IFRS 9 Financial instruments – Measurement

After initial recognition, an entity can measure its financial assets and financial liabilities at amortised cost, fair value through other comprehensive income or fair value through profit or loss.

The IFRS 9 Framework for financial assets

IFRS 9 recognises three different accounting policies for financial instruments. These principles determine the value of the financial instruments on the balance sheet.

The initial measurement is based on amortised costs, this is the amount for which an asset or liability is initially recognised in the balance sheet less principal repayments, plus or minus the cumulative amortisation of the difference between that initial amount and the redemption amount calculated by using the effective interest method and less any write-downs (directly or through the use of a provision) arising from impairment or un-collectibility.

The second measurement basis is the fair value through other comprehensive Read more

Convertible note with embedded derivative – The numbers

In practice, many conversion features in convertible notes fail equity classification, which means that the conversion feature is a financial liability.

The reason that many conversion features fail equity classification is that they contain contractual terms that result in the holder of the conversion feature having rights that are different to those of existing shareholders. This is because the contractual terms mean that either:

  • The number of shares to be issued varies
  • The amount of cash (or carrying amount of the liability) converted into shares varies
  • Both the number of shares and the amount of cash (the carrying amount of the liability) vary.

The commercial effect of this is that the holder of the conversion feature obtains a different … Read more

Convertible note with embedded derivative – Basics

In practice, many conversion features in convertible notes fail equity classification, which means that the conversion feature is a financial liability.

The reason that many conversion features fail equity classification is that they contain contractual terms that result in the holder of the conversion feature having rights that are different to those of existing shareholders. This is because the contractual terms mean that either:

  • The number of shares to be issued varies
  • The amount of cash (or carrying amount of the liability) converted into shares varies
  • Both the number of shares and the amount of cash (the carrying amount of the liability) vary.

The commercial effect of this is that the holder of the conversion feature obtains a different … Read more

Convertible notes – Basic requirements

Convertible notes are financial instruments that fall within the scope of IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments.

IAS 32 contains the definitions of financial liabilities, financial assets and equity. Therefore, whether a financial instrument should be classified as liability or equity is dealt with under IAS 32. As noted above, the standard approach in IFRS requires that a convertible instrument is dealt with by an issuer as having two ‘components’, being a liability host contract plus a separate conversion feature which may or may not qualify for classification as an equity instrument.

The definitions set out in IAS 32 for financial liabilities and equity are detailed and appear complex (see extracts below).… Read more

Curing of a credit-impaired financial asset

See credit-impaired financial asset for some introduction to this illustrative example.

The case

An existing loan with an effective interest rate of 10% has become credit-impaired. Lifetime expected credit losses have been recognised on the loan as of 1 January Year 20×1.

The expected shortfall in cash flows is shown in Table 1 and remain unchanged until 31 December N+3. Discounted at the effective interest rate (EIR) this gives an expected credit loss (ECL) as at 1 January of CU59,000, as shown in Table 1.

Table 1: Contractual & expected cash flows

Cash flows as at 31 Dec

in CU ‘000

20×1

20×2

20×3

20×4

Total

Contractual cash flows

10

10

10

110

140

Expected cash

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Setting the scene: the Expected Credit Losses model

Start here to get a good understanding of  Expected Credit Losses or continue, you decide…… The model should be applied to:Setting the scene: the Expected Credit Losses model

The IFRS 9 impairmentRead more

Summary impairment of financial assets

The impairment requirements are applied to:

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Property development (intercompany) finance

Interest bearing term loan – Senior interest-bearing bank term debt

THE CASE

Parent C operates in the UK real estate sector and purchases land for development into residential units for public sale. Each potential development proposal is supported by a detailed business case which includes a due diligence report in respect of the expected Gross Development Costs (GDC) as well as an independent third party valuation of the Gross Development Value (GDV) of the completed site both of which are undertaken in order to secure bank financing. Management assesses each proposal in accordance with a number of key investment criteria, including for example, the minimum yield required on each development.

Once the proposal has been approved by Management, a new … Read more

Equity investments at FVOCI

IFRS 9 requires all equity investments to be measured at fair value. The default approach is for all changes in fair value to be recognised in profit or loss.

However, for equity investments that are neither held for trading nor contingent consideration recognised by an acquirer in a business combination, entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This election is available for each separate investment.

Under this new FVOCI category, fair value changes are recognised in OCI while dividends are recognised in profit or loss (unless they clearly represent a recovery Read more

Debt instruments at FVOCI

A debt instrument is classified as subsequently measured at fair value through other comprehensive income (FVOCI) under IFRS 9 if it meets both of the following criteria:

This business model typically involves greater frequency and volume of sales than the hold to collect business Read more