IAS 39 Impairment principles applied in less-developed markets/economies: case of Macedonia - Marija Efremova Advisor to the Governor for IFRS ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
IAS 39 Impairment principles applied in
less-developed markets/economies:
case of Macedonia
Marija Efremova
Advisor to the Governor for IFRS
National Bank of the Republic of Macedonia
Vienna, 6-7 September 2010Content:
IAS
IAS 39
39 Impairment
Impairment principles
principles
Regulation for credit risk management for banks
operating in R.Macedonia
Case study – work on an example
Discussion
This session will talk about impairment on:
•loan receivables
•individually significant itemsIAS 39 Impairment principles (1/4)
existence of objective evidence
of impairment – impairment
triggering events
measure/assess the
amount of impairment loss
recognise impairment loss
in the booksIAS 39 Impairment principles (2/4) Impairment triggering events: significant financial difficulty of the issuer or obligor; a breach of contract (such as a default or delinquency in interest or principal payments); granting to the borrower a concession that the lender would not otherwise consider, due to the borrower’s financial difficulties; becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; if impairment triggers have not been identified on an individual basis, the asset must be assessed for impairment on a group basis.
IAS 39 Impairment principles (3/4)
If, and only if, one or more impairment triggering events
(“loss event”) has happened after the initial recognition of
the asset and that loss event has impact on estimated
future cash flows of the asset
Impairment incurred
Measure the amount of impairment lossIAS 39 Impairment principles (4/4)
Impairment loss asset’s carrying amount PV of
estimated future cash flows, discounted at the asset’s
original effective interest rate
Recognise Impairment loss in the Statement of
Comprehensive Income
Carrying amount of the loan receivable (including the
recognised impairment loss) is regularly reassessedContent:
IAS 39 Impairment principles
Regulation
Regulation for
for credit risk management for banks
operating
operating in
in R.Macedonia
R.Macedonia
Case study – work on an example
DiscussionRegulation for credit risk management
for banks operating in R.Macedonia (1/20)
“Decision for managing credit risk” - applicable for
banks operating in Macedonia, prescribed in February
2008 with effective implementation as of 1 January
2009
Prescribes:
•criteria for classification of credit exposures;
•methodology for determination of the level of impairment
losses and provisions;
•policies and procedures for managing the credit risk.Regulation for credit risk management for banks operating in R.Macedonia (2/20) step 1: classification of the loan receivable into the prescribed risk categories (A, B, C, D, E); step 2: determining the present value of the estimated future cash flows of the receivable; step 3: assessment of the amount of the impairment loss, as a difference between the carrying amount of the loan and the present value of the estimated future cash flows (as determined in step 2)
Regulation for credit risk management for banks operating in R.Macedonia (3/20) Alternative: If the bank does not determine the present value of the estimated future cash flows (step 2 is not applied) step 3 (alternative): Impairment loss carrying amount of the receivable upper level of impairment loss of the risk category in which the receivable has been classified (A, B, C, D, E)
Regulation for credit risk management for banks operating in R.Macedonia (4/20) step 1: Classification of credit exposures General principles for classification of credit exposures: • creditworthiness of the client; • servicing the liabilities to the bank; • quality of the collateral. Impairment triggering events, as prescribed by IAS 39 (each developed per separate risk categories)
Regulation for credit risk management
for banks operating in R.Macedonia (5/20)
trigger:
step 1:“breach of
Classification of credit exposures
contract”
Risk category Days overdue
A up to 30 days
B 31 to 60 days
(exceptionally 61 to 90)
C 61 to 120 days
(exceptionally 121 to 180)
D 121 to 270 days
(exceptionally over 270)
E over 270 daysRegulation for credit risk management
for banks operating in R.Macedonia (6/20)
trigger:
step“significant
1: Classification of credit exposures
financial
Risk difficulty of Financial performance
the borrower”
category
A Good; no indications for problems for servicing current and future
obligations; no restructuring in the last 2 years
B Currently small difficulties, but there are indications of recovery in
the near future; no restructuring in the last 6 months
C Inadequately capitalised; inadequate liquidity structure;
restructured liabilities
D Illiquid; becoming probable that the borrower will enter
bankruptcy or liquidation procedure; written-off receivables by its
debtors
E The client is under a bankruptcy or liquidation procedureRegulation for credit risk management
for banks operating in R.Macedonia (7/20)
trigger:
step 1: “granting a
Classification of credit exposures
concession,
Risk due to the Financial performance
borrower’s
category financial
difficulties”
A No restructuring in the last 2 years
B No restructuring in the last 6 months
C Restructured liabilities
D
ERegulation for credit risk management
for banks operating in R.Macedonia (8/20)
trigger:
step 1: “the borrower
Classification of credit exposures
willRisk
enter bankruptcy or Financial performance
other fin. reorganisation”
category
A -
B -
C -
D Becoming probable that the borrower will enter bankruptcy or
liquidation procedure; written-off receivables by its debtors
E The client is under a bankruptcy or liquidation procedureRegulation for credit risk management
for banks operating in R.Macedonia (9/20)
step 2: Determining the present value of the
estimated future cash flows of the receivable:
Determine the recoverable amount of the receivable by
calculating the present value of the estimated future cash
flows of the receivable, discounted with the original effective
interest rate.
