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Published by JNCreative, 2019-12-20 12:03:36

IFRS9 Financial Instruments

Financial Report

JN Group IFRS 9

Position Papers

Volume 1.0 - 2019



JN GROUP IFRS 9 Financial Instruments

TABLE OF CONTENTS

JN Group IFRS 9 Position Papers
Volume 1.0 - 2019

1 GLOSSARY OF TERMS___________________________________________________________________________ 7
2 PAPERS APPLICABLE TO ALL PORTFOLIOS___________________________________________________ 9

2.1 PROBABILITY WEIGHTED PAPERS (POLICIES & PROCEDURES)______________________________________ 11
2.1.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 11
2.1.2 POPULATION GROUPING__________________________________________________________________ 11
2.1.3 IFRS 9 GUIDANCE_________________________________________________________________________ 11
2.1.4 ALTERNATIVES CONSIDERED_______________________________________________________________ 12
2.1.5 RECOMMENDED APPROACH______________________________________________________________ 12
2.1.6 SUPPORT AND RATIONALE_________________________________________________________________ 13
2.1.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS______________________________________ 13
2.1.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9___________________________________________ 13

2.2 DETERMINATION OF EXPECTED LIFE______________________________________________________________ 15
2.2.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 15
2.2.2 POPULATION GROUPING__________________________________________________________________ 15
2.2.3 IFRS 9 GUIDANCE_________________________________________________________________________ 17
2.2.4 ALTERNATIVES CONSIDERED_______________________________________________________________ 17
2.2.5 RECOMMENDED APPROACH______________________________________________________________ 18
2.2.6 SUPPORT AND RATIONALE_________________________________________________________________ 19
2.2.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS______________________________________ 20
2.2.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9___________________________________________ 20

2.3 MEASUREMENTS AND CLASSIFICATIONS__________________________________________________________ 25
2.3.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 25
2.3.2 ASSESSMENT OF PORTFOLIOS_____________________________________________________________ 27
2.3.3 CONCLUSION ON MEASUREMENT_________________________________________________________ 38
2.3.4 APPENDIX A – ACCOUNTING IMPACT OF CATEGORY CHANGE_______________________________ 39
2.3.5 APPENDIX B – CREDIT POLICIES FOR THE DIFFERENT ENTITIES_______________________________ 39
2.3.6 APPENDIX C – INVESTMENT POLICIES FOR DIFFERENT ENTITIES _____________________________ 39

3 INVESTMENT PORTFOLIO_____________________________________________________________________ 41

3.1 EXPEDIENTS POLICIES & PROCEDURES___________________________________________________________ 43
3.1.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 43
3.1.2 POPULATION GROUPING__________________________________________________________________ 43
3.1.3 INVESTMENT SECURITIES__________________________________________________________________ 43
3.1.4 IFRS 9 GUIDANCE_________________________________________________________________________ 43
3.1.5 ALTERNATIVES CONSIDERED_______________________________________________________________ 44
3.1.6 RECOMMENDED APPROACH______________________________________________________________ 44
3.1.7 SUPPORT AND RATIONALE_________________________________________________________________ 45
3.1.8 IMPLEMENTATION AND EXECUTION CONSIDERATIONS______________________________________ 45
3.1.9 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9___________________________________________ 45

3.2 GROUPING POLICIES & PROCEDURES_____________________________________________________________ 48
3.2.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 48

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JN GROUP IFRS 9 Financial Instruments
3.2.2 POPULATION GROUPING__________________________________________________________________ 48
3.2.3 IFRS 9 GUIDANCE_________________________________________________________________________ 48
3.2.4 ALTERNATIVES CONSIDERED_______________________________________________________________ 49
3.2.5 RECCOMMENDED APPROACH_____________________________________________________________ 50
3.2.6 SUPPORT AND RATIONALE_________________________________________________________________ 50
3.2.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS______________________________________ 51
3.2.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9___________________________________________ 51
3.2.9 APPENDIX B – RELEVANT EXTRACTS FROM SCRAVL__________________________________________ 56

3.3 IMPAIRMENT – INVESTMENT SECURITIES_________________________________________________________ 60
3.3.1 EXECUTIVE SUMMARY_____________________________________________________________________ 60
3.3.2 EXPOSURE AT DEFAULT____________________________________________________________________ 67
3.3.3 LOSS GIVEN DEFAULT_____________________________________________________________________ 67
3.3.4 DISCOUNTING____________________________________________________________________________ 68
3.3.5 EXPECTED LIFE____________________________________________________________________________ 69
3.3.6 STAGING_________________________________________________________________________________ 69
3.3.7 APPENDIX A - TTC PD TERM STRUCTURE DERIVATION______________________________________ 71

3.4 MIGRATION______________________________________________________________________________________ 78
3.4.1 PURPOSE & EXECUTIVE SUMMARY_________________________________________________________ 78
3.4.2 POPULATION GROUPING__________________________________________________________________ 78
3.4.3 INVESTMENT SECURITIES__________________________________________________________________ 78
3.4.4 IFRS 9 GUIDANCE_________________________________________________________________________ 79
3.4.5 ALTERNATIVES CONSIDERED_______________________________________________________________ 79
3.4.6 RECOMMENDED APPROACH______________________________________________________________ 81
3.4.7 SUPPORT AND RATIONALE_________________________________________________________________ 83
3.4.8 IMPLEMENTATION AND EXECUTION CONSIDERATIONS______________________________________ 84
3.4.9 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9___________________________________________ 84
3.4.10 APPENDIX B – IFRS 9 ILLUSTRATIVE EXAMPLES______________________________________________ 90
3.4.11 APPENDIX C – ASSESSMENT OF SIGNIFICANT INCREASES IN CREDIT RISK____________________ 99

3.5 ORIGINATION DATE POLICIES & PROCEDURES____________________________________________________ 106
3.5.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 106
3.5.2 POPULATION GROUPING_________________________________________________________________ 106
3.5.3 IFRS 9 GUIDANCE________________________________________________________________________ 106
3.5.4 ALTERNATIVES CONSIDERED______________________________________________________________ 107
3.5.5 RECOMMENDED APPROACH_____________________________________________________________ 107
3.5.6 SUPPORT AND RATIONALE________________________________________________________________ 107
3.5.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 108
3.5.8 APPENDIX A – DATE OF INITIAL RECOGNITION DECISION TREE______________________________ 109
3.5.9 APPENDIX B – RELEVANT EXTRACTS FROM IFRS 9__________________________________________ 110
3.5.10 APPENDIX C – EXCERPT FROM APRIL 22, 2015 ITG MEETING________________________________ 113

4 LOAN PORTFOLIO_____________________________________________________________________________ 115

4.1 GROUPING - CREDIT PORTFOLIO_________________________________________________________________ 117
4.1.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 117
4.1.2 POPULATION GROUPING_________________________________________________________________ 117

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JN GROUP IFRS 9 Financial Instruments
4.1.3 IFRS 9 GUIDANCE________________________________________________________________________ 118
4.1.4 ALTERNATIVES CONSIDERED______________________________________________________________ 118
4.1.5 RECOMMENDED APPROACH_____________________________________________________________ 119
4.1.6 SUPPORT AND RATIONALE________________________________________________________________ 120
4.1.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 121
4.1.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9__________________________________________ 121
4.2 LOAN MODIFICATIONS (POLICIES & PROCEDURES)_______________________________________________ 127
4.2.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 127
4.2.2 POPULATION GROUPING_________________________________________________________________ 127
4.2.3 IFRS 9 GUIDANCE________________________________________________________________________ 128
4.2.4 ALTERNATIVES CONSIDERED______________________________________________________________ 129
4.2.5 RECOMMENDED APPROACH_____________________________________________________________ 130
4.2.6 SUPPORT AND RATIONALE________________________________________________________________ 131
4.2.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 132
4.2.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9__________________________________________ 132
4.2.9 APPENDIX B – ILLUSTRATIVE EXAMPLES____________________________________________________ 134
4.2.10 APPENDIX C – JN BANK MODIFICATION RULES____________________________________________ 136
4.3 ORIGINATION DATE- POLICIES & PROCEDURES___________________________________________________ 136
4.3.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 136
4.3.2 POPULATION GROUPING_________________________________________________________________ 137

4.3.3 IFRS 9 GUIDANCE________________________________________________________________________ 139
4.3.4 ALTERNATIVES CONSIDERED______________________________________________________________ 139
4.3.5 RECOMMENDED APPROACH_____________________________________________________________ 140
4.3.6 SUPPORT AND RATIONALE________________________________________________________________ 141
4.3.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 143
4.3.8 APPENDIX A – DATE OF INITIAL RECOGNITION DECISION TREE______________________________ 144
4.3.9 APPENDIX B – RELEVANT EXTRACTS FROM IFRS 9__________________________________________ 145
4.3.10 APPENDIX C – EXCERPT FROM APRIL 22, 2015 ITG MEETING________________________________ 148
4.3.11 APPENDIX D – JN BANK CREDIT RISK SCORING MODEL____________________________________ 149
4.4 IMPAIRMENT – LOANS & ADVANCES_____________________________________________________________ 158
4.4.1 EXECUTIVE SUMMARY____________________________________________________________________ 158
4.4.2 PROBABILITY OF DEFAULT – COHORT ANALYSIS____________________________________________ 158
4.4.3 CURE RATE______________________________________________________________________________ 163
4.4.4 LOSS GIVEN DEFAULT____________________________________________________________________ 165
4.4.5 EXPOSURE AT DEFAULT___________________________________________________________________ 166
4.4.6 DISCOUNTING___________________________________________________________________________ 167
4.4.7 EXPECTED LIFE___________________________________________________________________________ 167
4.4.8 CREDIT CARDS___________________________________________________________________________ 168
4.4.9 TRADE RECEIVABLES_____________________________________________________________________ 171
4.4.10 INTERCOMPANY LOANS_________________________________________________________________ 171
4.4.11 OFF BALANCE SHEET COMMITMENTS____________________________________________________ 171
4.4.12 PENSION SCHEME, RETIREMENT PLAN, MUTUAL FUND____________________________________ 172
4.4.13 FORWARD LOOKING INFORMATION ADJUSTMENT________________________________________ 173

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JN GROUP IFRS 9 Financial Instruments
4.4.14 SPECIFIC PROVISION (IAS 39)_____________________________________________________________ 178
4.4.15 MODEL VALIDATION_____________________________________________________________________ 178

4.5 EXPEDIENTS – 30 DAYS PAST DUE________________________________________________________________ 180
4.5.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 180
4.5.2 POPULATION GROUPING_________________________________________________________________ 180
4.5.3 IFRS 9 GUIDANCE________________________________________________________________________ 180
4.5.4 ALTERNATIVES CONSIDERED______________________________________________________________ 182
4.5.5 RECOMMENDED APPROACH_____________________________________________________________ 183
4.5.6 SUPPORT AND RATIONALE________________________________________________________________ 184
4.5.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 185

4.6 MIGRATIONS – POLICIES & PROCEDURES_________________________________________________________ 185
4.6.1 PURPOSE & EXECUTIVE SUMMARY________________________________________________________ 185
4.6.2 POPULATION GROUPING_________________________________________________________________ 186
4.6.3 IFRS 9 GUIDANCE________________________________________________________________________ 187
4.6.4 ALTERNATIVES CONSIDERED______________________________________________________________ 189
4.6.5 RECOMMENDED APPROACH_____________________________________________________________ 196
4.6.6 SUPPORT AND RATIONALE________________________________________________________________ 196
4.6.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS_____________________________________ 197
4.6.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9__________________________________________ 277
4.6.9 APPENDIX B – IFRS 9 ILLUSTRATIVE EXAMPLES______________________________________________ 203
4.6.10 APPENDIX C – ASSESSMENT OF SIGNIFICANT INCREASES IN CREDIT RISK___________________ 212

