1 Best Complete Read – Financial Instruments

Financial Instruments is a summary of the current (Financial Statements preparation for 2020 on wards) IFRS reporting requirements relating to the combination of IAS 32 Financial Instruments: Presentation, IFRS 7 Financial instruments: Disclosure and IFRS 9 Financial Instruments, into one overall narrative.

IFRS standards for Financial Instruments have a complicated history. It was originally intended that IFRS 9 would replace IAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments be improved quickly, the project to replace IAS 39 was divided into three main phases.

The three main phases of the project to replace IAS 39 were:

  1. Phase 1: classification and measurement of financial assets and financial liabilities.
  2. Phase 2: impairment methodology.
  3. Phase 3: hedge accounting.

The intention of IFRS 9 is/was to develop financial reporting of financial instruments that was principle-based and less complex. In addition, around 2005, the International Accounting Standards Board (IASB) and the US national standard-setter, the Financial Accounting Standards Board (FASB), began working towards a long-term objective of improving and simplifying the reporting for financial instruments.

1. Scope

Financial instruments are any contracts that give individually rise to a (sometimes compound) financial asset of one entity and a (sometimes compound) financial liability or (sometimes compound) equity instrument of another entity.

They can be created, traded, modified and settled.

They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form of currency (forex); debt (bonds, loans); equity (shares); or derivatives (options, futures, forwards).

The names of financial instruments/events in financial reporting lines under IAS 32, IFRS 7 and IFRS 9 are:

  • financial assets
  • financial liabilities
    • classified and measured at amortised costs, as the most appropriate measurement attribute for many financial liabilities because it reflects the issuer’s legal obligation to pay the contractual amounts in the normal course of business (ie on a going concern basis), and
    • classified and measured at fair value through other comprehensive income, as the most appropriate measurement attribute for trading operations,
  • contract assets and contract liabilities,
  • loans commitments that are firm commitments to provide credit under pre-specified terms and conditions,
  • financial guarantee contracts that are not an insurance contract (as defined in IFRS 17 Insurance contracts (and before that IFRS 4), but note the issuer of the financial guarantee contract may elect to apply either IFRS 9 or IFRS 17,
  • recognition and derecognition of financial assets,
  • impairment of financial assets, contract assets, loan commitments and financial guarantee contracts through recognition of expected credit losses,
  • impairment gain or loss,
  • derivatives deemed to be held for trading and measured at fair value fair value through profit or loss (unless designated as hedging instruments) and embedded derivatives,
  • hedge accounting for open portfolios (ie portfolios to which new financial instruments are added/removed over time) or macro hedging (ie hedging at the level that aggregates portfolios),
  • hedged items,
  • hedging instruments,
  • hedging relationships.

Outside scope

Because financial instruments in their definition are very broad specified. That is why the following ‘except for’ is rather important in IFRS reporting.

Financial instruments in the IFRS definitions consist of all types of financial instruments except:

  1. those interests in subsidiaries, associates or 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.
  2. rights and obligations under leases to which IFRS 16 Leases applies. However:
    1. finance lease receivables (ie net investments in finance leases) and operating lease receivables recognised by a lessor are subject to the derecognition and impairment requirements of this Standard;
    2. lease liabilities recognised by a lessee are subject to the derecognition requirements in paragraph 3.3.1 of this Standard; and
    3. derivatives that are embedded in leases are subject to the embedded derivatives requirements of this Standard.
  3. employers’ rights and obligations arising from employee benefit plans, to which IAS 19 Employee Benefits applies.
  4. financial instruments issued by the entity that meet the definition of an equity instrument in IAS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32.  However, the holder of such equity instruments shall apply this Standard to those instruments, unless they meet the exception in (a).
  5. rights and obligations arising under a contract within the scope of IFRS 17 Insurance Contracts, other than an issuer’s rights and obligations arising under an insurance contract that meets the definition of a financial guarantee contract. However, this Standard applies to (i) a derivative that is embedded in a contract within the scope of IFRS 17, if the derivative is not itself a contract within the scope of IFRS 17; and (ii) an investment component that is separated from a contract within the scope of IFRS 17, if IFRS 17 requires such separation. Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the issuer may elect to apply either this Standard or IFRS 17 to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.
  6. any forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination within the scope of IFRS 3 Business Combinations at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction.
  7. loan commitments other than those loan commitments that are within the scope of this Standard, loan commitments in scope are:
    1. loan commitments that the entity designates as financial liabilities at fair value through profit or loss (see IFRS 9 paragraph 4.2.2). An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan commitments in the same class.
    2. loan commitments that can be settled net in cash or by delivering or issuing another financial instrument. These loan commitments are derivatives. A loan commitment is not regarded as settled net merely because the loan is paid out in installments (for example, a mortgage construction loan that is paid out in installments in line with the progress of construction).
    3. commitments to provide a loan at a below‑market interest rate (see IFRS 9 paragraph 4.2.1(d)).

      However, an issuer of loan commitments shall apply the impairment requirements of this Standard to loan commitments that are not otherwise within the scope of this Standard. Also, all loan commitments are subject to the derecognition requirements of this Standard.

