Podcast
Questions and Answers
What did IFRS 9 introduce that brought many challenges to banks?
What did IFRS 9 introduce that brought many challenges to banks?
- Compound financial instruments
- Simplified approach for loss allowance calculation
- Convertible bonds
- Expected credit loss model (correct)
Why can't banks use the simplified approach for recognizing loss allowances on loans under IFRS 9?
Why can't banks use the simplified approach for recognizing loss allowances on loans under IFRS 9?
- Loans are not impacted by IFRS 9
- Loans have no credit risk
- Loans do not fall within the exception (correct)
- Loans are not financial assets
Under IFRS 13, what determines whether a financial asset is classified as amortized cost, fair value through profit or loss, or fair value through other comprehensive income?
Under IFRS 13, what determines whether a financial asset is classified as amortized cost, fair value through profit or loss, or fair value through other comprehensive income?
- Assessment based on specific tests (correct)
- Lifespan of the asset
- Interest rate of the asset
- Credit risk of the asset
What type of financial assets can majority of companies use a simplified approach for under IFRS 9?
What type of financial assets can majority of companies use a simplified approach for under IFRS 9?
What major challenge does the impairment of financial assets bring to banks under IFRS 9?
What major challenge does the impairment of financial assets bring to banks under IFRS 9?
Which type of companies cannot use a simplified approach for impairment of loans under IFRS 9?
Which type of companies cannot use a simplified approach for impairment of loans under IFRS 9?
What is the focus of IAS 19 Employee Benefits?
What is the focus of IAS 19 Employee Benefits?
What is a major difference in the assets and liabilities of banks compared to non-financial firms?
What is a major difference in the assets and liabilities of banks compared to non-financial firms?
What is a key aspect of financial instruments that is highlighted in the text?
What is a key aspect of financial instruments that is highlighted in the text?
Which financial reporting standard is particularly crucial for financial institutions due to its focus on 'fair value' accounting?
Which financial reporting standard is particularly crucial for financial institutions due to its focus on 'fair value' accounting?
What plays an important role in financing productive investment opportunities according to the text?
What plays an important role in financing productive investment opportunities according to the text?
How do valuation rules based on 'fair value' accounting under IFRS impact banks' solvency?
How do valuation rules based on 'fair value' accounting under IFRS impact banks' solvency?
What type of risk is NOT mentioned in relation to financial instruments in the text?
What type of risk is NOT mentioned in relation to financial instruments in the text?
How do money transactions typically relate to most non-banking companies?
How do money transactions typically relate to most non-banking companies?
What does the text suggest may shift some contracts from off-balance sheet to the balance sheet?
What does the text suggest may shift some contracts from off-balance sheet to the balance sheet?
What distinguishes the financial statements of banks from those of corporations?
What distinguishes the financial statements of banks from those of corporations?
Which accounting standard is specifically mentioned in the text regarding hedge accounting?
Which accounting standard is specifically mentioned in the text regarding hedge accounting?
Why are off-balance sheet commitments of banks highlighted as significant in relation to their balance sheets?
Why are off-balance sheet commitments of banks highlighted as significant in relation to their balance sheets?
What formula is used to calculate loan loss provision for the current period?
What formula is used to calculate loan loss provision for the current period?
How is the loan loss provision rate determined?
How is the loan loss provision rate determined?
What does a high Loan Loss Provision Coverage (LLPC) ratio indicate?
What does a high Loan Loss Provision Coverage (LLPC) ratio indicate?
How are loan loss reserves and supervisory capital requirements related?
How are loan loss reserves and supervisory capital requirements related?
What are loan loss reserves intended to cover?
What are loan loss reserves intended to cover?
What covers losses that are considered 'unexpected' according to the text?
What covers losses that are considered 'unexpected' according to the text?
What does it mean when loan loss or write-offs occur as accounting entries?
What does it mean when loan loss or write-offs occur as accounting entries?
Why should the Loan Loss Provision (LLP) not be less compared to expected future losses?
Why should the Loan Loss Provision (LLP) not be less compared to expected future losses?
Why are reviews necessary for representing losses on a balance sheet date?
Why are reviews necessary for representing losses on a balance sheet date?
What does analyzing the borrower's industry, such as Agriculture, Mining, or Tourism, help with?
What does analyzing the borrower's industry, such as Agriculture, Mining, or Tourism, help with?
How does the quality of credit policies and procedures affect loan portfolio evaluation?
How does the quality of credit policies and procedures affect loan portfolio evaluation?
What is the primary factor considered when determining the amount of allowance that must be set aside for potential losses?
What is the primary factor considered when determining the amount of allowance that must be set aside for potential losses?
Flashcards
Expected Credit Loss Model
Expected Credit Loss Model
IFRS 9's model for recognizing loss allowance for financial assets.
