IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot – no hedge accounting

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments quick and best snapshot 1

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

(Source https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance)

And in some more detail….

Important to remember, where does IFRS 9 come from – the International Accounting Standards Board (IASB) developed if as a response to the financial crisis and it was issued on 24 July 2014. The standard includes the requirements previously issued and introduces limited amendments to the classification and measurement requirements for financial assets as well as the expected loss impairment model. It includes:

  • Classification and measurement of financial assets – principle-based, as opposed to rule-based, classification and measurement categories for financial assets;
  • Classification and measurement of financial liabilities – new requirements for handling changes in
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Best focus on IAS 32 Equity and Financial Liabilities

IAS 32 Equity and Financial Liabilities

have to be distinguished by an issuer of more complex financial instruments

For many (most!), simpler financial instruments the classification as a financial liability or equity works well. So, classifying more complex financial instruments under IAS 32 – e.g. those with characteristics of equity – can be more challenging, leading to diversity in practice. IAS 32 Equity and Financial Liabilities

IFRS References: IAS 1, IAS 32, IFRS 9, IFRIC 17

IN SHORT to check off

An instrument, or its components, is classified on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

A financial instrument is a financial liability if it contains a contractual obligation to transfer cash or another financial asset.

IAS 32 Equity and Financial Liabilities

A financial instrument is also classified as a financial liability if it is a derivative that will or may be settled in a variable number of the entity’s own equity instruments or a non-derivative that comprises an obligation to deliver a variable number of the entity’s own equity instruments.

An obligation for an entity to acquire its own equity instruments gives rise to a financial liability, unless certain conditions are met.

As an exception to the general principle, certain puttable instruments and instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation are classified as equity instruments if certain conditions are met.

The contractual terms of preference shares and similar instruments are evaluated to determine whether they have the characteristics of a financial liability.

The components of compound financial instruments, which have both liability and equity characteristics, are accounted for separately.

A non-derivative contract that will be settled by an entity delivering its own equity instruments is an equity instrument if, and only if, it will be settled by delivering a fixed number of its own equity instruments.

A derivative contract that will be settled by the entity delivering a fixed number of its own equity instruments for a fixed amount of cash is an equity instrument. If such a derivative contains settlement options, then it is an equity instrument only if all settlement alternatives lead to equity classification.

Incremental costs that are directly attributable to issuing or buying back own equity instruments are recognised directly in equity.

Treasury shares are presented as a deduction from equity.

Gains and losses on transactions in an entity’s own equity instruments are reported directly in equity.

Dividends and other distributions to the holders of equity instruments, in their capacity as owners, are recognised directly in equity.

NCI are classified within equity, but separately from equity attributable to shareholders of the parent.

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Setting 1 complete scene the Expected Credit Losses model

the Expected Credit Losses model

Setting the scene the Expected Credit Losses model, start here to get a good understanding of ECL loss allowances or continue, you decide……

The Expected Credit Losses model (ECL) should be applied to: Setting the scene: the Expected Credit Losses model

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IFRS 9 ECL Model best read – Impairment of investments and loans

Impairment of investments and loans

is about impairment in a ‘normal’ business not complicated accounting but straightforward accounting calculations.

Normal operations

Although the focus for IFRS 9 Financial Instruments is on financial institutions such as banks and insurance companies, ‘normal’ operating entities are also affected by IFRS 9. Maybe their investment and loan portfolios are less complex but in operating a business and as part of the internal credit risk management practice policy making it is still important to implement the impairment model under IFRS 9 Financial Instruments.

