Embedded derivatives best 1 to read

Embedded derivatives are a component of a hybrid contract that also includes a non-derivative host, so some cash flows vary similar to a stand alone derivative

Accounting policies for financial instruments

Accounting policies for financial instruments – a quite complete overview of all kinds of accounting issues for financial instruments such as measurement categories, initial recognition, amortised costs and effective interest rate, financial assets, impairment, derecognition, financial liabilities, derecognition, and derivatives. Enjoy it!

Summary of significant financial instruments accounting policies

1 Financial assets and liabilities

1.1 Summary of measurement categories

The insurer classifies its financial assets into the following categories:

Business model and cash flow characteristics

Type of financial instruments

Classification

Hold to collect business model and solely payments of principal and interest

Cash and cash equivalents

Amortised cost (AC)

Hold to collect and sell business model and solely payments of principal and interest

Government bonds

Fair value through other

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IFRS 9 Classification of financial assets

Classification of financial assets , at fair value through other comprehensive income (FVOCI) or Read more

Loan receivable classification and measurement

Loan receivable classification and measurement – Once it has been determined that a loan receivable is within the scope of IFRS 9, it must be classified into one of three categories:

  1. Amortised cost; Loan receivable classification and measurement
  2. Fair Value through Profit or Loss (FVPL); or Loan receivable classification and measurement
  3. Fair Value through Other Comprehensive Income (FVOCI).

The classification decision is based on (i) the business model within which the loan is held and (ii) whether its contractual cash flows meet the ‘solely payments of principal and interest’ (SPPI) test, as illustrated below:

Business model >  Hold to collect Hold to collect and sell Other
Cash Flow Characteristic SPPI Amortised costs FVOCI Read more

What is a debt instrument?

What is a – A Read more

Claims against an entity with different seniorities

Claims against an entity with different seniorities – The following are a list of distinguished claims against an entity with a short explanation. Some claims take priority over other claims (‘are senior to’), which is also why the liquidation example is used. It also shows different types of equity claims, that also have a hierarchy between themselves regarding their seniority.

In finance, seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. Seniority can refer to either debt or preferred stock. Senior debt must be repaid before subordinated (or junior) debt is repaid. Each security, either debt or equity, that a company issues has a specific seniority or ranking. Bonds that … Read more

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification provides an overview of the financial asset classification requirements under IFRS 9, starting with the following well known decision tree:

IFRS 9 Financial asset classification

Here is the narrative for this table and the financial asset classification requirements under IFRS 9 including the differences with IAS 39:

Categories Conditions to be Met Impact
Amortized Cost The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows (“business model 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 (“SPPI Read more

IFRS 9 Profit participating loan

IFRS 9 Profit participating loan – Parent A advances €1m to Subsidiary B on 1 January 2018 with the following terms:

  • 5% interest;
  • 30% of the annual appreciation in the property value;
  • €1m repayable in 5 years – December 2022.

Classification

IFRS 9 Profit participating loanAs the loan is in a ‘hold to collect’ business model, the key classification question is whether the loan meets the Read more

Commitments in financial statements

in financial statements are items that are not reported as liabilities as of the balance sheet date. Some of these items are reported in the notes to the financial statements. Examples include non-cancelable (as at balance sheet date) binding contracts to rent space in the future or to purchase … Read more

Financial liabilities not at amortised costs

Financial liabilities not – IFRS 9 retains almost all of the existing requirements from IAS 39 on the classification of financial liabilities – including those relating to embedded derivatives – because the Board believes that the benefits of changing practice would not outweigh the costs of the disruption Read more