Masterclass - IFRS9: Modificaciones a los criterios contables de entidades financieras

Name: Masterclass - IFRS9: Modificaciones a los criterios contables de entidades financieras
Uploaded: 2022-09-07T14:10:29.000Z
Duration: 2 h 4 min 49 s

Masterclass on IFRS 9 Modifications

Introduction to the Session

The session begins with a welcome message to participants of the masterclass on IFRS 9 modifications in financial entities.

Jessica Magaña, an expert with over 20 years of experience in the Mexican financial system, is introduced as the speaker. She holds a master's degree in auditing and has worked extensively in regulatory roles.

Background of the Speaker

Jessica confirms her audio and prepares to share her presentation slides.

She expresses gratitude to AFI Escuela de Finanzas for hosting the session and outlines that she will discuss recent modifications to accounting criteria affecting regulated financial institutions.

Overview of Discussion Topics

The focus will be on changes related not only to IFRS 9 but also other relevant standards impacting financial instruments.

Jessica aims for attendees to leave with a general understanding of key changes rather than exhaustive details due to time constraints.

Structure of Accounting Criteria

Jessica explains that accounting criteria are developed by the Comisión Nacional Bancaria y de Valores (CNBV), which often gets confused with general financial reporting standards.

These criteria are based on laws governing regulated activities, emphasizing their distinct nature from broader financial norms.

Development Process and Objectives

The CNBV issues these criteria through general provisions, ensuring they align with both national regulations and international standards.

A significant point made is about convergence versus adoption; while striving for alignment with international norms, CNBV prioritizes maintaining stability within Mexico's financial system.

Regulatory Focus and Specialization

The commission monitors ongoing developments in both national and international regulations, adapting its criteria accordingly.

It is highlighted that specialized operations within regulated entities may not always have corresponding accounting criteria under standard frameworks, necessitating tailored guidelines from CNBV.

Conclusion on Current Normative Framework

Jessica emphasizes that while there are efforts towards convergence, certain differences remain due to specific operational needs within regulated entities.

Understanding Regulatory Accounting Criteria

Overview of Regulatory Accounting Framework

The accounting criteria for regulated entities are not consolidated into a single document; each entity has its own annex detailing specific accounting standards.

Currently, there are 21 normative bodies with annexes that outline the accounting criteria applicable to various financial entities, categorized into groupable and non-groupable entities for easier identification.

Groupable vs. Non-Groupable Entities

Groupable entities refer to financial institutions that can be aggregated under the law, which includes holding companies overseeing financial groups.

The tripartite provisions issued by national commissions (insurance, banking, and securities) establish specific accounting criteria for controlling companies within financial groups.

Specific Normative Bodies and Their Roles

Each commission has distinct powers granted by law to issue regulations; some aspects of accounting criteria are mandated jointly while others are delegated individually.

There are two main groups of normative bodies concerning controlling companies, reflecting the structure established by the National Banking and Securities Commission.

Types of Financial Entities Regulated

Various types of regulated entities include clearinghouses, liquidating partners, development finance organizations like Infonacot, credit unions, and popular savings sectors.

The National Banking and Securities Commission oversees a comprehensive set of accounting criteria structured similarly across different regulatory frameworks.

Legal Foundations for Accounting Standards

Article 99 of the Credit Law empowers the National Banking and Securities Commission to issue general provisions regarding accounting standards for credit institutions.

Annex 33 contains essential accounting criteria specifically tailored for banks as per the mandates outlined in relevant legal documents.

Key Accounting Criteria Explained

Series A outlines general accounting principles; key insights include foundational concepts from financial reporting standards that govern regulated entities' practices.

Criterion A1 refers to the conceptual framework guiding entities' operations based on fundamental postulates underpinning their accounting practices.

Detailed Normative Guidelines

Criterion A2 specifies particular norms that must be adhered to when preparing financial information; it lists applicable financial reporting standards required by institutions.

This criterion also provides clarifications necessary for compliance with these norms during their application in real-world scenarios.

