Financial Instrument

Chapter 1: Financial Instruments

1 Overview, Scope & Definitions

1.1 Overview
The following are the standards which deal primarily with the accounting for financial
instruments:
o IAS 32 – Financial Instrument – Presentation
o IAS 39 – Financial Instruments: Recognition and Measurement
o IFRS 9 – Financial Instrument: Disclosure
o IAS 32 – Financial Instruments: Other Aspect of Financial Instrument
In addition, several interpretations address the requirements of these standards, including:
o IFRIC 2 – Members’ Shares in Co-operative Entities and Similar Instruments;
o IFRIC 16 – Hedges of a Net Investment in a Foreign Operation; and
o IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments.
1.2 Scope

1.3 Definition
Financial Any contract which gives rise to both a financial asset of one entity &
Instrument a financial liability or equity instrument of another entity.
Financial Financial asset. Any asset that is:
Assets (a) cash, includes deposits of cash with banks;
(b) An equity instrument of another entity (e.g. investment in share of
Standard Chartered Bank);
(c) A contractual right to receive cash or another financial asset] from
another entity (e.g. trade receivables, loan receivables, bonds
receivables);
(d) A contractual right to exchange financial assets/liabilities with
another entity under potentially favourable conditions to the
entity;
(e) A contract that will or may be settled in the entity’s own equity
instruments and is:
 a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity’s own equity
instruments; or
 a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity’s own equity instruments. For
this purpose, the entity’s own equity instruments do not
include certain puttable and similar financial instruments
classified by exception as equity instruments or instruments
that are themselves contracts for the future receipt or delivery
of the entity’s own equity instruments.
Financial Any liability that is:
Liabilities (a) A contractual obligation:
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Financial Instrument

 To deliver cash or another financial asset to another entity,

(e.g. settling creditor by paying cash or
 To exchange financial instruments with another entity under
conditions that are potentially unfavourable; or
(b) A contract that will or may be settled in the entity's own equity
instruments and is:
 A non-derivative for which the entity is or may be obliged to
deliver a variable number of the entity's own equity
instruments; or
 A derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity's own equity instruments.
Equity
Equity Any contract that evidences a residual interest in the assets of an entity
Instrument after deducting all of its liabilities.
Equity Holder can-not claim on the company, if he/she can claim it is
not equity it is someone else.

2 Classification

3 Measurement

4 Derecognition of Financial Assets & Financial Liabilities

5 Impairment of the Financial Assets

5.1 Overview of the Impairment of the Financial Assets:

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The
following table shows the scope & out of the scope of Impairment Requirements of IFRS 9
In Scope Out of Scope
(a) Financial assets measured at amortized cost or at (a) Equity Instruments
FVTOCI – these includes loans, trade receivable, (b) Other Financial instruments
bank balance & debt securities measured at FVTPL
(b) Lease Receivable
(c) Contract Receivable
(d) Loan Commitments issued that are not measured at
FVTPL
(e) Financial Guarantee contracts issued that are in the
scope of IFRS 9 & are not measured at FVTPL

Incurred Credit Loss model vs Expected Credit Loss Model

IAS 39 incurred loss model was criticized for delaying the recognition of losses, for the complexity
of having multiple impairment
Application of the impairment requirements at a reporting date

Is the financial instrument a purchased or originated credit- Yes

Recognise change in
impaired financial asset? lifetime expected
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credit losses
Financial Instrument

No

Is the assets [a trade receivable or a contract assets with a

significant financing component or a lease receivable] for Yes
which the lifetime expected credit losses measurement has
been elected?

No Recognise lifetime
expected
Yes credit losses
Is the assets [a trade receivable or a contract assets]
without a significant financing component?
No
Has there been a significant increase in credit risk since Yes
initial recognition?
No
Recognise 12-month expected credit losses

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