  8. financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 Share-based Payment applies, except for contracts within the scope of this Standard to which this Standard applies.
  9. rights to payments to reimburse the entity for expenditure that it is required to make to settle a liability that it recognises as a provision in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, or for which, in an earlier period, it recognised a provision in accordance with IAS 37.
  10. rights and obligations within the scope of IFRS 15 Revenue from Contracts with Customers that are financial instruments, except for those that IFRS 15 specifies are accounted for in accordance with this Standard.

2. Definitions

Financial Instrument – A contract that creates a financial asset for one entity and a financial liability or equity instrument of another entity.

Financial Asset – Any asset that is:

  • Cash;
  • A contractual right to receive cash or another financial asset from another party;
  • A contractual right to exchange financial instruments with another party under conditions that are potentially favorable; or
  • An equity instrument of another entity.

The cost incurred by an entity to purchase a right to reacquire its own equity instruments from another party is a deduction from its equity, not a financial asset.

Financial Liability – Any liability that is a contractual obligation:

  • To deliver cash or another financial asset to another party; or
  • To exchange financial instruments with another party under conditions that are potentially unfavourable to the entity.

Equity Instrument – Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

DerivativeA contract with all three of the following characteristics:

  • It’s value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or other variable (sometimes called the “underlying”), provided in the case of a non-financial variable that the variable is not specific to a party to the contract;
  • It requires no initial investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and
  • It is settled at a future date.

3. Recognition and Measurement

Financial assets

Initial Recognition

Financial assets should be recognised in the statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.

Classification

Financial Instruments

An entity classifies financial assets as subsequently measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both:

  1. the contractual cash flow characteristics of the financial asset on an instrument-by-instrument basis (‘solely payments of principal and interest‘ or SPPI test); and
  2. the entity’s overall business model for managing the financial assets, not on an instrument-by-instrument (‘business model test‘).

Debt instruments:

  • Solely payments of principal and interest test – The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
  • Business model test between:
    • Held to collect – Business model whose objective is to hold assets in order to collect contractual cash flows.
    • Held to collect and sell – Business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and
    • Other business – not fitting in the first two business models.
  • FVPL Designation – As an exception to the rules above, an entity may, at initial recognition, irrevocably designate a financial assets as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

Equity instruments:

  • When equity instruments are held for trading these are classified and measured at fair value through profit or loss,
  • FVOCI Designation – when equity instruments are not held for trading, an entity may, at initial recognition, irrevocably designate an investments in equity instruments to present subsequent changes in fair value in other comprehensive income (without recycling).

A financial asset is required to be measured at fair value through profit or loss unless it is measured at amortised cost (in accordance with IFRS 9.4.1.2) or at fair value through other comprehensive income (in accordance with IFRS 9.4.1.2A).

With recycling/without recyclingFinancial Instruments

With recycling is the process where gains or losses for equity instruments are reclassified from equity to profit or loss as an accounting adjustment. In other words gains or losses for equity instruments are first recognised in the other comprehensive income and then in a later accounting period also recognised in the profit or loss.

In this way the gain or loss for equity instruments is reported in the total comprehensive income of two accounting periods and in colloquial terms is said to be recycled as it is recognised twice.

Without recycling is the process that gains and losses for equity instruments (including any related foreign exchange gains and losses) on these instruments are recognised in other comprehensive income and not profit or loss. Dividends that represent a return on investment for equity instruments (as opposed to a return of investment) continue to be recognised in profit or loss.

Reclassification

When, and only when, an entity changes its business model for managing financial assets, it reclassifies all affected financial assets. [IFRS 9.4.4]

Where an asset is reclassified, the reclassification is applied prospectively from the reclassification date and previously recognised gains, losses or interest should not be restated.

If the asset is reclassified to fair value, the fair value should be determined at the reclassification date and any gain / loss arising from a difference between the previous carrying amount and fair value is recognised in profit or loss.

Embedded derivativesFinancial Instruments

An embedded derivative is a component of a hybrid contract that also includes a non-derivative host – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.

If a hybrid contract contains a host that is an asset within the scope of IFRS 9 then the classification requirements discussed above apply.

If a hybrid contract contains a host that is not an asset within the scope of this IFRS, an embedded derivative shall be separated from the host and accounted for as a derivative under this IFRS if, and only if:

  1. the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host;
  2. a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
  3. the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (i.e. a derivative that is embedded in a financial liability at fair value through profit or loss is not separated).

If the embedded derivative is required to be separated then the host is accounted for in accordance with the relevant IFRS.

Nevertheless, if a contract contains one or more embedded derivatives and the host is not an asset within the scope of IFRS 9, an entity may designate the entire hybrid contract as at fair value through profit or loss unless:

  1. the embedded derivative(s) do(es) not significantly modify the cash flows that otherwise would be required by the contract; or
  2. it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.

If an entity is required by this IFRS to separate an embedded derivative from its host, but is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, it shall designate the entire hybrid contract as at fair value through profit or loss.

Measurement

Initial measurement

All financial instruments are measured initially at fair value.

  • Fair value – the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Directly attributable transaction costs are added to or deducted from the carrying value of those financial instruments that are not measured subsequently at fair value.

  • Directly attributable transaction costs – incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. (Transaction costs include expenditures such as legal fees, reimbursement of the lender’s administrative costs and appraisal costs associated with a loan. Transaction costs do not include financing fees, debt premiums or discounts.)

