PAS 32

FINANCIAL INSTRUMENT: PRESENTATION

Objective of IAS 32
The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or
equity and for offsetting financial assets and liabilities. [IAS 32.1]
IAS 32 addresses this in a number of ways:
o clarifying the classification of a financial instrument issued by an entity as a liability or as equity
o prescribing the accounting for treasury shares (an entity's own repurchased shares)
o prescribing strict conditions under which assets and liabilities may be offset in the balance sheet

IAS 32 is a companion to IAS 39 Financial Instruments: Recognition and

Measurement and IFRS 9 Financial Instruments. IAS 39 and IFRS 9 deal with initial recognition of
financial assets and liabilities, measurement subsequent to initial recognition, impairment, derecognition,
and hedge accounting. IAS 39 was progressively replaced by IFRS 9 as the IASB completed the various
phases of its financial instruments project.

Scope
IAS 32 applies in presenting and disclosing information about all types of financial instruments with the
following exceptions: [IAS 32.4]
o interests in subsidiaries, associates and joint ventures that are accounted for
under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in
Associates or IAS 31 Interests in Joint Ventures (or, for annual periods beginning on or after 1
January 2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial
Statements and IAS 28 Investments in Associates and Joint Ventures). However, IAS 32 applies
to all derivatives on interests in subsidiaries, associates, or joint ventures.
o employers' rights and obligations under employee benefit plans (see IAS 19 Employee Benefits)
o insurance contracts(see IFRS 4 Insurance Contracts). However, IAS 32 applies to derivatives that
are embedded in insurance contracts if they are required to be accounted separately by IAS 39
o financial instruments that are within the scope of IFRS 4 because they contain a discretionary
participation feature are only exempt from applying paragraphs 15-32 and AG25-35 (analysing
debt and equity components) but are subject to all other IAS 32 requirements
o contracts and obligations under share-based payment transactions (see IFRS 2 Share-based
Payment) with the following exceptions:
o this standard applies to contracts within the scope of IAS 32.8-10 (see below)
o paragraphs 33-34 apply when accounting for treasury shares purchased, sold, issued or
cancelled by employee share option plans or similar arrangements

IAS 32 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or
another financial instrument, except for contracts that were entered into and continue to be held for the
purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected
purchase, sale or usage requirements. [IAS 32.8]

Key definitions [IAS 32.11]

Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity.

Financial asset: any asset that is:

o cash
o an equity instrument of another entity
o a contractual right
o to receive cash or another financial asset from another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions
that are potentially favourable to the entity; or
o a contract that will or may be settled in the entity's own equity instruments and is:
 o a non-derivative for which the entity is or may be obliged to receive a variable number of
the entity's own equity instruments
o a derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity's own equity instruments.
For this purpose the entity's own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity's own equity
instruments
o puttable instruments classified as equity or certain liabilities arising on liquidation
classified by IAS 32 as equity instruments

Financial liability: any liability that is:

o a contractual obligation:
o to deliver cash or another financial asset to another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavourable to the entity; or
o a contract that will or may be settled in the entity's own equity instruments and is
o a non-derivative for which the entity is or may be obliged to deliver a variable number of
the entity's own equity instruments or
o a derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity's own equity instruments.
For this purpose the entity's own equity instruments do not include: instruments that are
themselves contracts for the future receipt or delivery of the entity's own equity
instruments; puttable instruments classified as equity or certain liabilities arising on
liquidation classified by IAS 32 as equity instruments

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Fair value: the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction.
The definition of financial instrument used in IAS 32 is the same as that in IAS 39.
Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to
the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of
an uncertain future event or the death or retirement of the instrument holder.
Classification as liability or equity
The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial
liability or an equity instrument according to the substance of the contract, not its legal form, and the
definitions of financial liability and equity instrument. Two exceptions from this principle are certain
puttable instruments meeting specific criteria and certain obligations arising on liquidation (see below).
The entity must make the decision at the time the instrument is initially recognised. The classification is
not subsequently changed based on changed circumstances. [IAS 32.15]
A financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation
to deliver cash or another financial asset to another entity and (b) if the instrument will or may be settled
in the issuer's own equity instruments, it is either:
o a non-derivative that includes no contractual obligation for the issuer to deliver a variable number
of its own equity instruments; or
o a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another
financial asset for a fixed number of its own equity instruments. [IAS 32.16]

Illustration – preference shares

If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a
mandatory redemption feature at a future date, the substance is that they are a contractual obligation to
deliver cash and, therefore, should be recognised as a liability. [IAS 32.18(a)] In contrast, preference
shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to
make any payment are equity. In this example even though both instruments are legally termed
preference shares they have different contractual terms and one is a financial liability while the other is
equity.
Illustration – issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity
instruments that varies so that the fair value of the entity's own equity instruments to be received or
delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability.
[IAS 32.20]

Illustration – one party has a choice over how an instrument is settled

When a derivative financial instrument gives one party a choice over how it is settled (for instance, the
issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial
asset or a financial liability unless all of the settlement alternatives would result in it being an equity
instrument. [IAS 32.26]

Contingent settlement provisions

If, as a result of contingent settlement provisions, the issuer does not have an unconditional right to avoid
settlement by delivery of cash or other financial instrument (or otherwise to settle in a way that it would be
a financial liability) the instrument is a financial liability of the issuer, unless:
o the contingent settlement provision is not genuine or
o the issuer can only be required to settle the obligation in the event of the issuer's liquidation or
o the instrument has all the features and meets the conditions of IAS 32.16A and 16B for puttable
instruments [IAS 32.25]

Puttable instruments and obligations arising on liquidation

In February 2008, the IASB amended IAS 32 and IAS 1 Presentation of Financial Statements with respect
to the balance sheet classification of puttable financial instruments and obligations arising only on
liquidation. As a result of the amendments, some financial instruments that currently meet the definition of
a financial liability will be classified as equity because they represent the residual interest in the net
assets of the entity. [IAS 32.16A-D]

Classifications of rights issues

In October 2009, the IASB issued an amendment to IAS 32 on the classification of rights issues. For
rights issues offered for a fixed amount of foreign currency current practice appears to require such
issues to be accounted for as derivative liabilities. The amendment states that if such rights are issued
pro rata to an entity's all existing shareholders in the same class for a fixed amount of currency, they
should be classified as equity regardless of the currency in which the exercise price is denominated.

Compound financial instruments

Some financial instruments – sometimes called compound instruments – have both a liability and an
equity component from the issuer's perspective. In that case, IAS 32 requires that the component parts be
accounted for and presented separately according to their substance based on the definitions of liability
and equity. The split is made at issuance and not revised for subsequent changes in market interest
rates, share prices, or other event that changes the likelihood that the conversion option will be exercised.
[IAS 32.29-30]
To illustrate, a convertible bond contains two components. One is a financial liability, namely the issuer's
contractual obligation to pay cash, and the other is an equity instrument, namely the holder's option to
convert into common shares. Another example is debt issued with detachable share purchase warrants.
When the initial carrying amount of a compound financial instrument is required to be allocated to its
equity and liability components, the equity component is assigned the residual amount after deducting
from the fair value of the instrument as a whole the amount separately determined for the liability
component. [IAS 32.32]
Interest, dividends, gains, and losses relating to an instrument classified as a liability should be reported
in profit or loss. This means that dividend payments on preferred shares classified as liabilities are treated
as expenses. On the other hand, distributions (such as dividends) to holders of a financial instrument
classified as equity should be charged directly against equity, not against earnings. [IAS 32.35]
Transaction costs of an equity transaction are deducted from equity. Transaction costs related to an issue
of a compound financial instrument are allocated to the liability and equity components in proportion to
the allocation of proceeds.
Treasury shares
The cost of an entity's own equity instruments that it has reacquired ('treasury shares') is deducted from
equity. Gain or loss is not recognised on the purchase, sale, issue, or cancellation of treasury shares.
Treasury shares may be acquired and held by the entity or by other members of the consolidated group.
Consideration paid or received is recognised directly in equity. [IAS 32.33]

Offsetting
IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a
financial asset and a financial liability should be offset and the net amount reported when, and only when,
an entity: [IAS 32.42]
o has a legally enforceable right to set off the amounts; and
o intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
[IAS 32.48]

Costs of issuing or reacquiring equity instruments

Costs of issuing or reacquiring equity instruments are accounted for as a deduction from equity, net of
any related income tax benefit. [IAS 32.35]

Disclosures
Financial instruments disclosures are in IFRS 7 Financial Instruments: Disclosures, and no longer in IAS
32.
The disclosures relating to treasury shares are in IAS 1 Presentation of Financial Statements and IAS
24 Related Parties for share repurchases from related parties. [IAS 32.34 and 39]
IAS 39
FINANCIAL INSTRUMENT: RECOGNITION AND MEASUREMENT

Scope
Scope exclusions
IAS 39 applies to all types of financial instruments except for the following, which are scoped out of
IAS 39: [IAS 39.2]
 interests in subsidiaries, associates, and joint ventures accounted for under IAS 27 Consolidated
and Separate Financial Statements, IAS 28 Investments in Associates, or IAS 31 Interests in
Joint Ventures (or, for periods beginning on or after 1 January 2013, IFRS 10 Consolidated
Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates
and Joint Ventures); however IAS 39 applies in cases where under those standards such
interests are to be accounted for under IAS 39. The standard also applies to most derivatives on
an interest in a subsidiary, associate, or joint venture
 employers' rights and obligations under employee benefit plans to which IAS 19 Employee
Benefits applies
 forward contracts between an acquirer and selling shareholder to buy or sell an acquiree that will
result in a business combination at a future acquisition date
 rights and obligations under insurance contracts, except IAS 39 does apply to financial
instruments that take the form of an insurance (or reinsurance) contract but that principally
involve the transfer of financial risks and derivatives embedded in insurance contracts
 financial instruments that meet the definition of own equity under IAS 32 Financial Instruments:
Presentation
 financial instruments, contracts and obligations under share-based payment transactions to
which IFRS 2 Share-based Payment applies
 rights to reimbursement payments to which IAS 37 Provisions, Contingent Liabilities and
Contingent Assets applies

Leases
IAS 39 applies to lease receivables and payables only in limited respects: [IAS 39.2(b)]
 IAS 39 applies to lease receivables with respect to the derecognition and impairment provisions

 IAS 39 applies to lease payables with respect to the derecognition provisions

 IAS 39 applies to derivatives embedded in leases.

Financial guarantees
IAS 39 applies to financial guarantee contracts issued. However, if an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS
4 Insurance Contracts to such financial guarantee contracts. The issuer may make that election contract
by contract, but the election for each contract is irrevocable.
Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless the contract is a
reinsurance contract). Therefore, paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors apply. Those paragraphs specify criteria to use in developing an accounting policy if
no IFRS applies specifically to an item.