Composition of the estimated future cash
flows is a key determinant of the
amount of impairment losses.Regulation for credit risk management
for banks operating in R.Macedonia (10/20)
step 2: Determining the present value of the
estimated future cash flows of the receivable:
Estimated future cash flows of the receivable can be
comprised of:
for regularly performing loans – ex.: contractual repayment
amounts (principal and interest)
for loans for which there is any uncertainty about the
timing and amount of the
There are cashconditions
certain flows; orinfor which there is a
respect
risk that payments will not be
of the inclusion made
of the when
value due expected –
of collateral
ex.: reduced and/or delayed contractual
in the estimated future cash repayment
flows of amounts;
expected value of the collateral upon the loan, to be collected
the receivable.
(when regular repayment is no more expected).Regulation for credit risk management
for banks
In Macedonia:
operating in R.Macedonia (11/20)
liquid market exists for some equity shares (companies operating in
Macedonia) and for treasury and government bills and bonds (maturity
ranges from 1 month to 3 years);
there is anHowactive to
market for residential
measure and commercial
the “fair value” of property,
assets but it is
not easily observable;
when there are no observable active and
transactions for purchase and sale of industrial property are occurring
irregularly liquid markets?
(predominantly for privatisation purposes).
In addition:
the time needed to overtake a collateral-property is between 6 months and
2 years.
the time needed to sold the foreclosed collateral-property is usually more
than 18 months.Regulation for credit risk management for
banks operating in R.Macedonia (12/20)
Active market: Inactive market:
quoted prices are readily low volume and level of activity;
and regularly available from the available prices vary
an exchange, dealer, broker, significantly over time or among
industry group, pricing market participants;
service or regulatory the prices are not current;
agencies. the changes in prices are
prices represent actual predominantly driven by
and regularly occurring speculative information, and less
market transactions on an by the performance or future
arm’s length basis. Inplans
theseofcircumstances, the valuation of
the market participants
collateral taken for the loans extended is
based primarily on management’s
judgment about future cash flows.Regulation for credit risk management for banks operating in R.Macedonia (13/20) Regulator’s perspective: How to measure the “fair value” of assets when there are no observable active and liquid markets? Regulator’s action: Prescribe the minimum characteristics of the market to be fulfilled, in order the value of the asset - collateral to be taken into account when calculating impairment losses.
Regulation for credit risk management for banks operating in R.Macedonia (14/20) step 2: Determining the present value of the estimated future cash flows of the receivable The value of the collateral is taken into consideration only if: • “first-class” collateral risk category “A” • unconditional irrevocable guarantee issued by non-banking financial or non-financial institution with a good credit standing (“A-” Standard&Poor’s; “A3” Moody’s) • the asset taken as collateral presents an “appropriate” asset for collection of the receivable
Regulation for credit risk management
for banks operating in R.Macedonia (15/20)
step 2: Determining the present value of the estimated
future cash flows of the receivable
if these criteria are
The asset taken as collateral presents an “appropriate” assetof
met, the value
for collection of the receivable, if: the collateral can
• there is a functional market for the asset or similar assets;
be included in the
• there is information available for the realised estimated
transactionsfuture
with the same or similar assets in the last 3 months;
cash flows of the
receivable,
• the information about the realised prices is publicly up to
available;
the amount
• proceeds from eventual sale of the collateral are expected of to
the
be collected in a period less then 12 months from outstanding
the date of
receivable.
foreclosure of the collateral.