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JN GROUP IFRS 9 Financial Instruments

GLOSSARY OF TERMS

BRR – Business Risk Rating refers to the internal credit risk rating assigned to a credit facility.
CCF Credit Conversion Factor - parameter representing the portion of the
currently undrawn amount on revolving instruments that is expected to be
withdrawn at the point of default.
the ratio of observed cures over the number of defaults that occurred during
Cure Rate the first 12 months of a given cohort. An exposure is considered cured if on
its last available observation its DPD is not larger than 30.
a loan is in default once it reached 90 days past due. This is with respect to
principal or interest. An impairment allowance will be raised against these loans
Default if the expected cash flows discounted at the effective interest rate are less than
the carrying value.
process of determining the present value of a payment or a stream of payments
that is to be received in the future.
Effective Interest Rate - represents the interest rate on the financial asset after
Discounting accounting for any fees applicable and compounding effect over time.
Expected Credit Losses - a present value measure of the credit losses expected
to result from default events that may occur during a specified period. ECLs must
EIR reflect the present value of cash shortfalls. ECLs must eflect the unbiased and
probability weighted assessment of a range of outcomes.
Exposure-at-default - an estimation of the extent to which the bank may be
ECL exposed to the counterparty at the time of a default. EAD is based on the
expected cash flows on the financial instrument from the measurement date
to the last cash flow date (i.e. end of lifetime – estimated and/or contractual).
De-recognition of an old loan and initial recognition of a new loan
Fair Value through Other Comprehensive Income – Financial Assets held for
EAD a business model that is achieved by both collecting contractual cash flows
and selling and that contain contractual terms that give rise on specified dates
to cash flows that are solely payments of principal and interest, are measured
at FVOCI
Fair Value through Profit and Loss - Financial Assets that do not meet the
Extinguishment criteria for amortized cost or FVOCI are measured at FVTPL
FVOCI This is when a financial instrument is recognized or the first time in the statement
of financial position i.e. contract start date
This is an assessment of expected losses associated with default events that may
occur during the life of an exposure, reflecting the present value of cash shortfalls
over the remaining expected life of the asset.
Loss Given Default - amount that will be recovered in the event of default
FVTPL (1 – Recovery Rate)
A modification occurs when the contractual cash flows of a financial asset are
renegotiated or otherwise modified and the renegotiation or modification does
Initial recognition not result in de-recognition. A modification requires immediate recognition in the

7
Lifetime expected credit losses



LGD


Modification

JN GROUP IFRS 9 Financial Instruments income statement of any impact on the carrying value and effective interest rate
(EIR). An example of modification event include financial distress.


PD : Probability of Default - measure for the likelihood that a loan will not be repaid
and will fall into default.
PIT Point-in-Time - reflect actual migration and default behaviour in accordance with
economic conditions.

Probation period 3-month period where the loan holds a consistent status after being in default
. Purchased or Credit Impaired - a Financial Asset is considered purchased or
POCI originated credit-impaired (POCI) if there is objective evidence of impairment
at the time of initial recognition. Such defaulted Financial Assets are termed POCI
Financial Assets and are initially recognized at fair value.


SICR Significant Increase in Credit Risk - when a significant increase in credit risk has
occurred based on quantitative and qualitative assessments. Exposures are
considered to have had a significant increase in credit risk as follows:
• Exposures are more than 30 days past due, used as a backstop rather than
a primary driver.
• Exposures are determined to be higher credit risk and subject to closer
credit risk monitoring i.e. watch list instruments.

Stage 1 This represents financial instruments where the credit risk of the financial
instrument has not increased significantly since initial recognition. These financial
instruments are required to recognize a 12 month expected credit loss allowance.

Stage 2 This represents financial instruments where the credit risk of the inancial
instrument has increased significantly since initial recognition. These financial
instruments are required to recognize a lifetime expected credit loss allowance.

Stage 3 This represents financial instruments where the financial instrument is considered
impaired. These financial instruments are required to recognize a lifetime
expected credit loss allowance.

SPPI Solely Payments of Principal and Interest: one of the two required conditions
for classifying an instrument at Amortized Cost.

TTC Through-the-Cycle - reflect the average migration and default behaviour within
a credit cycle.

Watch List A temporary classification for obligors exhibiting some unsatisfactory features,
which merit closer review but are not currently indicative of significant
deterioration.

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JN Group IFRS 9

Position Papers

Volume 1.0 - 2019

2. PAPERS APPLICABLE TO ALL PORTFOLIOS

• Probability Weighted Papers (Policies & Procedures)
• Determination of Expected Life
• Measurements and Classifications



JN GROUP IFRS 9 Financial Instruments

2.1 PROBABILITY WEIGHTED PAPERS (POLICIES & PROCEDURES)

Topic Probability Weighted Scenarios Reference: PW
Portfolio All Portfolios
Population group All Products Version 1.0

2.1.1 PURPOSE & EXECUTIVE SUMMARY
Purpose:
To determine the approach to calculating ECLs as probability-weighted estimates, including specific consideration
of the following question:
• How are multiple possible scenarios considered?

Executive Summary:
IFRS 9 require that expected credit losses be calculated as probability-weighted estimates that consider the risk or
probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no
credit loss occurs, irrespective of how low the probability of default might be.
The recommended approach for overall measurement of ECLs is described in the paper IFRS 9 Impairment (Loans
and Advances) in which the approach is a probabilistic model that considers multiple possible outcomes and results
in ECLs that comply with these requirements of IFRS 9.
The incorporation of forward-looking information is described more fully in the paper on Forward-looking Information.
In terms of considering multiple economic scenarios, we recommend the Group calculate ECLs for multiple economic
scenarios and weight each by its probability of occurrence, or perform analysis to demonstrate that doing so would
have a materially similar effect to a single run using a single input that considers multiple outcomes (i.e. where the
input has been subject to simulation by the Group Risk and Compliance in developing economic estimates). If taking
the first approach, the Group, after developing appropriate stress testing models, would be able to leverage some
of the scenarios applied for stress testing purposes.

2.1.2 POPULATION GROUPING
This paper discusses how probability-weighted outcomes are considered in the approach to ECL measurement
based on Approach 1 as described in the IFRS 9 Impairment paper which is expected to be adopted for all portfolios
with the exception initially of immaterial portfolios. As this method of incorporation does not vary by product, no
further segmentation is initially required.

2.1.3 IFRS 9 GUIDANCE
When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it
shall consider the risk or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and
the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low. [IFRS 9.5.5.18]
Paragraph 5.5.17(a) requires the estimate of expected credit losses to reflect an unbiased and probability-weighted
amount that is determined by evaluating a range of possible outcomes. In practice, this may not need to be a
complex analysis. In some cases, relatively simple modelling may be sufficient, without the need for a large number
of detailed simulations of scenarios. For example, the average credit losses of a large group of financial instruments
with shared risk characteristics may be a reasonable estimate of the probability-weighted amount. In other situations,
the identification of scenarios that specify the amount and timing of the cash flows for particular outcomes and the
estimated probability of those outcomes will probably be needed. In those situations, the expected credit losses
shall reflect at least two outcomes in accordance with paragraph 5.5.18. [IFRS 9.B5.5.42]

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JN GROUP IFRS 9 Financial Instruments

2.1.4 ALTERNATIVES CONSIDERED

IFRS 9 require that expected credit losses be calculated as probability-weighted estimates. While it states that an
entity need not necessarily identify every possible scenario, it is required to consider the risk or probability that a
credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no credit loss occurs,
irrespective of how low the probability of default might be.

As discussed in the paper on IFRS 9 Impairment (Loans and Advances), the approach is a probabilistic approach and
is expected to be applied to all material portfolios. This approach will incorporate conditional probabilities at each
time step to reflect the probability of default during that time step and consequently, is inherently a probability-
weighted estimate as required by IFRS 9.

IFRS 9 also requires that ECLs incorporate forward-looking information (refer to IFRS 9 Impairment paper) and
another question arises as to how multiple possible outcomes related to future economic conditions should be
considered in estimating ECLs. The following alternatives were considered:

1) Full simulation – ECL is calculated by running a Monte Carlo simulation to estimate the ECL given every
possible economic scenario.
• Practical – Most computationally burdensome.
• Conceptual – Conceptually sound as it considers forward-looking information and is probability-
weighted.

2) Multiple economic scenarios – ECL is calculated separately for a number of economic scenarios and then

each ECL is weighted by its probability of occurrence to total overall ECL. E.g. for 3 scenarios, 3 ECLs are
calculated and probability weighted average is taken.
• Practical – Less computationally burdensome than alternative 1, but more burdensome than alternative 3.
• Conceptual – Conceptually sound as it considers forward-looking information and is probability-
weighted.

3) Single provision with overlay – Run a single economic forecast through the model and then apply a top-
down overlay which is informed by sensitivity analysis to reflect impact of alternative economic scenarios.

• Practical – Easiest alternative to implement.
• Conceptual – For this approach to be conceptually sound, it must reliably estimate the impact of
alternative scenarios. Furthermore, a top-down overlay is difficult to identify at the individual account
level, which may be challenging for stage migration assessments if significant.

2.1.5 RECOMMENDED APPROACH
The recommended approach is described in the paper IFRS 9 Impairment in which the approach is a probabilistic
model that considers multiple possible outcomes and results in ECLs that are neither estimates for a worst-case
scenario nor estimates for the best-case scenario and will always be able to reflect the possibility that a credit loss
occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss.
The incorporation of forward-looking information is described more fully in the paper onIFRS 9 Impairment. In
terms of considering multiple economic scenarios, we recommend Alternative 2, i.e. calculating ECLs for multiple
economic scenarios and weighted each by its probability of occurrence. The Group is currently in the process of
developing a model to carry out stress testing of the credit portfolio. We understand that other industry participants
globally are generally considering including 3 – 5 economic scenarios in calculating ECLs and the Group will need
to conclude on the number of scenarios to be incorporated.
It is anticipated that economic data will be obtained from the Group Risk and Compliance departments and an
alternative view may be that multiple scenarios are not required on the basis that the estimates received from the
Group Risk and Compliance department have already been subject to simulation in their development (i.e. the
estimated economic inputs already reflect multiple possible economic scenarios) and thus further consideration is
not required. As the Group’s models are predominantly linear, it is possible that this approach may yield the same
result as considering multiple scenarios and weighting them accordingly. However, it may be possible that over or
under-estimation could result depending on the reaction to the input within the model (e.g. whether probability-
weighting the input yields the same result as running the model with various inputs and probability-weighting
the outcome). Consequently, if the Group chooses to pursue this approach, we recommend further analysis be
performed to support that it results in appropriate outcomes.

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JN GROUP IFRS 9 Financial Instruments

2.1.6 SUPPORT AND RATIONALE

Refer above and to Support and Rationale in IFRS 9 Impairment paper for discussion on the selection of the
approach to measuring ECLs. Alternative 2 has been recommended above for the incorporation of economic
scenarios as it is less computationally burdensome than Alternative 1, but more conceptually sound and provides less
implementation difficulty (e.g. with stage migration etc.) than Alternative 3. The recommended approach complies
with the requirements of IFRS 9.

Refer above and to Support and Rationale in IFRS 9 Impairment paper for discussion on the selection of the approach
to measuring ECLs. In respect of multiple economic scenarios:

1) operational efficiency and practicality (implementation and ongoing)
a. The recommended approach is the most practical approach that will comply with the requirements,
particularly if analysis can be performed to demonstrate that a single run can be applied without
requiring multiple model runs under different economic scenarios

2) cost effectiveness (implementation and ongoing)
a. The recommended approach leverages information from the Group Risk and Compliance department.
If multiple scenarios are run, it is possible that scenarios from stress testing may be leveraged as
well. As a result, the approach is expected to be cost effective.

