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IFRS 9: Financial

Instruments
Hasan Aksakal

Flow of Discussion
Introduction
Classification
Recognition

and
Measurement
Impairment

Introduction
Date

Phase Completed

November 12, 2009

IASB issued IFRS 9 Financial Instruments as the


first step in its project to replace IAS 39.
Introduced new requirements for classification
and measurement of financial assets. Effective
date January 1, 2013 with early adoption
permitted.

October 28, 2010

IASB reissued IFRS 9, incorporating new


requirements on accounting for financial
liabilities, carrying over IAS 39 requirements of
derecognition.

Introduction
Date

Phase Completed

December 16, 2011

Amended effective date of IFRS 9 to January 1, 2015.

November 19, 2013

IASB issued IFRS 9 Financial Instruments to include the


new general hedge accounting model, allow early
adoption of the treatment of fair value changes due to
own credit on liabilities designated at FVTPL and
remove January 1, 2015 effective date.

July 24, 2014

IASB issued the final version of IFRS 9 incorporating a


new expected credit loss impairment model.
Supersedes all versions. Effective January 1, 2018 with
early adoption permitted.

IAS 39 vs. IFRS 9


IAS 39
Classification of
financial assets

Four categories:
-Fair value through profit or
loss (FVTPL)
-Loans and receivables
-Held to maturity (HTM)
-Available-for-sale financial
assets

IFRS 9
Three categories:
-Amortized cost
-Fair value through
other comprehensive
income (FVTOCI)
-Fair value through
profit or loss (FVTPL)

IAS 39 vs. IFRS 9


IAS 39
Classification of
financial
liabilities

Two categories:
-Fair value through profit
or loss (FVTPL)
-Amortized cost

IFRS 9
No change to categories.
However, for financial
liabilities designated at
FVTPL under the fair
value option, the fair
value changes arising
from changes in the
entitys own credit risk
are recognized in OCI.

Financial Assets
Cash
An

Equity of another entity


A contractual right to receive cash or another financial asset from
another entity
A contractual right to exchange financial assets or financial liabilities
with another entity under conditions that is potentially favourable to the
entity;

Classification of financial assets under IFRS 9


(A) At amortised cost:
()An asset (other than equity instrument) that meets the below mentioned
conditions:
()The asset is held within a business model whose objective is to hold
assets in order to collect contractual cash flows;
()The contractual cash terms of the financial asset give rise to cash flows
on specific dates that are solely payments of principal and interest on the
principal amount outstanding;
()The entity has not invoked the fair value option for measurement of
financial asset to reduce an accounting or measurement mismatch
(B) At fair value

Business Model
An

entitys business model approach is determined on a higher level,


rather than an asset-by-asset basis. Further, the entity may have
different assets (portfolio of assets) for business purposes.
Accordingly, it

may not be right to identify the business model on an


entitys level either. The entity may comprise of a portfolio of assets
which is collected on the basis of contractual cash flows, and of a
portfolio of assets in which it trades.

Examples
K Ltd, a banking company, issues loans to various customers in

retail business. A customer, having taken a 20 years loan, decides to


pay off the loan in 5 years time. K Ltd cannot refuse the prepayment, and would receive the money due from the customer.
K

Ltd gives loan to various clients in the retail sector. If someone


does not pay the installment, K Ltd would follow different measures
to recover money. It may further mean to recover money by selling
off the collateral.

Amortized cost
K

Ltd invests $100,000 into debt instrument of T Ltd. The cost of


advisory / valuation comes at $5,000. K Ltd.'s business model is to
collect contractual cash flows in form of recovery of interest and
principal payments.

At Fair Value
IFRS

9 provides that changes in the value of a financial asset


measured at fair value, but not held for trading purposes, may be
done through Other Comprehensive Income. However, this choice
has to be made by the entity at the time of initial recognition of the
asset. This decision is irrevocable, and cannot be changed later.

Examples

Ltd invests in 3 years redeemable preference shares of T Ltd. K Ltd holds these shares
until maturity and recovers the cash flows through dividend and principal repayment.

K Ltd invests in bonds of T Ltd. The intention is to hold these bonds for a longer term.
However, K Ltd decided to value the investment at fair value routed through profit and loss.

K Ltd has receivables of $5 million from T Ltd. The business model of K Ltd is to sell off the
receivables portfolio to 3rd party and recover money the moment sales are made.

K Ltd has invested in debentures of T Ltd. K Ltd has an intention to hold these debentures
until maturity. However, if K Ltd identifies a substantial gain, it may sell off the debentures to
realise the gain.

A perpetual

debt (with no maturity) is considered at amortised cost.

A debt instrument convertible into equity shares of the entity is considered at fair value, rather
than at amortised cost. The recovery is not necessarily coming through contractual cash flows
in form of principal and interest.

At fair value
K

Ltd invests $100,000 into shares of T Ltd (not


for trading purposes). The cost of advisory /
valuation comes at $5,000.

