Debt instruments at FVOCI

Debt instruments at FVOCI – A debt instrument is classified as subsequently measured at fair value through other comprehensive income (FVOCI) under IFRS 9 if it meets both of the following criteria:

  • Hold to collect and sell business model test: The asset is held withi Series provision of distinct goods or services n a business model whose objective is achieved by both holding the financial asset in order to collect contractual cash flows and selling the financial asset; and
  • SPPI contractual cash flow characteristics 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.

This business model typically involves greater frequency and volume of sales than the hold Read more

IFRS 9 The Business Model Test

IFRS 9 The Business Model Test is a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI. The test is about 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 from the non-equity financial asset (Amortized Cost), or to both collect contractual cash flows from the non-equity financial asset and sell the non-equity financial asset (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

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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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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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Factoring and reverse factoring

Factoring and reverse factoring – There is no specific guidance in IFRS on the classification of cash flows from traditional factoring or reverse factoring arrangements. However, there is some guidance in the Accounting Standards that is helpful in determining the most appropriate presentation.

First and foremost, IAS 1 Presentation of Financial Statements requires that the statement of financial position include line items that present the following, including:

  • Trade and other payables Factoring and reverse factoring
  • Financial liabilities (excluding trade and other payables and provisions).  Factoring and reverse factoring

IAS 1 70 also provides a useful description of trade payables, stating that: “Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of … Read more

Factoring without recourse

Factoring without recourse – This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity G enters into an agreement to assign its portfolio of €20 million trade receivables without recourse to Factor H. The receivables have 60-day terms and are subject to normal warranties on the existence of the receivables at the date of transfer (for example, if a customer returns the goods purchased because they are faulty, Read more

Factoring with recourse

Factoring with recourse – This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity J enters into an agreement to assign its portfolio of €20 million trade receivables with recourse to factor K. The receivables have 90-day terms and are subject to normal warranties on the existence of the receivables at the date of the transfer (for example, if a customer returns the goods purchased because they Read more

IFRS 9 Classification and Measurement of Financial Instruments

IFRS 9 Classification and Measurement of Financial Instruments – IFRS 9 uses the following criteria for determining the classification as of financial assets at Amortized Cost, FVOCI or FVPL categories apply: IFRS 9 Classification and Measurement of Financial Instrumen

IFRS 9 Classification and Measurement of Financial Instruments

The critical issues for classifying and measuring financial assets are whether: IFRS 9 Classification and Measurement of Financial Instruments

  • The objective of the entity’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (“the Business Model test”), and

  • The contractual cash flows of an asset give rise to payments on specified dates that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding (“the SPPI

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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 collectHold to collect and sellOther
Cash Flow CharacteristicSPPIAmortised costsFVOCIFVPL
OtherFVPLFVPL
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IFRS 9 Financial Instruments Measurement

IFRS 9 Financial Instruments Measurement uses the following criteria for determining the classification and measurement of financial assets at Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL):

IFRS 9 Financial Instruments Measurement

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

  • The objective of the entity’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (“the Business Model test”), and

  • The contractual cash flows of an asset give rise to payments on specified dates that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding (“the SPPI test”). IFRS 9 Financial Instruments Measurement

Both of these … Read more