IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot – no hedge accounting

IFRS 9 is a replacement of IAS 39

IFRS 9 introduces a single classification and measurement model for financial assets, dependent on both:

IFRS 9 removes the requirement to separate embedded derivatives from financial asset host contracts (it instead requires a hybrid contract to be classified in its entirety at either amortised cost or fair value.)

Separation of embedded derivatives has been retained for financial liabilities (subject to criteria being met).

1. Financial assets and Financial liabilities

Initial Recognition

When the entity becomes party to the contractual provisions of the instrument.

Initial Measurement

At fair value, plus for those financial assets and liabilities not classified at fair value through profit or loss, directly attributable transaction costs.

  • Fair value – is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
  • Directly attributable transaction costs – incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability.

2. Financial assets

Subsequent classification and measurement

Financial Assets are classified as either:

  1. Amortised cost,
  2. Fair Value through other comprehensive income, or
  3. Fair value through profit or loss

(1) Amortised cost

Category classification criteria, both of the below conditions must be met:

  1. Business model objective: financial assets held in order to collect contractual cash flows
  2. Contractual cash flow characteristics: solely payments of principal and interest on the principal amount outstanding.

Subsequent measurement

Amortised cost using the effective interest method.

(i) Business model assessment

Based on the overall business, not instrument-by-instrument

Centres on whether financial assets are held to collect contractual cash flows:

  • How the entity is run
  • The objective of the business model as determined by key management personnel (KMP) (per IAS 24 Related Party Disclosures).

Financial assets do not have to be held to contractual maturity in order to be deemed to be held to collect contractual cash flows, but the overall approach must be consistent with ‘hold to collect’.

(ii) Contractual cash flow assessment

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

FOREX financial assets: assessment is made in the denomination currency (i.e. FX movements are not taken into account).

IFRS 9 contains various illustrative examples in the application of both the (i) Business Model Assessment and (ii) Contractual Cash Flow Characteristics.

(2) Fair value through other comprehensive income

2.1 Equity Instruments

Note: Designation at initial recognition to FVPL (see below) is optional and irrevocable.

Category classification criteria

Available only for investments in equity instruments (within the scope of IFRS 9) that are not held for trading.

Subsequent measurement

  • Fair value, with all gains and losses recognised in other comprehensive income
  • Changes in fair value are not subsequently recycled to profit and loss
  • Dividends are recognised in profit or loss.
2.2 Debt Instruments

Category classification criteria

  1. Business model objective: financial assets held to collect contractual cash flows and to sell the financial assets
  2. Contractual cash flow characteristics: solely payments of principal and interest on the principal amount outstanding.

Subsequent measurement

  • Fair value, with all gains and losses (other than those relating to impairment, which are included in profit or loss) being recognised in other comprehensive income
  • Changes in fair value recorded in other comprehensive income are recycled to profit or loss on derecognition or reclassification.
(i) Business model assessment

Based on the overall business, not instrument-by-instrument

Centres on whether financial assets are held to collect contractual cash flows and to sell the financial assets:

  • How the entity is run
  • The objective of the business model as determined by key management personnel (KMP) (per IAS 24 Related Party Disclosures).

Financial assets held to both collect contractual cash flows from the non-equity financial asset and sell the non-equity financial asset, but the overall approach must be consistent with ‘hold and collect’.

(ii) Contractual cash flow assessment

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

FOREX financial assets: assessment is made in the denomination currency (i.e. FX movements are not taken into account).

IFRS 9 contains various illustrative examples in the application of both the (i) Business Model Assessment and (ii) Contractual Cash Flow Characteristics.

(3) Fair value through profit or loss

The remaining classification and measurement application.

Category classification criteria

  • Financial assets that do not meet the amortised cost or fair value through other comprehensive income criteria (also includes assets held for trading).
  • Financial assets designated at initial recognition. The option to designate is available if doing so eliminates, or significantly reduces, a measurement or recognition inconsistency (i.e. ‘accounting mismatch’).

Note: the option to designate is irrevocable.

Subsequent measurement

Fair value, with all gains and losses recognised in profit or loss.

3. Impairment of financial assets – Expected credit losses

Scope

The impairment requirements are applied to:

  • Financial assets measured at amortised cost (incl. trade receivables)
  • Financial assets measured at fair value through OCI
  • Loan commitments at below market interest rate
  • Financial guarantees contracts which are not insurance contracts under the scope of IFRS 4 Insurance Contracts
  • Lease receivables.

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial instrument that determine:

  • the recognition of impairment, and
  • the recognition of interest revenue.

