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IFRS 9 classification —

helping you see more than


the tip of the iceberg
EY IFRS 9 Classification Engine ICE
a ing IFRS 9 classification easie aste
o e e i le an o e elia le

EY’s IFRS 9 Classification Engine | 1


Introduction
In order to help you deal with the continuous regulatory and accounting changes in the financial
services industry, we created a dedicated Financial Accounting Advisory Services (FAAS) group within
EY EMEIA FSO (Financial Services Organisation). We advise financial institutions on new accounting
and regulatory standards in banking, insurance and wealth management. Our teams provide insights
on matters related to financial accounting and its impact on accounting and reporting processes,
In July 2014, the International Accounting Standards Board (IASB) issued the final version
systems and controls. Our FAAS group combines technical accounting knowledge with insights from
of IFRS 9 Financial Instruments, bringing together the classification and measurement,
our Assurance, Advisory, Transactions, and Tax departments.
impairments, and hedge accounting aspects of this IASB project to replace IAS 39 Financial
Instruments: Recognition and Measurement.
Our experienced people are on top of current market developments in the European and global financial
services industry, addressing the most challenging needs of our clients. Our goal is to be the one-stop-
The new standard, IFRS 9, is effective for annual periods beginning on or after 1 January 2018
shop for CFO’s. In particular, we have knowledgeable consultants in IFRS, Transaction Accounting,
for all entities, except for certain insurance entities that are eligible for temporary exemption.
Operating Model Simplification, Integrated Risk and Finance Reporting, Solvency II, AnaCredit, Basel III
These insurance entities can defer the implementation of IFRS 9 until the mandatory date of
and other requirements mandated by supervising bodies and regulators.
the upcoming new insurance contracts standard, IFRS 17 (or 2021 if sooner).
We have major experience in IFRS 9, and our teams across the EMEIA region have successfully provided
complete IFRS 9 projects for a significant number of financial institutions.
Why EY?
For IFRS 9 classification and measurement, EY possesses extensive experience in providing tailored We are well prepared to assist all financial services companies. Regardless of whether you are
tools to its clients. well advanced with your IFRS 9 project, or still anticipating a large effort, we can help you to
successfully cross the finish line in time.

The classification of financial instruments under IFRS 9 is based on the entity’s business model
for managing the financial assets, but is also based on the nature of their contractual cash flows.

EY has developed the tools needed to facilitate a successful execution of IFRS 9:

• Our business model checklist supports a rigorous and structured approach to determining
whether cash flows are generated from holding the financial assets, selling the financial
assets or both.

• EY ICE tool offers an automated classification tool for instruments with identifiers (ISIN,
CUSIP). This tool has repeatedly demonstrated its value during our client engagements
throughout the globe. EY ICE tool has benefited from the rich input that our clients and our
senior leadership have provided during its development and is continuously updated.

• In order to analyse more complex loans and contractually linked instruments that are not
eligible for automated classification, we offer a text data mining tool, which generates
an assessment of the instruments’ risk of failing the contractual cash flow (SPPI - Solely
payments of principal and interest) test.

• The results of this assessment can then be used as a basis for further classification using our
SPPI checklist. This checklist examines all essential instrument features that are relevant
for classification.

2 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 3


Key aspects of the IFRS 9 classification for financial assets

This chart provides


an overview of
Debt Derivatives Equity
the required (including hybrid contracts)
assessments and
resulting outcomes
for IFRS 9
classification and ‘Contractual cash flow
measurement. characteristics’ test
(at instrument level)

P a s s
F a il F a il F a il

‘Business model’ (BM) assessment


(at an aggregate level)
No
Held for trading?
(1) Hold-to-collect (2) BM with objective Neither (1)
contractual cash that results in collecting nor (2)
flows contractual cash flows and Y e s
selling financial assets

Conditional fair value option (FVO)


Y e s No FVOCI option elected?
elected?

No No Y e s
F CI Fai al e
t o g t e
Co e ensi e Inco e FVOCI* FVOCI
F Fai al e Amortised cost FVTPL**
t o g ofit o oss (with recycling) (no recycling)

4 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 5


EY IFRS 9 classification methodology and related tools Portfolios
A

E Y h a s Business model testing

Business model
Hold to collect Hold and sell Other
developed a
wide range e siness o el e ects o a o t olio o assets is anage to ac ie e siness o ecti es portfolios portfolios portfolios