• ....some administrative/documentary criteria.......Regulation for credit risk management
for banks operating in R.Macedonia (16/20)
step 3: Assess the amount of Impairment loss
Impairment loss asset’s carrying amount PV of
estimated future cash flows, discounted at the asset’s original
effective interest rate (as determined in step 2)
Subject to (prudential) limitationsRegulation for credit risk management
for banks operating in R.Macedonia (17/20)
step 1: Classification of credit exposures
(A, B, C, D, E)
versus
step 3: Assess the amount of Impairment lossRegulation for credit risk management
for banks operating in R.Macedonia (18/20)
step 1 vs step 3:
Risk Rang of % of impairment
category loss
A 0% - 10%
B 10.1% - 25%
C 25.1% - 50%
D 50.1% - 75%
E 75.1% - 100%Regulation for credit risk management
for banks operating in R.Macedonia (19/20)
step 1 vs step 3:
the amount of Impairment loss can not be lower than the
impairment loss determined by application of the lowest % of
impairment loss for the risk category in which the receivable
has been classified (determined in step 1)
Better risk category
if the bank has determined Impairment loss higher than
the one calculated by applying the highest % of impairment
loss for the risk category in which the receivable has been
classified (determined in step 1), the bank must reclassify the
receivable in the appropriate risk category
Worsen risk categoryRegulation for credit risk management for banks operating in R.Macedonia (20/20) Effects / Differences in the recognised Impairment losses due to: (Non-)Inclusion of the value of collateral in the calculation of the recoverable amount Impairment loss can not be lower than the one calculated when applying the lowest % of impairment loss for the respective risk category Firstly, step 1: Classification; then calculation of Impairment loss, subject to prudential limitations
Content:
IAS 39 Impairment principles
Regulation for credit risk management for banks
operating in R.Macedonia
Case study
Case study –– work
work on
on an
an example
example
DiscussionCase- study 1 (1/8) At 27.09.2009 the bank approved a short-term loan to company X for working capital needs, in the amount of EUR 1 million. The loan should be repaid on a 1 year period, with a full repayment at the end of the period. The loan bears an interest of 6.75% p.a., payable monthly. This loan is approved under the terms of the frame credit agreement between the bank and company X. This loan is collateralised with the collateral taken by the bank under the frame credit agreement between the bank and company X.
Case- study 1 (2/8) General information about the borrower: The company X, founded in 1975, is a family business and operates in Macedonia; The main activity of the company is production and wholesale of metal goods, pipes, devices and equipment for central heating and production of mesh reinforcement and profile beams for construction works; The company operates a hotel (170 beds, restaurant of 300 seats, congress room of 200 seats, sports recreation and trade centre) and 4 petrol stations, including restaurant services; The company employs 75 employees (95 employees in 2008);
Case- study 1 (3/8)
The company has a frame loan agreement for utilizing
different credit facilities from the Bank, within maximum
credit exposure of EUR 8.4 million.
Collateral:
Value of the Date of
In millions of Euro collateral valuation
Petrol station 0.8 02.09.2009
Petrol station 0.2 02.09.2009
Petrol station 0.1 02.09.2009
Collateral Hotel 4.8 02.09.2009
Pledge on raw materials 2.1 02.09.2009
Pledge on production 1.2 02.09.2009
equipment
Total: 9.2Case- study 1 (4/8)
Credit facilities used by the borrower:
30.06.2010 31.12.2009 31.12.2008
In millions of Euro
Principal 7.8 7.8 8.2
Interest 0.04 0.02 -
Off-Balance 0.5 0.1 0.08
Credit Sheet
exposure exposure
Total credit 8.3 7.9 8.3
exposure:
Number of Short-term 6 12 8
credit
facilities Long-term 3 3 3
usedCase- study 1 (5/8)
Financial performance:
31.08.2009 31.12.2008 31.12.2007
In millions of Euro
Sales revenue 4.3 10.7 8.2
- metal production 2.5 (62%) 7.5 (67%) n.a.
- petrol stations 1.3 (31%) 3.1 (28%) n.a.
- hotel 0.3 (7%) 0.5 (5%) n.a.
Net income/(loss) (0.5) (0.2) 0.2
Finished products and raw materials 4.6 5.7 1.8
Long-term liabilities 1.2 1.2 0.5
Short-term liabilities 7.4 7.5 4.1
Financing expense 0.3 0.7 0.2Case- study 1 (6/8)
Financial performance:
31.08.2009 31.12.2008 31.12.2007
Current ratio 0.78 0.87 0.92
Quick ratio 0.16 0.11 0.49
Stock turnover ratio 0.93 1.88 4.61
Debt/equity ratio 5.32 4.29 2.06
ROE (in %) (130.94) (52.13) 46.46
Net profit margin (in %) (12.36) (2.00) 2.31
Inventory turnover (days) 344 212 86
Receivables collection period (days) 38 15 30
Payables payment period (days) 47 21 32Case- study 1 (7/8) Due to the global crisis, that impacted the metal industry as well, the company faces financial difficulties: realised loss in 2008 and 2009; deteriorated operating profit; deteriorated liquidity position in the second half of 2009; increase of inventory of both finished goods and raw materials; canceled purchase agreements from the company’s customers from Greece, Serbia, Croatia, Slovenia. The external auditor issued qualified Audit opinion for the FS 2008, for the value of inventories (overstated for EUR 0.6 million)
Case- study 1 (8/8) The company services its liabilities to the bank regularly (source for repayment: revenues from the other businesses of the company (hotel and petrol stations) and by drawing new facilities from the bank for repayment of the previous facilities) In the 1st quarter 2010 the company requested a rescheduling of the short-term facilities into one long-term facility on a 7 years period, with regular monthly repayment schedule
Case- study 2 (1/8) At 11.08.2009 the bank approved a long-term loan to company Y for investment purposes (for expansion and modernization of the production process), in the amount of EUR 7.6 million. The loan has a grace period up to 30.06.2010. The loan is repayable on a monthly basis during 8 years (96 months) period after the grace period (up to 30.06.2018). The loan bears an interest of 6.75% p.a., payable monthly. This loan is collateralised with the collateral taken by the bank under the frame credit agreement between the bank and company Y. The company’s participation in the investment is 20%.
