Annual Report 2017

Rothschild & Co | Annual Report 2017

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1. Overview

4. Financial statements

Management report

2. Business review

D. Developments in reporting standards and interpretations

The standards and interpretations used in preparation of the financial statements to 31 March 2017 were supplemented by the IFRS as adopted by the

European Union at 31 December 2017 whose first-time application is mandatory in the nine months to 31 December 2017 financial period.

1 New accounting standards affecting the consolidated financial statements in the nine months ended

31 December 2017

New amendments and interpretations of accounting standards, which are mandatory for the Group’s financial statements for the nine months ended

31 December 2017, are considered to have no material effect on the Group. The Group did not choose to apply any new standards, amendments and

interpretations adopted by the European Union for which the application in the nine months ended December 2017 was optional.

2 Future standards and interpretations

A number of significant changes to the Group’s financial reporting for future accounting periods are expected as a result of amended or new accounting

standards and interpretations from the IASB. The most significant of these are as follows:

2.1 IFRS 9 FINANCIAL INSTRUMENTS

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement. It sets new principles governing the classification

and measurement of financial instruments, impairment of credit risk and hedge accounting. IFRS 9 is effective for periods beginning on or after

1 January 2018.

In preparation for applying this standard, the Group’s finance function has worked with the business lines and support functions which will be most

affected by the changes, and reported its progress to the R&Co Audit Committee and to the GEC. For R&Co, the main challenges set by IFRS 9 are

expected to relate to two main changes:

2.1.1 IFRS 9: CLASSIFICATION AND MEASUREMENT

Financial assets must be classified in one of three categories according to the measurement methods applied: amortised cost; fair value through profit

or loss (FVTPL); and fair value through other comprehensive income (FVOCI). Classification will depend on the contractual cash flow characteristics of the

instruments and the entity’s business model for managing its financial instruments.

By default, financial assets will be classified as measured at fair value through profit or loss.

Debt instruments (loans, receivables and bonds) will be measured at amortised cost only if the contractual cash flows consist solely of payments of

principal and interest (“the SPPI test”), and the business model is predominantly to collect the contractual cash flows.

Debt instruments which meet the SPPI test, but for which the business model is not predominantly to collect the contractual cash flows, will be measured

at fair value through other comprehensive income (with cumulative gains or losses reclassified in profit or loss when the instruments are derecognised).

Non-trading equity instruments will be measured at fair value through profit or loss, except where an irrevocable election is made at initial recognition to

measure them at fair value through other comprehensive income without subsequent reclassification to income.

Accounting for financial liabilities is largely unchanged and is not expected to have an impact on R&Co.

Implementation of classification and measurement changes

Where it has a choice, the Group has decided, based on existing business models, to classify its assets under IFRS 9 based on the following principles:

1 Investment assets

Assets which are held primarily to make valuation gains will be classified as fair value through profit or loss. This will include Merchant Banking investments.

2 Loans and other receivables

Loans and other receivables will continue to be classified as amortised cost where allowed under IFRS 9.

3 Debt securities within the liquidity portfolio

Certain highly liquid debt securities are held by the treasury function for a long period of time. These securities may be sold before maturity, but such sales

are not expected to be more than infrequent. The Group considers that these securities are held within a business model whose objective is to hold assets

to collect the contractual cash flows. These assets will be classified as measured at amortised cost under IFRS 9.

4 Securitised vehicles

Under IAS 39, the Group’s investments in securitised vehicles are classified as AFS debt investments. When applying IFRS 9, the Group must make an

assessment of whether the tranches held meet the SPPI criteria. A critical point to consider is whether the tranche has a credit rating that is higher than

the underlying portfolio of assets. Those which do (generally the senior tranches) can be classified as amortised cost. Those which do not (generally the

junior tranches) must be classified as FVTPL.