IFRS 7,9, & 32 Financial Instruments: Welcome! July 31, 2019

IFRS 7,9, & 32
FINANCIAL INSTRUMENTS
Welcome!
Seek Wisdom, Elevate Your

Intellect, and Serve Humanity!
Addis Ababa University July 31, 2019
This material is the property of Department of Accounting and Finance, CoBE, AAU. Permission must be
obtained from the Department prior to reproduction 1
APPLICABLE STANDARDS
 IFRS 9 Recognition and Measurement
 IFRS 7 Disclosures
 IAS 32 Financial Instruments: Presentation
2
Objective
 To establish principles for recognizing and measuring:
 financial assets,
 financial liabilities and
 some contracts to buy or sell non-financial items.
 To present information about financial instruments.

 To disclose information about financial instruments.
Scope
 Exclusions:
 Interests in controlled entities, associates and joint ventures (IFRS 10, IAS 27, IAS 28 IFRS 11);
 Rights and obligations under leases to which IFRS 16 except for derecognition and
impairment treatments;
 Employers’ rights and obligations under employee benefit plans, to which IAS 19 applies;
 Rights and obligations arising under an insurance contract to which IFRS 17 applies;
 Financial instruments, contracts and obligations under share-based payment transactions
to which IFRS 2 applies
 Rights and obligations within the scope of IFRS 15 Revenue from Contracts with Customers
that are financial instruments, except for those that IFRS 15 specifies are accounted for in
accordance with this Standard.
BASIC CONCEPTS AND TERMINOLOGIES
Financial instrument
Any contract that gives rise to:
• A financial asset of one entity; and
• A financial liability or equity instrument of another entity
• Cash to cash cycle/path
 Financial asset
• Cash
• A contractual right to receive cash or another financial asset
• A contractual right to exchange financial assets or liabilities with another
entity on potentially favourable terms
• An equity instrument (e.g. Ordinary shares of another entity).
• Example: Cash, A/c Receivable, Notes Receivable, derivatives, investments
 Financial liability
• A contractual obligation to deliver cash or another financial asset
• A contractual obligation to exchange financial assets or liabilities with
another entity on potentially unfavourable terms.
• Example: a/c payable, notes payable, bank overdraft, loans payable, certain
preference shares, derivatives
 Equity instrument
• A contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
• Example: Ordinary shares, certain preference shares
Test your understanding
Which of the following meet the definition of a financial instrument:
a. Issue of ordinary share capital/State capital
b. Issue of debt (or borrowing)
c. Sale of service on credit
d.Purchase of goods on credit
e. Income tax
9
f. On January 1, 2009 Company X agrees to buy from Company Y 100 pounds of

coffee on April 1, 2009 at a price of Br.150 per pound (at market price valid at the
time of delivery). On April 1, 2009 the spot price (also known as the market price)
of coffee is Br.180 a pound.
Option 1. Physical delivery where the buyer gives the seller Br15,000 for 100
pounds of coffee.
Option 2. The seller simply pays the buyer Br.3,000 which is the cash difference
between the agreed upon price and the current price, or (Br.180-Br.150)
*100.
10
 The 2 options:
1. The entity can take physical delivery (=coffee)
2. Instead of physical delivery, the entity settle in cash (pay or receive the
difference in market prices between the date of the contract and the time of
delivery).
INITIAL RECOGNITION
An entity shall recognise a financial asset/liability in its statement of financial
position [SOFP] when, and only when, the entity becomes party to the
contractual provisions of the instrument as a consequence, has a legal right to
receive/pay cash or another financial instrument.
Contract Period
Beginning of contract End of contract
Compare this with the recognition criteria for non-financial assets.

12
INITIAL MEASUREMENT: BASIS CLASSIFICATION
OF FA
The INITIAL as well as SUBSEQUENT measurement of financial assets is subject
to their classification.
Classification category
1. Financial assets measured at FVTPL
2. Financial assets measured at fair value through other comprehensive income
(FVTOCI)
 with gains and losses remaining in other comprehensive income (OCI) without
subsequent reclassification to profit or loss.
 with cumulative gains and losses reclassified to profit or loss upon
derecognition.
3. Financial assets measured at amortised cost
13
OF FA
1. 2. Business
Model Test @ an aggregate level
Other
Hold to Hold to collect business
Cash flows are collect and Sell model
solely payments of
Cash principal and
interest (SPPI) Amortised cost FVOCI FVTPL
Flows
Test@
instrume
nt level Other types of
FVTPL FVTPL FVTPL
cash flows
Fair Value at
OF FA
initial
recognition
Interest on the principal amount

