KENANGA ANNUAL REPORT 2017

2. CHANGES IN ACCOUNTING POLICIES AND REGULATORY REQUIREMENT (CONT’D.) 2.2 Standards issued but not yet effective (cont’d.) MFRS 9 Financial Instruments In November 2014, MASB issued the final version of MFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces MFRS 139 Financial Instruments: Recognition and Measurement and all previous versions of MFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. MFRS 9 is effective for annual periods beginning on or after 1 January 2018. Retrospective application is required, but comparative information is not compulsory. The Group has set up a project team to prepare for MFRS 9 Implementation with the involvement from Risk, Finance and Operations personnel, as well as the assistance from external consultants. The project team regularly reports to the Audit Committee. The Bank has also engaged its external auditor to independently verify and validate the accounting policies and solution tools to be developed under the project and to report on whether they comply with the requirements of MFRS 9. The adoption of MFRS 9 will have an effect on the classification and measurement of the Group and the Bank’s financial assets, but will not have an impact on the classification and measurement of the Group and the Bank’s financial liabilities. The impact on hedge accounting is not applicable to the Bank. MFRS 9 will require all financial assets, other than equity instruments and derivatives, to be classified on the basis of two criteria, namely the entity’s business model for managing the assets, as well as the instruments’ contractual cash flow characteristics. Financial assets will be measured at amortised cost if they are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows that are solely payments of principal and interest. If the financial assets are held within a business model whose objective is achieved by both selling financial assets and collecting contractual cash flows that are solely payments of principal and interest, the assets shall be measured at fair value through other comprehensive income (“FVOCI”). Any financial assets that are not measured at amortised cost or FVOCI will be measured at fair value through profit or loss (“FVTPL”). MFRS 9 will also allow entities to continue to irrevocably designate instruments that qualify for amortised cost or FVOCI as FVTPL, if doing so eliminates or significantly reduces a measurement or recognition inconsistency. Equity instruments are normally measured at FVTPL; nevertheless entities are allowed to irrevocably designate equity instruments that are not held for trading as FVOCI, with no subsequent reclassification of gains or losses to the profit or loss. Having completed its latest assessment, the Group and the Bank does not expect any major change in classification and measurement of financial assets; with the outcome as follow: – the majority of loans and advances that are classified as loans and receivables under MFRS 139 are expected to be measured at amortised cost under MFRS 9; – investments in money market instruments and corporate bonds held for liquidity management purposes, some of which are currently classified as available-for-sale under MFRS 139, are expected to be measured at FVOCI under MFRS 9; – the investments in equity instruments not held for trading which are classified as available-for-sale under MFRS 139 are expected to be measured at FVOCI (with no recycling to profit or loss) under MFRS 9; – financial assets held for trading are expected to continue to be measured at FVTPL. Annual Report 2017 31 December 2017 99 notes to the financial statements