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IFRS 9 Financial Instruments Measurement

IFRS 9 uses the following criteria for determining the classification as of financial assets at Amortized Cost, FVOCI or FVPL categories apply:

The critical issues for classifying and measuring financial assets are whether:

Both of these tests have to be met in order to account for an instrument at Amortized Cost or … Read more

IFRS 9 The Business Model Test

Under IFRS 9, a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI is whether the asset is part of a group or portfolio that is being managed within a business model whose objective is to collect contractual cash flows (Amortized Cost), or to both collect contractual cash flows and to sell (FVOCI). Otherwise, the asset is measured at FVPL. The key elements of this test are listed below.

Observe: IFRS 9 recommends applying the Business Model test before applying the SPPI test because this may eliminate the need to apply the more detailed SPPI test, which is applied at a more granular level.

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The Risk and Rewards Test and the Control Test

Based on criteria in previous steps it has been concluded that an entity has transferred a financial asset (see IFRS 9 B3.2.1).

The central questions here are: The Risk and Rewards Test and the Control Test

1) has the entity transferred or retained substantially all risks and rewards?

and

2) has the entity retained control of the asset(s)? The Risk and Rewards Test and the Control Test

Which leads to 3 possible outcomes, or in a diagram:

The risk and rewards test The Risk and Rewards Test and the Control Test

These steps are set out in paragraphs IFRS 9 3.2.6(a)-(b). The three potential outcomes of this evaluation are (see diagram above):

  1. transfer of substantially all risks and
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Pass-through testing

Here are some examples to learn which types of financial instruments/transactions qualify for accounting for a pass-through arrangement. An explanation of a pass-through arrangement and the three conditions a vehicle has to meet in qualifying for a pass-through are provided in ‘Pass-through arrangements‘  If the originator/transferor meets these three conditions the assets transferred are derecognised by the transferor.

Transfer of disproportionate share in pass-through

Question

Can the transfer of a disproportionate share of the cash flows from a loan meet the conditions for a pass-through arrangement?

Background

Entity M originates a five-year interest-bearing loan of 100. M then enters into an agreement with entity N in which, in exchange for a cash payment of 85, M Read more

Derecognise a transfer of a financial instrument or not?

Here are some examples regarding transfers of financial instruments and the question of whether or not these should be derecognised (and why)?

Transfer versus agency relationship

Question

Is the transfer of securities to a custodian a transfer of the contractual rights under IFRS 9 3.2.4(a)?

Background

Entity K enters into an arrangement with bank L whereby L will manage K’s securities. K transfers the securities to a safe custody account of L. L will receive a management fee for its service. K can decide when and which assets should be sold and can require a surrender of the securities at any time.

Solution

No. The transfer of securities to a custodian is not a transfer under IFRS 9 Read more

Derecognise a sale of a financial instrument or not?

Here are some examples regarding sale transactions of financial instruments and whether or not these should be derecognised or not (and why)?

Sale of disproportionate interest

Question

Can the sale of the rights to the first of any cash collections from a group of similar financial assets be considered a part of those assets for derecognition purposes?

Background

Entity A originates a portfolio of similar five-year interest-bearing loans of 10,000. A then enters into an agreement with entity B. A agrees to pay to B the first 9,000 of cash collected from the portfolio plus interest in exchange for an upfront cash payment from B. A retains the rights to the last 1,000 plus interest, representing a subordinated interest in … Read more