3) ability to leverage existing models and processes (if desired)
a. As noted above, the recommended approach leverages existing information developed by the
Group Risk and Compliance department as well as process and governance currently in place.
Additionally, if multiple scenarios are run, it is possible that the Group may be able to leverage
scenarios currently run for stress testing.

4) ability to meet deadlines (implementation and ongoing)
a. No significant concerns noted

5) modifiable in future periods as facts and circumstances change that require changes
a. The models will require updated inputs each reporting period. If a multiple scenario approach is
adopted, the Group could adopt a process to reconsider / refresh the number and nature of
scenarios on a periodic basis.

While definitive conclusions haven’t yet been reached, we understand that many banks globally are expecting to
apply Alternative 2 to incorporate different economic scenarios.

2.1.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS
As noted above, it may be possible for the Group to leverage some of the scenarios currently used for stress testing,
weighted by the probability of their occurrence.

2.1.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9
Under IFRS 9, an entity shall measure expected credit losses of a financial instrument in a way that reflects:

an unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes; the time value of money; and
reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions. [5.5.17]
When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it
shall consider the risk or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and
the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low. [IFRS 9.5.5.18]
Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls)
over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows that are
due to an entity in accordance with the contract and the cash flows that the entity expects to receive. Because
expected credit losses consider the amount and timing of payments, a credit loss arises even if the entity expects to
be paid in full but later than when contractually due. [IFRS 9.B5.5.28]
The purpose of estimating expected credit losses is neither to estimate a worst-case scenario nor to estimate the
best-case scenario. Instead, an estimate of expected credit losses shall always reflect the possibility that a credit loss
occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss. [B5.5.41]

13

JN GROUP IFRS 9 Financial Instruments

Paragraph 5.5.17(a) requires the estimate of expected credit losses to reflect an unbiased and probability-weighted
amount that is determined by evaluating a range of possible outcomes. In practice, this may not need to be a
complex analysis. In some cases, relatively simple modelling may be sufficient, without the need for a large number
of detailed simulations of scenarios. For example, the average credit losses of a large group of financial instruments
with shared risk characteristics may be a reasonable estimate of the probability-weighted amount. In other situations,
the identification of scenarios that specify the amount and timing of the cash flows for particular outcomes and the
estimated probability of those outcomes will probably be needed. In those situations, the expected credit losses
shall reflect at least two outcomes in accordance with paragraph 5.5.18. [IFRS 9.B5.5.42]

14

JN GROUP IFRS 9 Financial Instruments

2.2 DETERMINATION OF EXPECTED LIFE

Topic Determination of Expected Life REFERENCE: EL
Portfolio All Portfolios
Population Group All Products Version 1.0

2.2.1 PURPOSE & EXECUTIVE SUMMARY

Purpose:
To assess the framework for determining the expected life of a loan (i.e. being the period over which the entity
is expected to be exposed to credit risk) for the purpose of measuring expected credit losses, including specific
consideration of the following key questions:
• How is expected life determined?
• Are any extension options considered?
• How are prepayment assumptions considered?
• How is the expected life incorporated in the ECL calculation?
Executive Summary:
As outlined in the paper below, the ‘expected life’ of a financial instrument is not defined by IFRS 9, however, it may
be reasonable to interpret it as being the period over which the cash flows related to the instrument are expected to
occur. To the extent that a PD model approach to estimating ECLs is adopted as recommended in the paper ‘IFRS
9 Impairment (Loans and Advances)’, then the ‘expected life’ is based on the maturity of the instrument and is an
input into the ECL measurement itself.
For financial instruments other than commitments that include both a loan and an undrawn amount, IFRS 9 requires
that the maximum period to consider in estimating ECLs is the maximum contractual period over which the entity is
exposed to credit risk and not a longer period, even if a longer period is consistent with business practice. In other
words, even if 5 year term loans ordinarily roll and are only repaid after 8 years, only the initial 5 years is considered
since this is the maximum contractual period to which the entity is exposed. Similarly, if there is a 5 year term, but the
Group is able to demand repayment on the second anniversary, then the maximum contractual term may be limited
to the 2 years during which repayment cannot be demanded.
As an exception, if the borrower has an extension option then the period covered by the extension option must
also be considered, and the probability of the option being exercised would then be incorporated in the entity’s
estimate of expected cash flows over the maximum contractual period in accordance with IFRS 9. In effect, the
extension options serve to extend the maximum contractual term over which the Group is exposed to credit
risk. Extensions at the Group’s option (or those which require the Group’s approval) are not substantive from the
borrower’s perspective as they do not expose the Group to additional credit risk and therefore are not considered
in the maximum contractual period.
The only circumstances in which a period longer than the maximum contractual period is considered in measuring
ECLs is under IFRS 9 when there is a financial instrument with both a loan and an undrawn commitment component.
For example, this might include credit cards or other revolving facilities. In such cases, the contractual notice period
(e.g. which may be as little as one day) may be considered to be non-substantive as in practice the Group is not able
to limit its credit risk exposure to such periods and, therefore, it is necessary to determine the period over which the
entity is realistically exposed to credit risk, giving consideration to factors like the period(s) it has taken in the past to
take action and limit credit risk on similar financial instruments. For example, in illustrative example 10 of IFRS 9, the
entity determines that this period is 30 months.
2.2.2 POPULATION GROUPING

For term and revolving exposures, the approach to determining expected life is applicable to all product types (e.g.
mortgage vs. credit cards) and no further segmentation is initially required. Therefore, a single policy position can
be applied to all products and portfolios. The application of the concept to term and revolving facilities is explained
separately in the subsequent sections.

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JN GROUP IFRS 9 Financial Instruments

Note that the following presumes the application of PD model approach to measure the expected credit losses as
discussed in IFRS 9 Impairment– P.

Product Unique characteristics Considerations

Mortgages Term vs. amortization period for Expected credit losses are limited to the
mortgages (e.g. 5 yrs. vs. 25 yrs.). maximum contractual period.

Credit Cards May include drawn and undrawn Requires analysis of contractual notice
amounts. period to assess the period over which
May have no contractual maturity. the Group is exposed to credit risk, which
may be longer than the contractual notice
Auto Financing Prepayments and amortization. period based on: the period over which it
Extension options. has been exposed to credit risk on similar
products in the past, the length of time
Revolving May include drawn and undrawn for defaults to occur on similar financial
Personal Line of Credit amounts. instruments and past events that led to
May have no contractual maturity. credit risk management actions because of
an increase in credit risk on similar financial
Unsecured Retail Lending Term vs. renewals. instruments, such as the reduction or
removal of undrawn credit limits.
Cash Secured Loans Extension options. Substantive borrower extension options
have the effect of extending the
contractual period over which the Group
is exposed to credit risk and therefore,
are included in the period over which
expected credit losses are estimated for
IFRS 9.
Requires analysis of contractual notice
period to assess the period over which
the Group is exposed to credit risk, which
may be longer than the contractual notice
period based on: the period over which it
has been exposed to credit risk on similar
products in the past, the length of time
for defaults to occur on similar financial
instruments and past events that led to
credit risk management actions because of
an increase in credit risk on similar financial
instruments, such as the reduction or
removal of undrawn credit limits.
Expected credit losses are limited to the
maximum contractual period.

Insurance Premium Financing
Developing financing
Staff Loans
Business Commercial
Lending
Counterparty Credit
Syndicated loans

16

Product Unique characteristics JN GROUP IFRS 9 Financial Instruments

Investment securities The Group may hold securities with an Considerations
intended hold period which differs from
the contractual term of the instrument. ECLs are measured based on expected
For example, the Group may hold a 10 cash flows over the life of the instrument
year bond that it expects to sell in 5 (e.g. subject to the maximum contractual
years. period guidance in IFRS 9.5.5.19 above)
irrespective of the intended hold period.
Measuring ECLs based on the expected
hold period would also require arbitrary
estimates of expected future sales for each
instrument whereas the timing of such
future sales is not definitively known.

2.2.3 IFRS 9 GUIDANCE
Under IFRS 9, expected credit losses are a probability-weighted estimate of credit losses over the expected life of
the financial instrument. [IFRS 9.B5.5.28]
The maximum period to consider is the maximum contractual period (including extension options) over which the
entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business
practices. [IFRS 9.5.5.19]
However, some financial instruments include both a loan and an undrawn commitment component and for which
the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity’s
exposure to credit losses to the contractual notice period. For such instruments, and only those financial instruments,
the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected
credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the
maximum contractual period. [IFRS 9.5.5.20]

2.2.4 ALTERNATIVES CONSIDERED
The following alternatives were considered:
1) Contractual maturity only – This option assumes that customers hold loans until contractual maturity and do

not prepay their loans.
• Practical - Easy to implement, but in practice this overestimates the period in which the Group would
be exposed to credit risk and, consequently, will overestimate the allowance amount.
• Conceptual - This alternative would not comply fully with requirements of IFRS 9 to the extent that a
financial instrument’s expected life is shorter than its contractual life.
2) Behavioral maturity only – This option requires analysis of historical data to identify average customer lifetime
for each product type.
• Practical – more complicated than contractual maturity as this alternative requires modelling behaviors.
• Conceptual - As IFRS 9 requires that the expected life not exceed the contractual period (with the
exception of certain revolving products that include a loan and undrawn commitment), a purely
behavioral approach will not comply fully with the requirements of IFRS 9.
3) Combination of behavioral and contractual maturity – This option requires analysis of historical data to
develop behavioral models for adjusting contractual cash flows or, alternatively, identify average lifetime for
each product type. Developed in this manner, expected life estimates will be capped at the contractual life,
but could give consideration to the contractual period override for financial instruments that include both a
loan and an undrawn commitment.
• Practical – More complex than alternatives 1 and 2.
• Conceptual - This alternative fully complies with the requirements of IFRS 9.

17

JN GROUP IFRS 9 Financial Instruments

2.2.5 RECOMMENDED APPROACH
Refer also to the Executive Summary for an overview. We recommend Alternative 3 above as this is the only alternative
which complies fully with the requirements of IFRS 9.
As a starting point, IFRS 9 requires that ECLs be calculated based on the maximum contractual period. For example,
this would be the end of the term, or an earlier date if repayment could be demanded sooner. Additionally, options
that are substantive from the borrower’s perspective (i.e. those which give the borrower the unilateral right to extend)
have the effect of extending the Group’s contractual period of credit risk exposure and thus are also considered.
As an exception, for financial instruments that include both a loan and an undrawn commitment, it is often the case
that the Group is not able to limit its credit risk to the contractual notice period or term and instead, in practice it
only withdraws the facility once the observable credit risk has increased significantly. In other words, the contractual
maturities are protective rather than being actively enforced. In such cases, ECLs should be based on the period
over which the entity is exposed to credit risk and during which credit losses would not be mitigated by credit risk
management actions, even if that period extends beyond the maximum contractual period. As illustrated in Example
10 of IFRS 9 in Appendix B, the analysis to determine this period focuses on:
• The period over which the entity was exposed to credit risk on similar financial instruments.
• The length of time for defaults to occur on similar financial instruments.
• Past events that led to credit risk management actions because of an increase in credit risk on similar
financial instruments such as the reduction or removal of undrawn credit limits.
In response to the specific questions raised:
1. How is expected life determined?