When a financial asset is originated or acquired or a financial liability is issued or assumed in a related party transaction, the transaction should be measured in accordance with Section 3840, Related Party Transactions, (parties whose sole relationship with the entity is in the capacity of management, are deemed to be unrelated third parties for financial instrument purposes).

If there is a difference between the consideration paid or received and the fair value of the instrument, the difference should be recognized in net income unless it qualifies as some other type of asset or liability.

Subsequent measurement

After initial recognition, a financial asset is measured in accordance with IFRS 9.4.1.1-4.1.5 at:

An entity applies the impairment requirements in IFRS 9.5.5 to financial assets that are measured at amortised cost in accordance with IFRS 9.4.1.2 and to financial assets that are measured at fair value through other comprehensive income in accordance with IFRS 9.4.1.2A.

An entity shall apply the hedge accounting requirements in paragraphs IFRS 9.6.5.8 – 6.5.14 (and, if an entity elects to continue to apply the hedge accounting requirements in IAS 39 instead of IFRS 9 as permitted by IFRS 9.7.2.21, IAS 39.89 – 94 for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial asset that is designated as a hedged item.

Gains and losses

A gain or loss on a financial asset that is measured at fair value shall be recognised in profit or loss unless:

  • it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income in accordance with IFRS 9.5.7.5; or
  • it is a financial asset measured at fair value through other comprehensive income in accordance with IFRS 9.4.1.2A and the entity is required to recognise some changes in fair value in other comprehensive income in accordance with IFRS 9.5.7.10.

A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised, impaired or reclassified and through the amortisation process.

A gain or loss on financial assets that are hedged items are recognised in accordance with IFRS 9.6.5.8 -6.5.14 and, if applicable, IAS 39.89-94 for the fair value hedge accounting for a portfolio hedge of interest rate risk.

If an entity recognises financial assets using settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost.

For assets measured at fair value, however, the change in fair value is recognised in profit or loss or in other comprehensive income, as appropriate. The trade date shall be considered the date of initial recognition for the purposes of applying the impairment requirements.

Election for equity instruments

At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of IFRS 9 that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 Business Combinations applies.

This election allows subsequent changes in the fair value of the instrument to be presented in other comprehensive income. Note: dividends on these instruments continue to be presented in profit or loss.

Financial liabilities

Initial Recognition

Financial liabilities are recognised in the statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.

Classification

An entity shall classify all financial liabilities as subsequently measured at amortised cost using the effective interest method, except for:

  1. financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value;
  2. financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. IFRS 9.3.2.15 and IFRS 9.3.2.17 apply to measurement of such liabilities;
  3. financial guarantee contracts. After initial recognition, an issuer of such a contract shall subsequently measure it at the higher of:
    1. the amount of loss allowance determined in accordance with IFRS 9.5.5; and
    2. the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IFRS 15 Revenue from Contracts with Customers; and
  4. commitments to provide a loan at a below-market interest rate. After initial recognition, an issuer of such a commitment shall subsequently measure it at the higher of:
    1. the amount of loss allowance determined in accordance with IFRS 9.5.5; and
    2. the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IFRS 15.
  5. contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies. Such contingent consideration shall subsequently be measured at fair value with changes recognised in profit or loss.

Exception

An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when permitted by the standard, or when doing so results in more relevant information, because either:

  1. it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
  2. a group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel.

Reclassification

An entity shall not reclassify any financial liability.

The above discussion about embedded derivatives under financial assets is also relevant in the context of financial liabilities.

Measurement

Initial measurement

At initial recognition, an entity shall measure a financial liability at its fair value minus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability.

Subsequent measurement

After initial recognition, an entity shall measure a financial liability in accordance with IFRS 9.4.2.1 – 4.2.2.

An entity shall apply the hedge accounting requirements in IFRS 9.6.5.8 – 6.5.14 to a financial liability that is designated as a hedged item.

Gains and losses

A gain or loss on a financial liability that is measured at fair value and is not part of a hedging relationship is recognised in profit or loss unless it is a financial liability designated as at fair value through profit or loss and the entity is required to present the effects of changes in the liability’s credit risk in other comprehensive income.

A gain or loss on a financial liability that is measured at amortised cost and is not part of a hedging relationship shall be recognised in profit or loss when the financial liability is derecognised and through the amortisation process.

A gain or loss on financial liabilities that are hedged items in a hedging relationship shall be recognised in accordance with paragraphs 6.5.8 – 6.5.14 and, if applicable, paragraphs 89 – 94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk.

An entity shall present a gain or loss on a financial liability designated as at fair value through profit or loss as follows:

  1. the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income; and
  2. the remaining amount of change in the fair value of the liability shall be presented in profit or loss;

unless the treatment of the effects of changes in the liability’s credit risk described in (a) would create or enlarge an accounting mismatch in profit or loss. If this is the case, an entity shall present all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss.

Impairment

General Approach

An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with IFRS 9, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with IFRS 9.

Except for purchased or originated credit-impaired financial assets, trade receivables, contract assets and lease receivables:

  • at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.
  • if, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

Determining significant increases in credit risk

At each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased significantly sinceFinancial Instruments initial recognition. In order to do this, an entity may either use past due information or reasonable and supportable forward-looking information which is available without undue cost or effort.

Regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due.

An entity can rebut this presumption if the entity has reasonable and supportable information that is available without undue cost or effort, that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. When an entity determines that there have been significant increases in credit risk before contractual payments are more than 30 days past due, the rebuttable presumption does not apply.

An entity may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date.

Purchased or originated credit-impaired financial assets

At the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets.

At each reporting date, an entity shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favorable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition.

Simplified approach for trade receivables, contract assets and lease receivables

An entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for:

  1. trade receivables or contract assets that result from transactions that are within the scope of IFRS 15, and that:
    1. do not contain a significant financing component (or when the entity applies the practical expedient for contracts that are one year or less) in accordance with IFRS 15; or
    2. contain a significant financing component in accordance with IFRS 15, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses.
  2. lease receivables that result from transactions that are within the scope of IFRS 16 Leases, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses.

Measurement of expected credit losses

An entity shall measure expected credit losses of a financial instrument in a way that reflects:

  1. an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
  2. the time value of money; and
  3. reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

If there is evidence of impairment, reduce the carrying amount of the asset, or group of assets, to the highest of the following:

  • The present value of the cash flows from holding the asset discounted using a current market rate of interest;
  • The amount that could be realized by selling the asset, or group of assets, at the balance sheet date; and
  • The net amount the entity expects to realize by exercising its right to any collateral held to secure repayment of the asset.

The carrying amount of the asset shall be reduced directly or through the use of an allowance account through net income.

The impairment can also be reversed through net income if the situation changes. The adjusted carrying amount of the asset shall not be greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously.

For financial assets other than trade receivables, an entity shall disclose the carrying amount of impaired financial assets, by type of asset, and the amount of any related allowance for impairment. For current trade receivables, an entity shall disclose the amount of any allowance for impairment.

Derecognition

Financial assets

Receivables shall be derecognized only when the transferor has surrendered control. Control is surrendered when all of the following conditions are met:

  • The transferred assets have been isolated from the transferor — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership;
  • Each transferee has the right to pledge or exchange the assets it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor; and
  • The transferor does not maintain effective control over the transferred assets through either:
  • An agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity; or
  • The ability to unilaterally cause the holder to return specific assets with limited exception.

Upon completion of a transfer of receivables that satisfies the conditions to be accounted for as a sale, the transferor (seller):

  • Derecognizes all assets sold;
  • Recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale;
  • Initially measures at fair value assets obtained and liabilities incurred in a sale; and
  • Recognizes in income any gain or loss on the sale.

The transferee recognizes all assets obtained and any liabilities incurred and initially measures them at fair value (in aggregate, presumptively the price paid).

Servicing is inherent in all receivables; it becomes a distinct asset or liability only when contractually separated from the underlying assets by sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing. A servicer that recognizes a servicing asset or servicing liability accounts for the contract to service receivables separately from those assets, as follows:

  • Report servicing assets separately from servicing liabilities in the Balance Sheet.
  • Initially measure servicing assets retained in a securitization of the assets being serviced at their allocated previous carrying amount based on relative fair values, if practicable, at the date of the securitization.
  • Initially measure servicing assets purchased or servicing liabilities assumed at fair value.
  • Initially measure servicing liabilities undertaken in a securitization at fair value, if practicable.
  • Account separately for rights to future interest income from the serviced assets that exceed contractually specified servicing fees.
  • Subsequently measure servicing assets by amortizing the amount recognized in proportion to and over the period of estimated net servicing income — the excess of servicing revenues over servicing costs.
  • Subsequently evaluate and measure impairment of servicing assets.
  • Subsequently measure servicing liabilities by amortizing the amount recognized in proportion to and over the period of estimated net servicing loss — the excess of servicing costs over servicing revenues.

Financial liabilities

A financial liability (or part of it) is extinguished when the debtor:

  • Discharges the liability (or part of it) by paying the creditor; or
  • Is legally released from primary responsibility for the liability (or part of it), either by process of law or by the creditor.

As a result, payments to third parties, including a trust (i.e. in-substance defeasance), by itself will not result in derecognition of the liability, without legal release from the creditor.

When the terms of a financial liability are changed, an entity must determine whether the change is substantial and as such should be accounted for as an extinguishment of old debt and recognition of new debt, or whether the change is a modification of debt.

Extinguishment accounting will be applied when the change in terms is substantial. The change is considered substantial when the present value of the cash flows under the new terms differs by at least 10% from the present value of the remaining cash flows under the original terms, both discounted at the original rate of interest. The difference between the carrying amount of a financial liability extinguished and the fair value of the consideration paid, is recognized in net income for the period.

4. Hedge accounting

The purpose of hedge accounting is to recognize offsetting gains, losses, revenues and expenses of the hedged item and the hedging instrument in net income in the same period or periods.

Hedge accounting is optional.

Qualifying Instruments

A derivative measured at fair value through profit or loss may be designated as a hedging instrument, except for some written options.

A non-derivative financial asset or a non-derivative financial liability measured at fair value through profit or loss may be designated as a hedging instrument unless it is a financial liability designated as at fair value through profit or loss for which the amount of its change in fair value that is attributable to changes in the credit risk of that liability is presented in other comprehensive income.

