments cost
in fair value is shown
(HTM)
Non-derivative financial No derivatives, no shares (because

assets with fixed or payments not determinable + no maturity), no
determinable payments and loans, no bonds you intend to sell

before maturity
fixed maturity that an entity
has the positive intent and
ability to hold to maturity
other than: What can I put in there?
Treasury bills and bonds that the bank
a.Those that the entity upon initial designation intends to hold until maturity
designates as at fair value through p&l; (ALM might put part of its portfolio here)
b.Those that the entity upon initial designation
designates as available for sale;
c.Those that meet the definition of loans and

receivables

Held-to-maturity
Held-to-
Maturity
Investments
(HTM)
Tainting rules Penalty
During year or 2 previous years, 1.Reclassification of ALL HTM to

the entity sells, reclassifies, available for sale
transfers or exercises put options
on more than an insignificant 2.Cannot classify other assets as
portion of the HTM category HTM during the year of disposal
and next 2 years
P&L impact
could be
significant

Held-to-maturity
Held-to-
Maturity
Investments
(HTM)
No tainting when
−Sale close to maturity, with minimal

effect on fair value
−Sale occurs after collection of

substantially all original principal
−Isolated non-recurring event beyond

the entity’s control such as:
o Sale right after significant unexpected deterioration of the
issuer’s creditworthiness
o Change in tax lax or regulatory environment
o Business combination that triggers the need for selling the

HTM portfolio

How to calculate amortised cost
Cumulative
write-down
amortisation
Amount @ for
Amortised Principal of difference
cost = initial - repayments +/- between initial - impairment
recognition or un-
amount and
collectability
maturity amount
use effective
interest rate
method

Calculate the amortised cost:

-102 6 6 106
−We buy a bond above par for 102
−the bond will be repaid in 3 years at 100

0 1 2 3
−the bond pays 6% interest
= Fair value + transaction costs Debit bond 102

0 102
Credit current account 102
effective yield (IRR in excel)= 5,2620%
102 x 5,2620% = 5,3672 = revenue recognised in P&L for year 1

Debit current account 6
Credit bond 0,63
Credit interest income 5,37
1 101,37 = 102 - 0 +/- - 0,63 - 0

1 101,37
101,37 x 5,2620% = 5,3340 = revenue recognised in P&L for year 2

Credit bond 0,67
2 100,70 = 101,37 - 0 +/- - 0,67 - 0
100,70 x 5,2620% = 5,2989 = revenue recognised in P&L for year 3

Credit bond 100,70
3 0 = 100,70 - 100 +/- - 0,70 - 0

What makes this complex?
Full amount of debt Principal

drawn spread over a repayments (partial)
period prepayment
Accordeon-
Receipt of
loans
(changing maturities) reinvestment
fee from client
Adjustments to
contractual
interest rate Daycount
conventions
(360/365...)
Step-up Impairment
interest rates Floating
interest rates

Categories
Financial
ASSETS
Held-to-
Loans and Maturity
Through P&L (AFS)
(HTM)
Held for Fair value

trading option

Held for trading
Held for Fair value

trading Through P&L
a. acquired principally for What can I put in there?

the purpose of selling or Derivatives, shares, bonds,
even loans you intend to trade...
repurchasing in the near (typically the trading portfolio
term of a bank, merchant bank/global markets)
b. part of a portfolio
managed together +
evidence of pattern of
short-term profit-taking
c. derivative
(except guarantee or hedging)

Fair value option
Fair value Fair value

option Through P&L
designated upon initial Why would you want this?

recognition as at fair
value through P&L −alternative to hedge accounting
−alternative to consolidation of
− The instrument contains significant certain private equity investments
embedded derivative(s) that would −avoid bifurcation of embedded derivatives
otherwise need to be separated (IAS −for unit-linked contracts
39.11a)
(measurement matching for insurance)
− If it results in more relevant information:
− reduces accounting mismatch
− group of assets that are

managed/evaluated on fair value
basis

Fair value hierarchy
Subject to change
by new draft IFRS
on fair value
measurement
Cost
Fair Value = amount for which
Valuation – an asset could be exchanged,
Techniques
– a liability settled, or
– an equity instrument granted could be exchanged,
Quoted Prices in Active Market between knowledgeable, willing parties in an arm’s length
transaction.
Active Market
1.quoted prices are readily and regularly available