Principal
outstanding
Consideration for Time value of Other basic lending risks

the passage of time Credit risk
money or costs
For example
• Liquidity risk
• Administrative costs
• Profit margin
• etc.
16
OF FA
Adjusted for
transaction costs
Initial Initial
Initial =
carrying carrying
carrying Fair value
amount amount
amount
Asset or Liability Asset Liability

Measured Measured
Measured at
at other at other
FVTPL
than FVTPL than FVTPL
OF FA
 Initial recognition = fair value only OR =fair value + transaction
costs
 Transaction costs include:
 Fees and commissions to agents, advisers, brokers and dealers
 Levies by regulatory agencies and securities exchanges
 Transfer taxes and duties
 Transaction costs do not include:
 Debt premiums or discounts
 Financing costs
 17
Subsequent Measurement of Financial Asset
Amortised Cost Model (Non-Equity Financial Assets)
SOFP SOPL OCI

Interest revenue using
effective interest method
Impairment
Amortised cost Nil
Foreign exchange gains &
losses
Gain or loss on derecognition

Computation of Amortised Cost

Amount at initial recognition.................................................................. xxx
Less: Principal repayments...................................................................... xxx
Add/Less: Cumulative amortization of any d/n b/n initial amount &
maturity amount using EIM [Premium/Discount]................... xxx
Gross carrying amount............................................................................ xxx
Less: Loss allowance................................................................................ xxx
Amortized cost........................................................................................ xxx
 EIR is the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial asset or financial liability to the gross
carrying amount of a financial asset or to the amortised cost of a financial liability.
Value lines
Face Buyer Seller
value-a (Tc)
Discount Loss Gain
Market
value (Tm)
Premium Gain Loss
Face
value-b (Tc)
20
FVTOCI Model (FVTOCI Debt Instruments)
SOFP SOPL OCI

Interest revenue using Fair value change other
effective interest method than those recognised in
profit or loss
Fair value Impairment
(amounts accumulated
Foreign exchange gains are recycled to P&L
& losses upon derecognition)
FVTOCI Model (Investments In Equity Instruments)
SOFP SOPL OCI

Changes in fair value and
foreign exchange component
Fair value Dividends

(amounts accumulated never
recycled to P&L → may be
transferred within equity)
FVTPL Model (Debt/Equity)
SOFP SOPL OCI

Changes in
Fair value
Fair value Nil
Gain or loss on
derecognition
IMPAIRMENT OF FINANCIAL ASSETS
Impairment
 Impairment is a loss in the future economic benefits or service potential of an asset
 An entity shall assess at the end of each reporting period whether there is any
impairment of a financial asset or group of financial assets.
 Impairment tests are conducted only for financial assets not measured at fair value.
 Impairment is determined based on reasonable and supportable forward-looking
information that is available without undue cost or effort.

Example-Reasonable and supportable forward-looking information:
 Information about past events, current conditions and forecasts of future

economic conditions.
 Borrower-specific factors: changes in operating results of borrower,
technological advances that affect future operations, changes in collateral
supporting obligation
 Macroeconomic factors: house price indexes, GDP, household debt ratios
 The data sources could be: Internal data - credit loss experience and ratings;
External data - ratings, statistics or reports
25
Receivables
 Impairment loss = Credit losses are the present value of the difference between all contractual cash
flows that are due and all cash flows that are expected to be received (i.e., the cash shortfall).
 discounted at the financial asset’s original effective interest rate
 Cash flows relating to short-term receivables are not discounted if the effect of
discounting is immaterial.
 Journal entry: Impairment expense/Doubtful accounts expense………..xxx
Loss allowance/Allowance for doubtful accounts…………..xxx
Impairment of Receivables
Expected Credit Loss are a probability-weighted estimate of credit losses.