testing
of tools for et e ol ing t e financial assets selling t e assets o ot anage ent nee s to se
efficient IFRS 9 g ent to assess t e siness o el ta ing all acto s an acti ities into acco nt S ficient
e i ence is e i e in o e to eac t e ig t concl sions ic n e lines t e nee o a
classification,
covering all
st ct e a oac EY ill g i e t e entit t o g t e assess ent oce e an assist Identified portfolios for further analysis
anage ent in co e ing e as ects
aspects of Cont act all lin e inst ents o loans
the required
assessment. SPPI testing Automated Pre-work for manual testing
Fo a e t inst ent to ass t e cont act al cas o s c a acte istic test an e s se entl
Among them is eas e at a o tise cost o ai al e t o g ot e co e ensi e inco e t e entit ISIN list Cluster based on similar characteristics
the EY ICE tool, st ete ine et e cont act al cas o s a e solel a ents o inci al an inte est’
which performs ence t e assess ent is also e e e to as t e S I test’ n inst ent asses t e S I test
automated i it oes not int o ce is s o olatilit t at a e inconsistent it a asic len ing a ange ent Assess reclassification risk
classification
of portfolios e S I testing t icall in ol es a ai a o nt o eso ces an an entities n e esti ate
High (priority 1) Medium (priority 2) Low (priority 3)
t e e o ts e i e EY S I testing tools ill acilitate t is ocess ile s stantiall e cing

SPPI testing
consisting of
t e ti e an costs elate to t is o Detailed Validate Validate
securities with
assessment assumptions assumptions
an ISIN or
CUSIP.
The following chapters will describe four tools in more detail: Obtain sample

C Text data mining


A B C D
B Completion of SPPI testing
Business Automated
Text data S P P I Automated Manual
model classification —
mining checklist
checklist EY ICE classification —
D lso no n as
EY ICE tool SPPI checklist sec itisations

6 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 7


A What to expect

Purpose

Business
IFRS 9 e i es t e siness o el assess ent to e ase on t e acts an ci c stances t at e ist on t e ate o
a o tion o t e stan a siness o el c ec list o i es t e necessa s o t to e o t is assess ent
an el s to n a el i o tant in o ation ega ing o financial assets a e anage t e entit s t e siness

model
o el assess ent is an a ea o t e stan a e i ing consi e a le g ent it is i e ati e t at entities se a
st ct e a oac

Requirements

checklist
In o e to e a le to el o e o l nee to con ct inte ie s it t e ele ant contacts in o o ganisation
ese a e o essionals o no t e financial inst ents an a e a ital so ce o in o ation o e o ing t e
assess ent e c ec list incl es an anal sis o e e o ance in icato s t e entit ses to assess e o ance
an o e ie o siness o ecti es an a antitati e anal sis o sales le els

How it works

e tool consists o a fille o t etaile o oc ent it an E cel ase te late e e e en co lete


t e c ec list itsel is t e o t t

Key features
• stan a ise estion list contin o sl a a te on t e asis o o e e ience o ot e o ects is o i e
• e o t t satisfies t e oc entation e i e ents i ose t e stan a

8 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 9


What to expect

Purpose

Fo t e S I testing o inst ents it an i entifie ISI C SI EY esents EY ICE tool IFRS 9 Classification
Engine o tool o a to ate classification It can e se to elia l an acc atel anal se inst ents on

B Automated
t e asis o e c a acte istics e tool et ie es a et ata an acc atel classifies t e inst ents sing an
IFRS 9 ase ecision t ee algo it

Requirements

n i entifie is nee e o eac inst ent ISI C SI etc

How it works

classification — e tool et ie es a et ata o


algo it
ata o i e s on t e asis o t e i entifie
t at is ilt on IFRS 9 inci les it acc atel classifies financial inst
eso ce e i e ents co a e to an al classification e tool classifies t e inst
o g t e se o a ecision t ee
ents significantl e cing t e
ents sing an IFRS 9 ase

EY ICE
ecision t ee algo it co ining IFRS 9 inci les it EY inte etations t at a e ase on o ast a et
e e ience In icato s o t e ai al e a e agge an t e tool gi es a ig l etaile o t t incl ing is als an
an a it t ail

• Fast: The data extraction and classification report generation is done within a few hours.
• Easy: The only input needed is a list of ISIN (or CUSIP) codes, then the tool produces an
excel file indicating the classification conclusion and the reasons for it.
• Reliable: The tool is validated by our senior leadership and used for many Financial
Institutions in the world. The results and related documentation include a detailed
audit trail.

1 0 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 1


For all of the ISINs that were not
Key features classified by the tool, we have a
database of financial instruments
that have been assessed manually
by EY.
EY ICE tool S I testing e o e it EY ICE tool t icall es lts in a o t olio co e age o a o t 9
significantly t ot e e enefits a ise as ell sing t is tool e can
reduces required
classification • Signi icantl e ce t e e ie e ot o S I testing gi en t e ig eg ee o a to ation
efforts, offers
• e t e sa e consistent a oac o e e inancial inst ent
a consistent
approach • o i e etails on t e classi ication ocess o eac inst ent it e e ence to t e stan a
and improves
accuracy.