Case- study 2 (2/8) General information about the borrower: The company Y is the largest producer of steel and slabs in Macedonia and the only producer of hot rolled plates in the region; The major shareholder of the company is an international steel production and wholesale company; One part of the company’s business refers to processing activities for the major shareholder and the other part is own production and sale of company Y; The company is listed on the Macedonian Stock Exchange; The company employs more than 1,000 employees;
Case- study 2 (3/8)
The company has a frame loan agreement for utilizing
different credit facilities from the bank, within maximum
credit exposure of EUR 39.5 million.
Collateral:
Value of the Date of
In millions of Euro collateral valuation
Production facilities and 24.2 24.11.2009
administrative building
Pledge over the production 75.1 24.11.2009
equipment, raw materials and
Collateral finished products
Future pledge on equipment (to 3.2 n.a.
be purchased under the
investment project)
Total: 102.5Case- study 2 (4/8)
Credit facilities used by the borrower:
30.06.2010 31.12.2009 31.12.2008
In millions of Euro
Principal 23.9 23.9 13.2
Interest and 0.09 0.1 0.03
other
receivable
Credit
exposure Off-Balance 0.3 0.9 11.7
Sheet
exposure
Total credit 24.4 24.9 24.9
exposure:
Number of Short-term 20 12 13
credit
facilities Long-term 9 11 7
usedCase- study 2 (5/8)
Financial performance:
30.06.2010 31.12.2009 31.12.2008 31.12.2007
In millions of Euro
Sales revenue 42.7 70.3 102.9 89.9
Net income/(loss) (0.2) 0.02 1.1 3.4
Finished products and 15.0 19.4 15.9 19.9
raw materials
Long-term liabilities 18.6 12.5 8.8 4.1
Short-term liabilities 52.4 54.7 55.6 54.8
Financing expense 0.6 1.0 0.5 0.7Case- study 2 (6/8)
Financial performance:
30.06.2010 31.12.2009 31.12.2008 31.12.2007
Current ratio 0.47 0.43 0.44 0.59
Quick ratio 0.11 0.11 0.15 0.23
Stock turnover ratio 4.39 4.05 6.43 4.50
Debt/equity ratio 3.90 4.15 3.78 3.69
ROE (in %) (0.23) 0.04 1.73 5.22
Net profit margin (in %) (0.39) 0.04 1.08 3.74
Inventory turnover n.a. n.a. 74 110
(days)
Receivables collection n.a. n.a. 25 44
period (days)
Payables payment period n.a. n.a. 49 49
(days)Case- study 2 (7/8) Due to the global crisis, that impacted severely the metal industry, the company faces financial difficulties: realising loss in 2010 and significantly decreased profit in 2009; change in the structure of the company’s activities – own production and sales significantly reduced (previously around 70% of production), while increased processing activities for the major shareholder; fall in sale prices on the international markets for more than 60% and sharp fall in demand since 2008; deteriorated liquidity position in the second half of 2009 and 2010 (part of it due to the investment project). The external auditor draws attention to the going concern of the company, due to its large dependence on the major shareholder.
Case- study 2 (8/8) No redundancies, but salaries decreased for 15%. There is an agreement that the major shareholder will cover the company’s generated losses on a quarterly basis (in 2009: covered EUR 4.7million). The major shareholder extended a short-term interest-free loan in the amount of EUR 26 million, considered as permanent financing. The company services its liabilities to the bank regularly (source for repayment: by drawing new facilities from the bank for repayment of the previous facilities and by the financial support from the major shareholder). The company’s share price on the Macedonian Stock Exchange has decreased for around 32% in 2009 and 2010.
Case- study 1 and 2 You are required to: identify the impairment triggers, if any estimate the impairment loss as of 30.06.2010 classify the loan receivable in risk category, in accordance with the credit risk management regulation in R.Macedonia and estimate the level of impairment losses
Content: IAS 39 Impairment principles Regulation for credit risk management for banks operating in R.Macedonia Case study – work on an example Discussion Discussion
Thank you for your attention!
EfremovaM@nbrm.gov.mk
www.nbrm.gov.mkYou can also read