Expected credit losses (ECLs) are the sum of all possible credit losses, weighted
based on their probability of occurrence.
 A Br.100 credit loss is expected with a 10% probability of default occurring. This
implies that there is a 90% probability of no default occurring. What are the ECLs?
 Assessment: The ECLs are calculated as follows: ECLs = (10% probability x Br.100
credit loss) + (90% probability x Br.0 credit loss) = Br.10.
Impairment Model
General approach Simplified approach

3-Stages No Stages
Loss allowance Loss allowance
12-month ECL / Life-time ECL Life-time ECL

[Not to overstate] [Not to understate]
Trade receivables or Contract assets (IFRS 15) that result from

 A ‘three-stage’ general transactions that are within the scope of IFRS 15, and that:
impairment model for  Do not contain significant financing component
impairment based on changes in  Contain significant financing component, but chosen to measure loss
credit quality since initial allowance at lifetime ECL (Practical expedient)
recognition on reporting date:  lease receivables that result from transactions that are within the
scope of IFRS 16, if the entity chooses as its accounting policy
Impairment Model
General approach Simplified approach

3-Stages No Stages
Loss allowance Loss allowance
12-month ECL / Life-time ECL Life-time ECL

[Not to overstate] [Not to understate]
500 [individual] 500 500
1,500 [cumulative/aggregate]-3-stage model

‘Performing’ ‘Under-performing’ ‘Non-performing’

(12 month expected loss) (life-time expected loss) (lifetime expected loss)
… assessment performed at an
… assessment performed at a portfolio level 30
individual level
31
Objective evidence for
Transfer out of Stage 2 impairment/default?
Breach of contract Lenders grant a concession

(e.g. past due or default) relating to the borrower’s
financial difficulty
Probable bankruptcy or
Significant financial Events
other financial
difficulty of the borrower indicating a reorganisation
credit
impairment
Disappearance of an active market Purchase or origination of a financial asset

for that financial asset because of at a deep discount that reflects the
financial difficulties incurred credit losses
32
Case: Recognition of Debt Investments
Example
An entity purchased a five-year bond on 1 January 2012 at a cost of Br5m with

annual interest of 5%, which is also the effective rate, payable on 31 December
annually. At the reporting date of 31 December 2012 interest has been received as
expected and the market rate of interest is now 6%.
Requirement: Account for the financial asset on the basis that it is classified:
(a) Amortised cost; and
(b) FVTPL/FVTOCI
33
(a) If classified to be measured at amortised cost

This requires that the fair value of the bond is measured based upon expected future
cash flows discounted at the original effective rate of 5%. This will continue to be at
Br5m as illustrated below:
Year Expected Cash Flows Discount Factor (5%) Present Value
31/12/2012 250,000 0.9524 238,095.24
31/12/2013 250,000 0.9070 226,757.37
31/12/2014 250,000 0.8638 215,959.40
31/12/2015 250,000 0.8227 205,675.62
31/12/2016 250,000 0.7835 195,881.54
1/1/2017 5,000,000 0.7835 3,917,630.83
5,000,000.00
In addition, interest received during the year of Br0.25m will be taken to profit or
loss for the year.
34
Initial recognition:
2012 Debt investments 5,000,000
Jan. 1 Cash 5,000,000
Reporting date:
2012 Cash 250,000
Dec. 31 Finance income-P/L 250,000
35
(b) If classified as FVTPL/FVOCI

The FV of the bond is measured based upon expected future cash flows
discounted at the current market rate of interest of 6% as follows:
31/12/2013 250,000 0.9434 235,849.06
31/12/2014 250,000 0.8900 222,499.11
31/12/2015 250,000 0.8396 209,904.82
31/12/2016 250,000 0.7921 198,023.42
1/1/2017 5,000,000 0.7921 3,960,468.32
4,826,744.72
Therefore, at the reporting date of 31 December 2012, the financial asset will
be stated at a fair value of Br4.8267m, with the fall in fair value amounting to
Br0.1733m taken to profit or loss in the year. Interest received will be taken to
profit or loss for the year amounting to Br0.25m. 36
Initial recognition:
2012 Debt investments 5,000,000
Jan. 1 Cash 5,000,000
Reporting date:
2012 Cash 250,000
Dec. 31 Finance income- 250,000
2012 PL/OCI
Fair value adjustment 173,300
Dec. 31 Gain or loss-PL/OCI 173,300
37
Case: Impairment of Debt Investments
Impairment Example
Using the information contained in the example for debt investments where the
carrying value of the financial asset at 31 December 2012 was Br500,000. If, in early
2013, it was identified that the bond issuer was beginning to experience financial
difficulties and that there was doubt regarding full recovery of the amounts due to
ABC, an impairment review would be required. The expected future cash flows now
expected by Aquaria Limited from the bond issuer are as follows:
31 December 2013 Br20,000
31 December 2016 Br20,000 + Br440,000
Requirement : Calculate the extent of impairment of the financial asset to be
included in the financial statements of Aquaria Limited for the year ending 31 38
Case: Impairment of Debt Investments
The future expected cash flows are discounted to present value based on the original
effective rate associated with the financial asset of 5% as follows:
31/12/2013 200,000 0.9524 190,476.19
31/12/2014 200,000 0.9070 181,405.90
31/12/2015 200,000 0.8638 172,767.52
31/12/2016 200,000 0.8227 164,540.49
1/1/2017 4,400,000 0.8227 3,619,890.89
4,329,080.99
Therefore, impairment amounting to the change in carrying value of (5,000,000 – 4,329,081)