Practical Application Example

Understanding Financial Statement Standards

Overview of Financial Statement Criteria

The commission aims to standardize financial statement criteria, providing a uniform framework for entities to follow, ensuring consistency in accounting practices.

Series B includes concepts related to financial statements, addressing the unique operations of specialized entities that may not be covered by general financial reporting standards.

Specific guidelines are provided for recognizing, evaluating, and presenting reports on various financial instruments such as loans and credit portfolios.

Series C focuses on specific criteria applicable to particular operations, while Series D outlines the formats that entities should adhere to when preparing their financial statements.

The commission's modifications aim to enhance clarity and applicability of accounting standards based on national and international information.

Historical Context of Financial Instruments Standards

Discussion transitions towards modifications made in financial instrument standards following the 2008 financial crisis, highlighting the need for improved regulations.

Prior to 2008, complex international norms were criticized for being difficult to understand and apply effectively in practice.

In response to these challenges, there was a push from stakeholders for simpler principles-based standards rather than overly complex rules-based ones.

Response to the 2008 Financial Crisis

Efforts began around 2005 aimed at simplifying reporting requirements for financial instruments; however, progress was interrupted by the onset of the 2008 crisis.

The crisis revealed significant weaknesses in existing accounting norms regarding timely recognition of credit losses and inadequate evaluation requirements.

Key issues identified included delayed loss recognition which exacerbated crises impacts on institutions due to lack of proactive risk management strategies.

Recommendations Post-Crisis

Following the crisis, it became evident that common evaluation and disclosure requirements were lacking across different investments leading to confusion among stakeholders.

A G20 committee recommended urgent reforms in accounting standards focusing on improving transparency and timeliness in loss recognition processes.

In April 2009, responding directly to these recommendations from global leaders, an accelerated timeline was announced for revising key accounting standards.

International Financial Reporting Standards (IFRS) 9 Overview

Implementation Timeline and Objectives

The IFRS 9 standard related to financial instruments was issued in 2014 after five years of preparation, with an implementation date set for January 1, 2018.

The goal of the new standard was to reduce complexity and enhance understandability; however, its effectiveness in achieving this remains debatable among practitioners.

Phases of Development

The development of IFRS 9 occurred in three distinct phases: classification and measurement, impairment, and hedge accounting.

A significant change in classification focuses on aligning the evaluation of financial instruments with the entity's business model rather than individual intentions regarding each instrument.

Classification Changes

Previously, financial instruments were classified based on the entity's intent; now they are classified according to the defined business model.

Key considerations include understanding the purpose behind holding financial instruments and how cash flows from these instruments are managed.

Business Model Implications

If a business model is designed solely for collecting principal and interest payments without additional components, those instruments should be evaluated at amortized cost.

For models that involve both collecting cash flows and potential sales opportunities, evaluations must reflect fair value through other comprehensive income (OCI).

Evaluation Framework

Instruments not intended for collection or sale but rather for capital gains should be evaluated at fair value through profit or loss (P&L).

While previous classifications may seem similar to current ones, the fundamental shift lies in defining business strategy at a higher decision-making level within organizations.

Impairment Assessment

The second phase involved estimating credit losses based on risk levels associated with each financial instrument.

Instruments are categorized into three stages based on credit risk changes since initial recognition: Stage 1 (no significant increase), Stage 2 (significant increase), and Stage 3 (credit impairment).

Credit Risk Staging

In Stage 1, entities estimate expected credit losses over a period of twelve months if no significant risk increase occurs.

Overview of Financial Instruments and Risk Management

Expected Loss and Hedge Accounting

The focus shifts to expected loss, emphasizing the need for improved hedge accounting for derivative financial instruments. These hedging relationships must align with the entity's strategic objectives.

The previous strict parameters (80-125 effectiveness range) are eliminated, allowing entities to define their own criteria for effective hedge accounting.

Entities must consistently adhere to their established parameters; failure to do so could lead to the elimination of hedging relationships, which is crucial for risk management.

Rebalancing Hedging Relationships

A new concept introduced is "rebalancing," which allows entities to adjust hedging relationships that have become ineffective, ensuring they meet the originally defined effectiveness proportion.