Initial recognition

At initial recognition of the financial asset an entity recognises a loss allowance equal to 12 months expected credit losses which consist of expected credit losses from default events possible within 12 months from the entity’s reporting date. An exception is purchased or originated credit impaired financial assets.

Subsequent measurement

Three-stage approach

Stage

1

2

3

Impairment

Applicable when no significant increase in credit risk

Applicable in case of significant increase in credit risk

Applicable in case of credit impairment

Entities remains in this class when credit risk does not change when updated at each reporting date

Entities remains in this class when credit risk does not change when updated at each reporting date, change may be is 1 (upgrade) or 3 (downgrade)

12 month expected credit loss

Recognition of lifetime expected losses

Recognition of lifetime expected losses

Interest

Presentation of interest on gross basis

Presentation of interest on gross basis

Presentation of interest on a net basis

Practical expedients

  • 30 days past due rebuttable presumption
    • Rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due
    • When payments are 30 days past due, a financial asset is considered to be in stage 2 and lifetime expected credit losses would be recognised
    • An entity can rebut this presumption when it has reasonable and supportable information available that demonstrates that even if payments are 30 days or more past due, it does not represent a significant increase in the credit risk of a financial instrument.
  • Low credit risk instruments
    • Instruments that have a low risk of default and the counterparties have a strong capacity to repay (e.g. financial instruments that are of investment grade)
    • Instruments would remain in stage 1, and only 12 month expected credit losses would be provided.

Simplified approach

Short term trade receivables
  • Recognition of only ‘lifetime expected credit losses’ (i.e. stage 2)
  • Expected credit losses on trade receivables can be calculated using provision matrix (e.g. geographical region, product type, customer rating, collateral or trade credit insurance, or type of customer)
  • Entities will need to adjust the historical provision rates to reflect relevant information about current conditions and reasonable and supportable forecasts about future expectations.
Long term trade receivables and lease receivables

Entities have a choice to either apply:

Loan commitments and financial guarantees

The three-stage expected credit loss model also applies to these off balance sheet financial commitments

An entity considers the expected portion of a loan commitment that will be drawn down within the next 12 months when estimating 12 month expected credit losses (stage 1), and the expected portion of the loan commitment that will be drawn down over the remaining life the loan commitment (stage 2)

For loan commitments that are managed on a collective basis an entity estimates expected credit losses over the period until the entity has the practical ability to withdraw the loan commitment

4. Financial liabilities

Subsequent classification and measurement

Financial Liabilities are classified as either:

  1. Amortised Cost, or
  2. Fair value through profit or loss.

In addition, specific guidance exists for:

  1. Financial guarantee contracts, and (ii) Commitments to provide a loan at a below market interest rate
  2. Financial Liabilities that arise when the transfer of a financial asset either does not qualify for derecognition or where there is continuing involvement.

(1) Amortised cost

Category classification criteria

All financial liabilities, except those 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 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

  3. 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.

  4. 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.

Subsequent measurement

Amortised cost using the effective interest method.

(2) Fair value through profit or loss

Category classification criteria
  • Financial liabilities held for trading
  • Derivative financial liabilities
  • Financial liabilities designated at initial recognition. The option to designate is available:
    • If doing so eliminates, or significantly reduces, a measurement or recognition inconsistency (i.e. ‘accounting mismatch’), or
    • If a group of financial liabilities (or financial assets and financial liabilities) is managed, and evaluated, on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally to KMP.
Subsequent measurement

Fair value with all gains and losses being recognised in profit or loss.

(i) Financial guarantee contracts and (ii) Commitments to provide a loan at a below market interest rate

Subsequent measurement

The higher of either

  1. The amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
  2. The amount initially recognised, less (when appropriate) cumulative amortisation recognised in accordance with IFRS 15 Revenue form contracts with customers.

(iii) Financial liabilities resulting from the transfer of a financial asset

(That does not qualify for derecognition) – (Where there is continuing involvement)

Financial liability for the consideration received is recognised.

Subsequent measurement

The net carrying amount of the transferred asset and associated liability is measured as either:

  • Amortised cost of the rights and obligations retained (if the transferred asset is measured at amortised cost)
  • The fair value of the rights and obligations retained by the entity when measured on a stand-alone basis (if the transferred asset is measured at fair value).

5 Embedded derivatives

Definition and description

Embedded derivatives are components of a hybrid contract (i.e. a contract that also includes a non-derivative host), that causes some (or all) of the contractual cash flows to be modified according to a specified variable (e.g. interest rate, commodity price, foreign exchange rate, index, etc.)

Exclusions and exemptions (i.e. not embedded derivatives)

  • Non-financial variables that are specific to a party to the contract.
  • A derivative, attached to a financial instrument that is contractually transferable independently of
  • that instrument, or, has a different counterparty from that instrument.
    • Instead, this is a separate financial instrument.