For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial asset or a non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income.

For hedge accounting purposes, only contracts with a party external to the reporting entity (i.e. external to the group or individual entity that is being reported on) can be designated as hedging instruments.

Qualifying Items

A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction or a net investment in a foreign operation. The hedged item must be reliably measurable. The hedged item can be:

  1. a single item;
  2. a group of items; or
  3. a component of a. or b. above.

If a hedged item is a forecast transaction (or a component thereof), that transaction must be highly probable.

An aggregated exposure that is a combination of an exposure that could qualify as a hedged item and a derivative may be designated as a hedged item. This includes a forecast transaction of an aggregated exposure (i.e. uncommitted but anticipated future transactions that would give rise to an exposure and a derivative) if that aggregated exposure is highly probable and, once it has occurred and is therefore no longer forecast, is eligible as a hedged item.

For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions with a party external to the reporting entity can be designated as hedged items. Hedge accounting can be applied to transactions between entities in the same group only in the individual or separate financial statements of those entities and not in the consolidated financial statements of the group, except for the consolidated financial statements of an investment entity, as defined in IFRS 10 Consolidated Financial Statements, where transactions between an investment entity and its subsidiaries measured at fair value through profit or loss will not be eliminated in the consolidated financial statements.

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:

  1. the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
  2. at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.
  3. the hedging relationship meets all of the following hedge effectiveness requirements:
    1. there is an economic relationship between the hedged item and the hedging instrument;
    2. the effect of credit risk does not dominate the value changes that result from that economic relationship; and
    3. the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

Hedging relationships

There are three types of hedging relationships:

  1. fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss;
  2. cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss; and
  3. hedge of a net investment in a foreign operation as defined in IAS 21 The Effects of Changes in Foreign Exchange Rates.

Fair value hedges

Fair value hedges that meet the qualifying criteria shall be accounted for as follows:

  1. the gain or loss on the hedging instrument shall be recognised in profit or loss (or other comprehensive income, if the hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income); and
  2. the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item (if applicable) and be recognised in profit or loss. However, if the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income, those amounts shall remain in other comprehensive income. When a hedged item is an unrecognised firm commitment (or a component thereof), the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss.

Cash flow hedges

Cash flow hedges that meet the qualifying criteria shall be accounted for as follows:

  1. the separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):
    1. the cumulative gain or loss on the hedging instrument from inception of the hedge; and
    2. the cumulative change in fair value (present value) of the hedged item (i.e. the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge;
  2. the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (i.e. the portion that is offset by the change in the cash flow hedge reserve shall be recognised in other comprehensive income;
  3. any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve is hedge ineffectiveness that shall be recognised in profit or loss; and
  4. the amount that has been accumulated in the cash flow hedge reserve shall be accounted for as follows:
    1. if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see IAS 1 Presentation of Financial Statements) and hence it does not affect other comprehensive income.
    2. for cash flow hedges other than those covered by (i) above, that amount shall be reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see IAS 1) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognised or when a forecast sale occurs).
    3. however, if that amount is a loss and an entity expects that all or a portion of that loss will not be recovered in one or more future periods, it shall immediately reclassify the amount that is not expected to be recovered into profit or loss as a reclassification adjustment (see IAS 1).

Hedges of a net investment in a foreign operation

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment (see IAS 21), shall be accounted for similarly to cash flow hedges:

  1. the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised in other comprehensive income; and
  2. the ineffective portion shall be recognised in profit or loss.

The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or loss as a reclassification adjustment (see IAS 1) in accordance with paragraphs 48 – 49 of IAS 21 on the disposal or partial disposal of the foreign operation.

Recognition

A hedge of an anticipated transaction is accounted for as follows:

  • When the anticipated transaction occurs, the hedged item is recognized initially at the amount of consideration received or paid; and
  • The forward contract is not recognized until its maturity.
  • When the forward contract matures, the gain or loss on the contract is recorded as an adjustment of the carrying amount of the hedged item. When the hedged item is recognized directly in net income, the gain or loss on the forward contract is included in the same category of revenue or expense in the income statement.
  • When the forward contract matures before the hedged item is recognized, the gain or loss on the forward contract is recognized as a separate component of equity until the hedged item is recognized. Then when the hedged item is recognized, the gain or loss on the forward contract is transferred from the separate component of equity to the carrying amount of the hedged item or into net income and is included in the same category of revenue or expense in the income statement.
  • When the forward contract matures after the hedged item is recognized, the forward contract is recognized on the same date as the hedged item using the spot price / rate in effect on that date. The resulting gain or loss is included in the carrying amount of the hedged item or in net income, in the same category of revenue or expenses in the income statement, and the offsetting amount is recognized as a derivative-related asset or liability, as appropriate. If a reporting period ends before the forward contract matures, the forward contract is remeasured using the spot price or rate in effect at the reporting period balance sheet date with any gain or loss included in net income. When the forward contract matures, the asset or liability is derecognized and any additional gain or loss on the forward contract is recognized in net income.