As noted above, presuming that the PD model to measuring ECLs is adopted, then the expected life of a loan
is calculated based on the contractual terms of the instrument or estimated in the case for revolving loans and
credit cards. In other words, the expected life is an input into the ECL calculation based on the exposure of
credit risk.
Are any extension options considered?
As noted in IFRS 9.5.5.19, extension options are required to be considered as they form part of the contractual
term of the instrument. In other words, extension options are part of the contractual provisions of the instrument
and thus have the effect of extending the contractual period over which the entity is exposed to credit risk. For
example, this means that in the case of a 5 year term loan with a 5 year borrower extension option, expected
credit losses should be estimated over the entire contractual period of 10 years since the Group is contractually
exposed to credit risk over this period. Extension options that are at the Group’s option, or that require the
Group’s approval, are not considered substantive as the Group is not exposed to additional credit risk (e.g. until
the point at which it agrees to the extension). As a result, such options would not extend the period over which
cash flows are estimated in calculating ECLs.
2. How are prepayment assumptions considered?
As explained in the paper IFRS 9: Impairment (loans and advances) prepayment assumptions are factored
into the cash flow estimates in calculating expected credit losses, based on analysis of historical experience on
similar products. Prepayments may shorten the expected life of a financial instrument and should be assessed
on a regular basis based on historical behaviour. Prepayment rate was assessed during implementation however
the data was not reliable to apply to the calculation as at transition date. This will be reviewed for incorporation
in the future.
3. How is the expected life incorporated into the ECL calculation?
As noted above, presuming the PD model approach to the measurement of ECL is adopted, the expected life
is incorporated into the ECL calculation explicitly. Exposure at default is based on the contractual term of the
instrument and the amortised cash flows are used to calculate exposure for the 12 month ECL and also the
lifetime ECL.

18

JN GROUP IFRS 9 Financial Instruments

Loans and advances

If the ECL calculation is performed using the PD model, then for term loans the expected life is calculated based on
the maturity of the instrument.

There are cases where the loan terms have expired on some mortgage and retail accounts. Due to the maturity of
these accounts, amortization schedules cannot be generated to calculate the expected credit losses within the ECL
calculator. A manual adjustment will be made on these accounts.

Management has implemented measures to prevent the reocurrence/ additions to the loans with maturities in the
past. This includes, but not limited to, contacting the customer to determine if the loan can be closed within the
expected time frame, modified such as a term extension or possible write-off.

Investments

If the ECL calculation is performed using the PD model, then for investments the expected life is calculated based
on the maturity of the instrument.

Revolving loans

IFRS 9 requires that the maximum period to be considered in measuring expected credit losses is the maximum
contractual period and not a longer period, even if the longer period is consistent with business practice. [IFRS
9.5.5.19] Consequently, for revolving loans this could mean having their expected lives limited by contractual notice
periods which may be as little as one day. However, IFRS 9 also notes that it may be impractical for the entity to limit
its exposure to credit risk to the contractual notice period and the standard says that for financial instruments which
include both a drawn and undrawn commitment, the entity shall measure expected credit losses over the period that
the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management
actions even if that period extends beyond the maximum contractual period. [IFRS 9.5.5.20]

Put differently, the entity is required in these cases to consider the period over which it is most likely to be exposed
to credit risk given business practices (e.g. the period prior to which its credit risk exposure could be eliminated in
practice). As a result, for facilities with both drawn and undrawn components (such as credit cards or other types of
lines of credit), the Group will need to perform an analysis based on:

• The period over which the entity was exposed to credit risk on similar financial instruments.
• The length of time for defaults to occur on similar financial instruments.
• Past events that led to credit risk management actions because of an increase in credit risk on similar
financial instruments such as the reduction or removal of undrawn credit limits.

JN Bank has determined the expected life of the credit cards as three years. This is based on industry average and
the concept that credit cards have a three year term for maturity.

Limit increases

For certain revolving facilities (e.g. credit cards), the Group may offer limit increases. Further analysis will be necessary
to understand how the process typically functions and whether or not ECLs should be required in respect of such
limit increases.

2.2.6 SUPPORT AND RATIONALE

Refer to explanation above.
IFRS 9– Note that the recommended approach complies with all requirements.
1) Operational efficiency and practicality (implementation and ongoing)

• Refer to assessment of alternatives above which note that while less simplistic than the alternative
approaches, the recommended approach is the only method to comply with the requirements of

IFRS 9 in their entirety.
• No significant operational concerns noted.

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JN GROUP IFRS 9 Financial Instruments

2) Cost effectiveness (implementation and ongoing)
• Refer to assessment of alternatives above which note that while less simplistic than the alternative
approaches, the recommended approach is the only method to comply with the requirements of IFRS 9
in their entirety.
• No significant operational concerns noted.

3) Ability to leverage existing models and processes (if desired)
• Assessment of the Group’s processes for risk management / action on revolving products will need to
be analyzed to estimate the expected period of credit exposure for all revolving products.
• Ability to meet deadlines (implementation and ongoing).
• No concerns noted.

4) Modifiable in future periods as facts and circumstances change that require changes
• Each quarter, cash flows will need to be updated which will include updating to reflect changes in terms
that include extensions of the contractual term or the addition of extension options which have the
effect of extending the maximum contractual period to consider in estimating ECLs for term products.

The Group will need to determine the frequency with which the analysis of the period over which it is exposed to
credit risk on revolving products.
The recommended approach is consistent with industry practice. It is currently unclear whether other financial
institutions will interpret the override to the contractual term in IFRS 9.5.5.20 as applying to all undrawn commitments
whether or not a related drawn component exists and there continues to be debate globally on this issue.
The following supporting documentation will be required to support the conclusions noted herein:

• Review of extension options by product (see Appendix A).
• Review of uncommitted facilities contractual terms / availability.
• Contractual maturity / terms for term products (e.g. language around maturity).
• The Group process / credit action analysis for period of exposure on revolving products.
2.2.7 IMPLEMENTATION AND EXECUTION CONSIDERATIONS
Differences from current practice:
• Expected life is not currently considered for loss allowances in accounting or regulatory capital as
predefined periods are used (LCP for accounting, and 12 month expected loss for regulatory capital).

2.2.8 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9

The maximum period to consider when measuring expected credit losses is the maximum contractual period
(including extension options) over which the entity is exposed to credit risk and not a longer period, even if that
longer period is consistent with business practice. [IFRS 9.5.5.19]
However, some financial instruments include both a loan and an undrawn commitment component and the entity’s
contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity’s exposure
to credit losses to the contractual notice period. For such financial instruments, and only those financial instruments,
the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected
credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the
maximum contractual period. [IFRS 9.5.5.20]
Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls)
over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows that are
due to an entity in accordance with the contract and the cash flows that the entity expects to receive. Because
expected credit losses consider the amount and timing of payments, a credit loss arises even if the entity expects to
be paid in full but later than when contractually due. [IFRS 9.B5.5.28]
In accordance with paragraph 5.5.19, the maximum period over which expected credit losses shall be measured
is the maximum contractual period over which the entity is exposed to credit risk. For loan commitments and

20

JN GROUP IFRS 9 Financial Instruments

financial guarantee contracts, this is the maximum contractual period over which an entity has a present contractual
obligation to extend credit. [IFRS 9.B5.5.38]
However, in accordance with paragraph 5.5.20, some financial instruments include both a loan and an undrawn
commitment component and the entity’s contractual ability to demand repayment and cancel the undrawn
commitment does not limit the entity’s exposure to credit losses to the contractual notice period. For example,
revolving credit facilities, such as credit cards and overdraft facilities, can be contractually withdrawn by the lender
with as little as one day’s notice. However, in practice lenders continue to extend credit for a longer period and may
only withdraw the facility after the credit risk of the borrower increases, which could be too late to prevent some or
all of the expected credit losses. These financial instruments generally have the following characteristics as a result
of the nature of the financial instrument, the way in which the financial instruments are managed, and the nature of
the available information about significant increases in credit risk:
(a) the financial instruments do not have a fixed term or repayment structure and usually have a short contractual
cancellation period (for example, one day);
(b) the contractual ability to cancel the contract is not enforced in the normal day-to-day management of the
financial instrument and the contract may only be cancelled when the entity becomes aware of an increase
in credit risk at the facility level; and
(c) the financial instruments are managed on a collective basis. [IFRS 9.B5.5.39]
When determining the period over which the entity is expected to be exposed to credit risk, but for which expected
credit losses would not be mitigated by the entity’s normal credit risk management actions, an entity should consider
factors such as historical information and experience about:
(a) the period over which the entity was exposed to credit risk on similar financial instruments;
(b) the length of time for related defaults to occur on similar financial instruments following a significant increase
in credit risk; and
(c) the credit risk management actions that an entity expects to take once the credit risk on the financial
instrument has increased, such as the reduction or removal of undrawn limits. [IFRS 9.B5.5.40]
Respondents noted that the use of the contractual period was of particular concern for some types of loan
commitments that are managed on a collective basis, and for which an entity usually has no practical ability to
withdraw the commitment before a loss event occurs and to limit the exposure to credit losses to the contractual
period over which it is committed to extend the credit. Respondents noted that this applies particularly to revolving
credit facilities such as credit cards and overdraft facilities. For these types of facilities, estimating the expected
credit losses over the behavioural life of the instruments was viewed as more faithfully representing their exposure
to credit risk. [IFRS 9.BC5.255]
Respondents also noted that those revolving credit facilities lack a fixed term or repayment structure and allow
borrowers flexibility in how frequently they make drawdowns on the facility. Such facilities can be viewed as a
combination of an undrawn loan commitment and a drawn-down loan asset. Typically, these facilities can be
contractually cancelled by a lender with little or no notice, requiring repayment of any drawn balance and cancellation
of any undrawn commitment under the facility. There would be no need on a conceptual basis to recognise expected
credit losses on the undrawn portion of these facilities, because the exposure period could be as little as one day
under the proposals in the 2013 Impairment Exposure Draft. [IFRS 9.BC5.256]
Outreach performed during the comment period on the 2013 Impairment Exposure Draft indicated that, in practice,
lenders generally continue to extend credit under these types of financial instruments for a duration longer than the
contractual minimum and only withdraw the facility if observable credit risk on the facility has increased significantly.
The IASB noted that, for such facilities, the contractual maturities are often set for protective reasons and are not
actively enforced as part of the normal credit risk management processes.
Participants also noted that it may be difficult to withdraw undrawn commitments on these facilities for commercial
reasons unless there has been an increase in credit risk. Consequently, economically, the contractual ability to
demand repayment and cancel the undrawn commitment does not necessarily prevent an entity from being exposed
to credit losses beyond the contractual notice period. [IFRS 9.BC5.257]
The IASB noted that the expected credit losses on these type of facilities can be significant and that restricting
the recognition of a loss allowance to expected credit losses in the contractual notice period would arguably be
inconsistent with the notion of expected credit losses (i.e. it would not reflect actual expectations of loss) and would

21

JN GROUP IFRS 9 Financial Instruments

not reflect the underlying economics or the way in which those facilities are managed for credit risk purposes. The
IASB also noted that the amount of expected credit losses for these facilities could be significantly lower if the
exposure is restricted to the contractual period, which may be inconsistent with an economic assessment of that
exposure. [IFRS 9.BC5.258]
The IASB further noted that from a credit risk management perspective, the concept of expected credit losses is as
relevant to off balance sheet exposures as it is to on balance sheet exposures. These types of financial instruments
include both a loan (i.e. financial asset) and an undrawn commitment (i.e. loan commitment) component and are
managed, and expected credit losses are estimated, on a facility level. In other words there is only one set of cash
flows from the borrower that relates to both components. Expected credit losses on the on balance sheet exposure
(the financial asset) are not estimated separately from the expected credit losses on the off balance sheet exposure
(the loan commitment). Consequently, the period over which the expected credit losses are estimated should reflect
the period over which the entity is expected to be exposed to the credit risk on the instrument as a whole. [IFRS
9.BC5.259]
The IASB remains of the view that the contractual period over which an entity is committed to provide credit (or
a shorter period considering prepayments) is the correct conceptual outcome. The IASB noted that most loan
commitments will expire at a specified date, and if an entity decides to renew or extend its commitment to extend
credit, it will be a new instrument for which the entity has the opportunity to revise the terms and conditions.
Consequently, the IASB decided to confirm that the maximum period over which expected credit losses for loan
commitments and financial guarantee contracts are estimated is the contractual period over which the entity is
committed to provide credit. [IFRS 9.BC5.260]
However, to address the concerns raised about the financial instruments noted in paragraphs BC5.254–BC5.257,
the IASB decided that for financial instruments that include both a loan and an undrawn commitment component
and the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the
entity’s exposure to credit losses to the contractual notice period, an entity shall estimate expected credit losses
over the period that the entity is expected to be exposed to credit risk and expected credit losses would not be
mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period.
When determining the period over which the entity is exposed to credit risk on the financial instrument, the entity
should consider factors such as relevant historical information and experience on similar financial instruments. The
measurement of expected credit losses should take into account credit risk management actions that are taken once
an exposure has increased in credit risk, such as the reduction or withdrawal of undrawn limits. [IFRS 9.BC5.261]

22

JN GROUP IFRS 9 Financial Instruments

23

JN GROUP IFRS 9 Financial Instruments

24

JN GROUP IFRS 9 Financial Instruments

2.3 MEASUREMENTS AND CLASSIFICATIONS

Topic Measurement and Classification Reference: M&C
Portfolio All Portfolios
Population group All Products Version 1.0

2.3.1 PURPOSE & EXECUTIVE SUMMARY

Purpose:

To clarify the notion of IFRS 9 concepts regarding measurement and classification of financial instruments, including
consideration of the following questions:
• What is the business model of the financial instruments? This is determined through the following
considerations:
i) How are financial instruments grouped and managed?
ii) What is the objective of holding the financial instruments?
iii) How is performance of the business model evaluated and report to key management
personnel?
iv) What is the reason and frequency of past sales and what are the future expectations for sales?
v) Who are key management personnel and managers and how are they compensated?
• What are the cash flow characteristics of the financial instruments (whether the cash flows represent
‘sole payments of principal and interest’)?
• Is there an option to measure financial instruments at fair value through profit and loss to avoid
accounting mismatches?
• Accounting treatment upon adoption of IFRS 9

To clarify the instruments that are encompassed by this paper, management has included the following summarised
listing of financial instruments held at March 31, 2018 or December 31, 2017 (as applicable):

Territory Entity Investments Loans Other
Jamaica JN Bank Listed equities Retail loans Trade receivables
Unlisted equities Commercial loans
Sovereign bonds Intercompany loans
Corporate bonds Staff loans
Mutual funds
T Bills
Forward contracts
Swaps
Repos
Unit trust
CD’s

JN GI Listed equities Staff loans Trade receivables
Sovereign bonds
Corporate bonds
Unit Trust
Repo agreements
T Bills
CD’s

25

JN GROUP IFRS 9 Financial Instruments

Territory Entity Investments Loans Other
JN Life Sovereign bonds Staff loans Trade receivables
Corporate bonds
JNFM Mutual funds Retail loans None
Repo agreements Commercial loans Trade Receivables
T Bills Staff loans (fees receivable from
CD’s Investment/Admin
Listed equities management services)

JNSBL Sovereign bonds Secured Retail loans Trade and other
Corporate bonds Micro Business loans receivables
Repo agreements Staff loans Trade receivables
T Bills Staff loans
CD’s
Mutual funds (Inter
management pension
scheme)

Fixed Deposits
CD’s

JNMS & Sovereign bond
subsidiaries Unlimited equities

MCS Ltd. CD’s None Trade receivables
Mutual Funds
Repo agreements

The Creative Unit None None Trade receivables
JAA CD’s None Trade receivables
TCS CD’s Staff loans None

Sovereign bonds Retail loans Trade receivables
Commercial loans
Cayman JN Cayman Sovereign bonds
Corporate bonds
CDs

Executive Summary:
The management of Jamaica National Group (collectively referred to as “JN” or “Group”), have concluded on the
treatment of the financial instruments under IFRS 9 – Financial instruments and the subsequent implications these
decisions will have on the Company’s annual financial statement for the fiscal period beginning April 1, 2018.
IAS 39 focuses on how the Company intends to realise the cash flows of individual assets where IFRS 9 focuses on
the business model(s) the entity uses to generate cash flows. Management have concluded that all loan portfolios,
intercompany loans, intercompany receivables, trade receivables, and other receivables within the Group will be
classified within a hold to collect business model and will be measured at amortised cost under IFRS 9, which is
consistent with how these instruments are currently being recorded. There will be no opening day adjustment
required to any of the portfolios mentioned above.
Management have assessed the investment portfolios for each entity with the Group and have included a high level
summary of the decisions made relating to the measurement and classification of the investment instruments.
Refer to the attached investment and loan listings from various entities within the Group showing the classifications
under IFRS 9 and the previous classification under IAS 39.

26

JN GROUP IFRS 9 Financial Instruments

2.3.2 ASSESSMENT OF PORTFOLIOS
What is the business model of the financial instruments?
Applying the Business Model test involves the following steps:

1. Identify the Key Management Personnel and Managers;
2. Determine the level at which the business model defined and objectives;
3. Conclude on how performance of the business model is evaluated and reported to key management
personnel;
4. Identify the key risks of the portfolios and determine the rationale and frequency of both past and
expected future sales; and
5. Determine how Key Management Personnel are compensated

Refer below and to the following pages for an assessment of the factors listed above.

1) Identify the Key Management Personnel and Managers
IFRS 9 B.4.1.1 An entity assesses whether its financial assets meet the condition in paragraph 4.1.2(a) or the
condition in paragraph 4.1.2A(a) on the basis of the business model as determined by the entity’s key management
personnel (as defined in IAS 24 Related Party Disclosures).
IAS 24.9 Key Management Personnel are those persons having authority and responsibility for planning, directing
and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise)
of that entity.

Based on the Group’s existing analysis under IAS 24, the Key Management Personnel of the business model, from
a consolidated group (and solo legal entity perspective, in some instances), is the Board Finance Committee (BFC)
The objectives of the BFC are stated hereunder:

• establish the Group’s risk policies, including risk tolerances and ensure that senior management
establish an enterprise wide risk management framework for all business units.

• monitor exposures against established limits;

• ensure that senior management implement processes to identify, measure, monitor and control risks

(credit, market, liquidity, operational and strategic);

• review the Group’s capital structure, dividend policy, annual capital plan, capital adequacy process,

capital raising and capital allocation across The Jamaica National Group, JN Financial Group, MCS

Group and their subsidiaries.

• ensure that appropriate Credit and Risk policies are in place in all companies.

• review monthly financial statements and monitor performance of each company against established

targets and make recommendations for performance improvement

• review any initiatives, including appraisal of investments, mergers, acquisitions and disposals that

exceed management thresholds and make recommendations to the Board as necessary.

• review financial forecasts, operating budgets, capital expenditures, expense management and

performance relative to competitors.

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JN GROUP IFRS 9 Financial Instruments

The main committees existing in the Group are noted in the table below:

Name Asset & Board Investment Finance & Investment Credit Audit** IT Conduct Board of
of entity Liability Finance & Risk Operations/ and Loan Comm (Risk & Steering Review Directors**
Committee Committee Operations Committee Compliance) Comm.
(ALCO) (BFC) ** Management Committee or Sales/ X
Marketing
related

JN Bank x x Xx

JNGI x xx xX

MCS Ltd xX

JN MS xx xX

JN FM x x xx xX

JNSBL xX xX

JN Life xx xX

JN X X
Cayman
** Group Committee exists

2) Determine the level at which the business model defined and objectives
IFRS 9 B.4.1.2 An entity’s business model is determined at a level that reflects how groups of financial assets are
managed together to achieve a particular business objective. The entity’s business model does not depend on
management’s intentions for an individual instrument. Accordingly, this condition is not an instrument by instrument
approach to classification and should be made on a higher level of aggregation. However, a single entity may have
more than one business model for managing its financial instruments. Consequently, classification need not be
determined at the reporting entity level.

In relation to the loan portfolios, the business model assessment is considered to exist at the entity level primarily
due to:
• Decisions about the origination of such instruments is determined by management at the entity level.
Although governed by the individual Credit Risk Policy per entity, there are specific parameters
communicated within the lending guidelines and policies for each individual territory due to differences
in the regulatory and economic environments (refer to Appendix A for policies);
• The main objectives of the loan portfolios are as follows:
Build a high quality credit portfolio that is commensurate with JN Group’s strategy and risk appetite;
Ensure that credit risk is managed within the appropriate legal and regulatory frameworks;
Maximize the Group’s risk-adjusted returns by maintaining credit risk exposure within acceptable
parameters.
Maximize risk–adjusted after-tax returns on the investment portfolio and provide a competitive
long-term rate of return on equity.
Mitigate credit and liquidity risks while preserving capital through a diversified mix of fixed income,
equity and real estate investments.

In relation to the investment portfolios, the business model assessment is considered to exist at the entity level
primarily due to:
• Decisions about the acquisition and disposal of investments are made by managers within the treasury
unit at an entity level (or designated Investment Manager, as applicable). Investment decisions are
governed by investment policies prepared for each individual entity which dictate permissible
investments, duration, liquidity, and concentration limits with reference to different regulatory guidelines
for each type and territory of an entity (i.e. a banking institution or an investment institution);
• The main objectives of the investment portfolios are as follows:
• To maximize portfolio yield over the short to medium term in a manner that is consistent with the
organizations established strategies, liquidity needs, pledging requirements, asset & liability
management strategies and safety of principal.
• To maximize overall portfolio return in a manner that recognizes primarily liquidity needs, the
Group’s risk appetite and capital preservation as well as other factors including but not limited to
pledging requirements, asset/liability management strategies and safety of principal;
• Given the importance of liquidity and liquidity management for a commercial bank (or other entity),
the portfolio objectives will be largely influenced by the targeted liquidity needs associated with

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net deposit outflow, loan demand or contingencies. Where projected available liquidity requirements
are not sufficiently robust, as determined by the Group ALCO or the Group Risk Unit, the portfolio
will be rebalanced accordingly.

In relation to both intercompany loans and receivables, as well as trade receivables, the business model assessment
is considered to exist at the entity level primarily due to:
• Decisions about the origination of intercompany loans is determined by management at the entity level.
Terms and conditions are set and approved at the entity level;
• Intercompany receivables are generated based upon agreements for various cost sharing arrangements
that were approved at both the entity and Group level;
• Trade receivables are generated by business decisions made at a Group level regarding the formation
of entities for specific purposes;
• The main objectives of originating intercompany loans are to provide necessary funding for operational
or capital projects with the intention of collecting the principal and interest within the stated time
period;
• The main objective of originating both intercompany and trade receivables is to recover shared expenses
and generate revenue from services rendered respectively;
3) Conclude on how performance of the business model is evaluated and reported to key management
personnel?

IFRS 9 B4.1.2B An entity’s business model for managing financial assets is a matter of fact and not merely an
assertion... the entity must consider all relevant evidence that is available at the date of the assessment [and]
includes … (a.) how the performance of the business model and the financial assets held within that business model
are evaluated and reported to the entity’s key management personnel.

IFRS 9 B4.1.6 A portfolio of financial assets that is managed and whose performance is evaluated on a fair value
basis (as described in paragraph 4.2.2(b)) is neither held to collect contractual cash flows nor held both to collect
contractual cash flows and to sell financial assets. The entity is primarily focused on fair value information and uses
that information to assess the assets’ performance and to make decisions.

Loans

As noted above, the loan portfolios are viewed at the entity level. Performance of the lending portfolio is reported
to the respective committee in the institution’s BFC, Credit Committee (or ILC in some entities) Committee for each
individual entity that operates within the Group.

The Credit Committee (in JN Bank, JNSBL and JN Cayman) have the following responsibilities:
• monitor the entity’s credit risk management;
• monitor the effectiveness and administration of credit policies;
• monitor the performance and quality of the credit portfolio and identify trends that may affect the
portfolio;
• approve or recommend credits for approval by the Board;
• assess adequacy of the allowance for loan losses; and
• oversee the implementation of regulatory and accounting requirements.