2.prices represent actual an regularly occurring
market transactions on an arm’s length basis
Categories
Financial
ASSETS
Held-to-
Loans and Maturity
Through P&L (AFS)
(HTM)
Held for Fair value

trading option

Available for sale
Impact of revaluations is
Available shown in equity
Fair value
For Sale (other comprehensive
Through equity income), and not in P&L
(AFS)
(comprehensive income)
Those non-derivative No derivatives

financial assets that are
designated as available for
sale or are not classified as
a.Loans and receivables
b.held-to-maturity investments
c.financial assets at fair value through P&L

What can I put in there?
Shares, bonds,...
SUNDRY (typically the ALM portfolio
of a bank)

AFS
Unquoted equity instruments
What if you should be

Available
For Sale
revaluing something Cost
(AFS) but you are unable
to calculate a fair value?
Investments in equity instruments
1. that do not have a quoted market price in an active market

and
2. whose fair value cannot be determined
(+ derivatives linked to such unquoted instruments) Held for

trading
shall be measured at cost

reclassifications reclassifications
IN OUT
Loans and From AFS NOT

receivables or trading ALLOWED
Held-to-
Maturity From AFS Tainting rule
(or trading in rare
Investments circumstances only)
(all other HTM securities
must be reclassified as AFS)
(HTM)
Available From HTM To HTM

For Sale but tainting rule applies or loans and
(or trading in rare
(AFS) circumstances only) receivables
To AFS, HTM
Held for
trading
or loans and
NOT receivables
ALLOWED
Fair value NOT
option ALLOWED
Agenda
2. Financial assets

Categories
Financial
LIABILITIES
Financial
liabilities Other
@ fair value liabilities
Through P&L
Held for Fair value

trading option

Measurement
INITIAL SUBSEQUENT
Financial
liabilities Fair value
Fair Value
@ fair value Through P&L
Through P&L
Fair Value
Other + Amortised
liabilities Transaction cost
costs

Liabilities @ Fair value
Financial
liabilities
@ fair value
Through P&L
idem as asset side
Changes in credit risk of

Held for Fair value the liability should be
trading option included in the fair value
1. you have issued convertible bonds and put
them into fair value option
2. your credit rating deteriorates

e.g. bonds containing
e.g. negative an embedded 3. this has a positive impact on the fair value of
fair values of derivative that your convertible bonds (market value goes
down which is an unrealised gain for you)
derivatives would otherwise
need to be separated 4. you need to disclose this

Other liabilities
Other Amortised
liabilities cost
All non-derivative
financial liabilities that Client deposits,
are not classified as savings accounts,
trading or at fair value ...
through P&L

Reclassifications
IN OUT
Held for
trading
Fair value NOT NOT

option ALLOWED ALLOWED
Other
liabilities

What to remember?
different categories
your intentions matter + labels you give are very sticky
classification has an impact on revenue recognition
IAS 32
IAS 39

Intermission

Exposure Draft:
Financial Instruments:
Classification and
Measurement
July, 2009
Replacing IAS 39
− Two measurement categories

(fair value and amortised cost)
− Characteristics of instrument drive measurement
− Elimination of tainting rules
− One impairment method
(now same bond has more severe impairment if it is in AFS than if it is HTM)
− Single classification approach
(simplified accounting for ‘embedded derivatives’)
− All equity investments at fair value
(through P&L or other comprehensive income/equity)

Implications
− Not mandatory before 2012, but early

application permitted at the end of 2009;
− A lot more bonds will be classified at
amortised cost
− Only shares can be revalued through
equity (no more available for sale bonds)
− Clearer guidance on calculation methods
for amortised cost or present value
techniques
− Significant impact on disclosures to be
expected

