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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Best short read – IFRS 9 Basis adjustment

Basis adjustment

is used in hedge accounting and is the adjustment on an individual asset basis of the hedged item or portfolio basis of hedged items using a systemic and rational method for changes in business risks (for example interest rate risk, foreign currency risk)  occurring throughout the hedging relationship’s life. The name comes from the fact that the (measurement) basis of the hedged item is always amortised costs

Basis adjustments are accounted for in the same manner as other components of the amortized cost basis of the hedged item. Partial dedesignation is permitted when expectations about the last of layer have changes such that the remaining amount is expected to be outstanding at the end of the hedging relationship is less than the hedged item. Partial dedesignation is required for the amount no longer expected to be outstanding. The basis adjustment associated with the amount of the hedged item dedesignated is allocated to all remaining assets in the closed portfolio using a systemic and rational method.

When the last layer is breached, full dedesignation is required. An entity would recognize a portion of the basis adjustment immediately on profit or loss. The remaining outstanding basis adjustment would be allocated to all remaining individual assets in the closed portfolio using a systemic and rational method.

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Excellent Study IFRS 9 Eligible Hedged items

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) FRS 9 Eligible Hedged itemsrecognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

  1. exposes the entity to risk of changes in fair value or future cash flows and
  2. is designated as being hedged

The hedge item can be:

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.

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IFRS 7 Financial instruments Disclosures High level summary

Scope IFRS 7 Financial instruments Disclosures High level summary

IFRS 7 applies to all recognised and unrecognised financial instruments (including contracts to buy or sell non-financial assets) except:

  • Interests in subsidiaries, associates or joint ventures, where IAS 27/28 or IFRS 10/11 permit accounting in accordance with IAS 39/IFRS 9
  • Assets and liabilities resulting from IAS 19
  • Insurance contracts in accordance with IFRS 4 (excluding embedded derivatives in these contracts if IAS 39/IFRS 9 require separate accounting)
  • Financial instruments, contracts and obligations under IFRS 2, except contracts within the scope of IAS 39/IFRS 9
  • Puttable instruments (IAS 32.16A-D).

Disclosure requirements: Significance of financial instruments in terms of the financial position and performance

Statement of financial position

Statement of

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IFRS 9 Financial instruments quick and best snapshot

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

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments 4

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

IFRS 9 Financial instruments

(Source https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance)

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
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High level overview IFRS 9 Hedge accounting

High level overview IFRS 9 Hedge accounting

IFRS 9 Hedge accounting

Criteria to apply hedge accounting (all criteria must be met)

(i) Hedging Relationship

Must consist of:

  • Eligible hedging instruments
  • Eligible hedged items.

(ii) Designation and Documentation

Must be formalised at the inception of the hedging relationship, includes:

  • The hedging relationship
  • Risk management strategy and objective for undertaking the hedge
  • The hedged item and hedging instrument
  • How hedge effectiveness will be assessed.

(ii) Designation and Documentation

Must be formalised at the inception of the hedging relationship, includes:

  • The hedging relationship
  • Risk management strategy and objective for undertaking the hedge
  • The hedged item and hedging instrument
  • How hedge effectiveness will be assessed.

Eligible hedging instruments

Only those from contracts with EXTERNAL

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Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. The detailed ‘mechanics’ of the consolidation process vary from one group to another, depending on the group’s structure, history and financial reporting systems. IFRS 10 and much of the literature on consolidation are based on a traditional approach to consolidation under which the financial statements (or, more commonly in practice, group ‘reporting packs’) of group entities are aggregated and then adjusted on each reporting date.

IFRS 7 Other price risks Step-by-step

IFRS 7 Other price risks Step-by-step – Other price risks is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures. Other price risks is part of market risk (the other main market risk categories being currency risk and interest rate risk) and is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer or by factors affecting all similar financial instruments traded in the market. IFRS 7 Other price risks Step-by-step

Management should disclose information … Read more

Natural disasters Hedge accounting

Natural disasters Hedge accounting, how to deal with this combination, contracts go on but the business dies….. Here is how to report such issues under IFRS.

The natural disaster and potential subsequent events can disrupt many business transactions that may be postponed or cancelled. For example, entities may have been forecasting purchases of local goods or sales of their goods to local entities. Natural disasters Hedge accounting

Prior to the disaster, many such transactions may have constituted ‘highly probable’ hedged transactions in cash flow hedges under IFRS 9 Financial instruments (or IAS 39, if still applicable). However, purchases and sales that were considered highly probable a few weeks prior to the natural disaster, may no longer be highly probable (in … Read more