Loan commitments
Loan commitments are outside the scope of IAS 39 if they cannot be settled net in cash or another
financial instrument, they are not designated as financial liabilities at fair value through profit or loss, and
the entity does not have a past practice of selling the loans that resulted from the commitment shortly
after origination. An issuer of a commitment to provide a loan at a below-market interest rate is required
initially to recognise the commitment at its fair value; subsequently, the issuer will remeasure it at the
higher of (a) the amount recognised under IAS 37 and (b) the amount initially recognised less, where
appropriate, cumulative amortisation recognised in accordance with IAS 18. An issuer of loan
commitments must apply IAS 37 to other loan commitments that are not within the scope of IAS 39 (that
is, those made at market or above). Loan commitments are subject to the derecognition provisions of
IAS 39. [IAS 39.4]

Contracts to buy or sell financial items

Contracts to buy or sell financial items are always within the scope of IAS 39 (unless one of the other
exceptions applies).

Contracts to buy or sell non-financial items

Contracts to buy or sell non-financial items are within the scope of IAS 39 if they can be settled net in
cash or another financial asset and are not entered into and held for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity's expected purchase, sale, or usage requirements.
Contracts to buy or sell non-financial items are inside the scope if net settlement occurs. The following
situations constitute net settlement: [IAS 39.5-6]
 the terms of the contract permit either counterparty to settle net
 there is a past practice of net settling similar contracts
 there is a past practice, for similar contracts, of taking delivery of the underlying and selling it
within a short period after delivery to generate a profit from short-term fluctuations in price, or
from a dealer's margin, or
 the non-financial item is readily convertible to cash

Weather derivatives
Although contracts requiring payment based on climatic, geological, or other physical variable were
generally excluded from the original version of IAS 39, they were added to the scope of the revised
IAS 39 in December 2003 if they are not in the scope of IFRS 4. [IAS 39.AG1]

Definitions
IAS 39 incorporates the definitions of the following items from IAS 32 Financial Instruments: Presentation:
[IAS 39.8]
 financial instrument
 financial asset
 financial liability
 equity instrument.
Note: Where an entity applies IFRS 9 Financial Instruments prior to its mandatory application date (1
January 2015), definitions of the following terms are also incorporated from IFRS 9: derecognition,
derivative, fair value, financial guarantee contract. The definition of those terms outlined below (as
relevant) are those from IAS 39.

Common examples of financial instruments within the scope of IAS 39

 cash
 demand and time deposits
 commercial paper
 accounts, notes, and loans receivable and payable
 debt and equity securities. These are financial instruments from the perspectives of both the
holder and the issuer. This category includes investments in subsidiaries, associates, and joint
ventures
 asset backed securities such as collateralised mortgage obligations, repurchase agreements, and
securitised packages of receivables
 derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.

A derivative is a financial instrument:

 Whose value changes in response to the change in an underlying variable such as an interest
rate, commodity or security price, or index;
  That requires no initial investment, or one that is smaller than would be required for a contract
with similar response to changes in market factors; and

 That is settled at a future date. [IAS 39.9]

Examples of derivatives
Forwards: Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a
foreign currency at a specified price determined at the outset, with delivery or settlement at a specified
future date. Settlement is at maturity by actual delivery of the item specified in the contract, or by a net
cash settlement.
Interest rate swaps and forward rate agreements: Contracts to exchange cash flows as of a specified
date or a series of specified dates based on a notional amount and fixed and floating rates.
Futures: Contracts similar to forwards but with the following differences: futures are generic exchange-
traded, whereas forwards are individually tailored. Futures are generally settled through an offsetting
(reversing) trade, whereas forwards are generally settled by delivery of the underlying item or cash
settlement.
Options: Contracts that give the purchaser the right, but not the obligation, to buy (call option) or sell (put
option) a specified quantity of a particular financial instrument, commodity, or foreign currency, at a
specified price (strike price), during or at a specified period of time. These can be individually written or
exchange-traded. The purchaser of the option pays the seller (writer) of the option a fee (premium) to
compensate the seller for the risk of payments under the option.
Caps and floors: These are contracts sometimes referred to as interest rate options. An interest rate cap
will compensate the purchaser of the cap if interest rates rise above a predetermined rate (strike rate)
while an interest rate floor will compensate the purchaser if rates fall below a predetermined rate.

Embedded derivatives
Some contracts that themselves are not financial instruments may nonetheless have financial instruments
embedded in them. For example, a contract to purchase a commodity at a fixed price for delivery at a
future date has embedded in it a derivative that is indexed to the price of the commodity.
An embedded derivative is a feature within a contract, such that the cash flows associated with that
feature behave in a similar fashion to a stand-alone derivative. In the same way that derivatives must be
accounted for at fair value on the balance sheet with changes recognised in the income statement, so
must some embedded derivatives. IAS 39 requires that an embedded derivative be separated from its
host contract and accounted for as a derivative when: [IAS 39.11]
 the economic risks and characteristics of the embedded derivative are not closely related to those
of the host contract
 a separate instrument with the same terms as the embedded derivative would meet the definition
of a derivative, and
 the entire instrument is not measured at fair value with changes in fair value recognised in the
income statement

If an embedded derivative is separated, the host contract is accounted for under the appropriate standard
(for instance, under IAS 39 if the host is a financial instrument). Appendix A to IAS 39 provides examples
of embedded derivatives that are closely related to their hosts, and of those that are not.
Examples of embedded derivatives that are not closely related to their hosts (and therefore must be
separately accounted for) include:
 the equity conversion option in debt convertible to ordinary shares (from the perspective of the
holder only) [IAS 39.AG30(f)]
 commodity indexed interest or principal payments in host debt contracts[IAS 39.AG30(e)]
 cap and floor options in host debt contracts that are in-the-money when the instrument was
issued [IAS 39.AG33(b)]
 leveraged inflation adjustments to lease payments [IAS 39.AG33(f)]
 currency derivatives in purchase or sale contracts for non-financial items where the foreign
currency is not that of either counterparty to the contract, is not the currency in which the related
good or service is routinely denominated in commercial transactions around the world, and is not
 the currency that is commonly used in such contracts in the economic environment in which the
transaction takes place. [IAS 39.AG33(d)]

If IAS 39 requires that an embedded derivative be separated from its host contract, but the entity is
unable to measure the embedded derivative separately, the entire combined contract must be designated
as a financial asset as at fair value through profit or loss). [IAS 39.12]

Classification as liability or equity

Since IAS 39 does not address accounting for equity instruments issued by the reporting enterprise but it
does deal with accounting for financial liabilities, classification of an instrument as liability or as equity is
critical. IAS 32 Financial Instruments: Presentation addresses the classification question.

Classification of financial assets

IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]
 Financial assets at fair value through profit or loss
 Available-for-sale financial assets
 Loans and receivables
 Held-to-maturity investments
Those categories are used to determine how a particular financial asset is recognised and measured in
the financial statements.

Financial assets at fair value through profit or loss. This category has two subcategories:
 Designated. The first includes any financial asset that is designated on initial recognition as one
to be measured at fair value with fair value changes in profit or loss.
 Held for trading. The second category includes financial assets that are held for trading. All
derivatives (except those designated hedging instruments) and financial assets acquired or held
for the purpose of selling in the short term or for which there is a recent pattern of short-term profit
taking are held for trading. [IAS 39.9]

Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial
recognition as available for sale or any other instruments that are not classified as as (a) loans and
receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.
[IAS 39.9] AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets
are recognised directly in equity, through the statement of changes in equity, except for interest on AFS
assets (which is recognised in income on an effective yield basis), impairment losses and (for interest-
bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was
recognised in equity is recognised in profit or loss when an available-for-sale financial asset is
derecognised. [IAS 39.55(b)]

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market, other than held for trading or designated on initial recognition as assets at
fair value through profit or loss or as available-for-sale. Loans and receivables for which the holder may
not recover substantially all of its initial investment, other than because of credit deterioration, should be
classified as available-for-sale.[IAS 39.9] Loans and receivables are measured at amortised cost.
[IAS 39.46(a)]

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments
that an entity intends and is able to hold to maturity and that do not meet the definition of loans and
receivables and are not designated on initial recognition as assets at fair value through profit or loss or as
available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a held-
to-maturity investment other than in insignificant amounts or as a consequence of a non-recurring,
isolated event beyond its control that could not be reasonably anticipated, all of its other held-to-maturity
investments must be reclassified as available-for-sale for the current and next two financial reporting
years. [IAS 39.9] Held-to-maturity investments are measured at amortised cost. [IAS 39.46(b)]
Classification of financial liabilities
IAS 39 recognises two classes of financial liabilities: [IAS 39.47]
 Financial liabilities at fair value through profit or loss
 Other financial liabilities measured at amortised cost using the effective interest method

The category of financial liability at fair value through profit or loss has two subcategories:
 Designated. a financial liability that is designated by the entity as a liability at fair value through
profit or loss upon initial recognition
 Held for trading. a financial liability classified as held for trading, such as an obligation for
securities borrowed in a short sale, which have to be returned in the future

Initial recognition
IAS 39 requires recognition of a financial asset or a financial liability when, and only when, the entity
becomes a party to the contractual provisions of the instrument, subject to the following provisions in
respect of regular way purchases. [IAS 39.14]

Regular way purchases or sales of a financial asset. A regular way purchase or sale of financial
assets is recognised and derecognised using either trade date or settlement date accounting. [IAS 39.38]
The method used is to be applied consistently for all purchases and sales of financial assets that belong
to the same category of financial asset as defined in IAS 39 (note that for this purpose assets held for
trading form a different category from assets designated at fair value through profit or loss). The choice of
method is an accounting policy. [IAS 39.38]
IAS 39 requires that all financial assets and all financial liabilities be recognised on the balance sheet.
That includes all derivatives. Historically, in many parts of the world, derivatives have not been
recognised on company balance sheets. The argument has been that at the time the derivative contract
was entered into, there was no amount of cash or other assets paid. Zero cost justified non-recognition,
notwithstanding that as time passes and the value of the underlying variable (rate, price, or index)
changes, the derivative has a positive (asset) or negative (liability) value.

Initial measurement
Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for
assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with
the following exceptions: [IAS 39.46-47]
 Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should
be measured at amortised cost using the effective interest method.
 Investments in equity instruments with no reliable fair value measurement (and derivatives
indexed to such equity instruments) should be measured at cost.
 Financial assets and liabilities that are designated as a hedged item or hedging instrument are
subject to measurement under the hedge accounting requirements of the IAS 39.
 Financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition, or that are accounted for using the continuing-involvement method, are subject to
particular measurement requirements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction. [IAS 39.9] IAS 39 provides a hierarchy to be
used in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs AG69-82]
 Quoted market prices in an active market are the best evidence of fair value and should be used,
where they exist, to measure the financial instrument.
 If a market for a financial instrument is not active, an entity establishes fair value by using a
valuation technique that makes maximum use of market inputs and includes recent arm's length
market transactions, reference to the current fair value of another instrument that is substantially
the same, discounted cash flow analysis, and option pricing models. An acceptable valuation
 technique incorporates all factors that market participants would consider in setting a price and is
consistent with accepted economic methodologies for pricing financial instruments.
 If there is no active market for an equity instrument and the range of reasonable fair values is
significant and these estimates cannot be made reliably, then an entity must measure the equity
instrument at cost less impairment.

