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
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The best 1 in overview – IFRS 9 Impairment requirements

IFRS 9 Impairment requirements

forward-looking information to recognise expected credit losses for all debt-type financial assets

 

Under IFRS 9 Impairment requirements, recognition of impairment no longer depends on a reporting entity first identifying a credit loss event.

IFRS 9 instead uses more forward-looking information to recognise expected credit losses for all debt-type financial assets that are not measured at fair value through profit or loss.

IFRS 9 requires an entity to recognise a loss allowance for expected credit losses on:

  • debt instruments measured at amortised cost
  • debt instruments measured at fair value through other comprehensive income
  • lease receivables
  • contract assets (as defined in IFRS 15 ‘Revenue from Contracts with Customers’)
  • loan commitments that are not measured at fair value through profit or loss
  • financial guarantee contracts (except those accounted for as insurance contracts).

IFRS 9 requires an expected loss allowance to be estimated for each of these types of asset or exposure. However, the Standard specifies three different approaches depending on the type of asset or exposure:

IFRS 9 Impairment requirements

* optional application to trade receivables and contract assets with a significant financing component, and to lease receivables

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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

1 Best and Fine read – IFRS 9 Reclassification of financial instruments

IFRS 9 Reclassification of financial instruments

IFRS 9 Reclassification of financial instruments, this section looks at the circumstances in which financial assets are reclassified, and their measurement on reclassification. Financial liabilities cannot be reclassified. [IFRS 9 4.4.2]

For financial assets, reclassification is required between FVPL, FVOCI and amortised cost, if and only if the entity’s business model objective for its financial assets changes so its previous model assessment would no longer apply (see below). [IFRS 9 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business model. An entity does not restate any previously recognised Read more

Classification for investments in bonds

Classification for investments in bondsClassification for investments in bonds – Under IFRS 9, bonds should be classified and measured based on an entity’s business model for managing the bonds and their contractual cash flow characteristics (SPPI Test) (see table below).

The business model refers to how an entity manages bonds in order to generate cash flows—either by collecting contractual cash flows, selling the bonds or both. An entity is also required to determine whether the bond’s contractual cash flows are “Solely Payments of Principal and Interest” (SPPI) on the principal amount outstanding.

The entity must assess its business model by looking at several factors, including the expected frequency, volume and timing of asset sales, the measurement of financial asset performance, … Read more

Instruments with par prepayment features

Debt instruments with par  prepayment features that give rise to compensation being paid to the party triggering the possibility to be measured at amortised cost or fair value through other Instruments with par prepayment featurescomprehensive income (FVOCI) in certain circumstances. Instruments with certain par prepayment features

If a financial asset would otherwise meet the SPPI test, but fails to do so only as a result of a contractual term that permits or requires prepayment before maturity, or permits or requires the holder to put the instrument back to the issuer, then the asset can be measured at amortised cost or FVOCI if:

  • the relevant business model test is satisfied;
  • the entity acquired or originated the financial asset at a premium or discount to the
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Financial liabilities not at amortised costs

Financial liabilities not at amortised costs – 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 caused by such a change. [IFRS 9 BCE 12] Financial liabilities not at amortised costs

Therefore under IFRS 9, financial liabilities after initial recognition are subsequently classified as measured at amortised cost, except for the following instruments. [IFRS 9 4.2.1IFRS 9 4.2.2]

Financial liabilities not at amortised costs

Measurement requirements

Financial liabilities that are held for trading – including derivatives

FVTPL

Financial liabilities that

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Commitments in financial statements

Commitments 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 items at specified prices. Commitments in financial statementsCommitments in financial statements

A financial commitment is a commitment to an expense at a future date. Commitments in financial statements

A capital commitment is the projected capital expenditure a company commits to spend on non-current assets over a period of time. Commitments in financial statements

Financial or capital commitment revolves around the designation of funds for a particular purpose including any future liability. Most commonly, … 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 FVPL
Other FVPL FVPL
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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 loanAs 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