A hedge of an interest bearing asset or liability is accounted for as follows:

  • Interest on the hedged item is recognized using the instrument’s stated interest rate plus or minus amortization of any initial premium or discount and any financing fees and transaction costs;
  • Net amounts receivable or payable on the interest rate swap are recognized as an adjustment to interest on the hedged item in the period in which they accrue; and
  • When applicable, recognized foreign currency receivables and payables on a hedging cross-currency interest rate swap are translated using current exchange rates with gains and losses included in net income in the period in which they arise.
    The approach for both types of hedges results in the derivative being accounted for off-balance sheet. This approach is offset by the requirement for disclosures which describe the nature and terms of the hedged item, the nature and terms of the hedging instrument, the fact that hedge accounting applies and the net effect of the relationship.

Discontinuance

Once a hedging relationship is accounted for using hedge accounting, an entity cannot choose to discontinue hedge accounting. Once hedge accounting is being used for a specific relationship, any entity can only discontinue hedge accounting when:

  • The hedge item or the hedging item ceases to exist;
  • The critical terms of the hedging item set out in 6.4 Qualifying criteria for hedge accounting cease to match those of the hedged item, including but not limited to, when:
  • It becomes probable an interest bearing asset or liability hedged with an interest rate or cross currency interest rate swap will be prepaid; and
  • It is no longer probable that an anticipated transaction will occur in the amount designated or within 30 days of the maturity date of the hedging item.

When a hedging item ceases to exist, any gains or losses incurred on its termination are recognized in net income at the same time the hedged item affects net income.

If the hedged item is an anticipated transaction, any gain or loss incurred on the termination of the hedging item is recognized in a separate component of shareholders’ equity. When the anticipated transaction occurs, the gain or loss is removed from shareholders’ equity and is recognized as an adjustment of the carrying amount of the hedged item.

If the hedged item is a recognized asset or liability, any gain or loss incurred on the termination of the hedging item is recognized as an adjustment of the carrying amount of the hedged item.

When hedge accounting is discontinued, the hedging item is measured as otherwise required by Section 3856 and any gain or loss is recognized in net income.

5. Presentation

The issuer of a financial instrument classifies the instrument or its component parts, 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.

The instrument is classified as an equity instrument if, and only if, both conditions (a) and (b) below are met.

  1. The instrument includes no contractual obligation:
    1. to deliver cash or another financial asset to another entity; or
    2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.
  2. If the instrument will or may be settled in the issuer’s own equity instruments, it is:
    1. a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
    2. a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments.

Puttable instruments

As an exception to the definition of a financial liability, an instrument that includes a contractual obligation for the issuer to repurchase or redeem the instrument for cash or another financial asset on exercise of the put, is classified as an equity instrument if it has all the following features:

  1. entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation;
  2. the instrument is in the class of instruments that is subordinate to all other classes of instruments;
  3. all financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features;
  4. apart from the contractual obligation for the issuer to repurchase or redeem the instrument for cash or another financial asset, the instrument does not include any contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity, and it is not a contract that will or may be settled in the entity’s own equity instrument as set out in paragraph (b) of the definition of a financial liability;
  5. the total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument (excluding any effects of the instrument).

Equity or liability

A financial instrument, or its components, should be classified as a liability or as equity in accordance with the substance of the contractual arrangement on initial recognition and not based on its legal form.

A financial liability exists when:

  • The issuer has a contractual obligation to deliver cash or another financial asset to the holder or to exchange another financial instrument with the holder under conditions that are potentially unfavourable to the issuer. A restriction on the ability of the issuer to satisfy an obligation does not negate the issuer’s obligation or the holder’s right under the instrument; or
  • An issuer’s obligation can be settled through the issuance of shares and the number of shares fluctuates in response to changes in a variable other than the market price of the entity’s own equity instruments.

Exceptions

The following instruments shall be classified as equity on initial recognition:

  • Preferred shares issued in a tax planning arrangement. The entity must present the shares at par, stated or assigned value as a separate line item in the equity section of the balance sheet.
  • Partnership interests and certain types of shares in co-operative organizations that provide for payments to the holder of a pro-rata share of the residual equity of the issuer in the event of specific events like liquidation or death of the holder.
  • A retractable or mandatorily redeemable share is classified as a liability unless all of the following criteria are met:
  • The redeemable shares are the most subordinated of all equity instruments issued by the enterprise;
  • The redemption feature is extended to 100 percent of the shares and the basis for determination of the redemption price is the same for all shares;
  • The shares have no preferential rights relative to other classes of shares of the enterprise that have the same degree of subordination; and
  • The redemption event is the same for all the shares subject to the redemption feature.

Hybrid instruments

If an instrument has both liability and equity components, such as the case with convertible debt or when warrants or options are issued with and detachable from a liability, an accounting policy choice exists as there are two acceptable methods for measurement of the liability and equity elements on initial measurement:

  • The equity component is measured at zero. As a result, the entire proceeds are allocated to the liability component; or
  • The less easily measurable component is allocated to the residual amount after deducting from the entire proceeds of the issue the amount separately determined for the component that is more easily measurable.

Treasury shares

If an entity reacquires its own equity instruments, those instruments (treasury shares) shall be deducted from equity.

No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Consideration paid or received shall be recognised directly in equity.

Interest, dividends, losses and gains

Interest, dividends, losses and gains related to a financial instrument that is a financial liability are recognised as income or expense in the profit or loss.