Amortised cost is calculated using the effective interest method. The effective interest rate is the rate that
exactly discounts estimated future cash payments or receipts through the expected life of the financial
instrument to the net carrying amount of the financial asset or liability. Financial assets that are not
carried at fair value though profit and loss are subject to an impairment test. If expected life cannot be
determined reliably, then the contractual life is used.

IAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial
liability to be measured at fair value, with value changes recognised in profit or loss. This option is
available even if the financial asset or financial liability would ordinarily, by its nature, be measured at
amortised cost – but only if fair value can be reliably measured.
In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any
financial asset or any financial liability to be measured at fair value through profit and loss (the fair value
option). The revisions limit the use of the option to those financial instruments that meet certain
conditions: [IAS 39.9]
 the fair value option designation eliminates or significantly reduces an accounting mismatch, or
 a group of financial assets, financial liabilities or both is managed and its performance is
evaluated on a fair value basis by entity's management.

Once an instrument is put in the fair-value-through-profit-and-loss category, it cannot be reclassified out

with some exceptions. [IAS 39.50] In October 2008, the IASB issued amendments to IAS 39. The
amendments permit reclassification of some financial instruments out of the fair-value-through-profit-or-
loss category (FVTPL) and out of the available-for-sale category – for more detail see IAS 39.50(c). In the
event of reclassification, additional disclosures are required under IFRS 7 Financial Instruments:
Disclosures. In March 2009 the IASB clarified that reclassifications of financial assets under the October
2008 amendments (see above): on reclassification of a financial asset out of the 'fair value through profit
or loss' category, all embedded derivatives have to be (re)assessed and, if necessary, separately
accounted for in financial statements.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as available for
sale, in which case it is measured at fair value with changes in fair value recognised in equity.

Impairment
A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is
objective evidence as a result of one or more events that occurred after the initial recognition of the asset.
An entity is required to assess at each balance sheet date whether there is any objective evidence of
impairment. If any such evidence exists, the entity is required to do a detailed impairment calculation to
determine whether an impairment loss should be recognised. [IAS 39.58] The amount of the loss is
measured as the difference between the asset's carrying amount and the present value of estimated cash
flows discounted at the financial asset's original effective interest rate. [IAS 39.63]
Assets that are individually assessed and for which no impairment exists are grouped with financial
assets with similar credit risk statistics and collectively assessed for impairment. [IAS 39.64]
If, in a subsequent period, the amount of the impairment loss relating to a financial asset carried at
amortised cost or a debt instrument carried as available-for-sale decreases due to an event occurring
after the impairment was originally recognised, the previously recognised impairment loss is reversed
through profit or loss. Impairments relating to investments in available-for-sale equity instruments are not
reversed through profit or loss. [IAS 39.65]
Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due.
[IAS 39.9]
Under IAS 39 as amended, financial guarantee contracts are recognised:
 initially at fair value. If the financial guarantee contract was issued in a stand-alone arm's length
transaction to an unrelated party, its fair value at inception is likely to equal the consideration
received, unless there is evidence to the contrary.
 subsequently at the higher of (i) the amount determined in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets and (ii) the amount initially recognised less, when
appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. (If specified
criteria are met, the issuer may use the fair value option in IAS 39. Furthermore, different
requirements continue to apply in the specialised context of a 'failed' derecognition transaction.)

Some credit-related guarantees do not, as a precondition for payment, require that the holder is exposed
to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed asset when
due. An example of such a guarantee is a credit derivative that requires payments in response to
changes in a specified credit rating or credit index. These are derivatives and they must be measured at
fair value under IAS 39.

Derecognition of a financial asset

The basic premise for the derecognition model in IAS 39 is to determine whether the asset under
consideration for derecognition is: [IAS 39.16]
 an asset in its entirety or
 specifically identified cash flows from an asset or
 a fully proportionate share of the cash flows from an asset or
 a fully proportionate share of specifically identified cash flows from a financial asset

Once the asset under consideration for derecognition has been determined, an assessment is made as to
whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently
eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows,
or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed
a contractual obligation to pass those cash flows on under an arrangement that meets the following three
conditions: [IAS 39.17-19]
 the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent
amounts on the original asset
 the entity is prohibited from selling or pledging the original asset (other than as security to the
eventual recipient),
 the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the
risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and
rewards have been retained, derecognition of the asset is precluded. [IAS 39.20]
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then
the entity must assess whether it has relinquished control of the asset or not. If the entity does not control
the asset then derecognition is appropriate; however if the entity has retained control of the asset, then
the entity continues to recognise the asset to the extent to which it has a continuing involvement in the
asset. [IAS 39.30]
These various derecognition steps are summarised in the decision tree in AG36.
Derecognition of a financial liability
A financial liability should be removed from the balance sheet when, and only when, it is extinguished,
that is, when the obligation specified in the contract is either discharged or cancelled or expires.
[IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms of
an existing financial liability, this transaction is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original
financial liability is recognised in profit or loss. [IAS 39.40-41]

Hedge accounting
IAS 39 permits hedge accounting under certain circumstances provided that the hedging relationship is:
[IAS 39.88]
 formally designated and documented, including the entity's risk management objective and
strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the
nature of the risk being hedged, and how the entity will assess the hedging instrument's
effectiveness and
 expected to be highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk as designated and documented, and effectiveness can be reliably
measured and
 assessed on an ongoing basis and determined to have been highly effective

Hedging instruments
Hedging instrument is an instrument whose fair value or cash flows are expected to offset changes in the
fair value or cash flows of a designated hedged item. [IAS 39.9]
All derivative contracts with an external counterparty may be designated as hedging instruments except
for some written options. A non-derivative financial asset or liability may not be designated as a hedging
instrument except as a hedge of foreign currency risk. [IAS 39.72]
For hedge accounting purposes, only instruments that involve a party external to the reporting entity can
be designated as a hedging instrument. This applies to intragroup transactions as well (with the exception
of certain foreign currency hedges of forecast intragroup transactions – see below). However, they may
qualify for hedge accounting in individual financial statements. [IAS 39.73]

Hedged items
Hedged item is an item that exposes the entity to risk of changes in fair value or future cash flows and is
designated as being hedged. [IAS 39.9]
A hedged item can be: [IAS 39.78-82]
 a single recognised asset or liability, firm commitment, highly probable transaction or a net
investment in a foreign operation
 a group of assets, liabilities, firm commitments, highly probable forecast transactions or net
investments in foreign operations with similar risk characteristics
 a held-to-maturity investment for foreign currency or credit risk (but not for interest risk or
prepayment risk)
 a portion of the cash flows or fair value of a financial asset or financial liability or
 a non-financial item for foreign currency risk only for all risks of the entire item
 in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the portfolio of financial
assets or financial liabilities that share the risk being hedged

In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a highly probable intragroup
forecast transaction to qualify as the hedged item in a cash flow hedge in consolidated financial
statements – provided that the transaction is denominated in a currency other than the functional
currency of the entity entering into that transaction and the foreign currency risk will affect consolidated
financial statements. [IAS 39.80]
In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:
 inflation in a financial hedged item
 a one-sided risk in a hedged item.

Effectiveness
IAS 39 requires hedge effectiveness to be assessed both prospectively and retrospectively. To qualify for
hedge accounting at the inception of a hedge and, at a minimum, at each reporting date, the changes in
the fair value or cash flows of the hedged item attributable to the hedged risk must be expected to be
highly effective in offsetting the changes in the fair value or cash flows of the hedging instrument on a
prospective basis, and on a retrospective basis where actual results are within a range of 80% to 125%.
All hedge ineffectiveness is recognised immediately in profit or loss (including ineffectiveness within the
80% to 125% window).

Categories of hedges
A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or
a previously unrecognised firm commitment or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect profit or loss. [IAS 39.86(a)] The gain
or loss from the change in fair value of the hedging instrument is recognised immediately in profit or loss.
At the same time the carrying amount of the hedged item is adjusted for the corresponding gain or loss
with respect to the hedged risk, which is also recognised immediately in net profit or loss. [IAS 39.89]

A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognised asset or liability (such as all or some future interest payments
on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss.
[IAS 39.86(b)] The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in other comprehensive income. [IAS 39.95]
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a
financial liability, any gain or loss on the hedging instrument that was previously recognised directly in
equity is 'recycled' into profit or loss in the same period(s) in which the financial asset or liability affects
profit or loss. [IAS 39.97]
If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-
financial liability, then the entity has an accounting policy option that must be applied to all such hedges of
forecast transactions: [IAS 39.98]
 Same accounting as for recognition of a financial asset or financial liability – any gain or loss on
the hedging instrument that was previously recognised in other comprehensive income is
'recycled' into profit or loss in the same period(s) in which the non-financial asset or liability
affects profit or loss.
 'Basis adjustment' of the acquired non-financial asset or liability – the gain or loss on the hedging
instrument that was previously recognised in other comprehensive income is removed from equity
and is included in the initial cost or other carrying amount of the acquired non-financial asset or
liability.

A hedge of a net investment in a foreign operation as defined in IAS 21 The Effects of Changes in
Foreign Exchange Rates is accounted for similarly to a cash flow hedge. [IAS 39.102]
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value
hedge or as a cash flow hedge.
Discontinuation of hedge accounting
Hedge accounting must be discontinued prospectively if: [IAS 39.91 and 39.101]
 the hedging instrument expires or is sold, terminated, or exercised
 the hedge no longer meets the hedge accounting criteria – for example it is no longer effective
 for cash flow hedges the forecast transaction is no longer expected to occur, or
 the entity revokes the hedge designation
In June 2013, the IASB amended IAS 39 to make it clear that there is no need to discontinue hedge
accounting if a hedging derivative is novated, provided certain criteria are met. [IAS 39.91 and IAS
39.101]

For the purpose of measuring the carrying amount of the hedged item when fair value hedge accounting
ceases, a revised effective interest rate is calculated. [IAS 39.BC35A]
If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no
longer expected to occur, gains and losses deferred in other comprehensive income must be taken to
profit or loss immediately. If the transaction is still expected to occur and the hedge relationship ceases,
the amounts accumulated in equity will be retained in equity until the hedged item affects profit or loss.
[IAS 39.101(c)]

If a hedged financial instrument that is measured at amortised cost has been adjusted for the gain or loss
attributable to the hedged risk in a fair value hedge, this adjustment is amortised to profit or loss based on
a recalculated effective interest rate on this date such that the adjustment is fully amortised by the
maturity of the instrument. Amortisation may begin as soon as an adjustment exists and must begin no
later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the
risks being hedged.