The Investment and Loan Committee (ILC) has the authority to make investment decisions on behalf of the Company.
The ILC is responsible for recommending to the Board of Directors, for their approval, a written Investment and
Loan Policy which strives to maximize portfolio performance while keeping the management of the portfolio within
the bounds of sound risk management practices and satisfying the liquidity and legal requirements of the company
and its regulators, the FSC. The ILC reviews the Policy on at least a bi-annual basis and recommends amendments
as necessary.

JN Group Risk and Compliance is be mandated to identify, assess, monitor and manage a range of risk categories
to ensure that the Company operates within its established risk appetite, policies and parameters. The RMU shall
report on the investment activities to the ILC and BOD on a monthly basis.

Investments

As noted above, the investment portfolios are viewed on the entity level; therefore, there are differences between
the frequency of reporting, how performance is reported, and who performance is reported to depending on the
individual entity.

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JN GROUP IFRS 9 Financial Instruments

The Treasury Unit (in JN Bank, and JN FM, who acts in a Treasury role for some entities in the group) is responsible
for the execution of the investment objectives and strategies within the entities.

The ALCO or ILC (endorsed by BFC) approves the purchase, sale and exchange of securities/investments above the
policy limits allowed for by management or that which requires additional scrutiny.

The ALCO or ILC is responsible for monitoring the performance of the portfolio and overseeing the adequacy of
systems and internal controls designed to ensure the holdings in securities are consistent with the strategies of the
Company and that the implementation of the strategies remains consistent with the portfolio policy’s objectives.

The ILC is responsible for overseeing the relationship with the Portfolio Manager to whom investment and
management authority is delegated, as defined in the Portfolio Agreement between the Company and the Portfolio
Manager.

The Committee is comprised of: A minimum of three persons, at least one of whom shall be an officer of the
Company. The majority, however, shall not be an officer or an employee of the Company or an associated company.

Matters to be reviewed by the ILC include, inter alia:
• The performance of the management of the investment portfolio.
• Significant changes in investment strategy.
• All transactions over a specified limit
• Decisions requiring the voting of proxy material.
• Monthly valuations of the Company’s portfolio.
• Quarterly performance comparisons relative to appropriate benchmarks.
• All real estate, equity or non-fixed income transactions.

Investments shall be made with judgment and care, under circumstances prevailing, which persons of prudence,
discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment,
considering the probable safety of their capital as well as the probable income to be determined.

4) Identify the key risks of the portfolios and determine the rationale and frequency of both past and
expected future sales.

IFRS 9 B4.1.2B An entity’s business model for managing financial assets is a matter of fact and not merely an
assertion... the entity must consider all relevant evidence that is available at the date of the assessment [and] includes
… (b.) the risks that affect the performance of the business model (and the financial assets held within that business
model) and, in particular, the way in which those risks are managed.

IFRS 9 B4.1.2C Financial assets that are held within a business model whose objective is to hold assets in order to
collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the life of
the instrument. That is, the entity manages the assets held within the portfolio to collect those particular contractual
cash flows (instead of managing the overall return on the portfolio by both holding and selling assets). In determining
whether cash flows are going to be realised by collecting the financial assets’ contractual cash flows, it is necessary to
consider the frequency, value and timing of sales in prior periods, the reasons for those sales and expectations about
future sales activity. However sales in themselves do not determine the business model and therefore cannot be
considered in isolation. Instead, information about past sales and expectations about future sales provide evidence
related to how the entity’s stated objective for managing the financial assets is achieved and, specifically, how cash
flows are realised. An entity must consider information about past sales within the context of the reasons for those
sales and the conditions that existed at that time as compared to current conditions.

IFRS 9 B.4.1.3A The business model may be to hold assets to collect contractual cash flows even if the entity sells
financial assets when there is an increase in the assets’ credit risk … Irrespective of their frequency and value, sales
due to an increase in the assets’ credit risk are not inconsistent with a business model whose objective is to hold
financial assets to collect contractual cash flows because the credit quality of financial assets is relevant to the entity’s
ability to collect contractual cash flows. … Selling a financial asset because it no longer meets the credit criteria
specified in the entity’s documented investment policy is an example of a sale that has occurred due to an increase in
credit risk. However, in the absence of such a policy, the entity may demonstrate in other ways that the sale occurred
due to an increase in credit risk.

IFRS 9 B4.1.3B Sales that occur for other reasons, such as sales made to manage credit concentration risk (without an
increase in the assets’ credit risk), may also be consistent with a business model whose objective is to hold financial
assets in order to collect contractual cash flows. In particular, such sales may be consistent with a business model
whose objective is to hold financial assets in order to collect contractual cash flows if those sales are infrequent (even
if significant in value) or insignificant in value both individually and in aggregate (even if frequent).

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IFRS 9 B4.1.4A An entity may hold financial assets in a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets. In this type of business model, the entity’s key management
personnel have made a decision that both collecting contractual cash flows and selling financial assets are integral
to achieving the objective of the business model. There are various objectives that may be consistent with this type
of business model. For example, the objective of the business model may be to manage everyday liquidity needs,
to maintain a particular interest yield profile or to match the duration of the financial assets to the duration of the
liabilities that those assets are funding. To achieve such an objective, the
entity will both collect contractual cash flows and sell financial assets.

IFRS 9 B4.1.5 Financial assets are measured at fair value through profit or loss if they are not held within a business
model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective
is achieved by both collecting contractual cash flows and selling financial assets (but see also paragraph 5.7.5). One
business model that results in measurement at fair value through profit or loss is one in which an entity manages the
financial assets with the objective of realising cash flows through the sale of the assets. The entity makes decisions
based on the assets’ fair values and manages the assets to realise those fair values.

The key risks experienced by the Group are similar across all entities and territories that the Group operates within.
These are discussed below:

Loans

The key risks affecting the business model are:
• Credit risk: this is the risk that a counterparty to a loan will be unable to meet the obligation, thereby
causing financial loss to the Group. Management limits exposure to credit risk by:

• Where collateral is held against an outstanding loan, it is sufficiently insured;
• Loan loss provisioning is in keeping with Bank of Jamaica (BOJ) and CIMA Regulations;
• Loans are not concentrated in one individual, company or group; and
• Strong underwriting and credit administration systems are in place.
• Interest rate risk: management believe interest rate risk to be minimal due to the interest rate of the
majority of the loans being set at fixed rates.

These risks are managed according to the Group Credit Risk Policy. Refer to Appendix B for an example of the
Group Credit Risk Policy.

Historically, there have not been sales of loan portfolios within any entity, with the exception of the following events:
• Sales to and from JN Cayman and JN Bank, where at March 31, 2018 there were 13 loan accounts with
a value of CI$2,361M was included in the books of JN Bank (based on prior years net acquisition)

The sales events which resulted in the above occurred as a result of the underlying credit risk of the loan portfolios.
As such, there is no evidence to suggest a historical pattern of sales that would be inconsistent with a hold to collect
business model. Additionally, management does not expect to have any future sales of loans that are unrelated to
credit risk as management does not originate loans with the intention of selling them to 3rd party institutions.

Investments

The key risks affecting the business model are:
• Credit risk: the risk of loss due to the default by investment counterparties. Management limits exposure
to credit risk by:

• Conducting risk assessments to ensure that proposed investments are within the company’s risk
tolerance and regulatory limit

• Pre-qualifying the financial institutions, brokers, intermediaries and advisers with which the company
does business

• Diversifying the investment portfolio so that potential losses on individual issues and types of securities
are minimized relative to the total portfolio.

• Market risk: the risk of loss due to fluctuations in market prices, such as foreign exchange rates, interest
rates, and the price of equities. Management limits exposure to market risk by:

• Stop loss limits imposed and monitored on certain asset classes.
• Diversification of the portfolio to mitigate the risk of all investment classes performing poorly

simultaneously
• Foreign currency risk: the risk that the value of the financial instrument will fluctuate due to changes in
foreign exchange rates. Management limit exposure to credit risk by:

• Ensuring the net exposure is kept to an acceptable level by daily monitoring their cost of funds against
market price so as to ensure that a consistent positive spread is maintained between the buying and
selling of the traded currencies

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JN GROUP IFRS 9 Financial Instruments

• Foreign currency liabilities are generally backed by foreign currency assets.
• Interest rate risk: the risk that the market value of securities in the portfolio will fall below original cost
due to changes in general interest rates. Management limit exposure to interest rate risk by:

• Limiting the duration of the investment portfolio based on the outlook for interest rate movements and
the company’s tolerance for risk

• Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing
operations, thereby avoiding or limiting the need to sell securities on the open market at unfavorable
price prior to maturity.

• Balancing the investment of operating funds in a mix of short to medium term securities to ensure that
there is adequate room in the portfolio to take advantage of interest rate swings

• Liquidity risk: the risk of potential loss arising from wither its inability to meet its obligations or to fund
increases in assets as they fall due without incurring unacceptable costs or losses. Management limit
exposure to liquidity risk by:

• Structuring the portfolio to ensure maturities are staggered to avoid sales at an unfavourable price
• Maintain an adequate portfolio of liquid investments
• Regular monitoring and reporting to the ALCO
These risks are managed according to investment policies approved by the Group Investment Committee. Refer to
Appendix C for an example of an investment policy for JN Group.

Historically, sales vary significantly based on the entity and also on the types of instruments held within the portfolio(s)
within the various entities.

When assessing the historical sales, it was noted that the sales were not integral to achieving the business model’s
objective. Management believe historical sales will be an appropriate indicator of future sales as the instructions to
portfolio managers has not changed significantly and isn’t expected to change in the future. Sales were assessed as
to the reason why and noted that the sales were due to either:
i) changes in credit rating,
ii) changes in market conditions where the debt instruments were not obtaining the anticipated yield.
iii) Funds were used to produce a greater yield.

5) Determine how Key Management Personnel are compensated?

IFRS 9 B4.1.2B An entity’s business model for managing financial assets is a matter of fact and not merely an
assertion... the entity must consider all relevant evidence that is available at the date of the assessment [and] includes
… (c.) how managers of the business are compensated (for example, whether the compensation is based on the fair
value of the assets managed or on the contractual cash flows collected).

The performance of Key Management Personnel is not evaluated or compensated based on the fair value of the
various loan, investment, or receivable portfolios within the Group. Key Management Personnel are rewarded based
on a range of factors, with variable compensation being most significantly impacted by the overall performance of
each entity / territory that they are responsible for.

As the objectives, targets and strategies for the Investment entities are different than the objectives, targets and
strategies for financial entities within the Group, the factors used to evaluate and reward management of those
particular entities differ. Compensation of management is achieved through both a hold-to-collect and a hold-to-
collect and sell business model.

Key Management Personnel compensation is based on:
1. Financial indicator: overall performance of the entity / Group
2. Non-financial indicator: other balanced scorecard metrics assessing team leadership, compliance with
minimum group standards and personal development.

Indicator for:
• Hold-to-collect (all entities in the Group other than those noted below)
• Hold-to-collect and sell (only for the Investment entities in each territory)
• Other (FVPL)

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JN GROUP IFRS 9 Financial Instruments

Conclusion on business models – loans

Entity Summary of indicators Hold to Collect Hold to Collect FVTPL
and Sell
X
JN Group Activities / objectives X
Performance evaluation

Risks and rationale X
for sales X
Managers compensation

All loans portfolios within the group fall within a hold to collect business model. The business model for the
investment portfolios by entity is stated in table below.

