Embedded derivatives: separation of host

[From Guidance on implementing IFRS 9 Financial Instruments]

Embedded derivatives: separation of host debt instrument

If an embedded non-option derivative is required to be separated from a host debt instrument, how are the terms of the host debt instrument and the embedded derivative identified? For example, would the host debt instrument be a fixed rate instrument, a variable rate instrument or a zero coupon instrument?

The terms of the host debt instrument reflect the stated or implied substantive Continue reading

Regular way contracts: forward contract

[From Guidance on implementing IFRS 9 Financial Instruments]

Regular way contracts: forward contract

Entity ABC enters into a forward contract to purchase 1 million of M’s ordinary shares in two months for CU10 per share. The contract is with an individual and is not an exchange-traded contract. The contract requires ABC to take physical delivery of the shares and pay the counterparty CU10 million in cash. M’s shares trade in an active public market at an average Continue reading

Description of Derivatives

[From Guidance on implementing IFRS 9 Financial Instruments]

B.2 Definition of a derivative: examples of derivatives and underlyings

What are examples of common derivative contracts and the identified underlying?

IFRS 9 defines a derivative as follows:

A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:

  1. Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange
Continue reading

Descriptions of Financial Instruments

[From Guidance on implementing IFRS 9 Financial Instruments]

B.1 Definition of a financial instrument: gold bullion

Is gold bullion a financial instrument (like cash) or is it a commodity?

It is a commodity. Although bullion is highly liquid, there is no contractual right to receive cash or another financial asset inherent in bullion.

B.2 Definition of a derivative: examples of derivatives and underlyings

What are examples of common derivative contracts and the identified underlying?

IFRS 9 Continue reading

Practice of settling net: forward contract to purchase a commodity

[From Guidance on implementing IFRS 9 Financial Instruments]

Entity XYZ enters into a fixed price forward contract to purchase 1 million kilograms of copper in accordance with its expected usage requirements. The contract permits XYZ to take physical delivery of the copper at the end of twelve months or to pay or receive a net settlement in cash, based on the change in fair value of copper. Is the contract accounted for as a derivative?

While such Continue reading

Example IFRS 9 – Applying the ‘own use’ scope exemption

[IFRS 9.2 Scope]

The case:

Entity XYZ enters in to a contract to buy 100 tonnes of copper for CU200/tonne. The Coppercontract permits XYZ to take physical delivery of the copper at the end of 12 months or to settle net in cash, based on the difference between the spot price in 12 months’ time and CU200/tonne. Entity XYZ has a practice of settling net in cash (i.e. if the copper price at the end of year 1 is … Continue reading

Classification of financial assets

Whether a financial asset is classified as at amortised cost, at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVPL) is mainly based on the business model assessment and the solely payments of principal and interest (SPPI-) test.

Business model hold to collect

Ok so the financial instrument to classify and measure is a debt instrument.

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

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

The objective of the ‘hold to collect’ business model is to hold financial assets to collect their contractual cash flows, … Continue reading

Business model hold to collect and sell

Ok so the financial instrument to classify and measure is a debt instrument and the business model is not to hold to collect.

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

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

Under the ‘hold to collect and sell’ business model, the … Continue reading

The SPPI test

Ok so the financial instrument to classify and measure is a debt instrument, the business model is to hold to collect.

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.

A more elaborate explanation and examples of assets likely/not likely to meet the SPPI test.

The question is: Are the payments Continue reading