New classification
Financial
ASSETS
Equity
Financial assets
investments @
Amortised cost @ fair value
fair value
through P&L
through equity
Held for Fair value

trading option

Amortised cost
Amortised cost
instrument has only managed on a

basic loan features contractual yield basis
contractual terms that give only if they are managed,
rise on specified dates to cash and their performance
flows that are payments of evaluated on the basis of the
principal and interest on the contractual cash flows that
principal outstanding. are generated when held or
issued
• held for trading
• acquired at a discount that
reflects incurred credit losses.
financial asset or financial liability that does not meet these conditions shall be
measured at fair value (profit or loss or other comprehensive income)
New classification
Financial
ASSETS
Equity
Financial assets
investments @
fair value
through P&L
through equity
Held for Fair value

trading option

Held for trading
Held for Fair value

trading Through P&L
a. acquired principally for What can I put in there?

the purpose of selling or Derivatives, shares, bonds,
even loans you intend to trade...
repurchasing in the near (typically the trading portfolio
term of a bank, merchant bank/global markets)
b. part of a portfolio
managed together +
evidence of pattern of
short-term profit-taking
c. derivative
(except guarantee or hedging)

Fair value option
Fair value Fair value

option Through P&L
designated upon initial Why would you want this?

recognition as at fair
value through P&L −alternative to hedge accounting
−alternative to consolidation of
Only if it eliminates or significantly certain private equity investments
reduces a measurement or −for unit-linked contracts
recognition inconsistency (measurement matching for insurance)
(‘accounting mismatch’)

New classification
Financial
ASSETS
Equity
Financial assets
investments @
fair value
through P&L
through equity
Held for Fair value

trading option

Equity • irrevocable election to present in other
investments @ comprehensive income subsequent changes
fair value in the fair value of investments in equity
through equity instruments (not held for trading)
• dividends from those investments recognise in

other comprehensive income
(when the entity’s right to receive payment is established)
• No recycling of gains and losses to profit or

loss is allowed
• No impairment requirements are necessary

Reclassifications
IN OUT
Amortised cost
Financial assets NOT NOT

@ fair value
through P&L ALLOWED ALLOWED
Equity
investments @
fair value
through equity

Categories
Financial
LIABILITIES
Financial
liabilities Other
@ fair value liabilities
Through P&L
Held for Fair value

trading option

Reclassifications
IN OUT
Held for
trading
Fair value NOT NOT

option ALLOWED ALLOWED
Other
liabilities

What to remember?
New categories
Reclassifications possible in 2009
Exposure draft on Financial Instruments:

Classification and measurement
IAS 39

IAS 18 Revenue:
interest
July, 2009
Recognition in profit or loss
Revenue shall be recognised when
Seller retains no
Risks and rewards
continuing managerial involvement
have been transferred
or effective control over goods sold
Amount can Economic benefits Costs incurred for

be measured of transaction will transaction can be
reliably flow to the entity measured reliably

Interests, royalties, dividends
What? IFRS definition Revenue recognition

interest charges for the use of recognised using
cash or cash equivalents effective interest method
or amounts due (IAS 39.9 + AG5-AG8)
royalties charges for the long- recognised

term assets on accrual basis
(e.g. patents, trademarks, copyrights, and
computer software)
dividend distributions of profits to when shareholder’s right

holders of equity to receive payment is
investments in established
proportion to their (different treatment for investment in
associates IAS 28)
holdings

Financial service fees
In which period
PURPOSE determines should I show this fee
in P&L?
accounting:
SPREAD fee as adjust-
1. Fees part of the effective ment to effective interest
interest rate rate (except (held for) trading)
2. Fees earned as services are Recognised in P&L as

provided services are provided
3. Fees earned on the Recognised in P&L

execution of a significant when significant act
is completed
act

Fees part of
effective interest rate
ORIGINATION FEES Deferred because they generate an involvement

received relating to with the resulting financial instrument
creation of e.g. fee for evaluating borrower condition, for evaluating and recording guarantees,
collateral and other security arrangements, negotiating terms of instrument,
financial ASSET preparing and processing documents, and closing the transaction
Fee for loan commitment COMMITMENT FEES

FEE = compensation for ongoing involvement received to originate
If the commitment expires (e.g. client decided not to draw on the credit line), the a loan
commitment fee can be taken into P&L on expiry (loan commitment outside IAS 39)
ORIGINATION FEES Generates involvement with the financial liability

received on issuing Commitment fee and related transaction costs
financial LIABILITIES included in the initial carrying amount of the
(at amortised cost) financial liability

