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2© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Scope of Expected Credit Loss (CECL) Model
• Loans, held-to-maturity debt securities and trade receivables • Receivables that result from revenue transactions• Reinsurance receivables• Lease receivables recognized by a lessor• Loan commitments• Financial guarantee contracts not accounted for as insurance or at fair value
through net income• Loans made by a not-for-profit entity to meet its mission (programmatic loans)
Would apply to the following financial instruments
• Equity instruments• Available-for-sale (AFS) debt securities• Loans made to participants by defined contribution employee benefit plans• Policy loan receivables of an insurance entity• Promises to give (pledge receivables) of a not-for-profit entity• Related party loans and receivables between entities under common control
Would not apply to the following
3© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Expected Credit Loss Model
Replaces multiple
impairment models for debt
instruments measured at
amortized cost
Simplifies accounting for
purchased credit impaired (PCI) financial
assets
Uses single measurement objective for
expected credit loss
4© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Recognizing Expected Credit Losses
Estimate of all contractual cash flows not expected to be collected
No recognition threshold
Allowance recognized at each reporting date
Allowance trued up by a provision in current period earnings
5© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Measuring Expected Credit Losses
Historical
average loss
experience
Reasonable and
supportable
forecasts
Estimate of
lifetime expected
credit losses
6© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Purchased Credit-Impaired Assets
Should include individual financial assets or groups of financial assets with shared-risk characteristics.
Acquired financial assets that have experienced a more than insignificant deterioration in credit quality since origination, based on the assessment of the acquirer.
Interest income would be based on expected cash flows at the date of acquisition (yield held constant).
Expected credit losses at the acquisition date would be recognized as an allowance through a gross up to the balance sheet.
The expected credit loss allowance would not be recognized in interest income.
Subsequent increases or decreases in expected credit losses would be recognized immediately in earnings as a provision for credit losses.
Credit impairment would follow same approach as originated assets.
7© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Purchased Credit-Impaired Assets (continued)
Example – Purchased Credit Impaired Assets
Entity E pays $750,000 for a debt instrument with a par amount of $1,000,000. The instrument is classified at amortized cost. At the time of purchase, the expected credit loss embedded in the purchase price is $175,000.
The acquisition-date journal entry follows:
Loan – par amount $1,000,000
Loan – noncredit discount $ 75,000
Allowance for credit losses 175,000
Cash 750,000
8© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Modified Debt Instruments
New loan - non-troubled debt restructuring (TDR) modifications
• Expected credit losses would be based on the contractual cash flows post modification – discounted using the post-modification EIR
TDR modifications• EIR used for measuring expected credit losses would be the original
(pre-modification) EIR• Cost basis would be adjusted so the EIR post-modification would be
the same as the original EIR, given the new series of cash flows• Cost basis would be increased or decreased• The cost basis adjustment = amortized cost basis prior to the TDR
less PV of the modified contractual cash flows (discounted at the original EIR)
9© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Available-For-Sale Credit Loss Model
Impairment recognized using an allowance approach
Reversals of credit losses may occur
Length of time the fair value has been less than amortized cost is not considered
10© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Qualitative disclosures about how an entity
estimates expected losses, including changes in
techniques and credit loss expectations
Rollforward of the allowance for expected credit losses
for financial assets measured at amortized cost
and FV-OCI
Current credit quality indicators that are disclosed under current GAAP would be disaggregated by year of
origination
A discussion of the type of collateral and extent to
which collateral secures an entity’s financial assets
Reconciliation between the purchase price and the par
value of PCI financial assets at the time of purchase
Disclosures
AFS debt securities
• Retain current disclosure requirements, updated for the general principles regarding disclosing credit risk
11© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Transition
Other-than-temporarily impaired debt securities
• Prospectively• Amounts in AOCI as of the date of adoption that relate to significant
improvements in cash flow will continue to be accreted to interest income on a level-yield basis
PCI financial assets• All loans and debt securities acquired with deteriorated credit quality for which an entity applies Subtopic 310-30 (including by analogy) will be classified as PCI at the date of adoption