The key takeaway from these changes is the removal of rigid effectiveness parameters and the introduction of rebalancing as a general principle in hedge accounting.

Changes in Mexican Accounting Standards

Following international standards modifications, Mexico's accounting standard setter had to revise multiple norms due to structural differences in financial instrument evaluation and classification.

Unlike international standards consolidated into one norm (IFRS 9), Mexico required updates across more than ten different norms related to various types of financial instruments.

Specific Norm Modifications

Key modifications include updates to NIF 12 on asset compensation, clarifications in NIF C1 regarding cash equivalents, and revisions concerning investments in financial instruments.

New regulations were introduced such as NIF C19 for payable financial instruments and adjustments made across several other norms addressing derivatives and capital accounts.

Implementation Timeline and Scope

Significant modifications began implementation as early as 2018, aligning national standards with international practices.

Institutions like credit organizations started applying these updated regulations from January 1, 2022.

Definition of Financial Instruments

A broad definition encompasses any rights or obligations based on contracts; this includes not just securities but also cash equivalents and receivables specific to credit institutions.

Financial Instruments and Regulatory Changes

Overview of Financial Instruments

The discussion begins with an overview of financial instruments, particularly derivatives, highlighting the broad range of these instruments and their significance in financial regulation.

A visual aid is introduced to clarify modifications made by the commission regarding various criteria, emphasizing its utility for understanding changes in investment criteria.

Changes in Accounting Criteria

The importance of recognizing how accounting criteria have evolved is stressed, especially concerning cash and cash equivalents. The terminology has shifted from "disponibilidades" to a more standardized term aligned with international norms.

It is noted that as of 2021, entities must now adhere to NIF C3 for accounts receivable instead of previous guidelines, indicating a significant shift in regulatory compliance.

Elimination and Replacement of Criteria

The transition from older accounting standards (like criterion B2 for investments) to new regulations under NIC C2 is highlighted. This change reflects a broader move towards standardization in financial reporting.

Specific mention is made that particular criteria related to collection rights are also being replaced by NIPSE 20, showcasing ongoing adjustments within the regulatory framework.

Impact on Financial Reporting

For capital financing instruments, the previous specific criterion has been eliminated; now entities must follow NIPSE 10 regarding derivative financial instruments.

The discussion emphasizes that while some criteria remain unchanged (like those governing control over capital), many others have undergone substantial revisions affecting how entities report their financial status.

Business Model Considerations

A critical point raised is the necessity for businesses to align their classification and presentation of financial instruments with their business model rather than mere intent or historical practices.

Emphasis on operational challenges faced by organizations due to these changes indicates that they require robust policies reflecting their management strategies for financial assets.

Structural Modifications and Challenges

Significant structural modifications are discussed regarding how classifications affect recognition and presentation. Entities must adapt to new models based on business operations rather than traditional categories like "available-for-sale."

These changes necessitate careful consideration during credit decision-making processes as they impact overall financial statements significantly.

Evidence-Based Compliance

The need for evidence supporting the adopted business model when classifying financial instruments is underscored. This requirement will be scrutinized during supervisory reviews by regulatory bodies.

It’s emphasized that any reclassification between categories should be infrequent and tied directly to shifts in the underlying business model rather than arbitrary decisions.

Understanding Changes in Financial Reporting Standards

Overview of New Accounting Standards for Accounts Receivable

The transition from the C3 bulletin to NIF C3 for accounts receivable emphasizes the need for well-founded business models, particularly regarding how accounts are recognized.

A significant change is that if accounts receivable include an interest component, they must now be evaluated according to C-20 standards on financial instruments rather than Annex 3.

Previously, estimates were based on days overdue (incurred loss approach); now, they must follow NIF C16 guidelines using an expected loss model.

Practical solutions are available to avoid extensive evaluations; these allow for estimations based on historical and projected data while considering the time value of money.

The previous criteria from Bulletin C3 remain relevant as practical solutions within accounting standards, especially concerning credit risk estimations after specific periods post-recognition.