Embedded derivatives are accounted for differently depending on whether they are within a host contract that is a financial asset or a financial liability:

  1. Embedded derivatives within a financial asset host contract – The embedded derivative is not separated from the host contract – Instead, the whole contract in its entirety is accounted for as a single instrument in accordance with the requirements of IFRS 9.

  2. Embedded derivatives within a host contract that is a financial liability:

    • Subject to meeting the adjacent criteria, the embedded derivative is:

      1. Separated from the host contract

      2. Accounted for as a derivative in accordance with IFRS 9 (i.e. at fair value through profit or loss).

    • Criteria: to separate an embedded derivative:

      1. Economic characteristics of the embedded derivative and host are not closely related

      2. An identical instrument (with the same terms) would meet the definition of a derivative, and

      3. The entire (hybrid) contract is not measured at fair value through profit or loss.

    • Host contract (once embedded derivative is separated) – The (non-financial asset) host contract is accounted for in accordance with the appropriate IFRS.

6 Derecognition

Financial assets

If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it recognises either a servicing asset or liability for that servicing contract

If, as a result of a transfer, a financial asset is derecognised, but the entity obtains a new financial asset or assumes a new financial liability or servicing liability, the entity recognises the new financial asset, financial liability or servicing liability at fair value

On derecognition of a financial asset, the difference between the carrying amount and the sum of (i) the consideration received and (ii) any cumulative gain or loss that was recognised directly in equity is recognised in profit or loss.

See the below decision tree:

IFRS 9

IFRS 9.3.2.5 – where an entity retains the contractual rights to receive the cash flows of a financial asset, but assumes a contractual obligation to pay those cash flows to one or more entities, three conditions need to be met before an entity can consider the additional derecognition criteria:

  1. The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset

  2. The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients

  3. The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. The entity is not entitled to reinvest the cash flows except for the short period between collection and remittance to the eventual recipients. Any interest earned thereon is remitted to the eventual recipients.

Financial liabilities

A financial liability is derecognised only when extinguished – i.e., when the obligation specified in the contract is discharged, cancelled or it expires

An exchange between an existing borrower and lender of debt instruments with substantially different terms or substantial modification of the terms of an existing financial liability of part thereof is accounted for as an extinguishment

The difference between the carrying amount of a financial liability extinguished or transferred to a 3rd party and the consideration paid is recognised in profit or loss.

Hedge accounting is described in IFRS 9 Hedge accounting. IFRS 9 Financial instruments

And in some more detail….

Important to remember, where does IFRS 9 come from – the International Accounting Standards Board (IASB) developed if as a response to the financial crisis and it was issued on 24 July 2014. The standard includes the requirements previously issued and introduces limited amendments to the classification and measurement requirements for financial assets as well as the expected loss impairment model. It includes:

  • Classification and measurement of financial assets – principle-based, as opposed to rule-based, classification and measurement categories for financial assets;
  • Classification and measurement of financial liabilities – new requirements for handling changes in the fair value of an entity’s own debt, in order to address the “own credit” issue;
  • Impairment – a single, forward-looking impairment model that will result in more timely recognition of impairment losses on financial assets;
  • Hedge accounting – a hedge accounting model that allows entities to better reflect their risk management activities.

3 things to consider

1. Risk management considerations

Review the current risk management strategy and the financial instruments used manage financial risks. IFRS 9 allows more risks to be managed whilst achieving hedge accounting, meaning that there are opportunities to implement more dynamic hedging programmes.

Companies should therefore review their hedging strategy, assessing all sources of risk, defining their risk appetite and analysing available hedging options to identify impacts and opportunities of using alternative accounting treatments better aligned with risk management activities.

2. Classification and measurement

IFRS 9 requires financial instruments to be classified into one of three categories: Fair Value through Profit or Loss (FVTPL), Amortised Cost and Fair Value through Other Comprehensive Income (FVTOCI).

The classification determines how they are recorded in the financial statements and how they are valued. There is one principles-based classification approach for all types of financial assets, which depends on two criteria, the business model and the characteristics of the cash flows of the financial assets considered.