Distributions to holders of an equity instrument shall be recognised by the entity directly in equity.

Transaction costs relating to an equity transaction shall be accounted for as a deduction from equity, net of any related income tax benefit.

The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses and gains relating to that instrument are recognised as income or expense in profit or loss. For example, dividend payments on shares wholly recognised as liabilities are recognised as expenses in the same way as interest on a bond.

Offsetting a Financial Asset and a Financial Liability

A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when the entity:

  • has a current legally enforceable right to set off the recognised amounts, and
  • intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see IFRS 9.3.2.22 / (old) – IAS 39.36).

6. Disclosures

Significance of financial instruments in terms of the financial position and performance

Statement of financial position

  • Total carrying value of each category of financial assets and liabilities on face of the statement of financial position or in the notes:
    • Financial assets measured at amortized cost;
    • Financial assets measured at fair value; and
    • Investments in equity instruments measured at cost less any reduction for impairment.
    • Accounts and notes receivable shall be segregated so as to show separately trade accounts, amounts owing by related parties and other unusual items of significant amount. The amounts and, when practicable, maturity dates of accounts maturing beyond one year shall be disclosed separately.
  • Information on fair value of loans and receivables
  • Financial liabilities designated as at fair value through profit and loss
  • Financial assets reclassified
  • Financial assets that do not qualify for derecognition
  • Details of financial assets pledged as collateral & collateral held
  • Reconciliation of allowance account for credit losses.
  • Compound financial instruments with embedded derivatives
  • Details of defaults and breaches of loans payable.

Statement of comprehensive income

  • Gain or loss for each category of financial assets and liabilities in the statement of comprehensive income or in the notes
  • Total interest income and interest expense (effective interest method)
  • Fee income and expense
  • Interest on impaired financial assets
  • Amount of impairment loss for each financial asset.

Allowance account for credit losses

When financial assets are impaired by credit losses and the entity records the impairment in a separate account, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets, for example bad debt provisions.

Defaults and breaches

For loans payable recognised at the end of the reporting period, an entity shall disclose details of any defaults, the carrying amount of the loan payable in default and whether the default was remedied or renegotiated before the financial statements was authorised for issue.

Other disclosures

Accounting policies

Disclosure of the measurement basis (or bases) and other accounting policies used in preparing the financial statements that are relevant to an understanding of the financial statements.

Hedge accounting

An entity shall disclose the following details separately for each type of hedge described in IAS 39 (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign operations):

  1. description of each type of hedge;
  2. description of the financial instruments designated as hedging instruments and their fair values at the end of the reporting period; and
  3. the nature of the risks being hedged.

In relation to cash flow hedges, an entity shall disclose separately:

  1. the periods when the cash flows are expected to occur and when they are expected to affect the profit or loss;
  2. a description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur;
  3. the amount that was recognised in other comprehensive income during the period
  4. the amount that was reclassified from equity to profit or loss for the period, showing the amount included in each line item in the statement of comprehensive income; and
  5. the amount that was removed from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction

For a hedge of an anticipated transaction or interest bearing asset or liability, the entity discloses the nature and terms of the hedged item, the nature and terms of the forward contract or of the hedging interest rate or cross-currency interest rate swap, the fact that hedge accounting applies and the net effect of the relationship.

Financial liabilities

For bonds, debentures and similar securities, mortgages and other long-term debt, an entity shall disclose:

  • The title or description of the liability;
  • The interest rate;
  • The maturity date;
  • The amount outstanding, separated between principal and accrued interest;
  • The currency in which the debt is payable if it is not repayable in the currency in which the entity measures items in its financial statements; and
  • The repayment terms, including the existence of sinking fund, redemption and conversion provisions.

An entity shall disclose the carrying amount of any financial liabilities that are secured. An entity shall also disclose:

  • The carrying amount of assets it has pledged as collateral for liabilities; and
  • The terms and conditions relating to its pledge.

An entity shall disclose the aggregate amount of payments estimated to be required in each of the next five years to meet repayment, sinking fund or retirement provisions of financial liabilities.

For financial liabilities recognized at the balance sheet date, an entity shall disclose:

  • Whether any financial liabilities were in default or in breach of any term or covenant during the period that would permit a lender to demand accelerated repayment; and
  • Whether the default was remedied, or the terms of the liability were renegotiated, before the financial statements were completed.

For a financial liability that contains both a liability and an equity element, an entity shall disclose the following information about the equity element including, when relevant:

  • The exercise date or dates of the conversion option;
  • The maturity or expiry date of the option;
  • The conversion ratio or the strike price;
  • Conditions precedent to exercising the option; and
  • Any other terms that could affect the exercise of the option, such as the existence of covenants that, if contravened, would alter the timing or price of the option.

For a financial instrument that is indexed to the entity’s equity or an identified factor, an entity shall disclose information that enables users of the financial statements to understand the nature, terms and effects of the indexing feature, the conditions under which a payment will be made and the expected timing of any payment.

For a preferred share issued in a tax planning arrangement, an entity shall disclose:

  • On the face of the Balance Sheet, the total redemption amount for all classes of such shares outstanding;
  • The aggregate redemption amount for each class of such shares; and
  • The aggregate amount of any scheduled redemptions required in each of the next five years.

