CIA Accounting Standards

  1. New standards
    • Section 3855, Financial Instruments - Recognition and Measurement:
      • when to recognize a financial instrument (asset) on BS
      • at what amount
      • how to present related G/L
    • Section 1530, Comprehensive Income:
      • new req'ts for temporary presentation of certain G/L outside of NI
  2. Implications of new standards on Held-to-maturity
    1. Amortized cost on BS. Unaffected by changes in FV while asset is held. But selling sig amount will result in all HTM reclassified as AFS for >= 2 years leading to discontinuity in II.
      • major impediment to using HTM as potentially reduces flexibility in managing portfolio for rebalancing or strategic benefit, and creates reporting challenges if asset sale becomes attractive.
      • prior to selecting HTM, consider potential for unusual CFs (LLs, dividends) resulting in need to liquidate HTM
    2. G/L: booked to NI: regular II (coupons and dividends), change in amortized cost
    3. Volatility in NI, asset and equity: no change
  3. Implications of new standards on Available-for-sale
    1. Carried on BS at FV
    2. G/L:
      • NI: regular II (coupons and dividends), change in amortized cost
      • OCI: change in dif btw FV (incl forex translation) and amortized cost
    3. Volatility of NI:
      • OCI segregates volality of FV of invested assets outside NI.
      • but FV volatility may be re-intro into NI: increase in FV of invested assets decreases portfolio yield / discount rate for policy liabilities -> increases policy liabilties and decreases NI -> liabilities and NI more volatile
      • income mismatch since change in asset flows thru OCI and change in policy liabilities flows thru NI, which offset (partially or fully) in CI
    4. Volatility of asset and equity: increase
  4. Implications of new standards on Held-for-trading with FV option
    1. Marked to FV on BS
    2. All G/L recognized immediately in NI
    3. Volatility:
      • greater volatility of assets and related G/L
      • if all assets classified as HTM / FV option, discount rate used will reflect market yield -> policy liabilties more volatile
      • income can still match as long as CFs match between policy liabitlies and supporting assets -> G/L in assets and in policy liabilities will offset
  5. Book value / book yield
    • book value of an asset:
      • traditionally amortized value. 3855 -> MV or amortized value
      • determination of BV of an asset which supports policy liabilities will in turn affect book yield for that asset
    • book yield of an asset:
      • rate which equates the statement value of an asset to its future CFs.
      • more variable from period to period now vs. pre-3855 (based on purchase price)
  6. Impact on f.s.if all debt securities are classified as HTM or AFS or HFT and market interest rates increase
    • HTM: no effect on f.s.
    • AFS:
      • NI is only impacted by liabilities decrease
      • OCI is only impacted by assets decrease
      • equity change uncertain
    • HFT:
      • NI change uncertain; is impacted by decrease in both assets and liabilities
      • OCI is not used
      • equity change uncertain
  7. NI/OCI
    • NI
      • = realized G/L from HTM/AFS/HFT
      • + unrealized G/L from HFT
    • OR
      • = all regular II (dividends and bond coupons)
      • + change in amortized cost for HTM and AFS
      • + change in FV for HFT
    • OCI
      • = unrealized G/L from AFS
      • = change in dif between FV and amotized cost for AFS
  8. Impact of new standards on valuation
    1. Discount rate selection: process didn't change. but BV of an asset (MV, the amortized value etc.) supporting policy liab may change, which will, in turn, affect book yield for that asset
    2. Volatility: change in PfAD from changes in discount rate
    3. Tax implications: tax timing differences
    4. Challenges to confirming completeness and accuracy of asset data post-3855:
      1. Pre-3855, one-to-one mapping btw asset and accounting measurement. no longer the case now
      2. Book yields are much more variable from period to period
  9. 3855 'at what amount' - 6 measurement base alternatives
    • Historical cost
    • Current cost (reproduction cost and replacement cost)
    • Net realizable value
    • Value in use
    • Fair value
    • Deprival value
  10. Fair Value - Pros and cons
    • Pros: reflects:
      • market risk preferences and expectations wrt. amounts, timing and uncertainty of future CFs
      • current market expectations wrt. financial instrument’s future CFs discounted at risk-adj'd return avail in market place
    • Cons:
      • If active / liquid market doesn't exist for a financial instrument, measurement is complex and uncertain
  11. IFRS - 4-level measurement hierarchy of FV
    • Estimates of FV:
      • Level 1: observable market prices, incl market-based adj's
      • Level 2: accepted valuation models or techniques; all sig inputs are consistent with what market participants can be expected to use
    • Substitutes for FV:
      • Level 3: current cost, with possibile substitution of historical cost
      • Level 4: models and techniques that use entity inputs
  12. OCI
    • Change in the value of net assets that is not due to owner activities (investments or distributions)
    • CI = NI + OCI
    • Changes in OCI will flow directly through equity on BS; surplus is amended and renamed equity.
    • Equity is expanded to show not only retained earnings, but also AOCI and ACI (retained earnings + AOCI).
  13. OSFI - Criteria for FRFIs to use FV option
    May apply FV option if
    1. Institution has a documented risk mgt strategy to manage the group of financial instruments together on FV basis and can demonstrate that significant financial risks are eliminated or significantly reduced
    2. FVs are reliable
Card Set
CIA Accounting Standards
CIA accounting standards (Implications of CICA Accounting Standards 3855 and 1530)