The objective of these approaches to expected credit losses or timely recording of impairments/loss allowances is to provide approaches that result in a situation in which very different reporting entities all … Read more

Best example Amortised cost and EIR calculations

Amortised cost at subsequent periods: a numerical example Amortised cost and EIR calculations

Example Amortised cost and EIR calculations

The following example illustrates the principles underlying the calculation of the amortised cost and the effective interest rate (EIR) for a fixed-rate financial asset:

  • On 1 January 2019, entity A purchases a non-amortising, non-callable debt instrument with five years remaining to maturity for its fair value of €995 and incurs transaction costs of €5. The instrument has a nominal value of €1,250 and carries a contractual fixed interest of 4.7% payable annually at the end of each year (4.7% * €1,250 = €59). Its redemption amount is equal to its nominal value plus accrued interest.
  • The instrument qualifies for a measurement at amortised cost. As explained in the preceding section, its initial carrying amount is the sum of the initial fair value plus transaction costs, i.e. €1,000.
  • The Effective Interest Rate (EIR) is the rate that exactly discounts the expected cash flows of this financial asset, presented in the table below, to its initial gross carrying amount (i.e. €995 + €5 = €1,000 in this example). In practice, entities will need to establish a timetable of all the expected cash flows of the financial instrument (see the table below) and then use for example an Excel formula to determine this rate. The table below summarises the timing of the expected cash flows of the instrument:

Figure 1

Example Amortised cost and EIR calculations

In the present case, using an Excel formula, the EIR amounts to 10%. The following table shows that the sum of the discounted cash flows amounts to zero:

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IFRS 9 Proper accounting for Related Company Loans

IFRS 9 Proper accounting for Related Company Loans – IFRS 9 Financial Instruments makes no distinction between unrelated third party and related party transactions. Entities that prepare stand-alone financial statements are required to apply the full provisions of the standard to all transactions within its scope.

This means related company loan receivables must be classified and measured in accordance with the requirements of IFRS 9, including where relevant, applying the Expected Credit Loss (ECL) model for impairment. IFRS 9 Proper accounting for Related Company Loans

Applying IFRS 9 to related company loans can present a number of application challenges as they are often advanced on terms that are not arms-length or sometimes advanced on an informal basis without any terms … Read more

9 Best practical Impairment related company loans

9 Best practical Impairment related company loans – What are related company loans?

Technically not the most difficult question one would think, BUT………

Entities must first consider whether the loan is within the scope of IFRS 9 or another standard. This is because IFRS 9: 2.1(a) scopes out ‘interests in subsidiaries, associates and joint ventures’ that are accounted for in accordance with IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures i.e. at cost less impairment or using the equity method.

In many cases, it will be clear that the loan is a debt instrument that falls within the scope of IFRS 9 but some scenarios may require a more detailed analysis.

IFRS 9 replaced Read more

Offsetting of financial assets and financial liabilities

Offsetting of financial assets and financial liabilities – IAS 32 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 enterprise (IAS 32 42 ): Offsetting of financial assets and financial liabilities

  • has a legally enforceable right to set off the amounts; and
  • intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Offsetting of financial assets and financial liabilities 35

Offsetting is usually inappropriate when: Offsetting of financial assets and financial liabilities

  • several different financial instruments are used to emulate the features of a single financial instrument (a ‘synthetic instrument’);
  • financial assets and financial liabilities
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1 Best guidance Equity reserves

Equity reserves

are part of owner’s equity

Equity is defined as follows: The residual interest in the assets of the enterprise after deducting all of its liabilities. Equity reserves are defined/described in several IFRS Standards, let’s see….

Equity consists of several components such as Share capital, Treasury shares (issued shares held by the entity in a buyback), Share premium account (or Additional paid-in capital), Retained earnings and Non-controlling interest. But there is more….

  • Translation reserve (foreign currency translation reserve), that arises from the change in FX rates from translation of foreign operating entities (in other than the consolidation Equity reserves Equity reserves Equity reserves currency) from reporting period to reporting period, When realised in a sale the result is reclassified from other comprehensive income (OCI)
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IFRS 9 Complete Snapshot Financial Instruments

IFRS 9 Complete Snapshot Financial Instruments – The objective of IFRS 9 is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. The IFRS 9 Snapshot Hedge accounting is provided here.

1 What is part of IFRS 9 Financial instruments

IFRS 9 is applied to financial instruments except:

  1. those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures. However, entities shall apply IFRS

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