Disclosure
In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS 32 was
renamed Financial Instruments: Disclosure and Presentation. In 2005, the IASB issued IFRS 7 Financial
Instruments: Disclosures to replace the disclosure portions of IAS 32 effective 1 January 2007. IFRS 7
also superseded IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial
Institutions.
IFRS 7
FINANCIAL INSTRUMENTS: DISCLOSURE

Overview of IFRS 7
IFRS 7:
 adds certain new disclosures about financial instruments to those previously required
by IAS 32 Financial Instruments: Disclosure and Presentation (as it was then cited)
 replaces the disclosures previously required by IAS 30 Disclosures in the Financial Statements of
Banks and Similar Financial Institutions
 puts all of those financial instruments disclosures together in a new standard on Financial
Instruments: Disclosures. The remaining parts of IAS 32 deal only with financial instruments
presentation matters.

Disclosure requirements of IFRS 7

IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39
measurement categories. Certain other disclosures are required by class of financial instrument. For
those disclosures an entity must group its financial instruments into classes of similar instruments as
appropriate to the nature of the information presented. [IFRS 7.6]
The two main categories of disclosures required by IFRS 7 are:
1. information about the significance of financial instruments.
2. information about the nature and extent of risks arising from financial instruments

Information about the significance of financial instruments

Statement of financial position
 Disclose the significance of financial instruments for an entity's financial position and
performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8]
o financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition
o held-to-maturity investments
o loans and receivables
o available-for-sale assets
o financial liabilities at fair value through profit and loss, showing separately those held for
trading and those designated at initial recognition
o financial liabilities measured at amortised cost
 Other balance sheet-related disclosures:
o special disclosures about financial assets and financial liabilities designated to be
measured at fair value through profit and loss, including disclosures about credit risk and
market risk, changes in fair values attributable to these risks and the methods of
measurement.[IFRS 7.9-11]
o reclassifications of financial instruments from one category to another (e.g. from fair value
to amortised cost or vice versa) [IFRS 7.12-12A]
o information about financial assets pledged as collateral and about financial or non-
financial assets held as collateral [IFRS 7.14-15]
o reconciliation of the allowance account for credit losses (bad debts) by class of financial
assets[IFRS 7.16]
o information about compound financial instruments with multiple embedded derivatives
[IFRS 7.17]
o breaches of terms of loan agreements [IFRS 7.18-19]

Statement of comprehensive income

 Items of income, expense, gains, and losses, with separate disclosure of gains and losses from:
[IFRS 7.20(a)]
o financial assets measured at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition.
o held-to-maturity investments.
o loans and receivables.
 o available-for-sale assets.
o financial liabilities measured at fair value through profit and loss, showing separately
those held for trading and those designated at initial recognition.
o financial liabilities measured at amortised cost.
 Other income statement-related disclosures:
o total interest income and total interest expense for those financial instruments that are not
measured at fair value through profit and loss [IFRS 7.20(b)]
o fee income and expense [IFRS 7.20(c)]
o amount of impairment losses by class of financial assets [IFRS 7.20(e)]
o interest income on impaired financial assets [IFRS 7.20(d)]

Other disclosures
 Accounting policies for financial instruments [IFRS 7.21]
 Information about hedge accounting, including: [IFRS 7.22]
o description of each hedge, hedging instrument, and fair values of those instruments, and
nature of risks being hedged
o for cash flow hedges, the periods in which the cash flows are expected to occur, when
they are expected to enter into the determination of profit or loss, and a description of any
forecast transaction for which hedge accounting had previously been used but which is
no longer expected to occur
o if a gain or loss on a hedging instrument in a cash flow hedge has been recognised in
other comprehensive income, an entity should disclose the following: [IAS 7.23]
o the amount that was so recognised in other comprehensive income during the period
o the amount that was removed from equity and included in profit or loss for the period
o the amount that was removed from equity during the period and included in the initial
measurement of the acquisition cost or other carrying amount of a non-financial asset or
non- financial liability in a hedged highly probable forecast transaction
Note: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure
requirements apply. The required hedge accounting disclosures apply where the entity
elects to adopt hedge accounting and require information to be provided in three broad
categories: (1) the entity’s risk management strategy and how it is applied to manage risk
(2) how the entity’s hedging activities may affect the amount, timing and uncertainty of its
future cash flows, and (3) the effect that hedge accounting has had on the entity’s
statement of financial position, statement of comprehensive income and statement of
changes in equity. The disclosures are required to be presented in a single note or
separate section in its financial statements, although some information can be
incorporated by reference.
 For fair value hedges, information about the fair value changes of the hedging instrument and the
hedged item [IFRS 7.24(a)]
 Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges
of a net investment in a foreign operation) [IFRS 7.24(b-c)]
 Uncertainty arising from the interest rate benchmark reform [IFRS 7.24H]
 Information about the fair values of each class of financial asset and financial liability, along with:
[IFRS 7.25-30]
o comparable carrying amounts
o description of how fair value was determined
o the level of inputs used in determining fair value
o reconciliations of movements between levels of fair value measurement hierarchy
additional disclosures for financial instruments whose fair value is determined using level
3 inputs including impacts on profit and loss, other comprehensive income and sensitivity
analysis
o information if fair value cannot be reliably measured
The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the
overall fair value (IFRS 7.27A-27B):
 Level 1 – quoted prices for similar instruments
 Level 2 – directly observable market inputs other than Level 1 inputs
 Level 3 – inputs not based on observable market data

Note that disclosure of fair values is not required when the carrying amount is a reasonable
approximation of fair value, such as short-term trade receivables and payables, or for instruments whose
fair value cannot be measured reliably. [IFRS 7.29(a)]

Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures [IFRS 7.33]
 The qualitative disclosures describe:
o risk exposures for each type of financial instrument
o management's objectives, policies, and processes for managing those risks
o changes from the prior period

Quantitative disclosures
 The quantitative disclosures provide information about the extent to which the entity is exposed to
risk, based on information provided internally to the entity's key management personnel. These
disclosures include: [IFRS 7.34]
o summary quantitative data about exposure to each risk at the reporting date
o disclosures about credit risk, liquidity risk, and market risk and how these risks are
managed as further described below
o concentrations of risk

Credit risk
 Credit risk is the risk that one party to a financial instrument will cause a loss for the other party
by failing to pay for its obligation. [IFRS 7. Appendix A]
 Disclosures about credit risk include: [IFRS 7.36-38]
o maximum amount of exposure (before deducting the value of collateral), description of
collateral, information about credit quality of financial assets that are neither past due nor
impaired, and information about credit quality of financial assets whose terms have been
renegotiated [IFRS 7.36]
o for financial assets that are past due or impaired, analytical disclosures are required
[IFRS 7.37]
o information about collateral or other credit enhancements obtained or called [IFRS 7.38]

Liquidity risk
 Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities. [IFRS 7.
Appendix A]
 Disclosures about liquidity risk include: [IFRS 7.39]
o a maturity analysis of financial liabilities
o description of approach to risk management

Market risk [IFRS 7.40-42]

 Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to
changes in market prices. Market risk reflects interest rate risk, currency risk and other price
risks. [IFRS 7. Appendix A]
 Disclosures about market risk include:
o a sensitivity analysis of each type of market risk to which the entity is exposed
o additional information if the sensitivity analysis is not representative of the entity's risk
exposure (for example because exposures during the year were different to exposures at
year-end).
 o IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for
management purposes that reflects interdependencies of more than one component of
market risk (for instance, interest risk and foreign currency risk combined), it may
disclose that analysis instead of a separate sensitivity analysis for each type of market
risk

Transfers of financial assets [IFRS 7.42A-H]

An entity shall disclose information that enables users of its financial statements:
1. to understand the relationship between transferred financial assets that are not derecognised in
their entirety and the associated liabilities; and
2. to evaluate the nature of, and risks associated with, the entity's continuing involvement in
derecognised financial assets. [IFRS 7 42B]

Transferred financial assets that are not derecognised in their entirety

 Required disclosures include description of the nature of the transferred assets, nature of risk and
rewards as well as description of the nature and quantitative disclosure depicting relationship
between transferred financial assets and the associated liabilities. [IFRS 7.42D]

Transferred financial assets that are derecognised in their entirety

 Required disclosures include the carrying amount of the assets and liabilities recognised, fair
value of the assets and liabilities that represent continuing involvement, maximum exposure to
loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows
to repurchase the derecognised financial assets. [IFRS 7.42E]
 Additional disclosures are required for any gain or loss recognised at the date of transfer of the
assets, income or expenses recognise from the entity's continuing involvement in the
derecognised financial assets as well as details of uneven distribution of proceed from transfer
activity throughout the reporting period. [IFRS 7.42G]

Application guidance
An appendix of mandatory application guidance (Appendix B) is part of the standard.
There is also an appendix of non-mandatory implementation guidance (Appendix C) that describes how
an entity might provide the disclosures required by IFRS 7.
IFRS 9
FINANCIAL INSTRUMENTS

Overview of IFRS 9
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset
or financial liability not at fair value through profit or loss, transaction costs. [IFRS 9, paragraph 5.1.1]

Subsequent measurement of financial assets

IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those
measured at amortised cost and those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss
(fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value
through other comprehensive income, FVTOCI).

For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option
is elected. Whilst for equity investments, the FVTOCI classification is an election. Furthermore, the
requirements for reclassifying gains or losses recognised in other comprehensive income are different for
debt instruments and equity investments.

The classification of a financial asset is made at the time it is initially recognised, namely when the entity
becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain
conditions are met, the classification of an asset may subsequently need to be reclassified.

Debt instruments
A debt instrument that meets the following two conditions must be measured at amortised cost (net of any
write down for impairment) unless the asset is designated at FVTPL under the fair value option (see
below):
[IFRS 9, paragraph 4.1.2]
o Business model test: The objective of the entity's business model is to hold the financial asset
to collect the contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
o Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.

Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the
amount of payments. It is necessary to assess whether the cash flows before and after the change
represent only repayments of the nominal amount and an interest rate based on them.

The right of termination may for example be in accordance with the cash flow condition if, in the case of
termination, the only outstanding payments consist of principal and interest on the principal amount and
an appropriate compensation payment where applicable. In October 2017, the IASB clarified that the
compensation payments can also have a negative sign.*

*Prepayment Features with Negative Compensation (Amendments to IFRS 9); to be applied

retrospectively for fiscal years beginning on or after 1 January 2019; early application permitted
A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset
is designated at FVTPL under the fair value option (see below):
[IFRS 9, paragraph 4.1.2A]
o Business model test: The financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets.
o Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9,
paragraph 4.1.4]

Fair value option

Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI, IFRS 9
contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so
eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as
an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising
the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5]

Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial
position, with value changes recognised in profit or loss, except for those equity investments for which the
entity has elected to present value changes in 'other comprehensive income'. There is no 'cost exception'
for unquoted equities.

'Other comprehensive income' option

If an equity investment is not held for trading, an entity can make an irrevocable election at initial
recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. [IFRS 9,
paragraph 5.7.5]

Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may
be the best estimate of fair value and also when it might not be representative of fair value.

Subsequent measurement of financial liabilities

IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two
measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held for trading
are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair
value option is applied. [IFRS 9, paragraph 4.2.1]

Fair value option

IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, paragraph
4.2.2]:
o doing so eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on different bases, or
o the liability is part or a group of financial liabilities or financial assets and financial liabilities that is
managed and its performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy, and information about the group is
provided internally on that basis to the entity's key management personnel.

