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IFRS 9 provides accounting guidance on how companies should value financial instruments. Under IFRS 9 all financial instruments are initially measured at fair value plus or minus, within the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs [IFRS 9: 5.1.1]. Subsequent measurement falls into one among three categories [IFRS 9: 5.2.1]:

1. amortised cost;

2. fair value through other comprehensive income (FVTOCI);

3. fair value through profit or loss (FVTPL).

For all financial assets not measured at FVTPL, IFRS 9 introduced a replacement impairment model supported expected credit losses (rather than incurred losses as per IAS 39), which features a wider scope of application than IAS 39. In contrast to IAS 39, immediately upon initial recognition of the financial asset on the company’s record, a provision for expected credit losses (impairment) is made. This is applicable to all or any debt instruments held as financial assets that are valued at amortised cost or at FVOCI, off-balance sheet commitments and financial guarantees (unless measured at FVTPL), also as lease receivables and contract assets under IFRS 15 [IFRS 9: 5.5.1]. After initial recognition entities are obliged to reassess at reporting date whether there has been a big increase in credit risk (SICR) on the financial asset, whether assessed on a private or collective basis, considering all reasonable and supportable information, including that which is forward-looking [IFRS 9: 5.5.4]. IFRS 9 features a general approach for measuring impairment losses. Under this approach, entities are required to apportion the ECL into either:

--> 12-month ECLs – where there has not been a SICR, that portion of the lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date [IFRS 9: 5.5.5];

--> life-time ECLs – where there has been a SICR, this is often defined because the expect credit losses arising from all possible default events over the whole expected maturity of the financial instrument [IFRS 9: 5.5.4].

At each reporting date, entities are required to assess whether the credit risk on a financial instrument has increased significantly (SICR) since initial recognition. Under IFRS 9 entities might got to transfer financial assets from the 12-month ECL to the life-time ECL, therefore the new impairment method has three levels or stages [IFRS 9: B5.5.26]:

--> Stage 1, with reference to financial assets (not measured at fair value through profit and loss) entities got to provide a minimum of for the 12-month ECL;

--> a significant increase within the probability of a default (SICR) occurring since initial recognition results in a Stage 2 recognition of a provision (life-time ECL), which could materially increase the quantity of provisioning;

--> if the financial assets’ credit risk increases to the purpose where it's considered credit-impaired, interest revenue is calculated supported the loan’s amortised cost, this is often referred to as Stage 3. Lifetime ECLs are recognized as in Stage 2[1].

When assessing whether there's SICR, entities use the change within the risk of a default occurring over the expected lifetime of the financial instrument rather than the change within the amount of expected credit losses. Entities may use various approaches to assess whether credit risk has increased significantly. However, there are some specific requirements included within the standard which will be considered very relevant for the present COVID-19 crisis[2]. Consistent with the appliance of ECL model during the COVID-19 crisis, Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) for financial assets assessed for impairment both individually and collectively. The loan loss provision for financial assets is predicated on assumptions about the danger of default and expected loss rates. The utilization of various assumptions could produce significantly different estimates of ECL and therefore the inclusion of forward-looking macroeconomic scenarios requires judgement. Many banks base their scenario approach on judgements. Banks could leverage on approaches already adopted by some big global banks like Barclays, HSBC and SCB going forward[3]. These approaches include the Consensus Economic Scenario Approach or the Monte Carlo Simulation Approach. These approaches use mainly economic variables like unemployment rates, GDP growth, house prices, commodity prices and short-term interest rates. These models which are normally very useful, are struggling to include the acute economic conditions and therefore the levels of state support measures related to the present COVID-19 pandemic. Consequently, banks got to change their initial risk models so as to avoid misestimating credit risk. Banks have had to form many judgements in constructing models to suits the IFRS 9 impairment requirements. Differing approaches surely key judgements may end in IFRS 9 impairment provisions being treated inconsistently across banks and between jurisdictions, particularly during times of stress. Governments and banks in many jurisdictions have introduced extraordinary measures to alleviate the financial and economic impact of COVID-19. The relief measures include a variety of various payment moratoriums and government guarantees (ESMA 202; IPSASB 2020). Given the very fact that the COVID-19 crisis remains quite new and therefore the impact on future economic conditions is extremely hard to predict, banks are finding it very difficult to spot the ‘reasonable and supportable information’ [IFRS 9: 5.5.4] that they will use in their scenario models[4]. Consequently, the approach adopted by any particular entity varies counting on its specific situation and therefore the methodology it adopts in assessing ECL. Banks are likely to include estimates of forward-looking macro-economic factors into multiple scenarios about the longer term economy. The extent to which a subsequent spread of the COVID-19 virus would be factored into these possible scenarios, and therefore the associated probabilities of such scenarios, will vary counting on characteristics of the financial asset, like location and industry. Bank regulators have reacted to the COVID-19 crisis in several ways. In summary, we've seen two sorts of interference, sometimes combined by regulators:

--> interference in accounting by introducing more flexibility in interpreting and applying the accounting standards; delaying accounting standards; issuance of guidance to facilitate banks with macroeconomic scenarios and information;

--> interference in regulatory accounting; relaxation of capital requirements; extending transition periods[5].