• At the date of adoption, gross up the allowance for lifetime expected credit losses with a corresponding adjustment to the carrying value
• Interest income will be recognized based on the yield as of the date of adoptionAll other assets
• Cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period
12© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Effective Date and Transition Disclosures
Effective Date
• To be decided after considering constituent feedback (most likely calendar 2018 or 2019)
Transition disclosures would apply, including:
• Nature and reason for the change in accounting principle• Method of applying adoption• Effect of the adoption on line items on the statement of financial
position, if material, as of the beginning of the first period for which the guidance is effective
• Cumulative effect of the change on retained earnings or other components of equity
13© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Impairment - Significant Differences Between FASB and IASB models
SubjectFASB ED and Tentative
Decisions IFRS 9Measurement Objective Single measurement objective for
measuring expected credit lossesDual-measurement objective
Instruments Measured at FV-OCI
Targeted amendments to current OTTI model
No limit is provided
Measurement Current estimate of contractual cash flows not expected to be collected
For assets in Stage 1, impairment would be measured as all shortfalls in cash flows over the life of the financial assets that are associated with the probability of a loss in the 12 months after the reporting date
For assets in Stage 2 or 3, lifetime expected credit losses would be recognized
14© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Impairment - Significant Differences Between FASB and IASB models (continued)
Subject FASB ED and Tentative Decisions IFRS 9PCI Financial Assets
The purchase discount associated with expected credit losses would be recognized as an allowance at the acquisition date. Impairment would always reflect the entity’s current estimate of contractual cash flows that it does not expect to collect
Expected credit losses at the acquisition date would be factored into the effective interest rate (and would not be recognized as an allowance). Therefore, impairment would be based on the change from initial expected credit losses
Interest Income Recognition
Does not include a similar provision Would require interest income to be calculated on net carrying amount for financial assets that are ‘impaired’ (i.e. Stage 3)
16© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Equity investments
Financial liabilities measured at fair value
Assessment of a valuation allowance for a DTA related to an available-for-sale security
Classification and Measurement - Accounting
17© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Classification and Measurement – Presentation and Disclosure
Public business entities: present the fair value of financial assets and
financial liabilities that are measured at amortized cost either
parenthetically on the balance sheet or in the notes
Disclose all financial assets and financial liabilities grouped by both measurement category and form of
financial assets
For financial instruments measured at amortized cost, disclosures
about fair value will be limited to: Fair value amounts, disaggregated
by major asset category and fair value hierarchy Level 1, 2, or 3
For equity investments without a readily determinable fair value
disclose: carrying amount, amount of impairments, and the observable and unobservable adjustments, if
any, for the annual period
For bifurcated embedded derivatives:
- Carrying amount;- Measurement attribute;
and- B/S line item in which the bifurcated embedded derivatives
and related host contracts are presented
18© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Final standard expected second half 2015
• Modified retrospective application• Prospective for certain equity securities
To be decided after considering constituent feedback (most likely calendar 2018 or 2019)
Transition:
Classification and Measurement
19© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Classification and Measurement - Significant Differences Between FASB and IASB models
Subject FASB IFRS 9Basis for Classification and Measurement
Intent and ability on an asset-by-asset basis
Based on cash flow characteristics and business model
Categories • Trading• Available for Sale• Held to Maturity (tainting
notion)• Loans Held for Sale (Lower
of Cost or FV)• Loans Held for Investment
• FV - P&L• FV - OCI• Amortized cost (no tainting)
FVO Unconditional Conditional:• Financial asset and/or
financial liabilities• Accounting mismatch• Certain hybrid instruments
Embedded Derivatives Bifurcation guidance applies for financial assets and financial liabilities
Bifurcation guidance does not apply for financial assets, but does for financial liabilities
21© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.
Financial Instruments Project – Hedging
Targeted improvements
• Hedge effectiveness threshold.• Hedging components of non-financial items.• Elimination of shortcut and critical terms match methods.
Scope of project may include:
Board expected to begin deliberations