6) What are the characteristics of cash flows ‘sole payment of principle and interest’

B4.1.7A Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding
are consistent with a basic lending arrangement. In a basic lending arrangement, consideration for the time value
of money (see paragraphs B4.1.9A–B4.1.9E) and credit risk are typically the most significant elements of interest.
However, in such an arrangement, interest can also include consideration for other basic lending risks (for example,
liquidity risk) and costs (for example, administrative costs) associated with holding the financial asset for a particular
period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement. …
However, contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated
to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise
to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. An
originated or a purchased financial asset can be a basic lending arrangement irrespective of whether it is a loan in
its legal form.

The following features exist within the loan portfolios across the Group:

• Variable interest rates
• Options for borrowers to pay loan balances before contractual maturity with minimal to no fees

All loans that contain the features listed above have qualitatively passed the SPPI test as the terms are consistent
with a basic lending arrangement. No further analysis is necessary in regards to the lending portfolio.

The payments on some financial assets are contractually linked to payments received on a pool of other instruments.
These are referred to as contractually linked instruments. They are often issued by special purpose entities (SPEs)
in various tranches, with the more senior tranches being repaid in priority to the more junior ones. Contractually
linked instruments are financial assets that create concentrations of credit risk. The holders of such instruments have
the right to payments of principal and interest on the principal amount outstanding only if the issuer generates
sufficient cash flows to satisfy any higher-ranking tranches. [IFRS 9 para B4.1.20].
The classification criteria for the holder of such contractually linked instruments (tranches) should be assessed based
on the conditions at the date when the entity initially recognised the investment using a ‘look through’ approach.
This approach looks at the terms of the instrument itself, as well as through to the pool of underlying instruments.
The assessment considers both the characteristics of these underlying instruments and the tranche’s exposure to
credit risk relative to the pool of underlying instruments. [IFRS 9 para B4.1.22].

In such transactions, the tranche has cash flow characteristics that are payments of principal and interest on the
principal amount outstanding only if:
• The contractual terms of the tranche itself (without looking through to the pool of underlying instruments)
give rise to cash flows that are SPPI.
• The underlying pool contains one or more instruments that have contractual cash flows that are SPPI on
the principal outstanding. In addition, the underlying pool of instruments might also include instruments
that:
• reduce the variability of the instruments in the underlying pool (for example, an interest rate cap or
floor, or a contract that reduces the credit risk of the underlying pool of instruments); and

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JN GROUP IFRS 9 Financial Instruments

• align the cash flows of the tranches with the cash flows of the pool of underlying instruments to address
differences in whether the interest rate is fixed or floating, the currency in which the cash flows are
denominated (including inflation in that currency), or the timing of the cash flows.
• The credit rating of the tranche being assessed is equal to or higher than the credit rating that would
apply to a single tranche funding the underlying pool of financial instruments. Tranches with
a lower credit rating (that is, lower than a hypothetical single tranche funding the underlying pool of
financial instruments) are viewed as having leveraged the credit risk, which violates SPPI.
[IFRS 9 para B4.1.21]. [IFRS 9 para B4.1.23]. [IFRS 9 para B4.1.24].
Fair value measurement through profit or loss measurement is required if any instrument in the pool does not meet
the conditions outlined above, or if the composition of the underlying pool might change after the initial recognition
such that it would no longer meet the qualifying conditions, or if it is impracticable to look through. However, if
the underlying pool includes instruments that are collateralised by assets that do not meet the conditions outlined
above, the ability to take possession of such assets is disregarded, unless the entity acquired the tranche with the
intention of controlling the collateral. [IFRS 9 para B4.1.26].
At March 31, 2018 the debt instruments held were:

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JN GROUP IFRS 9 Financial Instruments

35

JN GROUP IFRS 9 Financial Instruments

36

JN GROUP IFRS 9 Financial Instruments

*due to the current market conditions there are less bonds held, this will fluctuate in the future
and the positions held at adoption will be subject to the SPPI test.

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JN GROUP IFRS 9 Financial Instruments

Accounting treatments upon adoption of IFRS 9
Debt Instruments
A financial asset should be subsequently measured at FVOCI if both of the following conditions are met:
• the financial asset is held within a business model whose objective is achieved by both holding financial
assets in order to collect contractual cash flows and selling financial assets; and
• the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.
[IFRS 9 para 4.1.2A].
If the financial asset is measured at FVOCI, all movements in the fair value should be taken through OCI, except for
the recognition of impairment gains or losses, interest revenue in line with the effective interest method and foreign
exchange gains and losses, which are recognised in profit or loss
If the financial asset does not pass the business model assessment and SPPI criteria, or the fair value option is
applied (see para 42.56), it is measured at FVTPL. This is the residual measurement category.
Equity Instruments
For all other equities within the scope of IFRS 9, management has the ability to make an irrevocable election on
initial recognition, on an instrument-by-instrument basis, to present changes in fair value in OCI rather than profit or
loss (except for equities that give an investor significant influence over an investee according to IAS 28, which can
only be accounted for under IFRS 9 if they are measured at FVTPL).
Dividends are recognised in profit or loss unless they clearly represent a recovery of part of the cost of an investment,
in which case they are recognised in OCI. There is no recycling of amounts from OCI to profit or loss – for example, on
sale of an equity investment – nor are there any impairment requirements. But the entity can transfer the cumulative
gain or loss within equity. The FVOCI accounting for equity instruments differs from the FVOCI accounting for debt
instruments, since the cumulative gain or loss previously recognised in OCI is reclassified when the asset is de-
recognised or reclassified.
Another notable difference is that interest income using the effective interest method, foreign exchange gains and
losses and impairment gains and losses are recognised in the income statement for debt instruments measured at
FVOCI, and not for equity instruments measured at FVOCI. [IFRS 9 para B5.7.1].
2.3.3 CONCLUSION ON MEASUREMENT
All loans and receivables are within the hold to collect business model also have features consistent with a basic
lending arrangement and are therefore measured at amortised cost under IFRS 9. The accounting treatment of
loans under IFRS 9 is consistent with the treatment under IAS 39.
Investments (bonds both corporate and sovereign) have an objective to maximise the return on the portfolio to
meet everyday liquidity needs and the entity achieves. That objective by both collecting contractual cash flows and
selling financial assets. In other words, both collecting contractual cash flows and selling financial assets are integral
to achieving the business model’s objective.

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JN GROUP IFRS 9 Financial Instruments

2.3.4 APPENDIX A – ACCOUNTING IMPACT OF CATEGORY CHANGE
The following table shows the different reclassification scenarios and their accounting consequences:

5. APPENDIX B – CREDIT POLICIES FOR THE DIFFERENT ENTITIES
• JN Bank Credit Policy Manual
• JNSBL Credit Manual
• JN Cayman Credit Policies Manual
• JN Fund Managers Credit Risk Management Policy
• JN Life Insurance Co. Ltd. Investment and Loan Policy
6. APPENDIX C – INVESTMENT POLICIES FOR DIFFÈRENT ENTITIES
• JN Bank
• JNSBL
• JN Cayman
• JN Fund Managers
• JN Life Insurance Co. Ltd. Investment and Loan Policy

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JN Group IFRS 9

Position Papers

Volume 1.0 - 2019

3. INVESTMENT PORTFOLIO

• Expedients Policies &Procedures
• Grouping Policies & Procedures
• Impairments – Investment & Securities
• Migration
• Origination Date Policies & Procedures



JN GROUP IFRS 9 Financial Instruments

3.1 EXPEDIENTS POLICIES & PROCEDURES

Topic Expedients Reference: E-I
Portfolio Investments
Population group All Portfolios Version 1.0

3.1.1 PURPOSE & EXECUTIVE SUMMARY

Purpose:

To determine whether the low credit risk operational simplification will be applied, including specific consideration
of the following key questions:

• Will the low credit risk expedient be applied?

Executive Summary:

IFRS 9 allows for the use of practical expedients when measuring expected credit losses, including the use of a “low
credit risk” threshold that can be applied to “investment grade” assets. In particular, the low credit risk operational
simplification allows an entity to presume Stage 1 classification (i.e. 12 month ECL) for assets subject to ‘low credit
risk’.

3.1.2 POPULATION GROUPING

As explained in the executive summary above, the low credit risk option is applied to investment securities within
the investment portfolio. The expedient will be applicable to all investment securities that are determined to have
a low credit risk at the reporting date. The approach for the application will not differ once the definition of “low
credit risk” is defined and which securities it will be applied to within the investment securities portfolio.

3.1.3 INVESTMENT SECURITIES

3.1.4 IFRS 9 GUIDANCE
An entity may assume that the credit risk on a financial instrument has not increased significantly since initial
recognition if the financial instrument is determined to have low credit risk at the reporting date (see paragraphs
B5.5.22-B5.5.24). [IFRS 9.5.5.10]
If reasonable and supportable forward-looking information is available without undue cost or effort, an entity
cannot rely solely on past due information when determining whether credit risk has increased significantly since
initial recognition. It is noted that there is no regulatory guidance which would prevent the Group from using the
‘low credit risk’ expedient.

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JN GROUP IFRS 9 Financial Instruments

3.1.5 ALTERNATIVES CONSIDERED

Will the low credit risk expedient be applied?

The low credit risk expedient identified in IFRS 9.5.5.10 and defined in IFRS 9.B5.5.22 is considered a simplified
approach to assessing whether or not there has been a significant increase in credit risk from the date of initial
recognition. As an exception to the general model, if the credit risk of a financial instrument is low at the reporting
date, the entity can presume that no significant increase has arisen and as a result, it can measure impairment
using 12-month ECL. In order for this operational simplification to apply, the financial instrument has to meet the
following requirements:

• It has a low risk of default.
• The borrower is considered, in the short term, to have strong capacity to meet its obligations.
• The lender expects, in the longer term that adverse changes in economic and business conditions
might, but will not necessarily; reduce the ability of the borrower to fulfil its obligations.

Alternative approaches for applying the low credit risk expedient are as follows:

1) For all portfolios – The low credit risk simplification is applied across all portfolios.

• Practical – Easiest to implement.
• Conceptual – While IFRS 9 does not restrict the application of this expedient, regulatory bodies
will not likely permit this approach.

2) For select portfolios – The low credit risk simplification is applied to select portfolios (e.g.,
investment securities).

• Practical – Easy to implement.
• Conceptual – While IFRS 9 does not restrict the application of this expedient, it is not permitted
by the Basel guidance as defined in Appendix A51. As a result, by using this approach the Group
is able to restrict the application of the exemption to investment securities which are outside
of the scope of the SCRAVL guidance and therefore, meet the requirements of IFRS 9 and SCRAVL
for all portfolios.

3) During transition – The low credit risk simplification is used for select portfolios during transition
where origination data is not available.

• Practical – Easy to implement, but less easy than alternatives 1 and 2 (as it further limits the
application of the exemption).
• Conceptual – While IFRS 9 does not restrict the application of this expedient, it is not permitted
by other regulatory bodies.

4) No – The low credit risk simplification will not be applied to any portfolios.

• Practical – Less easy than alternatives 1 -3 as it places no reliance on the expedient.
• Conceptual – This alternative would comply with the requirements of IFRS 9.

3.1.6 RECOMMENDED APPROACH

The recommended approaches are summarized in the table above.

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JN GROUP IFRS 9 Financial Instruments

1. IFRS 9 allows for the use of the low credit risk expedient to be applied to investment securities. IFRS
9.B5.5.23 indicates that “An external rating of ‘investment grade’ is an example of an instrument that
may be considered as having low credit risk.’

3.1.7 SUPPORT AND RATIONALE

1. Operational efficiency and practicality (implementation and ongoing)

• Generally, expedients are operationally easier to implement and more efficient cost effectiveness
(implementation and ongoing)
• Generally, expedients are more cost effective

2. Ability to leverage existing models and processes (if desired)
• Analysis of investment securities internal credit ratings to conclude on cut-off for definition of “low
credit risk”.