Fees EARNED
as services are provided
Fees for Recognised as revenue

SERVICING a loan as services are provided
When unlikely that lending arrangement will COMMITMENT FEES

be entered into, fee recognised as revenue on received for unsuc-
a time proportion basis over commitment period sessful originations
(loan commitment outside IAS 39)
Fees charged for managing investments

Investment
recognised as revenue as services are provided
management fees (except if incremental costs can be identified seperately + measured reliably +
probable that they will be recovered, then recognised as asset + amortised)

Fees EARNED
on execution of SIGNIFICANT ACT
Commision on Recognised as revenue when shares

allotment of shares have been allotted
Recognised as revenue when loan Placement fees

for arranging a loan between
has been arranged a borrower and an investor
1. arranging entity retains no part of loan:

recognised as revenue when syndication
is completed
2. arranging entity retains a part for itself:
Loan
a. if same interest rate as other participants:
syndication fees
recognise as revenue
when syndication is completed
b. if different interes rate: amortise
as part of effective interest rate
What to remember?
What to spread and what not
IAS 18
IAS 39

Fair Value
considerations
July, 2009
Agenda
1. Current definitions
2. Future IFRS
3. Fair value hierarchy
4. Valuation techniques
5. Cost

Definition
IFRS 2.A
Statement of financial
position Fair Value
Assets Liabilities
amount for which
Equity
Assets – an asset could be exchanged,
Debt
– an equity instrument granted could be
exchanged,
between knowledgeable, willing parties in
an arm’s length transaction.
Problems current standards
Lack of guidance ?
when to go from Cost
one level to another,
and when to go Valuation
? Techniques
back ...
Quoted Prices
in Active Market
When is a Significant impact on

market no what price to use for
longer active?
revaluing portfolios

Agenda
2. Future IFRS
5. Cost

Exposure draft
for new IFRS
Future IFRS on Fair Value
• Single source of guidance for all fair

value measurements
• Clarification of definition of fair value
• Convergence with USGAAP standard
SFAS 157
• Enhanced disclosure:
• extent of use of Fair Value
• inputs used
new definition
new
IFRS on
Fair Value
Fair Value Fair Value

amount for which price that would be
– an asset could be exchanged, received to sell an asset or

paid to transfer a liability
– an equity instrument granted could
be exchanged, in an orderly transaction between
between knowledgeable, willing market participants at the
parties in an arm’s length measurement date.
transaction.
PRICE
Transaction
orderly
transaction
A transaction that assumes exposure to the
market for a period before the measurement
date to allow for marketing activities that are
usual and customary for transactions involving
such assets or liabilities
it is not a forced transaction

(e.g. a forced liquidation or distress sale).
absence of an assume a hypothetical transaction

actual transaction considered from the perspective of a
participant who holds the asset or owes the
liability
Transaction
orderly takes place in

most advantageous market
transaction
most advantageous market = principal market
•market that maximises the amount market with the greatest volume and level
that would be received to sell the of activity for the asset or liability.
asset or
(provided entity can access that market)
•minimises the amount that would
be paid to transfer the liability,
after considering transaction costs

and transport costs.
presumed to be the market in which the entity

would normally enter into a transaction
market Buyers and sellers in the most
advantageous market for the asset
participants or liability that are:
independent of
each other, i.e. able to enter into a
not related transaction for the asset
parties (IAS 24) or liability; and
knowledgeable, i.e. willing to enter into a
sufficiently informed to transaction for the asset or
make an investment liability, i.e. they are
decision and are motivated but not forced or
presumed to be as otherwise compelled to do
knowledgeable as the so.
reporting entity about the
asset or liability
Agenda
2. Future IFRS
5. Cost

Fair Value Hierarchy
valuation techniques for

which any significant input
Cost
quoted prices in active markets
is not based on for similar assets or liabilities
observable market data. Level 3 or other valuation techniques
for which all significant inputs
are based on
Level 2 observable market data
Level 1
quoted prices in active markets

for the same instrument
(i.e. without modification or repackaging)
new
active market active market
1.quoted prices are readily and A market in which transactions

regularly available for the asset or liability take
2.prices represent actual an place with sufficient frequency
regularly occurring and volume to provide pricing
market transactions on an information on an ongoing
arm’s length basis basis.

