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Ifrs 9 Classification
Ifrs 9 Classification
The classification of financial instruments under IFRS 9 is based on the entity’s business model
for managing the financial assets, but is also based on the nature of their contractual cash flows.
• Our business model checklist supports a rigorous and structured approach to determining
whether cash flows are generated from holding the financial assets, selling the financial
assets or both.
• EY ICE tool offers an automated classification tool for instruments with identifiers (ISIN,
CUSIP). This tool has repeatedly demonstrated its value during our client engagements
throughout the globe. EY ICE tool has benefited from the rich input that our clients and our
senior leadership have provided during its development and is continuously updated.
• In order to analyse more complex loans and contractually linked instruments that are not
eligible for automated classification, we offer a text data mining tool, which generates
an assessment of the instruments’ risk of failing the contractual cash flow (SPPI - Solely
payments of principal and interest) test.
• The results of this assessment can then be used as a basis for further classification using our
SPPI checklist. This checklist examines all essential instrument features that are relevant
for classification.
P a s s
F a il F a il F a il
No No Y e s
F CI Fai al e
t o g t e
Co e ensi e Inco e FVOCI* FVOCI
F Fai al e Amortised cost FVTPL**
t o g ofit o oss (with recycling) (no recycling)
Business model
Hold to collect Hold and sell Other
developed a
wide range e siness o el e ects o a o t olio o assets is anage to ac ie e siness o ecti es portfolios portfolios portfolios
testing
of tools for et e ol ing t e financial assets selling t e assets o ot anage ent nee s to se
efficient IFRS 9 g ent to assess t e siness o el ta ing all acto s an acti ities into acco nt S ficient
e i ence is e i e in o e to eac t e ig t concl sions ic n e lines t e nee o a
classification,
covering all
st ct e a oac EY ill g i e t e entit t o g t e assess ent oce e an assist Identified portfolios for further analysis
anage ent in co e ing e as ects
aspects of Cont act all lin e inst ents o loans
the required
assessment. SPPI testing Automated Pre-work for manual testing
Fo a e t inst ent to ass t e cont act al cas o s c a acte istic test an e s se entl
Among them is eas e at a o tise cost o ai al e t o g ot e co e ensi e inco e t e entit ISIN list Cluster based on similar characteristics
the EY ICE tool, st ete ine et e cont act al cas o s a e solel a ents o inci al an inte est’
which performs ence t e assess ent is also e e e to as t e S I test’ n inst ent asses t e S I test
automated i it oes not int o ce is s o olatilit t at a e inconsistent it a asic len ing a ange ent Assess reclassification risk
classification
of portfolios e S I testing t icall in ol es a ai a o nt o eso ces an an entities n e esti ate
High (priority 1) Medium (priority 2) Low (priority 3)
t e e o ts e i e EY S I testing tools ill acilitate t is ocess ile s stantiall e cing
SPPI testing
consisting of
t e ti e an costs elate to t is o Detailed Validate Validate
securities with
assessment assumptions assumptions
an ISIN or
CUSIP.
The following chapters will describe four tools in more detail: Obtain sample
Purpose
Business
IFRS 9 e i es t e siness o el assess ent to e ase on t e acts an ci c stances t at e ist on t e ate o
a o tion o t e stan a siness o el c ec list o i es t e necessa s o t to e o t is assess ent
an el s to n a el i o tant in o ation ega ing o financial assets a e anage t e entit s t e siness
model
o el assess ent is an a ea o t e stan a e i ing consi e a le g ent it is i e ati e t at entities se a
st ct e a oac
Requirements
checklist
In o e to e a le to el o e o l nee to con ct inte ie s it t e ele ant contacts in o o ganisation
ese a e o essionals o no t e financial inst ents an a e a ital so ce o in o ation o e o ing t e
assess ent e c ec list incl es an anal sis o e e o ance in icato s t e entit ses to assess e o ance
an o e ie o siness o ecti es an a antitati e anal sis o sales le els
How it works
Key features
• stan a ise estion list contin o sl a a te on t e asis o o e e ience o ot e o ects is o i e
• e o t t satisfies t e oc entation e i e ents i ose t e stan a
Purpose
Fo t e S I testing o inst ents it an i entifie ISI C SI EY esents EY ICE tool IFRS 9 Classification
Engine o tool o a to ate classification It can e se to elia l an acc atel anal se inst ents on
B Automated
t e asis o e c a acte istics e tool et ie es a et ata an acc atel classifies t e inst ents sing an
IFRS 9 ase ecision t ee algo it
Requirements
How it works
EY ICE
ecision t ee algo it co ining IFRS 9 inci les it EY inte etations t at a e ase on o ast a et
e e ience In icato s o t e ai al e a e agge an t e tool gi es a ig l etaile o t t incl ing is als an
an a it t ail
• Fast: The data extraction and classification report generation is done within a few hours.
