Companies main impacted areas are those related to accounting systems and reporting. Organization processes and information system are strongly impacted ACCOUNTING SYSTEM AND REPORTING
New classification criteria of assets and liabilites Transition from “cost model” to “fair value model” Need of risk management systems reliable and articulates More volatility on financial statement results and less room for “balance sheets politics” PROCESSES AND INFORMATION SYSTEM
New organization constrains to handle financial instruments (ie: classification, hedge transactions) Strong actions on information system are needed to adopt new accounting and valuation standards It is necessary to revise some internal processes to correctly evaluate financial instruments
Main Ias innovations are related to fair value measurement, importance of economic substance of transactions , segment reporting
Fair value measurement
Assets and liabilities value will not be the same on different periods but will change with the market changes, with profit and loss impacts and more volatility
Economic substance of transactions
Disclosure must be changed in order to undertake a juridical fact explanation and to look at real economic impacts (ie Financial Leasing)
Segment Reporting
IAS 14 -Segment Reporting- companies must communicate balance sheet and financial statement data articulated into company segments. Geografic and business segments are to be indicated. As an impact, there is a convergence between accounting and business informations
Top changes in classification and measurement Credits
The main impact is related to the time evaluation of not performing loans: time value has to be included in impairment measurement criteria and credit net present value must be calculated
Stocks
The main impact is related to classification and measurement: stocks associated to Fair value measurement have direct effects on profit and loss. Available for sales stocks have imact on financial statement (reserves). Stocks held to maturity measured at amortized cost
Derivatives
Derivatives are posted as assets or liabiliets and measured applying fair value criteria. Specific and strict rules have to be applied in case of hedging: fair value hedge, cash flow hedge, foreing investments hedge
Partecipating interests
The main impact is related to consolidation area that includes partecipations on entities who have different activities from banks. Moreover, alla partecipations other than control and strong influence, should be measured at fair value with effects on profit and loss
Property
Amortization should not be calculated on ground
Long term costs
Capitalization of costs more strict with impacts on profit and loss
Post employment benefits
Present value of post employment benefits must be calculated and posted
Credit Area is mainly impacted by Ias 32 and Ias 39 with effects on bank processes and IT tools to classify and measure — Classificazione —
— IT GAAP — Credits posted for product and type of customers: Es. Voce 40. Crediti verso clientela
— Ias principles— Financial assets classified on one of the following categories: • Financial asset/liabilities at Fair Value through Profit & Loss (FVTPL) • Held to Maturity (HTM) • Loans & Receivables (LR)
Current accounts Personal loans Mortages Other loans Foreign credits Other products
• Available for Sale (AFS) Credits are classified as Loans & Receivables or Available for Sale (as bank is supposed to sell its credits) Nearly 100% of Banking groups chose to classify credits as “Loans & Receivables”.
Amortized cost measurement criteria is associated to the classification category and hedging — Measurement — — IT GAAP — Credits are measured at best supposes value related to:
— Ias standards— Initial Recognition (First time adoption): financial instruments must be posted at cost less up front fees
• Client Reliability and his ability to pay for his debts • Difficulties on soveraign debs • Negative Credit portfolio forecasts
Following measurements:: Balance sheet evaluation
Fair value changes
LR
Amortized cost+ Impairment
Profit and loss related to Impairment
AfS
Fair Value
Net worth/ Profit and loss Impairment
Class
Impairment must be applied with prudence principles
IAS 39: “A Legal Entity has to post an asset or a liability on balance sheet whether the Entity becomes part of contract clauses” - Amortized CostAmortized Cost of an asset (loans or credit) or of a liability (ie deposits) is the value used to initially measure the asset, decreased of capital reimbursement and increased of amortizing calculated using effective interest rate, netting impairment provisions
Initial value – Capital reimbursment +/- Amortizing using effective interest rate – Impairment +Revaluation
Fair Value is a evaluation method based on current market value, as an expression of the value adverse parties are disposed to pay to buy the asset
- Il Fair Value 1
FINANCIAL INSTRUMENT LISTED ON A REGULATED MARKET
2
IAS 39 defines how to calculate fair value when a ufficial price is not defined
SIMILAR INSTRUMENT PRICE
3
As an alternative, a pricing of a similar financial instriment could be taken as current value
DISCOUNTING BACK AT MARKET INTEREST RATEERCATO
4
As an alternative discounted cash flows at market interest rates can be used to calculate fair value As an alternative, mathematical methods could be used as they are accepted by financial markets
MATHEMATICAL METHODS
5 COST EVALUATION
19
If other methods are not usable, cost method could be used
Non performing loans will be evaluated using an amortized plan with recovery cash flows — Analytical Impairmnet— Regulation defines an Analytical Impairment based on Net present value of future cash flow for every single position: Discounting is calcuted using effective interest rates registered on the day opf transition to non performing Recovery plan could be defined using standard calculation methods on significant portfolios Impairment must be calculated on every single account
Hedging derivatives are used to decrease bank risks
Risk Types
Credit Risk
Interest Rate Risk
Exchange Risk
- Hedging Typesmicro-hedging, a one to one relation between the financial instrument and the asset hedged macro-hedging, a portfolio relation between the financial instrument and assets hedged