The challenges associated with classifying financial instruments should not be under-estimated. It will be necessary to :

  • assess how the entity manages its loans and receivables in terms of its business model and collecting the contractual cash flows from these assets;
  • undertake a review of all financial assets to ensure a consistent approach to classification and valuation;
  • understand the rules relating to the reclassification of financial instruments between categories.
OVERVIEW – Categories of financial assets and liabilities

Category

Type

Effective interest

Dividend

ECL

FX Gains/

Losses

Fair value gains/losses

Recycling OCI to P&L

Assets at amortised costs

Debt

P&L

n/a

P&L

P&L

n/a

n/a

Assets at fair value through OCI (with recycling)

Debt

P&L

n/a

P&L

P&L

OCI 1

yes

Assets at fair value through OCI (no recycling)

Equity

n/a

P&L

n/a

OCI

OCI

no

Liabilities at amortised costs

Debt

P&L

n/a

n/a

P&L

n/a

n/a

Assets/liabilities at FVPL

Debt, Equity, Derivatives

P&L

P&L

n/a

P&L

P&L 2

n/a

3. Expected credit loss model

Under the forward-looking approach in IFRS 9, companies will have to recognise immediately a certain amount of expected credit loss as an expense through profit or loss. At each subsequent balance sheet date, the expected credit risk should then be re-evaluated, to take into account any significant increase in the credit risk and expected loss.

Implementing the ECL model can be a real challenge for companies:

  • They will need to develop estimates of expected credit losses over the life of the financial instrument and monitor their exposures continually, and comply with new financial reporting requirements.
  • The interpretation of ‘significant increase’ and ‘default’ is subject to judgment: estimating ‘expected loss’ will not be a simple task.
  • They must develop an ECL model capable of applying the expected loss methodology to different asset classes.
  • An increase in cooperation between the Risk and Finance departments is required.

OBJECTIVE

The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.

SCOPE

IFRS 9 shall apply to all types of financial instruments, such as

  • interests in subsidiaries, associates and 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
  • rights and obligations under leases to which IFRS 16 Leases applies (with exceptions)
  • employers’ rights and obligations under employee benefit plans, to which IAS 19 Employee Benefits applies (with exceptions)
  • financial instruments issued by the entity that meet the definition of an equity instrument in IAS 32 (with exceptions)
  • rights and obligations arising under an insurance contract as defined in IFRS 4 Insurance Contracts (with exceptions)
  • loan commitments other than those loan commitments described in IFRS 9
  • 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
  • financial instruments, contracts and obligations under share based payment transactions to which IFRS 2 Share based Payment applies (with exceptions)
  • 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
  • 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 IFRS 9.

DEFINITIONS

Financial asset is any asset that is one of the following:

  • Cash
  • An equity instrument of another entity
  • A contractual right: to receive cash or another financial asset from another entity; or to exchange financial instruments with another entity under conditions that are potentially favourable.
  • A contract that will be settled in the reporting entity’s own equity instruments and is a non derivative for which the entity is, or may be obligated, to receive a variable number of its own equity instruments; or a derivative that will, or may, be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments (which excludes puttable financial instruments classified as equity and instruments that are themselves contracts for the future receipt or delivery of the entity’s equity instruments).

Financial liability is any liability which meets either of the following criteria:

  • A contractual obligation: to deliver cash or another financial asset to another entity; or to exchange financial instruments with another entity under conditions which are potentially unfavourable to the entity.
  • A contract that will, or may, be settled in the entity’s own equity instruments and is a non derivative for which the entity is, or may, be obligated to deliver a variable number of its own equity instruments; or a derivative that will, or may, be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments (which excludes puttable financial instruments classified as equity and instruments that are themselves contracts for the future receipt or delivery of the entity’s equity instruments).
Derecognition of financial assets

An entity shall derecognise a financial asset when, and only when:

  1. the contractual rights to the cash flows from the financial asset expire, or
  2. it transfers the financial asset and the transfer qualifies for derecognition.
Reclassification of financial assets

If an entity reclassifies financial assets it shall apply the reclassification prospectively from the reclassification date. The entity shall not restate any previously recognised gains, losses (including impairment gains or losses) or interest.

EFFECTIVE DATE

An entity shall apply this Standard for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

Example of IFRS 9 disclosures

Financial instruments – Fair values and risk management

A. Accounting classifications and fair values     a, b

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

Further, for the current year the fair value disclosure of lease liabilities is also not required.

Trade and other receivables and trade and other payables classified as held-for-sale are not included in the table below (see Note 20). Their carrying amount is a reasonable approximation of fair value.

FRS 9 Financial intruments full disclosure table

* Other payables that are not financial liabilities (refund liabilities recognised under IFRS 15 – €988 thousand) are not included.

Note a – In this table, the Group has disclosed the fair value of each class of financial assets and financial liabilities in a way that permits the information to be compared with the carrying amounts. In addition, it has reconciled the assets and liabilities to the different categories of financial instruments as defined in IFRS 9. This presentation method is optional and different presentation methods may be appropriate, depending on circumstances.