Classification of Financial
Liabilities

Financial
liabilities at
amortized cost

Financial
liabilities at fair
value through
profit or loss
(FVTPL)

Financial liabilities at
amortized cost

IFRS 9 requires all financial liabilities to be measured at amortized


cost unless:
The financial liability is required to be measured at FVTPL
because it is held for trading
The financial liability arise when a transfer of financial asset
does not qualify for derecognition or when the continuing
involvement approach applies
The financial liability is a financial guarantee contract

Financial liabilities at
amortized cost

IFRS 9 requires all financial liabilities to be measured at amortized


cost unless:
The financial liability commits to provide a loan at a belowmarket interest rate
The financial liability is a contingent consideration recognized
by an acquirer in a business combination to which IFRS 3
applies
The entity elects to measure the financial liability at FVTPL
(fair value option)

Financial liabilities at
amortized cost

Examples of financial liabilities that are likely to be classified and


measured at amortized cost include:
Trade payables
Loan payable with standard interest rates (such as benchmark
rate plus a margin)
Bank borrowings

Financial liabilities at fair value


through profit or loss (FVTPL)

In accordance with IFRS 9, financial liabilities are to be measured


at fair value through profit or loss if either:
The financial liability is required to be measured at FVTPL
because it is held for trading (e.g. Derivatives that have not been
designated in a hedging relationship)
The entity elects to measure the financial liability at FVTPL
(fair value option)

Financial liabilities at fair value


through profit or loss (FVTPL)

Examples of financial liabilities that are likely to be classified and


measured at fair value through profit or loss (FVTPL) include:
Derivatives that have not been designated in a hedging
relationship (interest rate swaps, commodity futures/options
contracts, foreign exchange futures/options contracts)
Convertible note liabilities that have been designated as FVTPL
Contingent consideration payable that arise from business
combination

Financial liabilities at fair value


through profit or loss (FVTPL)

Fair value option (FVO)


IFRS 9 permits an entity to designate financial liabilities at
FVTPL if any of the following apply:
If electing fair value will eliminate or reduce an accounting
mismatch
If the financial liability is managed and evaluated on a fair
value basis with other financial liabilities or financial assets
and liabilities as a group
A hybrid contract (e.g. A convertible note or a loan with a
leveraged interest rate) contains an embedded derivative that
would otherwise be required to be separated.

Financial liabilities at fair value


through profit or loss (FVTPL)

Fair value option (FVO)


If the entity uses the fair value option (FVO), changes in fair
value that relate to changes in the entitys own credit status
are presented in other comprehensive income instead of
profit or loss. However, if it creates or enlarges an
accounting mismatch in profit or loss, then all gains or loss
are required to be presented in profit or loss.
This is not subsequently recycled to profit or loss when the
financial liability is derecognized.

Classification
Financial
Instruments

Financial
Assets

Financial
liabilities
At amortised
cost

FV through
Income
statement

FV through
Other
Comprehensi
ve Income

At fair value
through
income
statement

At amortised
cost

Measurement of Financial
Instruments

Initial Measurement:
At fair value, plus for those financial assets and liabilities not
classified at fair value through profit or loss, directly attributable
transaction costs.
Subsequent Measurement:

Classificati
on

Valuatio
n

FV
Change
s

Interest/
Dividend
s

Impai
rment

Forex

FAFVPL

FV

PL

PL

PL

PL

FAFVOCI

FV

OCI*

PL

PL/OCI

PL/OCI

FAAC

Amortize
d Cost

None

PL

PL

PL

Impairment of Financial
Instruments

An entity shall recognize a loss allowance for expected


credit losses on a financial asset that is measured as
FAAC or FAFVOCI, a lease receivable, a contract asset
or a loan commitment and a financial guarantee.
The new impairment model establishes a three-stage
approach, based on changes in expected credit losses of a
financial instrument. This determines the recognition of
impairment (as well as the recognition of interest
revenue).

Impairment of Financial
Instruments
At

initial recognition, an entity recognizes a loss allowance equal to 12 months


expected credit losses (present value of all cash shortfalls over the remaining
life, discounted at the original effective interest rate).

After

initial recognition, the 3-stage expected credit loss model applies as


follow:
Stage 1: credit risk has not increased significantly since initial recognition
entities continue to recognize 12 months expected losses, updated at each
reporting date
Stage 2: credit risk has increased significantly since initial recognition entities
recognize lifetime expected losses and interest is presented on a gross basis
Stage 3: the financial asset is credit impaired entities recognize lifetime
expected losses but present interest on a net basis (based on the gross carrying
amount less credit allowance)

Impairment of Financial
Instruments
Stage

Recognition of
impairment

12 month
expected credit
losses

Recognition of
interest

Effective interest on the gross


carrying amount (before deducting
expected losses)

Lifetime expected credit loss

Effective interest
on the net
(carrying)
amount

Impairment of Financial
Instruments
General
Approach

Short-term trade receivables


Long-term trade receivables

Policy election at entity level

Other debt financial assets measured at AC or


FVOCI

Loan commitments and financial guarantee


contracts not accounted for at FVPL

Lease receivables
Contract assets (do not contain a significant
financing component)
Contract assets (contain a significant financing
component)

Simplified
Approach

Policy election at entity level

Policy election at entity level

Thank you
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