Clients typically
achieve a Why is this tool special?
portfolio
coverage of 90%
when using the • etaile o t t an a it t ail incl ing ationale o classi ication
tool.
• In se since an contin o sl ate

• ig l le i le le engine

• Fle i ilit ega ing in t classi ication o an i enti ie s o te ata o i es

1 2 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 3


What to expect

Purpose

is tool is se in o e to e o an assess ent o t e financial inst ents’ is o ailing t e cont act al cas
o S I test e tool can e se o an inst ent it a te t cont act is incl es cont act all lin e
inst ents asset ac e sec ities loans an o tgage cont acts

Requirements

Fo cont act all lin e inst ents t e e ing e o an also no n as e ing Ci c la o os ect s is
nee e Fo loans an o tgages t e cont act is e i e

How it works

C
• e tool e o s a e o sea c sing a le icon o e o s
• Eac e o as an associate is eig t
• e e o le icon is i e ent o loans an C Is
• E ten ing t e le icon is an ite ati e ocess

Text data
mining
1 4 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 5
Key features Text data mining tool
The challenge — CLIs (securitisations)
Our automated Our text data mining tool offers you a very efficient way of dealing with
EY ICE tool and Is it practicable to look through to the underlying pool of
tool creates a vast volumes of text: No
text data mining instruments?
user-friendly
classification • e c ent engine can assess a cont act it a o t one illion c a acte s in
secon s Y e s
output and
highlights
instruments • e tool can ocess a ataset o an n e ing o cont acts in a o t Does the tranche have cash flows that are solely payments of
EY ICE tool
principal and interest?
No
secon s enc a e
that need
further
• It can anage t e o lation o cont acts it total si e in n e one o Y e s
analysis. nteste
Text data mining Does the underlying pool have instruments with cash flows
• ese es lts can e i o e it aste a ae No
tool that are solely payments of principal and interest?

The lexicon in our tool has been developed over years of experience and has Y e s
the functionality to assess contracts in different languages.
Do all other instruments in the underlying pool reduce cash
Text data mining
flow variability or align the cash flows of the tranches with the No
eo t t o t e tool ig lig ts t e inst ents t at nee t e anal sis tool
cash flows of the underlying pool?
• Ris at i s o s is o F classification it in is catego ies Y e s
• Ris class o ces c ets o inst ents t at a e t e in estigate as necessa Credit risk
sing t e S I c ec list Is the credit risk of the tranche equal to or lower than the
‘tranche vs. pool’ No
credit risk of the underlying pool of instruments?
test*
Y e s
Can instruments in the underlying pool change after initial
Text data mining
recognition, in a way the pool does not meet the conditions Y e s
tool
above?
EY c eate a e icate et
o olog o e ficient t anc e s No
ool testing on t e asis o t e
in t o e te nal a et ata P a s s S P P I F a il S P P I
an c e it ating o i e s

1 6 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 7


What to expect

Purpose

e EY IFRS 9 S I c ec list o i es a co lete an eas to n e stan g i ance to con ct t e an al S I


classification

Requirements

cont act te s eet o a o ct esc i tion s eci ing in etail all t e c a acte istics o t e financial inst ent

How it works

etaile E cel ase ac o ena le oc ent is se E e estion can e ans e e it a si le es o no


ile acco anie it t e ele ant co ents an e i ence en co lete t e c ec list itsel is t e o t t

D Key benefits

S P P I
• S ita le o all assets incl ing C Is
• Co e s e e i o tant iss e esc i e in t e stan a
• Consi e s co leteness an e ce tions

checklist
Eas to n e stan it e lanations an e a les
• t t gi en as a clea ass’ o ail’ ase on e e ele ant S I c ite ion

1 8 | EY’s IFRS 9 Classification Engine EY’s IFRS 9 Classification Engine | 1 9


Your EY contacts
For more information and Belgium Netherlands
an approach tailored to your Emmanuel Villaire Sander de Ruiter
needs, please contact our Email: e an el illai e e e co Email: san e e ite nl e co
one one 9 99
IFRS 9 team.
France Spain
EY EMEIA contacts Celine Molinari Randolf Niedermeyer
E ail celine olina i e co Email: an ol nie e e e es e co
Tara Kengla one 9 one 9
E ail t engla e co
one
Germany United Kingdom
Dragutin Patrnogic Thimo Worthmann Yolaine Kermarrec
Email: ag tin at nogic e e co E ail t i o o t ann e e co E ail e a ec e co
one 9 one 9 9 one 9

Italy
Francesca Amatimaggio
Email: ancesca a ati aggio it e co
one 9

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A b o u t E Y
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We understand the importance of asking great questions. It’s how you innovate, transform and achieve a better working world.
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is ate ial as een e a e o gene al in o ational oses onl an is not inten e to e elie on as acco nting ta o ot e
o essional a ice lease e e to o a iso s o s ecific a ice
2 0 | EY’s IFRS 9 Classification Engine