Text | Ai Bin Xinbing Points
With the disclosure of financial reports of overseas listed Internet finance companies, Xinbing Points found that all companies have affected their performance last year due to the increase in "expected loss provisions", and the initiator behind this was that "International Financial Reporting Standards No. 9 - Financial Instruments" (IFRS9) (hereinafter referred to as "North Standards No. 9") began to take effect on January 1, 2018. Standard No. 9 has brought about major changes in financial instrument accounting and has the most significant impact on financial institutions.
From the main impact on the daily operation of financial assets, the changes in Standard No. 9 relative to the original are reflected in two aspects: First, financial assets are divided into three categories according to business model and contract cash flow characteristics, and are no longer divided into four categories according to the purpose of holding; Second, financial assets use the "expected loss model" to replace the current "loss model".
This standard may have a significant impact on the method of classifying and measuring the company's financial assets, resulting in changes in volatility of profit and loss (profit) and equity (assets), which in turn affects the key performance indicators of listed fintech companies.
This article will introduce the classification of financial assets of Standard No. 9, the "expected loss model" of financial assets impairment, and the impact of Standard No. 9 on the financial reports of listed financial technology companies.
(I) Financial Asset Classification
Compared with the four categories of "International Accounting Standard No. 39 - Financial Instruments" (hereinafter referred to as "IAS39"), Standard No. 9 reduces the classification of financial assets to three categories:
Financial assets measured at fair value and whose changes are included in the current profit and loss (FVTPL)
Financial assets measured at fair value and whose changes are included in other comprehensive income (FVTOCI)
Financial assets measured at amortized cost (AC)
0 0 friendly reminder: FVTPL adjusts the book value at the end of the period at a fair value, which has already achieved the effect of reducing assets and reducing profits, so there is no need to make additional impairment provisions. Both FVTOCI and AC need to do impairment tests, and the impairment and impairment provisions are included in the current profit and loss.
Standard No. 9 requires that the determination of financial asset categories is no longer based on the company's holding intention, but instead determines business model and cash flow characteristics. Among them, the business model refers to the purpose of a company holding financial assets, whether it is to obtain the cash flow agreed in the contract, or to sell it to obtain the difference between the fair value of the asset and the price difference of , or both. Cash flow of financial assets only refers to the principal and interest paid during the contract period.
In actual operation, it is generally first to judge whether the contract cash flow is only for payment of principal and interest. If it is not satisfied, it is classified as "FVTPL". If it is satisfied, it is then judged whether the business model is only for holding assets and obtaining contract cash flow. If it is satisfied, it is classified as "AC". If it is not satisfied but the business model is not satisfied but the purpose of meeting the business model is "acquisition of contract cash flow and sale", it is classified as "FVTOCI". If both of the above two are not satisfied, it is classified as "FVTPL". See the figure below for details.
Criteria No. 9 is more objective than IAS39 classification and is not easily disturbed by human factors. Since the recognition standards for the two categories of "FVTOCI" and "AC" are stricter, it is expected that the scope of financial assets classified as FVTPL will be expanded. Classification as FVTPL means that changes in the fair value of assets are included in the current profit and loss, and the company's profit and asset fluctuations may increase. For fintech companies, they will be more cautious when investing in financial assets to prevent the key performance indicators from fluctuating significantly as FVTPL.
At the same time, IFRS9 has stricter requirements for reclassification of financial assets. If the business model of the financial assets held changes, assets measured at fair value can be reclassified as measured at amortized cost, or vice versa; however, assets measured at fair value changes in current profit and loss cannot be changed to other comprehensive income, otherwise it is not allowed. This requires companies to be more cautious when initially confirming financial assets.
(II) "Expected Credit Loss" model for financial asset impairment
Standard No. 9 replaces the "losses that occurred" model in IAS39 with the "Expected Credit Loss" model, which means that credit loss preparations do not need to be confirmed after the loss event occurs.This standard will solve the problem of "too small and too late" credit loss provisions, and will speed up the recognition of losses and release potential risks in advance. We expect the new impairment regulations to increase credit loss provisions for many fintech companies and increase profit and loss (profit) volatility.