A financial liability which does not meet any of these criteria may still be designated as measured at
FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the
liability and are not clearly closely related. [IFRS 9, paragraph 4.3.5]

IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the
amount of change in fair value attributable to changes in credit risk of the liability, presented in other
comprehensive income, and the remaining amount presented in profit or loss. The new guidance allows
the recognition of the full amount of change in the fair value in profit or loss only if the presentation of
changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting
mismatch in profit or loss. That determination is made at initial recognition and is not reassessed. [IFRS 9,
paragraphs 5.7.7-5.7.8]

Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss,
the entity may only transfer the cumulative gain or loss within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine
whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2]
o an asset in its entirety or
o specifically identified cash flows from an asset (or a group of similar financial assets) or
o a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar
financial assets). or
o a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or
a group of similar financial assets)

Once the asset under consideration for derecognition has been determined, an assessment is made as to
whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently
eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows,
or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed
a contractual obligation to pass those cash flows on under an arrangement that meets the following three
conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]
o the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent
amounts on the original asset
o the entity is prohibited from selling or pledging the original asset (other than as security to the
eventual recipient),
o the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the
risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and
rewards have been retained, derecognition of the asset is precluded. [IFRS 9, paragraphs 3.2.6(a)-(b)]
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then
the entity must assess whether it has relinquished control of the asset or not. If the entity does not control
the asset then derecognition is appropriate; however if the entity has retained control of the asset, then
the entity continues to recognise the asset to the extent to which it has a continuing involvement in the
asset. [IFRS 9, paragraph 3.2.6(c)]

These various derecognition steps are summarised in the decision tree in paragraph B3.2.1.

Derecognition of financial liabilities

A financial liability should be removed from the balance sheet when, and only when, it is extinguished,
that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IFRS 9,
paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms of
an existing financial liability, this transaction is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original
financial liability is recognised in profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3]

Derivatives
All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at
fair value. Value changes are recognised in profit or loss unless the entity has elected to apply hedge
accounting by designating the derivative as a hedging instrument in an eligible hedging relationship.

Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with
the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone
derivative. A derivative that is attached to a financial instrument but is contractually transferable
independently of that instrument, or has a different counterparty, is not an embedded derivative, but a
separate financial instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply only to
hosts that are not financial assets within the scope of the Standard. Consequently, embedded derivatives
that under IAS 39 would have been separately accounted for at FVTPL because they were not closely
related to the host financial asset will no longer be separated. Instead, the contractual cash flows of the
financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the
contractual cash flow characteristics test is not passed (see above).

The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers identify
when an embedded derivative is closely related to a financial liability host contract or a host contract not
within the scope of the Standard (e.g. leasing contracts, insurance contracts, contracts for the purchase
or sale of a non-financial items).

Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only
if the entity's business model objective for its financial assets changes so its previous model assessment
would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date which is
defined as the first day of the first reporting period following the change in business model. An entity does
not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification:

o for equity investments measured at FVTOCI, or
o where the fair value option has been exercised in any circumstance for a financial assets or
financial liability.

Hedge accounting
The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification criteria
are met, hedge accounting allows an entity to reflect risk management activities in the financial
statements by matching gains or losses on financial hedging instruments with losses or gains on the risk
exposures they hedge.

The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic
portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or
liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9.
[IFRS 9 paragraph 6.1.3]

In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue
to apply the hedge accounting requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9
[IFRS 9 paragraph 7.2.21]

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
2. at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge.
3. the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9
paragraph 6.4.1]

Hedging instruments
Only contracts with a party external to the reporting entity may be designated as hedging instruments.
[IFRS 9 paragraph 6.2.3]

A hedging instrument may be a derivative (except for some written options) or non-derivative financial
instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes
due to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk
component of a non-derivative financial instrument, except equity investments designated as FVTOCI,
may be designated as the hedging instrument. [IFRS 9 paragraphs 6.2.1-6.2.2]

IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10
year instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows
only the intrinsic value of an option, or the spot element of a forward to be designated as the hedging
instrument. An entity may also exclude the foreign currency basis spread from a designated hedging
instrument. [IFRS 9 paragraph 6.2.4]

IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging

instrument. [IFRS 9 paragraph 6.2.5]

Combinations of purchased and written options do not qualify if they amount to a net written option at the
date of designation. [IFRS 9 paragraph 6.2.6]

Hedged items
A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable
forecast transaction or a net investment in a foreign operation and must be reliably measurable. [IFRS 9
paragraphs 6.3.1-6.3.3]

An aggregated exposure that is a combination of an eligible hedged item as described above and a
derivative may be designated as a hedged item. [IFRS 9 paragraph 6.3.4]

The hedged item must generally be with a party external to the reporting entity, however, as an exception
the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated
financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully
eliminated on consolidation. In addition, the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements provided that the
transaction is denominated in a currency other than the functional currency of the entity entering into that
transaction and the foreign currency risk will affect consolidated profit or loss. [IFRS 9 paragraphs 6.3.5 -
6.3.6]

An entity may designate an item in its entirety or a component of an item as the hedged item. The
component may be a risk component that is separately identifiable and reliably measurable; one or more
selected contractual cash flows; or components of a nominal amount. [IFRS 9 paragraph 6.3.7]

A group of items (including net positions is an eligible hedged item only if:
1. it consists of items individually, eligible hedged items;
2. the items in the group are managed together on a group basis for risk management purposes;
and
3. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not
expected to be approximately proportional to the overall variability in cash flows of the group:
1. it is a hedge of foreign currency risk; and
2. the designation of that net position specifies the reporting period in which the forecast
transactions are expected to affect profit or loss, as well as their nature and volume [IFRS
9 paragraph 6.6.1]

For a hedge of a net position whose hedged risk affects different line items in the statement of profit or
loss and other comprehensive income, any hedging gains or losses in that statement are presented in a
separate line from those affected by the hedged items. [IFRS 9 paragraph 6.6.4]
Accounting for qualifying hedging relationships
There are three types of hedging relationships:

Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk
and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI).
[IFRS 9 paragraphs 6.5.2(a) and 6.5.3]
For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if
hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the
carrying amount of the hedged item and is recognised in profit or loss. However, if the hedged item is an
equity instrument at FVTOCI, those amounts remain in OCI. When a hedged item is an unrecognised firm
commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a
corresponding gain or loss recognised in profit or loss. [IFRS 9 paragraph 6.5.8]
If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is
amortised to profit or loss based on a recalculated effective interest rate. Amortisation may begin as soon
as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for
hedging gains and losses. [IFRS 9 paragraph 6.5.10]

Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular
risk associated with all, or a component of, a recognised asset or liability (such as all or some future
interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit
or loss. [IFRS 9 paragraph 6.5.2(b)]
For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in
absolute amounts):
o the cumulative gain or loss on the hedging instrument from inception of the hedge; and
o the cumulative change in fair value of the hedged item from inception of the hedge.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is
recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or
loss.
If a hedged forecast transaction subsequently results in the recognition of a non-financial item or
becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been
accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other
carrying amount of the asset or the liability. In other cases the amount that has been accumulated in the
cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows
affect profit or loss. [IFRS 9 paragraph 6.5.11]
When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are
still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains
there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur,
that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12]
A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or
a cash flow hedge. [IFRS 9 paragraph 6.5.4]

Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a
monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow
hedges:
o the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognised in OCI; and
o the ineffective portion is recognised in profit or loss. [IFRS 9 paragraph 6.5.13]

The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is
reclassified to profit or loss on the disposal or partial disposal of the foreign operation. [IFRS 9 paragraph
6.5.14]

Hedge effectiveness requirements

In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:
 o there is an economic relationship between the hedged item and the hedging instrument;
o the effect of credit risk does not dominate the value changes that result from that economic
relationship; and
o the hedge ratio of the hedging relationship is the same as that actually used in the economic
hedge [IFRS 9 paragraph 6.4.1(c)]

Rebalancing and discontinuation

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio
but the risk management objective for that designated hedging relationship remains the same, an entity
adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the
qualifying criteria again. [IFRS 9 paragraph 6.5.5]

An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a
hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes
instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge
accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge
accounting continues for the remainder of the hedging relationship). [IFRS 9 paragraph 6.5.6]

Time value of options

When an entity separates the intrinsic value and time value of an option contract and designates as the
hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change
in the time value in OCI which is later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
[IFRS 9 paragraph 6.5.15] This reduces profit or loss volatility compared to recognising the change in
value of time value directly in profit or loss.

Forward points and foreign currency basis spreads

When an entity separates the forward points and the spot element of a forward contract and designates
as the hedging instrument only the change in the value of the spot element, or when an entity excludes
the foreign currency basis spread from a hedge the entity may recognise the change in value of the
excluded portion in OCI to be later removed or reclassified from equity as a single amount or on an
amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss.
[IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in
value of forward points or currency basis spreads directly in profit or loss.

Credit exposures designated at FVTPL

If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument
(credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if:
o the name of the credit exposure matches the reference entity of the credit derivative (‘name
matching’); and
o the seniority of the financial instrument matches that of the instruments that can be delivered in
accordance with the credit derivative.

An entity may make this designation irrespective of whether the financial instrument that is managed for
credit risk is within the scope of IFRS 9 (for example, it can apply to loan commitments that are outside
the scope of IFRS 9). The entity may designate that financial instrument at, or subsequent to, initial
recognition, or while it is unrecognised and shall document the designation concurrently. [IFRS 9
paragraph 6.7.1]

If designated after initial recognition, any difference in the previous carrying amount and fair value is
recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2]

An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the
qualifying criteria are no longer met and the instrument is not otherwise required to be measured at
FVTPL. The fair value at discontinuation becomes its new carrying amount. [IFRS 9 paragraphs 6.7.3 and
6.7.4]
Impairment
The impairment model in IFRS 9 is based on the premise of providing for expected losses.

Scope
IFRS 9 requires that the same impairment model apply to all of the following:
[IFRS 9 paragraph 5.5.1]
o Financial assets measured at amortised cost;
o Financial assets mandatorily measured at FVTOCI;
o Loan commitments when there is a present obligation to extend credit (except where these are
measured at FVTPL);
o Financial guarantee contracts to which IFRS 9 is applied (except those measured at
FVTPL);
o Lease receivables within the scope of IAS 17 Leases; and
o Contract assets within the scope of IFRS 15 Revenue from Contracts with
Customers (i.e. rights to consideration following transfer of goods or services).

General approach
With the exception of purchased or originated credit impaired financial assets (see below), expected
credit losses are required to be measured through a loss allowance at an amount equal to:
[IFRS 9 paragraphs 5.5.3 and 5.5.5]
o the 12-month expected credit losses (expected credit losses that result from those default events
on the financial instrument that are possible within 12 months after the reporting date); or
o full lifetime expected credit losses (expected credit losses that result from all possible default
events over the life of the financial instrument).