The Group has not disclosed the fair values of financial instruments such as short-term trade receivables and payables, because their carrying amounts are a reasonable approximation of fair value. (IFRS 7 8, IFRS 7 29)

Note b – An entity groups financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. Although IFRS 7 does not define ‘classes’, as a minimum instruments measured at amortised cost should be distinguished from instruments measured at fair value. (IFRS 7 6, IFRS 7 B1-B3)

The comparative table for 2018 shows as follows:

IFRS 9 Financial instruments quick and best snapshot* Other payables that are not financial liabilities (refund liabilities recognised under IFRS 15 – €883 thousand) are not included.

B. Measurement of fair values

i. Valuation techniques and significant unobservable inputs

The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values for financial instruments in the statement of financial position, as well as the significant unobservable inputs used. Related valuation processes are described in Note 4(B).

Type/IFRS reference Valuation technique Significant unobservable inputs Inter-relationship between significant unobservable inputs and fair value measurement

Financial instruments measured at fair value (IFRS 13 91(a), IFRS 13 93 (d), IFRS 13 93(h)(i), IFRS 13 99)

Contingent consideration (IFRS 3 B67(b)(iii))

IFRS 9 Financial instruments quick and best snapshot 

Discounted cash flows: The valuation model considers the present value of the expected future payments, discounted using a risk-adjusted discount rate.

Expected cash flows (31 December 2019: €318 thousand – €388 thousand).

Risk-adjusted discount rate (31 December 2019: 15%).

The estimated fair value would increase (decrease) if:

  • the expected cash flows were higher (lower); or
  • the risk-adjusted discount rate were lower (higher).

Equity securities

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

 

Market comparison/discounted cash flow: The fair value is estimated considering (i) current or recent quoted prices for identical securities in markets that are not active and (ii) a net present value calculated using discount rates derived from quoted yields of securities with similar maturity and credit rating that are traded in active markets, adjusted by an illiquidity factor.

 

Not applicable.

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

 

Not applicable.

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

Forward exchange contracts

 

Forward pricing: The fair value is determined using quoted forward exchange rates at the reporting date and present value calculations based on high credit quality yield curves in the respective currencies.

Not applicable.

Not applicable.

Interest rate swaps

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

 

Swap models: The fair value is calculated as the present value of the estimated future cash flows. Estimates of future floating-rate cash flows are based on quoted swap rates, futures prices and interbank borrowing rates. Estimated cash flows are discounted using a yield curve constructed from similar sources and which reflects the relevant benchmark interbank rate used by market participants for this purpose when pricing interest rate swaps. The fair value estimate is subject to a credit risk adjustment that reflects the credit risk of the Group and of the counterparty; this is calculated based on credit spreads derived from current credit default swap or bond prices.

Not applicable.

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

Not applicable.

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

IFRS 9 Financial instruments quick and best snapshot

Financial instruments not measured at fair value

Other financial liabilities*

 

Discounted cash flows: The valuation model considers the present value of expected payments, discounted using a risk-adjusted discount rate.

Not applicable.

Not applicable.

* Other financial liabilities include secured and unsecured bank loans, unsecured bond issues, convertible notes – liability component, redeemable preference shares and loans from associates (2018: other financial liabilities also included finance lease liabilities).

ii. Transfers between Levels 1 and 2

At 31 December 2019, FVOCI corporate debt securities with a carrying amount of €40 thousand were transferred from Level 1 to Level 2 because quoted prices in the market for such debt securities were no longer regularly available. To determine the fair value of such debt securities, management used a valuation technique in which all significant inputs were based on observable market data (see Note 32(B)(i)). There were no transfers from Level 2 to Level 1 in 2019 and no transfers in either direction in 2018. (IFRS 13 93(c), IFRS 13 95)

iii. Level 3 recurring fair values

Reconciliation of Level 3 fair values

The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values.  (IFRS 13 91, IFRS 13 93) 

Reconciliation of Level 3 fair values

Transfer out of Level 3 IFRS 9 Financial instruments quick and best snapshot

The Group holds an investment in equity shares of MSE Limited with a fair value of €243 thousand at 31 December 2019 (2018: €225 thousand). The fair value of this investment was categorised as Level 3 at 31 December 2018 (for information on the valuation technique, see B(i)). This was because the shares were not listed on an exchange and there were no recent observable arm’s length transactions in the shares. (IFRS 13 93 (e)(iv), IFRS 13 95)

During 2019, MSE Limited listed its equity shares on an exchange and they are currently actively traded in that market. Because the equity shares now have a published price quotation in an active market, the fair value measurement was transferred from Level 3 to Level 1 of the fair value hierarchy at 31 December 2019.