Even before the COVID-19 crisis, prudential banking regulators in several jurisdictions had adopted the approach of smoothing over time or delaying the impact of the adoption of the ECL model on capital adequacy measures. Such a practice eased the massive impact of the transition from the incurred loss model to the ECL and assists banks to strengthen their capital position. For instance, BCBS (2020) notes that:

“Irrespective of when a jurisdiction initially began to apply transitional arrangements, for the two year period comprising the years 2020 and 2021, jurisdictions may allow banks to add-back up to 100% of the transitional adjustment amount to CET1.7.4 The “add-back” amount must then be phased-out on a line basis over the next 3 years”. The Prudential regulatory agency of the BoE (2020) reminded UK financial institutions that the transitional arrangements in situ within the UK meant that ‘the regulatory capital impact of ECL is being phased in over time and through 2020, firms can add back CET1 like up to 70% of “new” provisions thanks to IFRS 9’. In the US, Marlin (2020) reports that the initial adoption of the CECL model for reporting periods ending 31 December 2020 resulted within the largest US banks recording approximately a 30% increase in their loan loss provisions[6]. The potential for a negative impact on capital adequacy measures had already been anticipated by US banks who lobbied the Office of the Comptroller of the Currency (Treasury), the Board of Governors of the Federal Reserve System System, and therefore the Federal Deposit Insurance Corporation with various proposals to smooth these negative impacts. As a result, these US agencies responded by issuing a rule that allowed any bank that incurred reduced retained earnings as a results of the initial adoption of the CECL model the choice of selecting to spread that regulatory capital impact over a three-year period (Office of Comptroller of the Currency, Treasury et al. 2019). Since the increase of the COVID-19 crisis and therefore the consequential government relief initiatives, regulators and prudential banking supervisors have provided further guidance, inter alia, about the estimation of expected losses of monetary assets. The crisis has also created a chance for those that are critical of the ECL (or of the US CECL) model to lobby for a delay in its application or maybe, ultimately, the repeal of the ECL requirements. We consider these responses within the context, firstly, of the EU and therefore the UK and, secondly, in the US[7].

One possible solution to overcome this crisis for the banks, could be to implement M&A operations. Mostly in Italy, in the last few years, we’ve seen lots of banks to do this kind of operations to improve their financial situation. For instance, the operation of M&A between Banco Popolare and BPM which has generated a new banking reality called Banco BPM. Before the merger, the two banks did not have a financial situation on par with the average of the large Italian banks, but after the merger it became one of the most important Italian banks. In detail, it is then explained how the merger operation and IFRS 3 were implemented and the related results. the Business Combination, it was identified on January 1, 2017, as the legal, accounting and tax effects of the transaction take effect from that date. The shares of the new entity were, in fact, attributed to the shareholders of the two merged banks with effect from that date and are tradable on the stock exchange starting from 2 January 2017 (first subsequent business day). No agreements have been envisaged such as to guarantee control to a category of shareholders before that date. The next step after identifying the date of the extraordinary management operation is to determine the cost of the combination.[8] The consideration transferred in a business combination is equal to the fair value, at the acquisition date, of the assets sold, the liabilities incurred and the equity instruments issued by the buyer in exchange for obtaining control of the acquisition. The consideration that the buyer transfers in exchange for the acquired entity includes any assets and liabilities resulting from an agreement on the "contingent consideration", to be recognized at the acquisition date on the basis of fair value. Changes to the consideration transferred are possible if they derive from additional information on facts and circumstances that existed at the date of acquisition and are recognizable within the measurement period of the business combination (ie within twelve months of the acquisition date). Any other changes resulting from events or circumstances subsequent to the acquisition, such as that recognized to the seller linked to the achievement of certain income performance, must be recognized in the income statement. The costs related to the acquisition, which include brokerage fees, consultancy, legal, accounting, professional costs, general administrative costs, are recorded in the income statement at the time of their incurring, with the exception of the costs of issuing shares and securities of debt which are recognized on the basis of the provisions of IAS 32 and IAS 39.

IFRS 3 requires that the cost of a business combination be determined as the sum of the fair value, at the date of the exchange: of the assets sold, the liabilities incurred and the equity instruments issued by the buyer in exchange for control of the acquisition.

