12-Month Expected Credit Losses

12-month expected credit loss is the portion of the lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. To get background on the impairment model introduced in IFRS 9 see ‘Impairment of financial assets‘.

Initial recognition 12-Month Expected Credit Losses

At initial recognition of a financial asset, an entity recognises, as a standard approach, a loss allowance equal to 12-month expected credit losses. The actual loss does not need to take place within the 12 month period; it is the occurrence of the default event that ultimately results in that loss. An exception is purchased or originated … Read more

IFRS 9 Financial Instruments Measurement

IFRS 9 uses the following criteria for determining the classification as of financial assets at Amortized Cost, FVOCI or FVPL categories apply:

The critical issues for classifying and measuring financial assets are whether:

  • The objective of the entity’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (“the Business Model test”), and

  • The contractual cash flows of an asset give rise to payments on specified dates that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding (“the SPPI test”). IFRS 9 Financial Instruments Measurement

Both of these tests have to be met in order to account for an instrument at Amortized Cost or FVOCI. In this … Read more

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.

  • Amortised cost
  • Fair value through other comprehensive income
  • Fair value through profit or loss.

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 income. IASB defines 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 return … 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 return … 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).

However, for the … Read more