A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit
risk of that financial instrument has increased significantly since initial recognition, as well as to contract
assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15.
[IFRS 9 paragraphs 5.5.3 and 5.5.15]

Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all
contract assets and/or all trade receivables that do constitute a financing transaction in accordance with
IFRS 15. The same election is also separately permitted for lease receivables. [IFRS 9 paragraph 5.5.16]

For all other financial instruments, expected credit losses are measured at an amount equal to the 12-
month expected credit losses. [IFRS 9 paragraph 5.5.5]

Significant increase in credit risk

With the exception of purchased or originated credit-impaired financial assets (see below), the loss
allowance for financial instruments is measured at an amount equal to lifetime expected losses if the
credit risk of a financial instrument has increased significantly since initial recognition, unless the credit
risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk
on the financial instrument has not increased significantly since initial recognition. [IFRS 9 paragraphs
5.5.3 and 5.5.10]

The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity
to meet its contractual cash flow obligations in the near term and adverse changes in economic and
business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to
fulfil its contractual cash flow obligations. The Standard suggests that ‘investment grade’ rating might be
an indicator for a low credit risk. [IFRS 9 paragraphs B5.5.22 – B5.5.24]

The assessment of whether there has been a significant increase in credit risk is based on an increase in
the probability of a default occurring since initial recognition. Under the Standard, an entity may use
various approaches to assess whether credit risk has increased significantly (provided that the approach
is consistent with the requirements). An approach can be consistent with the requirements even if it does
not include an explicit probability of default occurring as an input. The application guidance provides a list
of factors that may assist an entity in making the assessment. Also, whilst in principle the assessment of
whether a loss allowance should be based on lifetime expected credit losses is to be made on an
individual basis, some factors or indicators might not be available at an instrument level. In this case, the
entity should perform the assessment on appropriate groups or portions of a portfolio of financial
instruments.

The requirements also contain a rebuttable presumption that the credit risk has increased significantly
when contractual payments are more than 30 days past due. IFRS 9 also requires that (other than for
purchased or originated credit impaired financial instruments) if a significant increase in credit risk that
had taken place since initial recognition and has reversed by a subsequent reporting period (i.e.,
cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses
on the financial instrument revert to being measured based on an amount equal to the 12-month
expected credit losses. [IFRS 9 paragraph 5.5.11]

Purchased or originated credit-impaired financial assets

Purchased or originated credit-impaired financial assets are treated differently because the asset is
credit-impaired at initial recognition. For these assets, an entity would recognise changes in lifetime
expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss.
Under the requirements, any favourable changes for such assets are an impairment gain even if the
resulting expected cash flows of a financial asset exceed the estimated cash flows on initial recognition.
[IFRS 9 paragraphs 5.5.13 – 5.5.14]

Credit-impaired financial asset

Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have
a significant impact on the expected future cash flows of the financial asset. It includes observable data
that has come to the attention of the holder of a financial asset about the following events:
[IFRS 9 Appendix A]
o significant financial difficulty of the issuer or borrower;
o a breach of contract, such as a default or past-due event;
o the lenders for economic or contractual reasons relating to the borrower’s financial difficulty
granted the borrower a concession that would not otherwise be considered;
o it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
o the disappearance of an active market for the financial asset because of financial difficulties; or
o the purchase or origination of a financial asset at a deep discount that reflects incurred credit
losses.

Basis for estimating expected credit losses

Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-
weighted amount that is determined by evaluating the range of possible outcomes as well as
incorporating the time value of money. Also, the entity should consider reasonable and supportable
information about past events, current conditions and reasonable and supportable forecasts of future
economic conditions when measuring expected credit losses. [IFRS 9 paragraph 5.5.17]

The Standard defines expected credit losses as the weighted average of credit losses with the respective
risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to
consider every possible scenario, it must consider the risk or probability that a credit loss occurs by
considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if
the probability of a credit loss occurring is low. [IFRS 9 paragraph 5.5.18]

In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring
on the financial instrument during its expected life. 12-month expected credit losses represent the lifetime
cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the
probability of that default occurring.
An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably
available at the reporting date). Information is reasonably available if obtaining it does not involve undue
cost or effort (with information available for financial reporting purposes qualifying as such).

For applying the model to a loan commitment an entity will consider the risk of a default occurring under
the loan to be advanced, whilst application of the model for financial guarantee contracts an entity
considers the risk of a default occurring of the specified debtor. [IFRS 9 paragraphs B5.5.31 and B5.5.32]

An entity may use practical expedients when estimating expected credit losses if they are consistent with
the principles in the Standard (for example, expected credit losses on trade receivables may be
calculated using a provision matrix where a fixed provision rate applies depending on the number of days
that a trade receivable is outstanding). [IFRS 9 paragraph B5.5.35]

To reflect time value, expected losses should be discounted to the reporting date using the effective
interest rate of the asset (or an approximation thereof) that was determined at initial recognition. A “credit-
adjusted effective interest” rate should be used for expected credit losses of purchased or originated
credit-impaired financial assets. In contrast to the “effective interest rate” (calculated using expected cash
flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit
losses of the financial asset. [IFRS 9 paragraphs B5.5.44-45]

Expected credit losses of undrawn loan commitments should be discounted by using the effective interest
rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from
the commitment. If the effective interest rate of a loan commitment cannot be determined, the discount
rate should reflect the current market assessment of time value of money and the risks that are specific to
the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the
discount rate. This approach shall also be used to discount expected credit losses of financial guarantee
contracts. [IFRS 9 paragraphs B5.5.47]

Presentation
Whilst interest revenue is always required to be presented as a separate line item, it is calculated
differently according to the status of the asset with regard to credit impairment. In the case of a financial
asset that is not a purchased or originated credit-impaired financial asset and for which there is no
objective evidence of impairment at the reporting date, interest revenue is calculated by applying the
effective interest rate method to the gross carrying amount. [IFRS 9 paragraph 5.4.1]

In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but
subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest
rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss
allowance. [IFRS 9 paragraph 5.4.1]

In the case of purchased or originated credit-impaired financial assets, interest revenue is always
recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount.
[IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash
flows expected on initial recognition (explicitly taking account of expected credit losses as well as
contractual terms of the instrument) back to the amortised cost at initial recognition. [IFRS 9 Appendix A]
Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including reversals of
impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial
assets), are presented in a separate line item in the statement of profit or loss and other comprehensive
income.

Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding
disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk
management activities and hedge accounting and disclosures on credit risk management and
impairment.
Interaction with IFRS 4
On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for entities that
issue insurance contracts within the scope of IFRS 4:
o an option that permits entities to reclassify, from profit or loss to other comprehensive income,
some of the income or expenses arising from designated financial assets; this is the so-called
overlay approach;
o an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is
issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.

An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so
when it first applies IFRS 9. An entity choosing to apply the deferral approach does so for annual periods
beginning on or after 1 January 2018. The application of both approaches is optional and an entity is
permitted to stop applying them before the new insurance contracts standard is applied.
IFRS 13
FAIR VALUE MEASUREMENT

Objective
IFRS 13: [IFRS 13:1]
 defines fair value
 sets out in a single IFRS a framework for measuring fair value
 requires disclosures about fair value measurements.

IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair
value measurements (and measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except for: [IFRS 13:5-7]
 share-based payment transactions within the scope of IFRS 2 Share-based Payment
 leasing transactions within the scope of IAS 17 Leases
 measurements that have some similarities to fair value but that are not fair value, such as net
realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.
Additional exemptions apply to the disclosures required by IFRS 13.

Key definitions
[IFRS 13:Appendix A]
Fair value - The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
Active market - A market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis
Exit price - The price that would be received to sell an asset or paid to transfer a liability
Highest and best use - The use of a non-financial asset by market participants that would maximise the
value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be
used
Most advantageous market - The market that maximises the amount that would be received to sell the
asset or minimises the amount that would be paid to transfer the liability, after taking into account
transaction costs and transport costs
Principal market - The market with the greatest volume and level of activity for the asset or liability
Fair value hierarchy

Overview
IFRS 13 seeks to increase consistency and comparability in fair value measurements and
related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in
valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted
prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
[IFRS 13:72]

If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the
fair value measurement is categorised in its entirety in the level of the lowest level input that is significant
to the entire measurement (based on the application of judgement). [IFRS 13:73]

Level 1 inputs
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date. [IFRS 13:76]

A quoted market price in an active market provides the most reliable evidence of fair value and is used
without adjustment to measure fair value whenever available, with limited exceptions. [IFRS 13:77]
If an entity holds a position in a single asset or liability and the asset or liability is traded in an active
market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price
for the individual asset or liability and the quantity held by the entity, even if the market's normal daily
trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price. [IFRS 13:80]
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. [IFRS 13:81]

Level 2 inputs include:

 quoted prices for similar assets or liabilities in active markets
 quoted prices for identical or similar assets or liabilities in markets that are not active
 inputs other than quoted prices that are observable for the asset or liability, for example
o interest rates and yield curves observable at commonly quoted intervals
o implied volatilities
o credit spreads
 inputs that are derived principally from or corroborated by observable market data by correlation
or other means ('market-corroborated inputs').

Level 3 inputs
Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. An entity develops unobservable inputs using the best information
available in the circumstances, which might include the entity's own data, taking into account all
information about market participant assumptions that is reasonably available. [IFRS 13:87-89]

Measurement of fair value

Overview of fair value measurement approach
The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants at the measurement
date under current market conditions. A fair value measurement requires an entity to determine all of the
following: [IFRS 13:B2]
 the particular asset or liability that is the subject of the measurement (consistently with its unit of
account)
 for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistently with its highest and best use)
 the principal (or most advantageous) market for the asset or liability
 the valuation technique(s) appropriate for the measurement, considering the availability of data
with which to develop inputs that represent the assumptions that market participants would use
when pricing the asset or liability and the level of the fair value hierarchy within which the inputs
are categorised.

Guidance on measurement
IFRS 13 provides the guidance on the measurement of fair value, including the following:
 An entity takes into account the characteristics of the asset or liability being measured that a
market participant would take into account when pricing the asset or liability at measurement date
(e.g. the condition and location of the asset and any restrictions on the sale and use of the asset)
[IFRS 13:11]
 Fair value measurement assumes an orderly transaction between market participants at the
measurement date under current market conditions [IFRS 13:15]
 Fair value measurement assumes a transaction taking place in the principal market for the asset
or liability, or in the absence of a principal market, the most advantageous market for the asset or
liability [IFRS 13:24]
 A fair value measurement of a non-financial asset takes into account its highest and best use
[IFRS 13:27]
 A fair value measurement of a financial or non-financial liability or an entity's own equity
instruments assumes it is transferred to a market participant at the measurement date, without
settlement, extinguishment, or cancellation at the measurement date [IFRS 13:34]
  The fair value of a liability reflects non-performance risk (the risk the entity will not fulfil an
obligation), including an entity's own credit risk and assuming the same non-performance risk
before and after the transfer of the liability [IFRS 13:42]
 An optional exception applies for certain financial assets and financial liabilities with offsetting
positions in market risks or counterparty credit risk, provided conditions are met (additional
disclosure is required). [IFRS 13:48, IFRS 13:96]

Valuation techniques
An entity uses valuation techniques appropriate in the circumstances and for which sufficient data are
available to measure fair value, maximising the use of relevant observable inputs and minimising the use
of unobservable inputs. [IFRS 13:61, IFRS 13:67]

The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants and the measurement
date under current market conditions. Three widely used valuation techniques are: [IFRS 13:62]
 market approach – uses prices and other relevant information generated by market transactions
involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities
(e.g. a business)
 cost approach – reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost)
 income approach – converts future amounts (cash flows or income and expenses) to a single
current (discounted) amount, reflecting current market expectations about those future amounts.