In the transaction in question, the consideration transferred is represented by the fair value of the shares issued by the new entity and assigned to the shareholders of the former Banca Popolare di Milano (acquired entity). The amount in question was 1,548.2 million and is equal to the number of new Banco BPM shares assigned to the former shareholders of Banca Popolare di Milano (687,482,024 shares calculated by multiplying the BPM stake 45.37 % by the number of new shares issued equal to 1,515,182,126) multiplied by the opening price of the Banco BPM share recorded on 2 January 2017 (€ 2.252).[9]

Due to the specific nature of the own merger, no price adjustment mechanisms or potential payments are envisaged.

In addition, the cost of the combination did not take into account the costs related to the acquisition, which were accounted for by the purchaser as operating expenses to the extent that the costs were incurred and / or services were received, as established by IFRS 3.

With regard to the recognition and measurement of assets and liabilities acquired at fair value, the starting point is the value of the consolidated net equity of the BPM Group, which is equal to € 4,364,450,000. To this value must be added and subtracted the values ​​of the assets and liabilities recognized at fair value whose value is equal to € 405,460,000 which, net of the tax effect, is equal to € 259,897,000. Pursuant to art. 172 TUIR, the merger is fiscally neutral. This entails the creation of the recognition of deferred taxes when the book values ​​differ from the fiscal ones. As far as assets are concerned, if the book values ​​are greater than the fiscal values, deferred taxation is generated with the recognition of the related deferred tax reserve; in the case in which the opposite situation arises, or the book values ​​are lower than the fiscal values, there is deferred taxation and consequently the recognition of a tax credit. Instead, the recognized liabilities are managed in the opposite way; when the book values ​​are lower than the fiscal values, deferred taxes are generated, otherwise prepaid taxes. In our case in question, the net tax effect is equal to € 145,563,000 of deferred taxes calculated as the difference between € 431,459,000 of deferred taxes and € 285,896,000 of prepaid taxes. After recognizing assets and liabilities at fair value, the final result is reached, ie the BPM Group's equity expressed at fair value, which is equal to 4,624,347,000 €. Four years after the operation, the main KPIs have had significant changes. For example, doing an analysis from 2015 to 2019, we see that the normalized net profit varied by + 80%, the ROTE by + 4%, CET1 by + 0.6% and cost to income ratio of -4.2% . As we can see from these indicators, after the merger there have been improvements in terms of economic and financial performance and this solution should be undertaken by banks that are currently in a state of crisis in order to recover and have a predominant slice of the banking market[10].

[1] International Public Sector Accounting Standards Board 2020, ‘COVID-19 Relevant IPSASB Accounting Guidance’, Staff Questions and Answers, April. Available at: QA-COVID-19-Relevant-Accounting-Guidance_0.pdf, accessed 11 April 2020. [2] International Accounting Standards Board 2020, ‘IFRS 9 and COVID-19: Accounting for Expected Credit Losses Applying IFRS 9 Financial Instruments in the Light of Current Uncertainty Resulting from the COVID-19 Pandemic, 27 March. Available at: ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en, accessed 6 April 2020. [3] International Monetary Fund 2020a, ‘Transcript of April 2020 World Economic Outlook Press Briefing’, 14 April. Available at: 04/14/tr041420-transcript-of-april-2020-world-economicoutlook- press-briefing, accessed 15 April 2020. [4] Australian Accounting Standards Board and Auditing and Assurance Standards Board 2020, The Impact of Coronavirus on Financial Reporting and the Auditor’s Considerations, Joint FAQ, March. Available at: file/content102/c3/AASB19009_COVID19_FA.pdf, accessed 6 April, 2020. [5] Bank of England 2020, Letter from Sam Woods ‘Covid-19: IFRS 9, Capital Requirements and Loan Covenants’, 25 March. Available at: boe/files/prudential-regulation/letter/2020/covid-19-ifrs-9- capital requirements-and-loan-covenants.pdf?la=en&hash= 77F4E1D06F713D2104067EC6642FE95EF2935EBD, accessed 7 April 2020. [6] Marlin, S. 2020, ‘CECL Working as Intended Amid COVID- 19 Crisis, Says FASB’,, 18 March. Available at: as-intended-amid-covid-19-crisis-says-fasb, accessed 11 April 2020 [7] Maurer, M. 2020, ‘New Credit-loss Standard Could Benefit Lenders if Regulators Loosen Capital Requirements, Study Says; Bankers and Lawmakers Have Criticized the Accounting Rule and Called for Additional Study’, Wall Street Journal (Online), 11 February. Available at: articles/new-credit-loss-standard-could-benefit-lendersif- regulators-loosen-capital-requirements-study-says- 11581433202, accessed 15 April 2020. [8] 2017 Financial statements BancoBPM, pag.443 [9] 2017 Financial Statements BancoBPM, pag, 444 [10] Business Plan BancoBPM, pag. 10

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