• Easy: The only input needed is a list of ISIN (or CUSIP) codes, then the tool produces an
excel file indicating the classification conclusion and the reasons for it.
• Reliable: The tool is validated by our senior leadership and used for many Financial
Institutions in the world. The results and related documentation include a detailed
audit trail.
Clients typically
achieve a Why is this tool special?
portfolio
coverage of 90%
when using the • etaile o t t an a it t ail incl ing ationale o classi ication
tool.
• In se since an contin o sl ate
• ig l le i le le engine
Purpose
is tool is se in o e to e o an assess ent o t e financial inst ents’ is o ailing t e cont act al cas
o S I test e tool can e se o an inst ent it a te t cont act is incl es cont act all lin e
inst ents asset ac e sec ities loans an o tgage cont acts
Requirements
Fo cont act all lin e inst ents t e e ing e o an also no n as e ing Ci c la o os ect s is
nee e Fo loans an o tgages t e cont act is e i e
How it works
C
• e tool e o s a e o sea c sing a le icon o e o s
• Eac e o as an associate is eig t
• e e o le icon is i e ent o loans an C Is
• E ten ing t e le icon is an ite ati e ocess
Text data
mining
1 4 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 5
Key features Text data mining tool
The challenge — CLIs (securitisations)
Our automated Our text data mining tool offers you a very efficient way of dealing with
EY ICE tool and Is it practicable to look through to the underlying pool of
tool creates a vast volumes of text: No
text data mining instruments?
user-friendly
classification • e c ent engine can assess a cont act it a o t one illion c a acte s in
secon s Y e s
output and
highlights
instruments • e tool can ocess a ataset o an n e ing o cont acts in a o t Does the tranche have cash flows that are solely payments of
EY ICE tool
principal and interest?
No
secon s enc a e
that need
further
• It can anage t e o lation o cont acts it total si e in n e one o Y e s
analysis. nteste
Text data mining Does the underlying pool have instruments with cash flows
• ese es lts can e i o e it aste a ae No
tool that are solely payments of principal and interest?
The lexicon in our tool has been developed over years of experience and has Y e s
the functionality to assess contracts in different languages.
Do all other instruments in the underlying pool reduce cash
Text data mining
flow variability or align the cash flows of the tranches with the No
eo t t o t e tool ig lig ts t e inst ents t at nee t e anal sis tool
cash flows of the underlying pool?
• Ris at i s o s is o F classification it in is catego ies Y e s
• Ris class o ces c ets o inst ents t at a e t e in estigate as necessa Credit risk
sing t e S I c ec list Is the credit risk of the tranche equal to or lower than the
‘tranche vs. pool’ No
credit risk of the underlying pool of instruments?
test*
Y e s
Can instruments in the underlying pool change after initial
Text data mining
recognition, in a way the pool does not meet the conditions Y e s
tool
above?
EY c eate a e icate et
o olog o e ficient t anc e s No
ool testing on t e asis o t e
in t o e te nal a et ata P a s s S P P I F a il S P P I
an c e it ating o i e s
Purpose
Requirements
cont act te s eet o a o ct esc i tion s eci ing in etail all t e c a acte istics o t e financial inst ent
How it works
D Key benefits
S P P I
• S ita le o all assets incl ing C Is
• Co e s e e i o tant iss e esc i e in t e stan a
• Consi e s co leteness an e ce tions
•
checklist
Eas to n e stan it e lanations an e a les
• t t gi en as a clea ass’ o ail’ ase on e e ele ant S I c ite ion
Italy
Francesca Amatimaggio
Email: ancesca a ati aggio it e co
one 9
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© 2017 EYGM Limited - All Rights Reserved - EYG no. 01977-174Gbl - ED None
is ate ial as een e a e o gene al in o ational oses onl an is not inten e to e elie on as acco nting ta o ot e
o essional a ice lease e e to o a iso s o s ecific a ice
2 0 | EY’s IFRS 9 Classification Engine