In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation
techniques will be appropriate. [IFRS 13:63]

Disclosure
Disclosure objective
IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both
of the following: [IFRS 13:91]
 for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in
the statement of financial position after initial recognition, the valuation techniques and inputs
used to develop those measurements
 for fair value measurements using significant unobservable inputs (Level 3), the effect of the
measurements on profit or loss or other comprehensive income for the period.

Disclosure exemptions
The disclosure requirements are not required for: [IFRS 13:7]
 plan assets measured at fair value in accordance with IAS 19 Employee Benefits
 retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting
and Reporting by Retirement Benefit Plans
 assets for which recoverable amount is fair value less costs of disposal in accordance with IAS
36 Impairment of Assets.

Identification of classes
Where disclosures are required to be provided for each class of asset or liability, an entity determines
appropriate classes on the basis of the nature, characteristics and risks of the asset or liability, and the
level of the fair value hierarchy within which the fair value measurement is categorised. [IFRS 13:94]

Determining appropriate classes of assets and liabilities for which disclosures about fair value
measurements should be provided requires judgement. A class of assets and liabilities will often require
greater disaggregation than the line items presented in the statement of financial position. The number of
classes may need to be greater for fair value measurements categorised within Level 3.
Some disclosures are differentiated on whether the measurements are:
 Recurring fair value measurements – fair value measurements required or permitted by other
IFRSs to be recognised in the statement of financial position at the end of each reporting period
 Non-recurring fair value measurements are fair value measurements that are required or
permitted by other IFRSs to be measured in the statement of financial position in particular
circumstances.

Specific disclosures required

To meet the disclosure objective, the following minimum disclosures are required for each class of assets
and liabilities measured at fair value (including measurements based on fair value within the scope of this
IFRS) in the statement of financial position after initial recognition (note these are requirements have
been summarised and additional disclosure is required where necessary): [IFRS 13:93]
 the fair value measurement at the end of the reporting period*
 for non-recurring fair value measurements, the reasons for the measurement*
 the level of the fair value hierarchy within which the fair value measurements are categorised in
their entirety (Level 1, 2 or 3)*
 for assets and liabilities held at the reporting date that are measured at fair value on a recurring
basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the
reasons for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred, separately disclosing and discussing transfers into and out of each
level
 for fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, a
description of the valuation technique(s) and the inputs used in the fair value measurement, any
change in the valuation techniques and the reason(s) for making such change (with some
exceptions)*
 for fair value measurements categorised within Level 3 of the fair value hierarchy, quantitative
information about the significant unobservable inputs used in the fair value measurement (with
some exceptions)
 for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a
reconciliation from the opening balances to the closing balances, disclosing separately changes
during the period attributable to the following:
o total gains or losses for the period recognised in profit or loss, and the line item(s) in profit
or loss in which those gains or losses are recognised – separately disclosing the amount
included in profit or loss that is attributable to the change in unrealised gains or losses
relating to those assets and liabilities held at the end of the reporting period, and the line
item(s) in profit or loss in which those unrealised gains or losses are recognised
o total gains or losses for the period recognised in other comprehensive income, and the
line item(s) in other comprehensive income in which those gains or losses are recognised
o purchases, sales, issues and settlements (each of those types of changes disclosed
separately)
o the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons
for those transfers and the entity's policy for determining when transfers between levels
are deemed to have occurred. Transfers into Level 3 shall be disclosed and discussed
separately from transfers out of Level 3
 for fair value measurements categorised within Level 3 of the fair value hierarchy, a description of
the valuation processes used by the entity
 for recurring fair value measurements categorised within Level 3of the fair value hierarchy:
o a narrative description of the sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs to a different amount might result in a
significantly higher or lower fair value measurement. If there are interrelationships
between those inputs and other unobservable inputs used in the fair value measurement,
the entity also provides a description of those interrelationships and of how they might
magnify or mitigate the effect of changes in the unobservable inputs on the fair value
measurement
 o for financial assets and financial liabilities, if changing one or more of the unobservable
inputs to reflect reasonably possible alternative assumptions would change fair value
significantly, an entity shall state that fact and disclose the effect of those changes. The
entity shall disclose how the effect of a change to reflect a reasonably possible alternative
assumption was calculated
 if the highest and best use of a non-financial asset differs from its current use, an entity shall
disclose that fact and why the non-financial asset is being used in a manner that differs from its
highest and best use*.

'*' in the list above indicates that the disclosure is also applicable to a class of assets or liabilities which is
not measured at fair value in the statement of financial position but for which the fair value is
disclosed. [IFRS 13:97]

Quantitative disclosures are required to be presented in a tabular format unless another format is more
appropriate. [IFRS 13:99]

Effective date and transition

[IFRS 13:Appendix C]

IFRS 13 is applicable to annual reporting periods beginning on or after 1 January 2013. An entity may
apply IFRS 13 to an earlier accounting period, but if doing so it must disclose the fact.

Application is required prospectively as of the beginning of the annual reporting period in which the IFRS
is initially applied. Comparative information need not be disclosed for periods before initial application.
IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS

Superseded Standards
IFRS 15 replaces the following standards and interpretations
 IAS 11 Construction contracts
 IAS 18 Revenue
 IFRIC 13 Customer Loyalty Programmes
 IFRIC 15 Agreements for the Construction of Real Estate
 IFRIC 18 Transfers of Assets from Customers
 SIC-31 Revenue - Barter Transactions Involving Advertising Services

Objective
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer. [IFRS 15:1] Application of the standard is mandatory for
annual reporting periods starting from 1 January 2018 onwards. Earlier application is permitted.

Scope
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for:
leases within the scope of IAS 17 Leases; 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; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary
exchanges between entities in the same line of business to facilitate sales to customers or potential
customers. [IFRS 15:5]

A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of
another standard. In that scenario: [IFRS 15:7]
 if other standards specify how to separate and/or initially measure one or more parts of the
contract, then those separation and measurement requirements are applied first. The transaction
price is then reduced by the amounts that are initially measured under other standards;
 if no other standard provides guidance on how to separate and/or initially measure one or more
parts of the contract, then IFRS 15 will be applied.

Key definitions
[IFRS 15: Appendix A]
Contract - An agreement between two or more parties that creates enforceable rights and obligations.
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.
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.
Performance obligation - A promise in a contract with a customer to transfer to the customer either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
Revenue - Income arising in the course of an entity’s ordinary activities.
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.
Accounting requirements for revenue
The five-step model framework
The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. This core principle is delivered in a five-step model
framework: [IFRS 15:IN7]
 Identify the contract(s) with a customer
 Identify the performance obligations in the contract
 Determine the transaction price
 Allocate the transaction price to the performance obligations in the contract
 Recognise revenue when (or as) the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract with a
customer and will require the exercise of judgment.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS
15:9]
 the contract has been approved by the parties to the contract;
 each party’s rights in relation to the goods or services to be transferred can be identified;
 the payment terms for the goods or services to be transferred can be identified;
 the contract has commercial substance; and
 it is probable that the consideration to which the entity is entitled to in exchange for the goods or
services will be collected.

If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-
assess the contract going forward to determine whether it subsequently meets the above criteria. From
that point, the entity will apply IFRS 15 to the contract. [IFRS 15:14]

The standard provides detailed guidance on how to account for approved contract modifications. If certain
conditions are met, a contract modification will be accounted for as a separate contract with the customer.
If not, it will be accounted for by modifying the accounting for the current contract with the customer.
Whether the latter type of modification is accounted for prospectively or retrospectively depends on
whether the remaining goods or services to be delivered after the modification are distinct from those
delivered prior to the modification. Further details on accounting for contract modifications can be found in
the Standard. [IFRS 15:18-21].

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been promised
to the customer, and identify as a performance obligation: [IFRS 15.22]
 a good or service (or bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.

A series of distinct goods or services is transferred to the customer in the same pattern if both of the
following criteria are met: [IFRS 15:23]
 each distinct good or service in the series that the entity promises to transfer consecutively to the
customer would be a performance obligation that is satisfied over time (see below); and
 a single method of measuring progress would be used to measure the entity’s progress towards
complete satisfaction of the performance obligation to transfer each distinct good or service in the
series to the customer.

A good or service is distinct if both of the following criteria are met: [IFRS 15:27]
 the customer can benefit from the good or services on its own or in conjunction with other readily
available resources; and
  the entity’s promise to transfer the good or service to the customer is separately idenitifable from
other promises in the contract.

Factors for consideration as to whether a promise to transfer goods or services to the customer is not
separately identifiable include, but are not limited to: [IFRS 15:29]
 the entity does provide a significant service of integrating the goods or services with other goods
or services promised in the contract;
 the goods or services significantly modify or customise other goods or services promised in the
contract;
 the goods or services are highly interrelated or highly interdependent.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer
of goods and services. When making this determination, an entity will consider past customary business
practices. [IFRS 15:47]

Where a contract contains elements of variable consideration, the entity will estimate the amount of
variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable consideration
can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives,
performance bonuses, penalties or other similar items. Variable consideration is also present if an entity’s
right to consideration is contingent on the occurrence of a future event. [IFRS 15:51]

The standard deals with the uncertainty relating to variable consideration by limiting the amount of
variable consideration that can be recognised. Specifically, variable consideration is only included in the
transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a
significant revenue reversal in the future when the uncertainty has been subsequently resolved. [IFRS
15:56]

However, a different, more restrictive approach is applied in respect of sales or usage-based royalty
revenue arising from licences of intellectual property. Such revenue is recognised only when the
underlying sales or usage occur. [IFRS 15:B63]

Step 4: Allocate the transaction price to the performance obligations in the contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the
performance obligations in the contract by reference to their relative standalone selling prices. [IFRS
15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15
suggests various methods that might be used, including: [IFRS 15:79]
 Adjusted market assessment approach
 Expected cost plus a margin approach
 Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it may be
appropriate to allocate such a discount to some but not all of the performance obligations. [IFRS 15:81]

Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract
includes a significant financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60] A
practical expedient is available where the interval between transfer of the promised goods or services and
payment by the customer is expected to be less than 12 months. [IFRS 15:63]

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:32]
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining
benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining
the benefits from the asset. The benefits related to the asset are the potential cash flows that may be
obtained directly or indirectly. These include, but are not limited to: [IFRS 15:31-33]
 using the asset to produce goods or provide services;
 using the asset to enhance the value of other assets;
 using the asset to settle liabilities or to reduce expenses;
 selling or exchanging the asset;
 pledging the asset to secure a loan; and
 holding the asset.