NOT active markets
indicators little information

released publicly
significant decline for

new issues significant
decrease in
volume/ level of
few recent transactions activity
if market is not active,
price quotations not a change in valuation
quotations vary
substantially over
based on current technique may be
time or among
information appropriate
market makers
previously highly
correlated indices
wide bid-ask spread now uncorrelated
significant increase in implied liquidity

premiums, yields or performance indicators

NOT orderly
Even if a market is not

active, it is not indicators not orderly
appropriate to there was not adequate exposure to the market for a
conclude that all period before the measurement date to allow for
transactions in that marketing activities that are usual and customary
market are not orderly
(i.e. are forced or distress sales)
there was a usual and customary marketing period,
but the seller marketed the asset or liability to a
single market participant
seller is in or near bankruptcy or receivership

(i.e. distressed) or the seller was required to
sell to meet regulatory or legal requirements
(i.e. forced)
transaction price is an outlier

when compared with other
recent transactions for the same
or similar asset or liability

Initial recognition
Transaction price = best evidence of fair value

Unless...
• Transaction is between related parties

• Transaction under duress/ seller is forced to accept the
price in the transaction
• Different unit of account
• Market is different than the most advantageous
market
But if…
transaction price differs from

fair value, the entity
recognises the resulting gain
or loss in profit or loss unless
IFRS requires otherwise
Day One Profit or Loss
new IAS 39.AG76A
Day one profit or loss: Fair value is evidenced by

fair value at initial •comparison with other observable current
recognition differs from market transactions in the same instrument or
the transaction price •based on a valuation technique whose
variables include only data from observable
markets
fair value + Level 2

transaction costs that are directly
attributable (for financial instruments not held at fair value) Level 1
According to the classification
e.g. below market loans to

employees:
difference recognised in p&l as employee benefit
Day One Profit or Loss
new IAS 39.AG76A
Day one profit or loss: Fair value is NOT evidenced by

fair value at initial •comparison with other observable current
recognition differs from market transactions in the same instrument or
the transaction price •based on a valuation technique whose
variables include only data from observable
markets
defer the difference between the Level 3

fair value at initial recognition and
the transaction price
recognise that deferred difference as a gain or loss

only to the extent that it arises from a change in a
factor (including time) that market participants
would consider in setting a price.
Liabilities
Fair value of a liability
• if no observable market price, use same

methodology as corresponding asset
• adjust the observed price for the asset for
features that are present in the asset but not
present in the liability
• If no corresponding asset, use present value
techniques to estimate price market
participants would demand to assume liability
• Do not ignore information about market
participants that is reasonably available
• Fair value reflects non-performance risk =
risk that an entity will not fulfil an obligation
(includes credit risk)
• Restrictions on ability to transfer do not affect
fair value of a liability
Spread : amount by which
the ask price exceeds the bid
BID ASK
price a buyer is willing to pay for a
security
≤ price a seller is willing to accept for
a security, also known as the offer
price
• price within the bid-ask spread that is most

representative of fair value shall be used to
measure fair value, regardless of where the input is
categorised in the fair value hierarchy.
• New IFRS does not preclude the use of mid-
market pricing as a practical expedient for fair
value measurements within a bid-ask spread.
• If a bid-ask spread is not observable directly or
indirectly (similar asset or liability), an entity
need not undertake exhaustive efforts to
Level 1 estimate a bid-ask spread
Agenda
2. Future IFRS
5. Cost