Three-Stage General Model
Three-Stage General Model
Banks must use this three-step process to determine loss allowances.
Amortized Cost
Amortized Cost
Financial assets measured at their original cost, adjusted for amortization.
Fair Value Through Profit or Loss (FVTPL)
Fair Value Through Profit or Loss (FVTPL)
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Fair Value Through Other Comprehensive Income (FVOCI)
Fair Value Through Other Comprehensive Income (FVOCI)
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Fair Value Accounting
Fair Value Accounting
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Off-Balance Sheet Commitments
Off-Balance Sheet Commitments
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IFRS 10 and IFRS 12
IFRS 10 and IFRS 12
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Finance Lease
Finance Lease
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Employee Loans
Employee Loans
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Hedge Accounting
Hedge Accounting
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Loan Loss Provision (LLP)
Loan Loss Provision (LLP)
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Past Loss Experience
Past Loss Experience
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Quality of Management (Lending)
Quality of Management (Lending)
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Loan Collection and Recovery Practices
Loan Collection and Recovery Practices
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Quality of Credit Policies and Procedures
Quality of Credit Policies and Procedures
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Loan Growth
Loan Growth
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Financial Conditions of the Borrower
Financial Conditions of the Borrower
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General Economic Trends
General Economic Trends
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Borrower's Industry
Borrower's Industry
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LLP Calculation
LLP Calculation
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Overdue Tenor/Maturity Group
Overdue Tenor/Maturity Group
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Loan Loss Provision Coverage Ratio (LLPC)
Loan Loss Provision Coverage Ratio (LLPC)
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LLPC = (Pre-tax income + loan loss provision) / Net off charges
LLPC = (Pre-tax income + loan loss provision) / Net off charges
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Supervisory Capital Requirements
Supervisory Capital Requirements
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Loan Loss Reserves
Loan Loss Reserves
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Focus on Fair Value
Focus on Fair Value
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Banking Industry Regulations
Banking Industry Regulations
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Banks' Financial Statements
Banks' Financial Statements
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State of the economy
State of the economy
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Study Notes
Impairment of Financial Assets
- IFRS 9 introduced expected credit loss model for recognizing loss allowance to financial assets in July 2014
- Banks are severely affected by IFRS 9 and cannot use simplified approach for impairment of financial assets
- Banks need to apply 3-stage general model for recognizing loss allowances
Measurement IFRS 13
- Financial assets can be classified into three categories for measurement:
- Amortized cost
- At fair value through profit or loss (FVTPL)
- At fair value through other comprehensive income (FVOCI)
Impact of IFRS on Banking Sector
- Banks' financial statements follow the same basic principles as those of corporations, but with major differences
- Assets and liabilities of banks are financial contracts, and banks' capital is smaller compared to the size of the balance sheet
- Off-balance sheet commitments of banks have a size comparable to their balance sheets
Banking Industry
- Banking industry is heavily regulated
- International Financial Reporting Standards (IFRS) are of major importance for financial institutions due to their focus on "fair value" accounting
Financial Statements of Banks
- Financial statements of banks differ widely from those of corporations
- Focus is on significance of financial instruments, risks attached to financial instruments, and transfers of financial assets
Consolidation and Special Purpose Entities
- IFRS 10 and IFRS 12 are relevant for consolidation and special purpose entities
Other Issues to Watch Out
- Leases may not be called "lease" but may have a substance of a finance lease
- Employee benefits, such as "employee loans" and contributions to pension funds, need to be considered
- Hedge accounting requires specific conditions to be met, including hedge documentation
Loan Loss Provision
- Loan loss provision (LLP) should be maintained at a level believed to be sufficient to absorb estimated probable losses inherent in the bank's loan portfolio
- Factors to consider when evaluating a loan portfolio include:
- Past loss experience
- Quality of management in the lending area
- Loan collection and recovery practices
- Quality of credit policies and procedures
- Loan growth
- Financial conditions of the borrower
- General economic trends
- Borrower's industry
- State of the economy
Loan Loss Provision Calculation
- LLP for the current period = LLP calculated as of day - previous LLP
- Loan loss provision rate is determined by the overdue tenor/maturity group, based on risk attached to each class
Loan Loss Provision Coverage Ratio
- Loan loss provision coverage ratio (LLPC) shows the ability of the institution to absorb any loan losses that may be encountered
- LLPC = Pre-tax income + loan loss provision / Net off charges
Loan Loss Reserves and Regulatory Capital
- Loan loss reserves and supervisory capital requirements are directly linked
- Loan loss reserves are intended to cover losses that are expected to occur based on historical experience, adjusted for changes in the economic environment
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Description
Test your knowledge on the significance of financial instruments, accounting policies, risks like credit risk, market risk, and liquidity risk, transfers of financial assets, consolidation, special purpose entities under IFRS 10 and IFRS 12, and other related topics like leases.