Sensitivity analysis IFRS 9 Financial instruments quick and best snapshot

For the fair values of contingent consideration and equity securities, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant, would have the following effects. (IFRS 13 93(h)(ii)) IFRS 9 Financial instruments quick and best snapshot

Contingent consideration IFRS 9 Financial instruments quick and best snapshotContingent consideration 2C. Financial risk management     a IFRS 9 Financial instruments quick and best snapshot

The Group has exposure to the following risks arising from financial instruments: IFRS 9 Financial instruments quick and best snapshot

i. Risk management framework

Note a – The financial risk disclosures presented are only illustrative and reflect the facts and circumstances of the Group. In particular, IFRS 7 requires the disclosure of summary quantitative data about an entity’s risk exposures based on information provided internally to an entity’s key management personnel, although certain minimum disclosures are also required to the extent that they are not otherwise covered by the disclosures made under the ‘management approach’ above.

The Company’s board of directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The board of directors has established the risk management committee, which is responsible for developing and monitoring the Group’s risk management policies. The committee reports regularly to the board of directors on its activities. (IFRS 7 31, IFRS 7 33(b)) IFRS 9 Financial instruments quick and best snapshot

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Group audit committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group audit committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee. IFRS 9 Financial instruments quick and best snapshot

ii. Credit risk IFRS 9 Financial instruments quick and best snapshot

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investments in debt securities. (IFRS 7 31, IFRS 7 33) IFRS 9 Financial instruments quick and best snapshot

The carrying amounts of financial assets and contract assets represent the maximum credit exposure. (IFRS 7 35K(a), IFRS 7 36(a))

Impairment losses on financial assets and contract assets recognised in profit or loss were as follows. (IAS 1 82(ba))Impairment financial and contract assets

* Of which, €11 thousand (2018: €3 thousand) related to a discontinued operation (see Notes 6 and 7). IFRS 9 Financial instruments quick and best snapshot

Trade receivables and contract assets

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of its customer base, including the default risk associated with the industry and country in which customers operate. Details of concentration of revenue are included in Notes 6(D)(E).  (IFRS 7 33(a)–33(b)) IFRS 9 Financial instruments quick and best snapshot

The risk management committee has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, if they are available, financial statements, credit agency information, industry information and in some cases bank references. Sale limits are established for each customer and reviewed quarterly. Any sales exceeding those limits require approval from the risk management committee.

The Group limits its exposure to credit risk from trade receivables by establishing a maximum payment period of one and three months for individual and corporate customers respectively.

More than 85% of the Group’s customers have been transacting with the Group for over four years, and none of these customers’ balances have been written off or are credit-impaired at the reporting date. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or a legal entity, whether they are a wholesale, retail or end-user customer, their geographic location, industry, trading history with the Group and existence of previous financial difficulties.

The Group is monitoring the economic environment in [Region Z] and is taking actions to limit its exposure to customers in countries experiencing particular economic volatility. In 2019, certain purchase limits have been reduced, particularly for customers operating in [Countries A, B, C, D and E], because the Group’s experience is that the recent economic volatility has had a greater impact for customers in those countries than for customers in other countries. (IFRS 7 33(c))

The Group does not require collateral in respect of trade and other receivables. The group does not have trade receivable and contract assets for which no loss allowance is recognised because of collateral. (IFRS 7 35K(b), IFRS 7 B8G) IFRS 9 Financial instruments quick and best snapshot

The quantitative information below on trade receivables and contract assets includes amounts classified as held-for-sale (see Note 20).

At 31 December 2019, the exposure to credit risk for trade receivables and contract assets by geographic region was as follows.(IFRS 7 34(a), IFRS 7 34(c))Credit risk exposure 2019

At 31 December 2019, the exposure to credit risk for trade receivables and contract assets by type of counterparty was as follows.aGeo credit risk

At 31 December 2019, the carrying amount of the Group’s most significant customer (a European wholesaler) was €8,034 thousand (2018: €4,986 thousand). (IFRS 7 34(a), IFRS 7 34(c))

Note a – Identifying concentrations of risk requires judgement in light of specific circumstances, and may arise from industry sectors, credit ratings, geographic distribution or a limited number of individual counterparties. IFRS 9 Financial instruments quick and best snapshot

A summary of the Group’s exposure to credit risk for trade receivables and contract assets is as follows. (IFRS 7 34(a), IFRS 7 35M, IFRS 7 B8I)Exposure credit risk

Expected credit loss assessment for corporate customers

The Group allocates each exposure to a credit risk grade based on data that is determined to be predictive of the risk of loss (including but not limited to external ratings, audited financial statements, management accounts and cash flow projections and available press information about customers) and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default and are aligned to external credit rating definitions from agencies [Rating Agencies X and Y]. (IFRS 7 35B(a), IFRS 7 35F(c), IFRS 7 35G(a)–(b)) IFRS 9 Financial instruments quick and best snapshot

Exposures within each credit risk grade are segmented by geographic region and industry classification and an ECL rate is calculated for each segment based on delinquency status and actual credit loss experience over the past seven years. These rates are multiplied by scalar factors to reflect differences between economic conditions during the period over which the historical data has been collected, current conditions and the Group’s view of economic conditions over the expected lives of the receivables.

