IFRS 7 Complete Maturity analysis disclosure

IFRS 7 Complete Maturity analysis disclosure – IFRS 7 requires certain disclosures to be presented by category of an instrument based on the IFRS 9 recognition and measurement categories of financial instruments.

Certain other disclosures are required by class of financial instrument. For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7 6]

The two main categories of disclosures required by IFRS 7 are:

  1. information about the significance of financial instruments [IFRS 7 7 – 30]
  2. information about the nature and extent of risks arising from financial instruments [IFRS 7 31 – 42]

So IFRS 7 bets … Read more

Introduction IFRS 17 Insurance contracts

Introduction IFRS 17 Insurance contracts – More than 20 years in development, IFRS 17 represents a complete overhaul of accounting for insurance contracts. The new standard applies a current value approach to measuring insurance contracts and recognises profit as insurers provide services and are released from risk. The profit or loss earned from underwriting activities are reported separately from financing activities. Detailed note disclosures explain how items like new business issued, experience in the year, cash receipts and payments, and changes in assumptions affected the performance and the carrying amount of insurance contracts.

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts held and investment contracts with discretionary participation features an entity Read more

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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Loss allowance

Loss allowance is an approach for the prudence or conservatism principle. Assets should not be overstated, liabilities not understated. Better save than sorry!

Classification of financial assets

Classification of financial assets at amortised cost, at fair value through other comprehensive income (FVOCI) or at 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.

A financial asset is classified into a measurement category at inception and is reclassified only in rare circumstances.

The classification and measurement decision tree supports a structured approach to determine whether cash flows are generated from holding the financial assets, selling the financial assets or both (business model assessment). Then the SPPI check examines all essential instrument features that are relevant for classification.

The available classification and measurement classifications are:

  • Financial assets valued at amortised costs,
  • Financial
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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 FVPL
Other FVPL FVPL
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What is a debt instrument?

What is a debt instrument – A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with the terms of a contract (interest, repayment, redemption, provide collateral). Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a lender and a borrower. These instruments provide a way for market participants to easily transfer the ownership of debt obligations from one party to another. What is a debt instrument?

Individuals, businesses and governments use common types of debt instruments, such as loans, bonds and debentures, to raise capital or generate investment income. Debt instruments essentially act as an IOU between … 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 and the differences with IAS 39, as per below table:

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 contractual cash flow characteristics test”). (IFRS 9.4.1.2)

Investments classified as held to maturity under IAS 39 and measured at amortized cost will likely fall
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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 loan As the loan is in a ‘hold to collect’ business model, the key classification question is whether the loan meets the Solely Payments of Principal and Interest test (the SPPI test).

Despite the fact that the loan has contractual payments of principal and interest, the additional contingent payment linked to the appreciation in the property value must be considered in order to determine whether the loan meets the SPPI test. This because IFRS 9 requires Read more