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IFRS 9-
Revenue INTERNATIONAL ACCOUNTING STANDARD BOARD.
Financial
From IFRS 16 -
Instrument:
Contract Leases Complied by
Recognition &
with Adegbite Olusegun James , AAT.
Measurement
Customers
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
TABLE OF CONTENT
IFRS 9: Financial Instrument (Recognition & Measurement)………………..………………….1
IFRS 15: Revenue from Contract with customers …………………………………………….....7
IFRS 16: Leases……………………………………………………………………….……...…….11
Definition of Key Terms……………….………………………………....................................….12
(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with IFRS 10 Consolidated Financial
Statements , IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures . However, in some cases, IFRS
10, IAS 27 or IAS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with
some or all of the requirements of this Standard.
(b) Rights and obligations under leases to which IFRS 16 Leases applies. However:
(i) finance lease receivables (i.e. net investments in finance leases) and operating lease receivables recognized by a lessor are subject to
the derecognition and impairment requirements of this Standard;
(ii) lease liabilities recognized by a lessee are subject to the derecognition requirements
(c) employers’ rights and obligations under employee benefit plans, to which IAS 19 Employee benefit applies.
Subsequent measurement
Financial liabilities
All financial liabilities are subsequently measured at amortized cost, except for financial liabilities at fair value through profit or loss. Such
liabilities include derivatives (other than derivatives that are financial guarantee contracts or are designated and effective hedging
instruments), other liabilities held for trading, and liabilities that an entity designates to be measured at fair value through profit or loss.
Financial Asset
Financial Assets are subsequently measured based on the intention for which it is held by an entity. The intentions for which financial asset
are held are mainly;
1. At Amortized cost
2. At Fair value through profit or loss
3. At Fair value through OCI;
A Financial asset is measured at amortized cost provided it meets the following test;
1. The business model test: The business model test is held when a company holds a financial instrument to collect contractual cash flow and
not to sell to realize its fair value changes.
2. Contractual cash flow test: This test is met when the contractual terms of the instrument gives rise to payment of solely principal and
interest on the principal amount.
Where the intention for which an entity holds a financial instrument is to sell it prior to maturity; such financial instrument shall be measured
at fair value through profit or loss with any fair value changes recognized in profit or loss.
However, when an entity elects to hold and sell a financial asset; such financial asset shall be measured at fair value through OCI with any fair
value changes recognized in other comprehensive income.
EQUITY INSTRUMENT
Generally, equity instruments should be designated at fair value through profit or loss. However, an entity may elect to designate an equity
instrument at fair value through OCI- this is an irrevocable election and must be made at initial recognition.
Note: Dividend income on an equity instrument held at FVTPL should be recognized in profit or loss
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
The general purpose of an impairment test is to ensure that an asset is not carried for financial reporting purposes at an amount that exceeds
its recoverable amount. To do so would overstate a reporting entity‘s financial position and performance. In time past; Ias 39 requires that an
entity should recognize impairment on an incurred loss basis.
The incurred loss model is based on the perspective of allocating a credit loss to the period when that loss is incurred. Due to increased credit
risk and the need for entities to faithfully and prudently recognize financial instruments in their books- The expected credit loss basis for
impairment was introduced as part of the revision to existing Ias 39 impairment model for financial asset.
Under an expected loss model, revenue is reduced to reflect expected future credit losses at inception. Over the life of the financial asset the
income is the same under both models. However, provided credit losses occur as expected the expected loss model will mean lower net
income in the early periods and higher net income towards the end of the financial asset‘s life (after losses have been incurred) compared to
the incurred loss model.
The expected credit loss model in IFRS 9 Financial Instruments uses a dual measurement approach where the loss allowance is measured at an
amount equal to either the 12-month expected credit losses (Stage 1) or the lifetime expected credit losses (Stages 2 and 3).
• “Stage 1: As soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognized in profit or loss and a
loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets, interest revenue is
calculated on the gross carrying amount (i.e. without adjustment for expected credit losses).
• Stage 2: If the credit risk increases significantly and the resulting credit quality is not considered to be low credit risk, full lifetime expected
credit losses are recognized. Lifetime expected credit losses are only recognized if the credit risk increases significantly from when the entity
originates or purchases the financial instrument. The calculation of interest revenue on financial assets remains the same as for Stage 1.
• Stage 3: If the credit risk of a financial asset increases to the point that it is considered credit impaired, interest revenue is calculated based
on the amortized cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be
individually assessed. Lifetime expected credit losses are still recognized on these financial assets.” The distinction between Stages 2 and 3 is
that under Stage 2, impairment is typically assessed on a collective basis, whereas under Stage 3, it is assessed on an individual basis. The
impairment measurement basis depends upon whether there has been a significant increase in credit risk since initial recognition. Generally, if
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
there has been a significant increase in credit risk since initial recognition, then impairment is measured at lifetime expected credit losses. In
Stages 1 and 2, interest revenue is calculated based on the gross carrying amount. Under Stage 3, interest revenue is calculated based on the
amortized cost of the financial asset (i.e., the gross carrying amount adjusted for the loss allowance).
(a) Net interest revenue is recognized on the basis of expected cash flows considering expected credit losses. That is, net interest revenue
reflects the total net return expected at inception. It is noted that for presentation purposes, an entity would report gross interest revenue
(before the impact of expected credit losses) and separately the portion of initial expected credit losses recognized in the period, the
difference being net interest income;
(b) Impairment losses are recognized from an adverse change in credit loss expectations. It is important to note that these reflect changes in
expectations and do not necessarily represent an actual or incurred loss;
(c) Gains arising from an improved change in credit loss expectations are recognized; and
(d) Impairment losses and gains are recognized in a separate line item in profit or loss when expectations change. There is no impairment
trigger (e.g. evidence that losses have been incurred) so expected cash flows and expected losses are subject to periodical re-estimation.
An entity shall measure expected credit losses of a financial instrument in a way that reflects:
(a) An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
(c) 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.
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
SCOPE
An entity shall apply this Standard to all contracts with customers, except the following:
(a) Lease contracts within the scope of IFRS 16 Leases; (b) contracts within the scope of IFRS 17 Insurance Contracts. However, an entity may
choose to apply this Standard to insurance contracts that have as their primary purpose the provision of services for a fixed fee in accordance
with paragraph 8 of IFRS 17;
(c) financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint
Ventures; and
(d) non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For
example, this Standard would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their
customers in different specified locations on a timely basis
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
IFRS 15 provides clear guidance on how revenue should be recognized for financial reporting purpose by identifying Five (5) step model that should
be followed in the revenue recognition process.
Revenue
recognition-
Five step model
identify the
Identify the
performance
contract with
obligations in the
customer
contract
Recognise revenue when (or as) the entity satisfies a performance obligation Recognise revenue when (or as) the entity satisfies a
performance obli
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT
KEY TERMS
1. Contract asset :An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that
right is conditioned on something other than the passage of time (for example, the entity’s future performance).
2. Contract liability: An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the
amount is due) from the customer.
3. Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in
exchange for consideration.
4. Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
5. Revenue: Income arising in the course of an entity’s ordinary activities.
6. Stand-alone selling price: The price at which an entity would sell a promised good or service separately to a customer
7. Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third parties.
8. Contract: An agreement between two or more parties that creates enforceable rights and obligations.
9. Performance obligation: A promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT