Financial instruments

Financial instruments are important across all reporting entities and even more so in the financial services industry (banks, insurance companies, investment vehicles). But is took until 1995 when IAS 32 (now revised to Financial instruments: Presentation) was issued!

In 1999 IAS 39 was issued for recognition and measurement at a time that was known for increasingly volatile financial markets and more widespread use of innovative and complex financial products.

Various revisions have been made, IAS 32 was partly replaced by IFRS 7 in 2005 and IAS 39 was replaced by IFRS 9 in a phased approach from 2009 to 2015. The phased approach included classification and measurement of financial assets and financial liabilities, hedge accounting, derecognition and impairment, resulting in IFRS 9 replacing IAS 39 for annual reporting periods beginning on or after 1 January 2018.

Introduction

The way to IFRS 9 Financial instruments
Example IFRS 9 – Applying the ‘own use’ scope exemption
IAS 32 Financial instruments: Presentation

Nature and characteristics

Descriptions of financial instruments
Description of derivatives
Held for trading
Instruments with stepped interest payments
Gross carrying amount calculation financial assets
Perpetual debt instruments – decreasing interest rate
Perpetual debt instruments – variable rate
Option to put a non-financial asset
Practice of settling net: forward contract to purchase a commodity
Cross-currency swap

Embedded derivatives in host contracts

Embedded derivatives: separation of option
Embedded derivatives: separation of host
Embedded derivatives: synthetic instruments
Embedded derivatives: equity kicker
Recovery of recognised investment
Embedded foreign currency derivatives – currency of international commerce
Embedded foreign currency derivatives – unrelated foreign currency provision
Purchases and sales in FX Instruments

Classification of financial contracts

IFRS 9 Financial asset classification
Classification of financial assets

IFRS 9-The SPPI test explained by example!!!
IFRS 9 The Solely Payments of Principal and Interest Test
What is the SPPI test?

IFRS 9 The Business Model Test
What is a Business Model?

Cash flows identification- Not-Only Principal and interest
Cash flows identification- Only Principal and interest

Classification and measurement of financial liabilities
IFRS 9 – Reclassification of financial instruments
Classification of crypto-assets
Determination of separable assets

Business model:
– Examples hold assets and collect cash

– Examples collecting cash and selling assets
– Other business models

Financial liabilities and equity instruments

Classification and measurement of financial liabilities
Measurement of equity
What is a debt instrument?

Recognition and derecognition

Share purchase by call option 
Regular way contracts: forward contract 
Regular way contracts: no established market 
Customary settlement provisions 
Settlement date accounting 
Trade and settlement date Sale 
Trade or settlement date Financial asset 
Trade date or settlement date accounting 
Modifications and Write-offs

Measurement of financial assets and financial liabilities

Measurement categories

Summary impairment of financial assets 
IFRS 9 Impairment of Financial instruments

The general approach 
The simplified approach 
Determining significant increases in credit risk 
Possible indicators for ‘Lifetime Expected Credit Loss’ 
Indicators of a possible default 
Impairment – Expected credit losses on financial assets 
When and how to recognise Expected Credit Losses 
Measurement of Expected Credit Losses 
Collateral in measurement of expected credit losses 
Recognition of cash collateral 
Impairment of investments and loans

The credit-adjusted approach 
Simplified approach – Trade receivables 
Loan commitments and financial guarantee contracts 
Group managed and performance evaluated on a fair value basis 

Step-by-step measure expected credit losses 

Classification and measurement of financial liabilities 
Initial measurement: transaction costs 
Interaction between IFRS 9 and IAS 21 
FX translation of foreign entities 
Separation of currency component 
Claims against an entity with different seniorities 
Purchased and originated credit-impaired financial assets 
Change in the fair value of a bond

Hedge accounting

Hedge accounting of hedges for commodity risks 
Hedged item – Forecast Issue of FX debt 
Hedged item – Cash flow hedges – Future interest flows 
Hedged item – Risk components – Reliable measurement 
Hegded item – Hedge of a net position 
IFRIC 16 Hedges of a net investment in a foreign operation 
Aggregate hedged item – Forecast issue of undecided currency debt

Presentation and disclosure

Management of credit risk for financial instruments 
IFRS 32 Financial instruments: Presentation 
IFRS 7 Disclosures for IFRS 9 Financial instruments 
Presentation and disclosure of crypto-assets 
Off-setting of financial assets and financial liabilities 
Costs of issuing and reacquiring equity instruments
Financial instruments Basic risks

IFRS 9 Classification and measurement

IFRS 9 Classification and measurement of financial instruments