The IFRS 9

measurement category for certain debt instruments that were voluntarily designated as at FVTPL prior to the adoption of IFRS 9. The change in measurement is a result of the outcome of the business model assessment.

In limited cases, financial assets previously classified as held-tomaturity were not considered to have SPPI cash flows and have accordingly been measured at FVTPL. From the reviews carried out, this leverage-type feature is the common trigger for SPPI failure. Overall, the implementation of the SPPI testing presented significant challenges for banks that hold contracts with non-standardised and complex terms where individual, rigorous assessment is required.

In terms of the business model assessment, a question often asked is: How should we interpret ‘infrequent-significant or frequent-insignificant sales’? For sales out of a Hold-to-Collect (HTC) portfolio, IFRS 9 does not define the terms or lay down any thresholds. Therefore it is an area were judgement will be applied.

However, the industry seems to be pitching this threshold to between five and ten per cent of sales out of the HTC portfolio over the life of the portfolio for sales which are infrequent-significant or frequent-insignificant.

One other issue making the current debate is the accounting for equity instruments under the new FVOCI election. It is interesting to observe that banks still elected to measure equity instruments at FVOCI despite the prohibition on recycling gains and losses in profit or loss.

We believe that banks are now in a better position to understand that the classification and measurement requirements cannot be overlooked. Moreover, the classification of financial assets is the first step to identify portfolios subject to the expected credit loss model.

Impairment

The impairment requirements under IFRS 9 have resulted in banks witnessing a paradigm shift from an incurred-loss model to a forward-looking expected credit loss (ECL) model. While it is still crucial to consider historical and current information, IFRS 9 requires bankers to incorporate forward-looking economic scenarios (Table 1).

Past Events

One of the main elements used by banks in determining their ECL relates to past events, as historical losses incurred by customers may be reflective of the same customers’ behaviour in the future. The more granularities the banks’ information systems have in place, the more reliable the data is in determining the ECL, as it enables them to incorporate jurisdictional-specific, industry-specific and customer-specific information in their models. For instance, in determining customer-specific future credit risk, such level of

Table 1