An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35]
 the customer simultaneously receives and consumes all of the benefits provided by the entity as
the entity performs;
 the entity’s performance creates or enhances an asset that the customer controls as the asset is
created; or
 the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognised when control is passed at a certain point in time. Factors that may indicate
the point in time at which control passes include, but are not limited to: [IFRS 15:38]
 the entity has a present right to payment for the asset;
 the customer has legal title to the asset;
 the entity has transferred physical possession of the asset;
 the customer has the significant risks and rewards related to the ownership of the asset; and
 the customer has accepted the asset.

Contract costs
The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to
recover those costs. However, those incremental costs are limited to the costs that the entity would not
have incurred if the contract had not been successfully obtained (e.g. ‘success fees’ paid to agents). A
practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if
the associated amortisation period would be 12 months or less. [IFRS 15:91-94]

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are
met: [IFRS 15:95]
 the costs relate directly to a contract (or a specific anticipated contract);
 the costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
 the costs are expected to be recovered.

These include costs such as direct labour, direct materials, and the allocation of overheads that relate
directly to the contract. [IFRS 15:97]

The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic
basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.
[IFRS 15:99]

Further useful implementation guidance in relation to applying IFRS 15

These topics include:
 Performance obligations satisfied over time
 Methods for measuring progress towards complete satisfaction of a performance obligation
 Sale with a right of return
 Warranties
 Principal versus agent considerations
 Customer options for additional goods or services
  Customers’ unexercised rights
 Non-refundable upfront fees
 Licensing
 Repurchase arrangements
 Consignment arrangements
 Bill-and-hold arrangements
 Customer acceptance
 Disclosures of disaggregation of revenue

These topics should be considered carefully when applying IFRS 15.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a contract
liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance
and the customer’s payment. [IFRS 15:105]

A contract liability is presented in the statement of financial position where a customer has paid an
amount of consideration prior to the entity performing by transferring the related good or service to the
customer. [IFRS 15:106]

Where the entity has performed by transferring a good or service to the customer and the customer has
not yet paid the related consideration, a contract asset or a receivable is presented in the statement of
financial position, depending on the nature of the entity’s right to consideration. A contract asset is
recognised when the entity’s right to consideration is conditional on something other than the passage of
time, for example future performance of the entity. A receivable is recognised when the entity’s right to
consideration is unconditional except for the passage of time.

Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment
relating to contracts with customers should be measured, presented and disclosed in accordance with
IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of
revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS
15:107-108]

Disclosures
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable
users of financial statements to understand the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and
quantitative information about all of the following: [IFRS 15:110]
 its contracts with customers;
 the significant judgments, and changes in the judgments, made in applying the guidance to those
contracts; and
 any assets recognised from the costs to obtain or fulfil a contract with a customer.

Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how
much emphasis to place on each of the requirements. An entity should aggregate or disaggregate
disclosures to ensure that useful information is not obscured. [IFRS 15:111]
In order to achieve the disclosure objective stated above, the Standard introduces a number of new
disclosure requirements. Further detail about these specific requirements can be found at IFRS 15:113-
129.
Effective date and transition
The standard should be applied in an entity’s IFRS financial statements for annual reporting periods
beginning on or after 1 January 2018. Earlier application is permitted. An entity that chooses to apply
IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant financial statements. [IFRS
15:C1]
When first applying IFRS 15, entities should apply the standard in full for the current period, including
retrospective application to all contracts that were not yet complete at the beginning of that period. In
respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]
 apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or
 retain prior period figures as reported under the previous standards, recognising the cumulative
effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of
initial application (beginning of current reporting period).
PFRS FOR SMEs
SECTION 11.3
BASIC FINANCIAL INSTRUMENTS

 IFRS for SMEs has two sections on financial instruments:

o Section 11 on Basic Financial Instruments
o Section 12 on Other FI Transactions

 Option to follow IAS 39 instead of sections 11 and 12

 Even if IAS 39 is followed, make Section 11 and 12 disclosures (not IFRS 7 disclosures)
 Essentially, Section 11 is an amortised historical cost model
o Except for equity investments with quoted price or readily determinable fair value. These are
measured at fair value through profit or loss.

 Scope of Section 11 includes:

o Cash
o Demand and fixed deposits
o Commercial paper and bills
o Accounts and notes receivable and payable
o Debt instruments where returns to the holder are fixed or referenced to an observable rate
o Investments in nonconvertible and non-puttable ordinary and preference shares
o Most commitments to receive a loan

 Initial measurement:
o Basic financial assets and financial liabilities are initially measured at the transaction price
(including transaction costs except in the initial measurement of financial assets and liabilities
that are measured at fair value through profit or loss) unless the arrangement constitutes, in
effect, a financing transaction. A financing transaction may be indicated in relation to the sale
of goods or services, for example, if payment is deferred beyond normal business terms or is
financed at a rate of interest that is not a market rate. If the arrangement constitutes a
financing transaction, measure the financial asset or financial liability at the present value of
the future payments discounted at a market rate of interest for a similar debt instrument.

 Measurement subsequent to initial recognition:

o Debt instruments at amortised cost using the effective interest method
o Debt instruments that are classified as current assets or current liabilities are measured at the
undiscounted amount of the cash or other consideration expected to be paid or received (ie
net of impairment) unless the arrangement constitutes, in effect, a financing transaction. If the
arrangement constitutes a financing transaction, the entity shall measure the debt instrument
at the present value of the future payments discounted at a market rate of interest for a
similar debt instrument.
o Investments in non-convertible preference shares and non-puttable ordinary or preference
shares:
 if the shares are publicly traded or their fair value can otherwise be measured reliably
without undue cost or effort*, measure at fair value with changes in fair value
recognised in profit or loss
 measure all other such investments at cost less impairment

 Must test all amortised cost instruments for impairment or uncollectibility

 Previously recognised impairment is reversed if an event occurring after the impairment was first
recognised causes the original impairment loss to decrease
 Guidance is provided on determining fair values of financial instruments
o The most reliable is a quoted price in an active market
o When a quoted price is not available the most recent transaction price provides evidence of
fair value
 o If there is no active market or recent market transactions, a valuation technique may be used

 Guidance is provided on the effective interest method

 Derecognise a financial asset when:

o the contractual rights to the cash flows from the financial asset expire or are settled;
o the entity transfers to another party all of the significant risks and rewards relating to the
financial asset; or
o the entity, despite having retained some significant risks and rewards relating to the financial
asset, has transferred the ability to sell the asset in its entirety to an unrelated third party who
is able to exercise that ability unilaterally and without needing to impose additional restrictions
on the transfer.

 Derecognise a financial liability when the obligation is discharged, cancelled, or expires

 Disclosures:
o Categories of financial instruments
o Details of debt and other instruments
o Details of derecognitions
o Collateral
o Defaults and breaches on loans payable
o Items of income and expense

*'undue cost or effort' added by 2015 Amendments to the IFRS for SMEs issued on 21 May 2015 effective
1 January 2017
PFRS FOR SMEs
SECTION 23.3 AND 23.4
MEASUREMENT OF REVENUE

 Revenue results from the sale of goods, services being rendered, construction contracts income by
the contractor and the use by others of your assets
 Some types of revenue are excluded from this section and dealt with elsewhere:
o leases (section 20)
o dividends from equity accounted entities (section 14 and 15)
o changes in fair value of financial instruments (section 11 and 12)
o initial recognition and subsequent re-measurement of biological assets (section 34) and initial
recognition of agricultural produce (section 34)

 Principle for measurement of revenue is the fair value of the consideration received or receivable,
taking into account any possible trade discounts or rebates, including volume rebates and prompt
settlement discounts
 If payment is deferred beyond normal payment terms, there is a financing component to the
transaction. In that case, revenue is measured at the present value of all future receipts. The
difference is recognised as interest revenue.

 Recognition – sale of goods: An entity shall recognise revenue from the sale of goods when all the
following conditions are satisfied:
a. the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods.
b. the entity retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold.
c. the amount of revenue can be measured reliably.
d. it is probable that the economic benefits associated with the transaction will flow to the entity.
e. the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 Recognition – sale of services: Use the percentage of completion method if the outcome of the
transaction can be estimated reliably. Otherwise use the cost-recovery method.
 Recognition – construction contracts: Use the percentage of completion method if the outcome of the
contract can be estimated reliably. Otherwise use the cost-recovery method.
 Recognition – interest: Interest shall be recognised using the effective interest method as described in
Section 11
 Recognition – royalties: Royalties shall be recognised on an accrual basis in accordance with the
substance of the relevant agreement.
 Recognition – dividends: Dividends shall be recognised when the shareholder's right to receive
payment is established.

 Appendix of examples of revenue recognition under the principles in Section 23

o Award credits or other customer loyalty plan awards need to be accounted for separately. The fair
value of such awards reduces the amount of revenue initially recognised and, instead, is
recognised when awards are redeemed.
PFRS FOR SEs
SECTION 6.102
BASIC FINANCIAL INSTRUMENTS

Initial measurement
When a financial asset or financial liability is recognized initially, an entity shall measure it at the
transaction price (including transaction costs) unless the arrangement constitutes, in effect, a financing
transaction. A financing transaction may take place in connection with the sale of goods or services, for
example, if payment is deferred beyond normal business terms or is financed at a rate of interest that is
not a market rate. If the arrangement constitutes a financing transaction, the entity shall measure the
financial asset or financial liability at the present value of the future payments discounted at a market rate
of interest for a similar debt instrument.

Example - financial assets:

a. For a long-term loan made to another entity, a receivable is recognized at the present value of
cash receivable (including interest payments and repayment of principal) from that entity.
b. For goods sold to a customer on short-term credit, a receivable is recognized at the undiscounted
amount of cash receivable from that entity, which is normally the invoice price.
c. For an item sold to a customer on two-year interest-free credit, a receivable is recognized at the
current cash sale price for that item. If the current cash sale price is not known, it may be
estimated as the present value of the cash receivable discounted using the prevailing market
rate(s) of interest for a similar receivable.
d. For a cash purchase of another entity’s ordinary shares, the investment is recognized at the
amount of cash paid to acquire the shares.

Example - financial liabilities:

a. For a long-term loan received from a bank, a payable is recognized initially at the present value of
cash payable to the bank (for example, including interest payments and repayment of principal).
b. For goods purchased from a supplier on short-term credit, a payable is recognized at the
undiscounted amount owed to the supplier, which is normally the invoice price.

PFRS FOR SEs

SECTION 18.322
MEASUREMENT OF REVENUE

An entity shall measure revenue at the fair value of the consideration received or receivable. The fair
value of the consideration received or receivable is after deducting the amount of any trade discounts,
prompt settlement discounts and volume rebates allowed by the entity. The fair value also takes into
account the time value of money.