Valuation Technique
Level 3
Level 2
new
Valuation Valuation
Techniques Techniques
establish what the estimate the price at

transaction price would which an orderly
have been in an arm’s transaction would take
length exchange place between market
motivated by normal participants at the
business considerations measurement date
highest and best use
highest and best use
use of an asset by market participants that would maximise the value of the asset or
the group of assets and liabilities (eg a business) within which the asset would be
used.
Physically Legally Financially
possible permissible feasible
in-exchange in-use
valuation premise
valuation premise
or
A basis used to determine the
A basis used to determine the fair value of an asset that
fair value of an asset that provides maximum value to
provides maximum value to market participants principally
market participants principally through its use in combination
on a stand-alone basis. with other assets and liabilities
as a group.
To be used for
fair value of financial asset
Valuation Technique
Valuation
Techniques
market approach income approach cost approach
uses prices and other uses valuation techniques reflects the amount that
relevant information to convert future amounts would currently be
generated by market (e.g. cash flows or income required to replace the
transactions involving and expenses) to a single service capacity of an
identical or comparable present (discounted) asset (current
assets or liabilities amount. replacement cost)
Value indicated by current

market expectations about
those future amounts. e.g.
present value techniques, option pricing
models (Black-Scholes-Merton)
inputs
Level 3
Level 2
observable inputs unobservable inputs
1.Inputs that are developed on 1.Inputs for which market data

the basis of available market are not available and
data and 2.that are developed on the
2.reflect the assumptions that basis of the best information
market participants would use available about the assumptions
when pricing the asset or that market participants would
liability. use when pricing the asset or
liability.
Agenda
2. Future IFRS
5. Cost

Cost
Unquoted equity instruments IAS39.AG80-81
Cost
Investments in equity instruments
1. that do not have a quoted market price in an active market

and
2. whose fair value cannot be determined
(+ derivatives linked to such unquoted instruments)
shall be measured at cost

What to remember?
Fair value hierarchy

Day one profit or loss
draft new IFRS
IAS 39
Exposure draft IFRS 7
Exposure draft new IFRS on Fair Value Measurement

IFRS For Banks: Benny Verhelst Bangkok, July 2009

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© 2009 finarch. All rights reserved. 29 October, 2009 2

Standards IFRS International Financial Reporting

Framework sets out concepts

the IASB likes to

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© 2009 finarch. All rights reserved. 29 October, 2009 8

incurrences of liabilities Residual interest in

• FASB: issues United States Generally Accepted

• Short-term/long-term convergence projects with

• Memorandum of Understanding (2008) sets out

Where can I get more information?

© 2009 finarch. All rights reserved. 29 October, 2009 11

© 2009 finarch. All rights reserved. 29 October, 2009 13

© 2009 finarch. All rights reserved. 29 October, 2009 14

examples: Contractual right to

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Contract that may be settled in the entity’s own

Non- derivative Derivative

e.g. Convertible bonds

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Trade date: date an entity commits to purchase or sell an asset

Settlement date date an asset is delivered to or by the entity

IAS 39 allows trade date or settlement date accounting

EXCEPT for DERIVATIVES:

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© 2009 finarch. All rights reserved. 29 October, 2009 18

Held for Fair value

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Non-derivative financial No derivatives, no shares (because

determinable payments that in an active market, no loans that

c.Those for which the holder may not recover

Held for Fair value

© 2009 finarch. All rights reserved. 29 October, 2009 22

Held-to- Tempting to put

Non-derivative financial No derivatives, no shares (because

determinable payments and loans, no bonds you intend to sell

c.Those that meet the definition of loans and

© 2009 finarch. All rights reserved. 29 October, 2009 23

Tainting rules Penalty

During year or 2 previous years, 1.Reclassification of ALL HTM to

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−Sale close to maturity, with minimal

−Sale occurs after collection of

−Isolated non-recurring event beyond

o Change in tax lax or regulatory environment

o Business combination that triggers the need for selling the

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© 2009 finarch. All rights reserved. 29 October, 2009 26

Calculate the amortised cost:

−the bond will be repaid in 3 years at 100

= Fair value + transaction costs Debit bond 102

effective yield (IRR in excel)= 5,2620%

102 x 5,2620% = 5,3672 = revenue recognised in P&L for year 1

Credit bond 0,63

Credit interest income 5,37

1 101,37 = 102 - 0 +/- - 0,63 - 0

effective yield (IRR in excel)= 5,2620%

101,37 x 5,2620% = 5,3340 = revenue recognised in P&L for year 2

Credit bond 0,67

Credit interest income 5,33