Scalar factors are based on GDP forecast and industry outlook and include the following: 1.3 (2018: 1.2) for [Country X], 0.9 (2018: 0.8) for [Country Y], 1.1 (2018: 1.2) for [Country Z] and 1.8 (2018:1.9) for [Industry A]. IFRS 9 Financial instruments quick and best snapshot

The following table provides information about the exposure to credit risk and ECLs for trade receivables and contract assets for corporate customers as at 31 December 2019. (IFRS 7 35M, IFRS 7 B8I) IFRS 9 Financial instruments quick and best snapshotexposure to credit risk and ECLs

Expected credit loss assessment for individual customers

The Group uses an allowance matrix to measure the ECLs of trade receivables from individual customers, which comprise a very large number of small balances. (IFRS 7 35B(a), IFRS 7 35F(c), IFRS 7 35G(a)–(b)) IFRS 9 Financial instruments quick and best snapshot

Loss rates are calculated using a ‘roll rate’ method based on the probability of a receivable progressing through successive stages of delinquency to write-off. Roll rates are calculated separately for exposures in different segments based on the following common credit risk characteristics – geographic region, age of customer relationship and type of product purchased.

The following table provides information about the exposure to credit risk and ECLs for trade receivables and contract assets from individual customers as at 31 December 2019. (IFRS 7 35M, IFRS 7 35N, IFRS 7 B8I) IFRS 9 Financial instruments quick and best snapshottrade receivables and contract assets from individual customers

Loss rates are based on actual credit loss experience over the past seven years. These rates are multiplied by scalar factors to reflect differences between economic conditions during the period over which the historical data has been collected, current conditions and the Group’s view of economic conditions over the expected lives of the receivables.

Scalar factors are based on actual and forecast unemployment rates and are as follows: 1.3 (2018: 1.2) for [Country X], 0.95 (2018: 1.0) for [Country Y] and 1.2 (2018:1.1) for [Country Z].

Expected credit loss assessment for corporate customers

The following table provides information about the exposure to credit risk and ECLs for trade receivables and contract assets for corporate customers as at 31 December 2018. (IFRS 7 35M, IFRS 7 35N, IFRS 7 B8I) IFRS 9 Financial instruments quick and best snapshotrade receivables and contract assets for corporate customer

Expected credit loss assessment for individual customers

The following table provides information about the exposure to credit risk and ECLs for trade receivables and contract assets from individual customers as at 31 December 2018. (IFRS 7 35M, IFRS 7 35N, IFRS 7 B8I) IFRS 9 Financial instruments quick and best snapshotECLs for trade receivables and contract assets from individual customers

The increase in loss allowance is mainly attributable to the total increase in the gross carrying amounts of trade receivables and contract assets. The increase in the proportion of wholesale customers and increase in gross carrying amount of more than 90 days past due in other customers contributed to the increase in loss allowance. The methodology for the calculation of ECL is the same as described in the last annual financial statements. (IFRS 7 35I) IFRS 9 Financial instruments quick and best snapshot

Movements in the allowance for impairment in respect of trade receivables and contract assets

The movement in the allowance for impairment in respect of trade receivables and contract assets during the year was as follows. (IFRS 7 35H, IFRS 7 42P)Bade debt allowance

Trade receivables with a contractual amount of €70 thousand written off during 2019 are still subject to enforcement activity. (IFRS 7 35L)

The following significant changes in the gross carrying amounts of trade receivables contributed to the changes in the impairment loss allowance during 2019:

  • the growth of the business in [Countries X and Y] (Countries A and B) resulted in increases in trade receivables of €4,984 thousand (2018: €2,356 thousand) and €4,556 thousand (2018: €2,587 thousand) respectively and increases in impairment allowances of €30 thousand (2018: €14 thousand) and €44 thousand (2018: €23 thousand) respectively;
  • increases in credit-impaired balances in [Country Z] (Country D) of €143 thousand (2018: €98 thousand) resulted in increases in impairment allowances of €47 thousand (2018: €44 thousand); and IFRS 9 Financial instruments quick and best snapshot
  • a decrease in trade receivables of €3,970 thousand attributed to the Packaging segment, which was sold in February 2019 (see Note 7), resulted in a decrease in the loss allowance in 2019 of €25 thousand. IFRS 9 Financial instruments quick and best snapshot

