Classification and Measurement of Financial Liabilities – How 2 best account it

Classification and Measurement of Financial Liabilities – The IFRS 9 requirements for the classification and measurement of financial liabilities are substantially unchanged from IAS 39 except for the following:Classification and Measurement of Financial Liabilities

  • Removal of the cost exception for derivative financial liabilities. Classification and Measurement of Financial Liabilities
  • Changes in fair value as a result of an entity’s own credit risk are recognized in other comprehensive income.

Overall, financial liabilities are still measured at amortized cost except for: Classification and Measurement of Financial Liabilities

Cost Exception for Derivative Financial Liabilities

The part of IFRS 9 dealing with financial assets removed the cost exemption in IAS 39 for unquoted equity instruments and related derivative assets where fair value is not reliably determinable. IFRS 9 also removed the cost exemption for derivative liabilities that will be settled by delivering unquoted equity instruments whose fair value cannot be determined reliably (e.g. a written option where, on exercise, an entity would deliver unquoted shares to the holder of the option). Therefore all derivatives on unquoted equity instruments, whether assets or liabilities, are measured at fair value under IFRS 9. Instead, these instruments must be measured at fair value through profit or loss.

Classification and Measurement of Financial Liabilities

Changes in Fair Value Attributable to a Change in an Entity’s Own Credit Risk

IFRS 9, consistent with IAS 39, allows an entity to designate certain financial liabilities as measured at fair value through profit or loss. This relates to the following situations (the fair value option):

  • A contract contains one or more embedded derivatives.
  • Designation eliminates, or significantly reduces, an accounting mismatch.
  • A group of financial liabilities, or financial assets and financial liabilities, is managed, and its performance is evaluated, on a fair value basis. (IFRS 9.4.2.2 & IFRS 9.4.3.5)

IAS 39 required that all fair value changes on financial liabilities which are irrevocably designated as measured at fair value through profit or loss be recognized in profit or loss. This treatment causes concern because it results in an entity recognizing gains in profit or loss when its credit standing deteriorates (and vice versa). This is counterintuitive and creates volatility in profit or loss.

IFRS 9 addresses this concern by requiring that the amount of the change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability (“an entity’s own credit risk”) is presented in other comprehensive income. The remaining change is presented in profit or loss. (IFRS 9.5.7.7) Classification and Measurement of Financial LiabilitiesClassification and Measurement of Financial Liabilities

However, if this treatment creates, or enlarges, an accounting mismatch in profit or loss, or the liability is a loan commitment or financial guarantee contract designated at fair value through profit or loss, the entity must present all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss. (IFRS 9.5.7.8-9) Classification and Measurement of Financial Liabilities

Derivatives

All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. Fair 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 in which some or all gains or losses may be recognised in other comprehensive income.

Something else -   Modification gain or loss

Classification and Measurement of Financial Liabilities

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Curing of a credit-impaired financial asset

Leave a comment