"Expected Credit Loss" model is applicable to the following three types of financial instruments: assets measured at amortized cost or at fair value and whose changes are included in other comprehensive income (most important for fintech companies) , debt instruments such as loans or bonds recognized on the balance sheet, and loan commitments and financial guarantee contracts.
In actual operation, according to the deterioration of asset credit quality, the "expected credit loss" model adopts the "three-stage method" to confirm the expected credit losses and interest income of financial assets at the balance sheet date.
Phase 1: If the credit quality has low credit risk or does not deteriorate significantly after initial recognition, the impairment provision will be confirmed based on the expected credit loss amount of 12 months, and the interest income will be calculated based on the total book value of the assets (i.e., no deduction of expected credit losses).
Phase 2: If the credit quality deteriorates significantly after initial confirmation but there is no sign of objective impairment, the impairment provision will be confirmed based on the expected credit loss amount in the life cycle, but the interest income will still be calculated based on the total book amount of the asset.
Stage 3: If there are signs of objective impairment, the impairment provision shall be confirmed based on the expected credit loss amount in the life cycle, and the interest income shall be calculated based on the net book value of the asset (i.e., deducting expected credit losses). The impact of the implementation of
(III) No. 9 on the financial report of fintech companies
9 after the implementation of , accounts receivable, related party receivable, financial leasing receivable, prepayment and other receivables related to the main business of fintech companies will have too large changes in impairment provisions such as accounts receivable, related party receivable, financial leasing receivable, prepayment and other receivables will affect operating profit and net profit; excessive changes in impairment provisions for investment financial assets such as equity investment and bonds will generally only affect net profit.
Qudian (NYSE:QD), Papaidai (NYSE:PPDF) and other financial technology companies obtain credit funds from banks and other financial institutions and individual investors, and give them to the borrower in the form of cash loans or consumer loans. A large amount of receivables will appear in the company's account. Yixin Group (02858.HK) financial leasing, Qudian 's defeat of automobile installment business will also lead to large amounts of accounts receivable on the account. When the macro economy declines, the borrower or leaser's ability to repay or the repayment is insufficient, it may lead to the risk of inability to recover the accounts receivable. Accounts receivable, related party receivable and financial leasing receivable are usually measured at amortized costs. After adopting the "expected credit loss" model, the company needs to increase the provision for credit loss, the amount of related bad debt reserves will increase, and the profit and loss fluctuation will be greater.
In 2018, the bleak revenue of Dabai Automobile's installment business of Qudian dragged down its overall profitability, and the credit business overdue rate also increased. The company stated that in order to reduce expenses and avoid the risks caused by asset impairment, Dabai Automobile's business was quickly reduced. We found from the Qudian 's annual financial statements for 2018 that the company's impairment and provisions increased from 605.2 million yuan in 2017 to 1.179 billion yuan in 2018, which may be due to the increase in impairment and impairment provisions accrued by related parties and accounts receivable.
At the same time, the 2018 annual report released by Yixin Group also showed that the company's adjusted operating profit in 2018 decreased by 33% year-on-year to 328 million yuan, while the adjusted net profit decreased by 26% year-on-year to 345 million yuan. The reduction was mainly due to the increase in the credit loss provision for financial leasing receivables after the adoption of Standard 9, from RMB 196 million in 2017 to RMB 497 million in 2018.
In addition, the assets such as "hold-to-maturity bonds" and "accounts receivable bonds" owned by fintech companies are measured at amortized costs in IAS39. Under the new rules, some holding maturing bonds may not meet the requirements of "payment of only principal and interest" due to the existence of clauses such as variable interest rates, early repayment rights, and extension options. Some receivable bonds cannot determine whether they are just for obtaining contract cash flow due to their vague business model.Therefore, some bonds may be classified as measured at fair value, and the possibility of credit losses or credit loss provisions increase will increase, which will affect the profit and loss and equity fluctuations of financial technology companies.
