… The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payment where applicable. [IFRS 9 paragraph 6.5.5], An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. Financial assets designated at FVTPL You will begin to understand what you could not figure out before. An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5], Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument during its expected life. This approach shall also be used to discount expected credit losses of financial guarantee contracts. IFRS 9 introduced new requirements for classifying and measuring financial assets that had to be applied starting 1 January 2013, with early adoption permitted. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be approximately proportional to the overall variability in cash flows of the group: it is a hedge of foreign currency risk; and, the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume [IFRS 9 paragraph 6.6.1], the cumulative gain or loss on the hedging instrument from inception of the hedge; and. One of the key differences introduced by IFRS 9 Financial Instruments (“IFRS 9”) relates to the manner in which financial assets are classified. Under IFRS 9, subsequent to initial recognition, an entity classifies its financial assets as measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) depending on the (a) the entity’s business model for managing the assets, and (b) the contractual cash flow characteristics of the financial assets. All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in 'other comprehensive income'. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. 90 IFRS IN PRACTICE 2019 fi IFRS 9 FINANCIAL INSTRUMENTS. On initial recognition, a financial asset is classified into one of the three primary measurement categories: – amortised cost; –air value through other comprehensive income (FVOCI); or f significant financial difficulty of the issuer or borrower; a breach of contract, such as a default or past-due event; the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted the borrower a concession that would not otherwise be considered; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset because of financial difficulties; or. This self-study course addresses requirements of the following standards: IFRS 9, Financial Instruments Assets = Liabilities + Equity. [IFRS 9 paragraphs 5.5.3 and 5.5.15], Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss. Recognition and measurement – financial assets. Value changes are recognised in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging instrument in an eligible hedging relationship. 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. [IFRS 9 Appendix A]. There are three types of hedging relationships: Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). Access notes and question bank for CFA® Level 1 authored by me at AlphaBetaPrep.com. Click for IASB Press Release (PDF 33k). The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor.  [IFRS 9 paragraphs B5.5.31 and B5.5.32], An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed provision rate applies depending on the number of days that a trade receivable is outstanding). If the fair value of an embedded derivative cannot be reliability measured, it is measured as the difference between fair value of the hybrid contract and the fair value of the host contract. According to IFRS 9, When an entity first recognizes a financial asset, it classifies based on the entity’s business model for managing the asset and the asset’s contractual cash flow (SPPI test) characteristics, as further described below. leasing contracts, insurance contracts, contracts for the purchase or sale of a non-financial items). [IFRS 9 paragraphs 6.7.3 and 6.7.4], This site uses cookies to provide you with a more responsive and personalised service. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not passed (see above). IFRS 9 does not define this term, instead, an NFI has to define it in the context of its type of financial instruments. NZ IFRS 9 Financial Instruments For-profit Specifies the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. A debt instrument that meets the following two conditions must be measured at amortised cost (net of any write down for impairment) unless the asset is designated at FVTPL under the fair value option (see below): Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments. If this too cannot be reliability measured, the entity measures the whole hybrid contract at FVTPL. [IFRS 9 paragraph 6.5.10], Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. The impairment model in IFRS 9 is based on the premise of providing for expected losses. intrinsic value of the option, as the hedging instrument. [IFRS 9 paragraph 6.5.4]. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL because they were not closely related to the host financial asset will no longer be separated. An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. [IFRS 9 paragraph 6.5.8], If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge adjustment is amortised to profit or loss based on a recalculated effective interest rate. [IFRS 9 paragraph 6.5.6]. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount. IFRS 9 for corporates CLASSIFICATION AND MASURMNT Impairment Hedge accounting Other requirements Further resources. In April 2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro Hedging. The consequence of credit risk increasing significantly since initial recognition is that a loss allowance, equal to lifetime ECLs, must be recognised. [IFRS 9 paragraph 5.5.5], With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. A financial asset is a liquid asset that represents—and derives value from—a claim of ownership of an entity or contractual rights to future payments from … If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the qualifying criteria are no longer met and the instrument is not otherwise required to be measured at FVTPL. [IFRS 9 paragraph 5.5.16], For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses. The objective of IFRS 9 is to ‘…establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.’ (para 1.1). On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for entities that issue insurance contracts within the scope of IFRS 4: An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. Under IFRS 9, a financial asset is initially measured at fair value plus transaction costs, unless it is carried at fair value through profit or loss, in which case transaction costs are immediately expensed. It includes observable data that has come to the attention of the holder of a financial asset about the following events: Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. As a result, for a fair value hedge of interest rate risk of a portfolio of financial assets or liabilities an entity can apply the hedge accounting requirements in IAS 39 instead of those in IFRS 9. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is low. [IFRS 9, paragraph 5.1.1], Subsequent measurement of financial assets. [IFRS 9 paragraph 6.5.11], When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12], A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. Financial assets measured at amortised cost; Financial assets mandatorily measured at FVTOCI; Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL); Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL); Lease receivables within the scope of IAS 17, Contract assets within the scope of IFRS 15, the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or. [IFRS 9, paragraphs 3.3.2-3.3.3]. The application guidance provides a list of factors that may assist an entity in making the assessment. Classification of financial assets. IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. The component may be a risk component that is separately identifiable and reliably measurable; one or more selected contractual cash flows; or components of a nominal amount. Despite the foregoing requirements, at initial recognition, an entity may irrevocably designate any financial asset to be measured at FVTPL if doing so would reduce or eliminate a recognition or measurement inconsistency (i.e. include the new general hedge accounting model; allow early adoption of the requirement to present fair value changes due to own credit on liabilities designated as at fair value through profit or loss to be presented in other comprehensive income; and, doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, or. [IFRS 9 paragraph 5.4.1], In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9, paragraph 4.3.1]. IFRS 9 Changes to Financial Assets Accounting and its Tax Implications. Once entered, they are only Subsequent measurement of financial liabilities, IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. IFRS 9 simplifies the classification requirements of financial assets and liabilities. [IFRS 9 paragraph 6.3.7]. The following decision tree shows how financial assets that are debt instruments are classified under IFRS 9: As shown in the table and decision tree above, the classification of a financial asset that is a debt instrument is based on whether that financial asset will pass the contractual cash flow characteristics test and a business model test. It was last revised in October 2017. Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses. IFRS 9 is built on a logical, single So far, the result consists of the publication of IFRS 9 “Financial Instruments” issued by IASB and an exposure draft on financial instruments issued by FASB. [IFRS 9 paragraph B5.5.35], To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an approximation thereof) that was determined at initial recognition. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss. These various derecognition steps are summarised in the decision tree in paragraph B3.2.1. IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). the seniority of the financial instrument matches that of the instruments that can be delivered in accordance with the credit derivative. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). If the entire contract is designated as the hedging instrument, hedge. 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