3. Ability to meet deadlines (implementation and ongoing)

• No concerns noted

4. Modifiable in future periods as facts and circumstances change that require changes

• The analysis will be required to be updated at each measurement date and therefore, will incorporate
changes in facts and circumstances related to behavior and contractual terms as they arise.

The recommended approach is consistent with industry practice and we are seeing D-SIBs steer clear of using
practical expedients in order to comply with local regulatory requirements.

3.1.8 IMPLEMENTATION AND EXECUTION CONSIDERATIONS

In order to implement the recommended approach noted above, on implementation and on an ongoing basis, the
Group will need to complete the tasks noted in the Next Steps section above.

Differences from current practice:
These expedients are new as there was no concept of stage migration under IAS 39.

3.1.9 APPENDIX A – RELEVANT EXTRACTS FROM IFRS 9

Low credit risk exemption
An entity may assume that the credit risk on a financial instrument has not increased significantly since initial
recognition if the financial instrument is determined to have low credit risk at the reporting date (see paragraphs
B5.5.22-B5.5.24)[IFRS 9.5.5.10]

The credit risk on a financial instrument is considered low for the purposes of paragraph 5.5.10, if the financial
instrument has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations
in the near term and adverse changes in economic and business conditions in the longer term may, but will not
necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. Financial instruments
are not considered to have low credit risk when they are regarded as having a low risk of loss simply because of
the value of collateral and the financial instrument without that collateral would not be considered low credit risk.
Financial instruments are also not considered to have low credit risk simply because they have a lower risk of default
than the entity’s other financial instruments or relative to the credit risk of the jurisdiction within which an entity
operates. [IFRS 9.B5.5.22]

To determine whether a financial instrument has low credit risk, an entity may use its internal credit risk ratings or
other methodologies that are consistent with a globally understood definition of low credit risk and that consider
the risks and the type of financial instruments that are being assessed. An external rating of ‘investment grade’ is an
example of a financial instrument that may be considered as having low credit risk. However, financial instruments
are not required to be externally rated to be considered to have low credit risk. They should, however, be considered
to have low credit risk from a market participant perspective taking into account all of the terms and conditions of
the financial instrument. [IFRS 9.B5.5.23]

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JN GROUP IFRS 9 Financial Instruments

Lifetime expected credit losses are not recognised on a financial instrument simply because it was considered to
have low credit risk in the previous reporting period and is not considered to have low credit risk at the reporting
date. In such a case, an entity shall determine whether there has been a significant increase in credit risk since initial
recognition and thus whether lifetime expected credit losses are required to be recognised in accordance with
paragraph 5.5.3. [IFRS 9.B5.5.24]

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JN GROUP IFRS 9 Financial Instruments

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JN GROUP IFRS 9 Financial Instruments

3.2 GROUPING POLICIES & PROCEDURES

Topic Grouping Reference: GP-I
Portfolio Investments
Population group All Products Version 1.0

3.2.1 PURPOSE & EXECUTIVE SUMMARY

Purpose:

To determine whether and how portfolios will be grouped for the purposes of assessing significant increases in
credit risk from initial recognition and the measurement of expected credit losses, including specific consideration
of the following key questions:

• Is the exposure assessed on a collective or individual basis?
• How are exposures grouped on origination?
• How often and when is resegmentation/ regrouping of the population required (e.g. each
reporting period, etc.)?
• How dynamic regrouping is applied operationally?
• Are exposures assessed at the obligor or facility level?

Executive Summary:

As noted in the papers on Migration and IFRS 9 Impairment (Investments), the recommended approaches are
for the Group to assess stage migration and calculate ECLs at the individual instrument level. For the purpose of
stage migration, the Group already generates BRR grades to which each investment can be related and its existing
expected loss models already estimate parameters at the individual instrument level. As a result, segmentation is
applied for the purpose of parameter estimation and for applying qualitative overlays (i.e. after instrument level
ECL estimates) when risks cannot be identified or quantified at the individual instrument level (e.g. whether related
to stage migration or ECL measurement), as well as for financial statement and other disclosure purposes.

IFRS 9 specifies that grouping may be done based on a number of factors, such as instrument type, collateral type,
industry, vintage and so on (refer to IFRS 9.B5.5.5 for complete list). However, we recommend that the Group
review its current segmentation to ensure that all relevant factors have been considered and develop a process to
review segmentation at each reporting date to ensure that no changes in circumstances have arisen which might
otherwise require adjustment to the segments used.

Note – the term ‘overlay’ in the discussion below is intended to describe any adjustment made to model outputs
(i.e. post-model adjustments) whether qualitative or otherwise.

3.2.2 POPULATION GROUPING

The approach to segmentation is consistent for all products and considers differences related to:

a) instrument type;
b) credit risk ratings;
c) collateral type;
d) date of initial recognition;
e) remaining term to maturity;
f) industry;
g) geographical location of the borrower; and
h) the value of collateral relative to the financial asset if it has an impact on the probability of a default
occurring (for example, non-recourse loans in some jurisdictions or loan-to-value ratios).

3.2.3 IFRS 9 GUIDANCE

In order to meet the objective of recognising lifetime expected credit losses for investments that have experienced
a significant increases in credit risk since initial recognition, it may be necessary to perform the assessment of
significant increases in credit risk on a collective basis by considering information that is indicative of significant

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JN GROUP IFRS 9 Financial Instruments

increases in credit risk on, for example, a group or sub-group of financial instruments. This is to ensure that an entity
meets the objective of recognising lifetime expected credit losses when there are significant increases in credit risk,
even if evidence of such significant increases in credit risk at the individual instrument level is not yet available.[IFRS
B5.5.1]

In some circumstances an entity does not have reasonable and supportable information that is available without
undue cost or effort to measure lifetime expected credit losses on an individual instrument basis. In that case,
lifetime expected credit losses shall be recognised on a collective basis that considers comprehensive credit risk
information. [IFRS B5.5.4]

For the purpose of determining significant increases in credit risk and recognising a loss allowance on a collective
basis, an entity can group financial instruments on the basis of shared credit risk characteristics with the objective of
facilitating an analysis that is designed to enable significant increases in credit risk to be identified on a timely basis.
The entity should not obscure this information by grouping financial instruments with different risk characteristics.
Examples of shared credit risk characteristics may include, but are not limited to, the:

a) instrument type;
b) credit risk ratings;
c) collateral type;
d) date of initial recognition;
e) remaining term to maturity;
f) industry;
g) geographical location of the borrower; and
h) the value of collateral relative to the financial asset if it has an impact on the probability of a default
occurring (for example, non-recourse loans in some jurisdictions or loan-to-value ratios). [IFRS 9.B5.5.5]

3.2.4 ALTERNATIVES CONSIDERED

As noted in the papers on Migration and Impairment, the recommended approaches are for the Group to assess
stage migration and calculate ECLs at the individual instrument level. For the purpose of stage migration, the
Group already generates BRR grades to which each investment can be related and its existing expected loss models
already estimate parameters at the individual instrument level. As a result, segmentation is applied for the purpose
of parameter estimation and for applying the Vasicek model or qualitative overlays (i.e. after instrument level ECL
estimates) when risks cannot be identified or quantified at the individual instrument level (e.g. whether related to
stage migration or ECL measurement), in addition to financial statement and other disclosures.

Parameter estimation

Although the recommended approach to ECL measurement is to estimate parameters at the instrument level and
use those estimates to calculate instrument level ECLs, the historical information about the portfolios must be
initially segmented in order to feed the models. This segmentation should be done on a basis consistent with the
requirements of IFRS 9 as explained below.

Qualitative overlays

Qualitative overlays may be required either for the purpose of stage migration (e.g. where a particular industry
or geography etc. has been impacted by a change in credit risk), or for ECL measurement in cases where the
incremental risk cannot be quantified at the individual instrument level. In these cases, the pool migration or overlay
should ideally be done at the lowest level possible in order to avoid over-provisioning.

As noted by IFRS 9.B5.5.5, an entity should not combine instruments with different characteristics if doing so
obscures information about them. This requirement applies both to the parameter estimation and overlays and the
Group should develop a process to ensure that in both cases the segmentation being applied is consistent with
the requirements of IFRS 9 including, in particular, the factors listed below. While overall it is expected that the
Group’s segmentation may be more granular under IFRS 9 than it is currently, significant management judgment
will be necessary to strike the right balance between under-segmenting (e.g. aggregating at too high a level which
could obscure information and lead to over or under-provisioning) and over-segmenting (e.g. separating immaterial
segments with no significant impact).

1With the exception of immaterial portfolios which initially may be subject to simplified approaches and could include collective assessments.

Because stage migration and ECL measurement is being done at the instrument level, no alternatives were
considered for applying collective approaches in these areas.

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JN GROUP IFRS 9 Financial Instruments

3.2.5 RECOMMENDED APPROACH

Responses to specific questions

Is the exposure assessed on a collective or individual basis?

• Refer to overall recommended approach as summarized above
• It is expected that significant increases in credit risk will be monitored and that ECLs will be calculated
at the individual instrument level, with the potential in both cases for a qualitative overlay where risks
cannot be quantified at the instrument level

How are exposures grouped on origination?

• As explained above, segmentation is applied for the purpose of developing parameter estimates that
are then applied to calculate individual instrument level ECLs, and for overlays where risks cannot be
quantified at the individual instrument level, as well as for financial statement and other disclosures
• While it is expected that much of the Group’s existing processes for determining segments can continue
to be applied, currently being segmented between corporate and sovereigns, we recommend that the
Group review its segmentation on transition and on an ongoing basis based on the factors in IFRS
9.B5.5.5, including:

a) instrument type;
b) credit risk ratings;
c) collateral type;
d) date of initial recognition;
e) remaining term to maturity;
f) industry;
g) geographical location of the borrower; and
h) the value of collateral relative to the financial asset if it has an impact on the probability of a default
occurring (for example, non-recourse loans in some jurisdictions or loan-to-value ratios).

How often and when is resegmentation/ regrouping of the population required (e.g. each reporting period, etc.)?

• Although not expected to be frequent, the factors noted above from IFRS 9.B5.5.5 (i.e. those used to
segment portfolios for the purpose of stage migration assessments and measuring ECLs) may change
from one period to another. It may be beneficial for the Group to re-segment the portfolio in order to
avoid over-provisioning by applying an overlay to the entire segment or by migrating the entire segment
into Stage 2, which could be avoided by sub-segmenting the portfolio to isolate the impacted sub-
segment and applying overlays and collective migration to that portion only.
• As these factors could change each reporting period (i.e. quarterly), we recommend that the Group
adopt a quarterly process to consider whether any changes in segmentation are required for the
purpose of migration and qualitative overlays in measuring ECLs (i.e. not a comprehensive re-
performance of all segmentation each period, but rather a ‘stand-back’ test to ensure that an appropriate
level of information is being captured), as well as for financial statement and other disclosure purposes.

How is dynamic regrouping applied operationally?

• The Group will need to develop a process for ongoing review of segments to ensure appropriate level
of aggregation is achieved (e.g. elements of the management overlay process).
• In applying this process, the Group would then consider not only whether new segments have arisen
that require separate collective assessment or overlay, but also whether segments assessed as requiring
Stage 2 migration or qualitative overlay continue to be subject to the specific risk characteristic
noted previously. For example, in some cases a risk may not be identifiable at the instrument level, but
may subsequently become identifiable at the instrument level in later periods (in which case the Group
may move from a collective to individual assessment), or the risk condition may abate altogether causing
a reversal of the stage migration or overlay. Procedures should ensure that there is no double counting
(e.g. overlay plus individual assessment) in the provisioning process.

3.2.6 SUPPORT AND RATIONALE

As noted above, the recommended approach was selected on the basis that the Group already develops
instrument level parameters and therefore, there is no significant incremental burden to performing stage migration
assessments and ECL measurements at the individual loan level versus on a pool basis. While expected to be rare,

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