Financial InstrumentsSeptember 29, 2010Australia | China | Hong Kong |Japan | Korea | Malaysia | New Zealand | Singapore

Outline of presentation

2

• Overview

• Impairment of amortised cost assets

• Financial liabilities, including own credit risk

• Progress on hedge accounting

• IASB-FASB convergence

• Expected timeline and transitions

Overview

3

Financial instruments:

IAS 39 replacement project

Phase 1: Classification and

measurement

Phase 2: Impairment

Phase 3: Hedging

Financial asset and liability offset

Overview: Replacement of IAS 39

4

• IFRS 9 (version 1) on financial assets

• ED/2009/12 – Financial Instruments: Amortised Cost and Impairment

• ED/2010/4 – Fair Value Option for Financial Liabilities

• Request for Comment on FASB ED

• ED on Hedging

5

Impairment of amortised cost assets

ED/2009/12 IASB tentative decision

EIR includes ELAOSSG comments: • departs from transaction-

based approach• mixes asset measurement

and revenue recognition • consider IBNR approach

as an alternative

• Proceed with a form of EL model

• Separate calculation of contractual EIR and EL

• Methodologies to be discussed

6

Impairment of amortised cost assetsED/2009/12 IASB tentative

decisionInitial EIR calculation and subsequent direct P&L adjustment

AOSSG comments: • forces closed portfolio

approach• distorts NIM• complex• unrelated to business

models

• Spread initial EL over remaining asset life

• Subsequent adjustment to be discussed

• Methodologies to be discussed

7

Impairment of amortised cost assets

ED/2009/12 IASB tentative decision

Subsequent impairment of variable rate instrumentsAOSSG comment: Impairment potentially includes amounts other than credit risk

To be discussed

8

Impairment of amortised cost assets

ED/2009/12 IASB tentative decision

Credit loss assessment over life of asset using ‘current information’AOSSG comment: Unclear whether projecting or forecasting – guidance needed

Consider all reasonable and supportable information when calculating EL

including forecasts

Financial liabilitiesImpact of ‘own credit risk’

9

ED/2010/4 IASB tentative decision

Re-classify from P&L to OCI

AOSSG comment: • general support; but • recommends narrowing

scope to liabilities not tradable

• recycle from OCI to P&L on disposal

Scope exclusions where:• accounting mismatch would arise

• liabilities are tradable – to be discussed?

Recycling to be discussed

10

Financial liabilitiesMeasurement basis for ‘own credit risk’

ED/2010/4 IASB tentative decision

IFRS 7 method as reasonable proxyAOSSG comment: IFRS 7 method incorporates factors other than credit risk

• IFRS 7 as one possible method

• Other methods permitted

• Guidance to be provided

11

Financial liabilities – hybrids

ED/2010/4 IASB tentative decision

Hybrids – retain IAS 39 bifurcation requirements

AOSSG: • bifurcation criteria complex• inconsistent with financial

asset hybrids – consider classification of whole instrument (as for assets)

To be discussed

Questions?

Comments?

13

IASB’s plan on hedge accounting

Hedge accounting issue Initial reaction1 Hedging derivatives Generally positive

3 Hedging portions of non-financial items

Generally positive

4 Hedging groups of items or net positions

Generally positive

5 Time value of options Mixed views

2 Components of derivatives Generally positive

14

IASB’s plan on hedge accounting

Hedge accounting issue Initial reaction

7 Revised approach to fair value hedges

Mixed views

8 Implications of not splitting embedded derivatives in non-financial assets

Mixed views

9 Hedging items at fair value through OCI without recycling

Mixed views

6 Effectiveness testing Generally positive

15

IASB-FASB convergence

Key measurement bases effectively the same – amortised cost and fair value

Liaising with IASB, but on a different timeline

Impairment model significantly different

Measurement outcomes potentially different

Howeve

r…!

16

Expected timeline and transition

2013?Q4 2010

June 2011

30 Sep 2010

Hedging ED

Effective

1.5 yrs

IFRSAsset/liability offset ED

FVO liabilities & Impairment

Comments on FASB ED

• IFRS 9 mandatory application date in 2013?• FASB proposes to prohibit early adoption of

revised Standard

Questions?

Comments?