Fair value

For each class of financial assets and financial liabilities, an entity shall disclose the fair value of that class of assets and liabilities so as to permit comparisons with its carrying amount.

Fair value measurements are to be classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy should have the following levels:

  1. quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
  2. inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and
  3. inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

Disclosures of fair value are not required:

  1. where the carrying amount is a reasonable approximation of fair value; e.g. short term trade receivables and payables;
  2. investment in equity instruments that do not have a quoted market price in an active market or derivatives linked to such equity instruments, that is measured at cost in accordance with IAS 39 because the fair value cannot be reliably measured; and
  3. for a contract containing a discretionary participation feature (as described in IFRS 4 Insurance Contracts) if the fair value of that feature cannot be measured reliably.

Nature and extent of risks arising from financial instruments and how the risks are managed

An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. The required disclosures focus on the risks that arise from financial instruments and the risk management initiatives.

The following types of risks are typically included but not limited to: (i) credit risk, (ii) liquidity risk and (iii) market risk.

Qualitative and quantitative disclosures are required to elaborate on the nature and extent of risks arising from the financial instruments.

Qualitative disclosures shall include:

  1. the exposures to risk and how they arise;
  2. the objectives, policies and processes for managing the risk and the methods used to measure the risk; and
  3. any changes in (a) or (b) from the previous period.

Quantitative disclosures shall comprise of data about its exposure to that risk (including concentration of risk) at end of the reporting period.

Credit Risk

Definition: The risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

By class of financial instrument, an entity shall disclose:

  • The amount that best represents its maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or credit enhancements.
  • Description of collateral held as security and of other credit enhancements, and their financial effect in respect of the amount that best represents the maximum exposure to credit risk.
  • Information about the credit quality of financial assets that are neither past due nor impaired.

Liquidity Risk

Definition: The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

An entity shall disclose:

  1. a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities [IFRS 7.B10A – B11F];
  2. a maturity analysis for derivative financial liabilities. The maturity analysis shall include the remaining contractual maturities for those derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows; and
  3. a description of how it manages the liquidity risk inherent in (a) and (b).

Market Risk

Definition: The risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.

An entity shall disclose:

  1. a sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date;
  2. the methods and assumptions used in preparing the sensitivity analysis; and
  3. changes from the previous period in the methods and assumptions used, and the reasons for such changes.

If the entity prepares a value-at-risk sensitivity analysis that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may use such a sensitivity analysis. If so, the entity shall also disclose an explanation of the method used in preparing the analysis including the parameters and assumptions. An explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value shall be disclosed as well.

Fair value hierarchy

All financial instruments measured at fair value must be classified into the levels below (that reflect how fair value has beenFinancial Instruments determined):

  • Level 1: Quoted prices, in active markets
  • Level 2: Level 1 quoted prices are not available but fair value is based on observable market data
  • Level 3: Inputs that are not based on observable market data.

A financial Instrument will be categorised based on the lowest level of any one of the inputs used for its valuation.

The following disclosures are also required:

  • Significant transfers of financial instruments between each category – and reasons why
  • For level 3, a reconciliation between opening and closing balances, incorporating; gains/losses, purchases/sales/settlements, transfers
  • Amount of gains/losses and where they are included in profit and loss
  • For level 3, if changing one or more inputs to a reasonably possible alternative would result in a significant change in FV, disclose this fact.

Transfers of financial assets

If an entity has transferred financial assets during the period and accounts for the transfer as a sale it shall disclose:

  • The gain or loss from all sales during the period;
  • The accounting policies for:
  • Initially measuring any retained interest (including the methodology used in determining its fair value); and
  • Subsequently measuring the retained interest; and
  • A description of the transferor’s continuing involvement with the transferred assets, including, but not limited to, servicing, recourse and restrictions on retained interests.

If an entity has transferred financial assets in a way that does not qualify for derecognition, it shall disclose:

  • The nature and carrying amount of the assets;
  • The nature of the risks and rewards of ownership to which the entity remains exposed; and
  • The carrying amount of the liabilities assumed in the transfer.

Profit or loss reporting

An entity shall disclose the following items of income, expense, gains or losses either on the face of the statements or in the notes to the financial statements:

  • Net gains or net losses recognized on financial instruments;
  • Total interest income;
  • Total interest expense on current financial liabilities;
  • Interest expense on long-term financial liabilities, separately identifying amortization of premiums, discounts and financing fees; and
  • The amount of any impairment loss or reversal of a previously recognized loss.

Derivatives

An entity shall disclose:

  • The notional and carrying amounts of all derivative assets measured at fair value;
  • The notional and carrying amounts of all derivative liabilities measured at fair value;
  • The method used to determine the fair value of all derivatives measured at fair value; and
  • The notional and accrued amounts of all interest rate and cross-currency interest rate swaps in designated hedging relationships.

When an entity measures the fair value of a derivative asset or liability using a quote from a derivatives dealer, it discloses that fact and the nature and terms of the instrument.

An entity shall disclose sufficient information about derivatives that are linked to, and must be settled by delivery of, equity instruments of another entity whose fair value cannot be readily determined to permit the reader to assess the potential implications of the contract. This information shall include:

  • The name of the issuer of the equity instrument;
  • A description of the equity instrument; and
  • The terms under which settlement will take place.

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