Implementation Challenges and Business Model Considerations

Implementing these changes has been challenging for banks due to their complexity; a solid business model is crucial for compliance with new standards.

The evaluation of credit portfolios depends heavily on whether the business model aligns with collecting principal and interest payments (SPPI test).

Credit portfolios should be recognized at amortized cost; however, recognition methods will still adhere to existing criteria while integrating international standard changes.

Interest Recognition and Risk Assessment

A major shift involves recognizing interest income based on effective interest rates instead of contractual rates, necessitating system updates within financial entities.

Credit portfolio presentation will now reflect risk levels rather than just current status; this includes classifying portfolios into different stages based on credit risk assessment.

If there’s no significant increase in credit risk, portfolios will be classified as Stage 1 with provisions covering the next 12 months.

Estimation Methodologies Under New Standards

For credits showing a significant increase in risk since initial recognition, estimations must comply with regulatory requirements over the remaining term of the loan.

In Stage 3 scenarios where objective evidence of impairment exists (e.g., defaults), estimation practices revert to established methodologies depending on delinquency periods.

Modifications in Credit Portfolio and Financial Instruments

Overview of Modifications

The discussion focuses on general modifications in credit portfolios and estimation determinations, emphasizing the complexity and numerous changes involved.

Highlights the importance of financial instruments within credit institutions, indicating that these are significant changes to monitor.

Impact on Various Entities

Notes that similar modifications apply to investments and accounts receivable across different entities, with particular challenges for institutions granting credit.

Discusses which entities have updated their practices according to new financial instrument standards, referencing a set of accounting criteria established by the commission.

Implementation Timeline

All updates related to financial instruments were published last year; entities must now comply with these standards in their reporting.

Clarifies that while IFRS 9 is a focal point, it encompasses broader regulatory changes beyond just financial instruments.

Broader Regulatory Context

Emphasizes that IFRS 9 also aligns with regulations concerning leases, revenue recognition, fair value measurement, and consolidation processes among grouped entities.

Acknowledges that many modifications extend beyond just financial instruments, urging stakeholders not to overlook other important regulatory updates.

Challenges Faced by Institutions

Mentions ongoing challenges faced by institutions due to recent global events (e.g., pandemic), affecting the timely issuance of new criteria.

Indicates expectations for upcoming guidance regarding collective financing instructions and electronic payment funds this year.

Questions and Answers Session

Discussion Points Raised

Jessica thanks participants for their engagement; encourages questions through chat during the Q&A session.

Specific Inquiries Addressed

A participant asks about potential extensions for effective rate implementation as per CNB guidelines.

Respondent notes previous deferrals allowed until 2023 but expresses uncertainty about further extensions from the commission's side.

Regulatory Insights

Clarifies that initial compliance was expected from 2021 onwards; suggests no more extensions will be granted based on current understanding.

New Normative Developments

Understanding Financial Regulations and Credit Risk Management

Overview of Financial Legislation

Discussion on specific legislation related to accounting standards, particularly referencing the NIF 16 which outlines how to quantify significant increases in financial metrics.

Emphasis on credit portfolio management, highlighting that regulations from the commission provide clear guidelines for transitioning between different stages of credit assessment.

Stages of Credit Assessment

Explanation of the migration process through various stages (Stage 1, Stage 2, Stage 3) as defined by regulatory bodies; Stage 3 indicates a deterioration event has occurred.

Focus on credit risk adjustments being primarily concerned with estimating potential losses due to credit risk.

Training and Practical Applications

Mention of an upcoming course on IFRS 9 tailored for financial entities in Mexico starting September 27, led by Jessica Magaña.

Clarification that different regulations apply depending on whether a company is regulated or not; specifically mentioning NIF 5 for leasing companies.

Importance of Credit Risk Evaluation

Acknowledgment that institutions must evaluate multiple factors influencing credit risk beyond historical data to determine potential future losses.

Transition from incurred loss models to forward-looking approaches necessitates more comprehensive data analysis for accurate estimations.

Conclusion and Future Engagement

The speaker offers to address additional questions post-discussion while expressing gratitude towards Jessica for her insights shared during the session.