Debt securities

The Group limits its exposure to credit risk by investing only in liquid debt securities and only with counterparties that have a credit rating of at least A2 from [Rating Agency X] and A from [Rating Agency Y]. (IFRS 7 33(a)–(b), IFRS 7 35B(a), IFRS 7 35F(a), IFRS 7 35G(a)–(b)) IFRS 9 Financial instruments quick and best snapshot

The Group monitors changes in credit risk by tracking published external credit ratings. To determine whether published ratings remain up to date and to assess whether there has been a significant increase in credit risk at the reporting date that has not been reflected in published ratings, the Group supplements this by reviewing changes in bond yields and, where available, credit default swap (CDS) prices together with available press and regulatory information about debtors. IFRS 9 Financial instruments quick and best snapshot

12-month and lifetime probabilities of default are based on historical data supplied by [Rating Agency X] for each credit rating and are recalibrated based on current bond yields and CDS prices. Loss given default (LGD) parameters generally reflect an assumed recovery rate of 40% except when a security is credit-impaired, in which case the estimate of loss is based on the instrument’s current market price and original effective interest rate. IFRS 9 Financial instruments quick and best snapshot

The exposure to credit risk for debt securities at amortised cost, FVOCI and FVTPL at the reporting date by geographic region was as follows. (IFRS 7 34(a), IFRS 7 34(c))credit risk for debt securities

The following table presents an analysis of the credit quality of debt securities at amortised cost, FVOCI and FVTPL. It indicates whether assets measured at amortised cost or FVOCI were subject to a 12-month ECL or lifetime ECL allowance and, in the latter case, whether they were credit-impaired. (IFRS 7 34(a), IFRS 7 35M, IFRS 7 B8I)table presents an analysis of the credit quality of debt securitie

An impairment allowance of €55 thousand (2018: €19 thousand) in respect of debt securities at amortised cost with a credit rating of D was recognised because of significant financial difficulties being experienced by the debtors. The Group has no collateral in respect of these investments. (IFRS 7 35I)

The movement in the allowance for impairment for debt securities at amortised cost during the year was as follows. (IFRS 7 35H, IFRS 7 42P)impairment for debt securities

The following contributed to the increase in the loss allowance during 2019. (IFRS 7 35I, IFRS 7 B8D)

  • An issuer of a debt security with a gross carrying amount of €109 thousand entered administration. The Group classified the debt security as credit-impaired and increased the loss allowance by €25 thousand. IFRS 9 Financial instruments quick and best snapshot
  • A recession in [Country Y] in the fourth quarter of 2019 resulted in credit rating downgrades and transfers to lifetime ECL measurement, with consequent increases in loss allowances of €33 thousand. IFRS 9 Financial instruments quick and best snapshot

The movement in the allowance for impairment in respect of debt securities at FVOCI during the year was as follows. (IFRS 7 16A, IFRS 7 35H, IFRS 7 42P)

allowance for impairment in respect of debt securities

Cash and cash equivalents

The Group held cash and cash equivalents of €1,504 thousand at 31 December 2019 (2018: €1,850 thousand). The cash and cash equivalents are held with bank and financial institution counterparties, which are rated AA- to AA+, based on [Rating Agency Y] ratings. (IFRS 7 33(a)–(b), IFRS 7 34(a), IFRS 7 35B(a), IFRS 7 35F(a), IFRS 7 35G(a)–(b), IFRS 7 35M)

Impairment on cash and cash equivalents has been measured on a 12-month expected loss basis and reflects the short maturities of the exposures. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties.

The Group uses a similar approach for assessment of ECLs for cash and cash equivalents to those used for debt securities.

The amount of impairment allowance at 31 December 2019 is €1 thousand (2018: €1 thousand). (IFRS 7 35H, IFRS 7 42P)

Derivatives

The derivatives are entered into with bank and financial institution counterparties, which are rated AA- to AA+, based on [Rating Agency Y] ratings. (IFRS 7 33(a)–(b), IFRS 7 34(a))

Guarantees

The Group’s policy is to provide financial guarantees only for subsidiaries’ liabilities. At 31 December 2019 (31 December 2018), the Company has issued a guarantee to certain banks in respect of credit facilities granted to two subsidiaries (see Note 33(B)).

Continue reading (iii) liquidity risk; and (iv) market risk  in hedge accounting (IFRS 9).

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