67,100 will be recognised as an impairment charge in the year to 31 Dec. 2013.
Impairment loss 670,919
Debt investments 670,919
39
Case: Reversal of Impairment on Debt Investments
For instance in our previous example early in 2015, issuer’s prospects have
improved considerably and as a result holder determines the fair value of its
investment is now Br.500,000.
2015 Debt investments 67,100

Dec. 31 Recovery of impairment Loss -SD 67,100
Scope of IFRS 9:
Subsequent Measurement of Equity Investments
Determining the accounting for interests in other entities

(Interaction of IFRS 10, 11, 12 and IAS 28)
Outright control?
Yes No
Consolidation (IFRS 10) Joint control?
Yes No
Determine type of joint arrangement Significant influence?

(IFRS 11)
Yes No
Joint Operation Joint Venture
Financial asset
Account for assets, liabilities, revenues and Equity accounting accounting (IAS
expenses (IFRS 11) (IAS 28) 39/IFRS 9)
IFRS 12 IFRS 7
Case: Recognition of Equity Investments
Example
On January 1, 2016 an entity acquires for cash 1,000 shares at Br10 per share plus
brokerage commissions of Br.1,000 and can designate them as at fair value through
profit or loss. At the year end 31 December 2016, the quoted price increases to Br16
and receives a cash dividend of Br200. The entity sells the shares Br16,400 on 31
January 2017.
42
Jan 1, 2016 Equity investments 10,000

Brokerage expense 1,000
Cash 11,000
Dec. 31, 2016 Cash 200

Dividend/Investment income-P/L 200
Dec. 31, 2016 Equity investments 6,000

Gain –P/L 6,000
Jan. 31, 2017 Cash 16,400

Equity investments 16,000
Gain –P/L 400
43
The accounting entries to record non-trading equity investments are the same as for
trading equity investments, except for recording the holding gain or loss as other
comprehensive income.
Example:
On December 10, 2016, an entity purchased 1,000 ordinary shares for Br.20.75 per
share (total cost Br.20,750) from XYZ Company. The investment represents less than a
20 percent interest. XYZ is a distributor for the entity’s products in certain locales, the
laws of which require a minimum level of share ownership of a company in that
region. The investment in XYZ meets this regulatory requirement.
44
The classification of an equity investment as non-trading is irrevocable. The entity

records this investment as follows.
2016 Equity investments 20,750
Dec. 10 Cash 20,750
At December 31, 2016, Entity's investment in XYZ has fair value of Br.
24,000.
2016 Fair value adjustment 3,250
Dec. 31 Gain or loss-OCI 3,250
45
During 2017, sales of the entity’s products through XYZ as a distributor did not
meet management's goals. As a result, the entity withdrew from these markets. On
December 20, 2017, the entity sold all of its XYZ Company ordinary shares,
receiving proceeds of Br.22,500.
The entity makes the following entry to adjust the carrying value of the non-
trading investment.
2017 Gain or loss-OCI 1,500
Dec. 20 Fair value adjustment 1,500
46
The following entry is then made to record the sale of the

investment.
2017 Cash 22,500
Dec. 20 Fair value adjustment 1,750
Equity investments 20,750
As a result of these entries, the Fair Value Adjustment account is eliminated. Note
that all gains and losses on the non-trading investment are recorded in equity.
Such that not recycled to P & L.
47
DERECOGNITION OF FINANCIAL ASSETS
 Removal of a previously recognised financial asset from an entity’s statement of financial position.
A financial asset is derecognized when and only when:
1. The contractual rights to the cash flows from the financial asset expire; or
2. The financial asset is transferred and the transfer qualifies for derecognition.
A financial asset is transferred when:
An entity transfers the contractual rights to receive the cash flows of the financial asset, or
An entity retains the contractual rights to receive the cash flows of the financial asset, but assumes
a contractual obligation to pay the cash flows to one or more recipients (pass through of cash flows);
Transfer of financial asset qualifies for derecognition:
if the entity transfers substantially all the risks and rewards of ownership of the financial asset, or
if the entity has not retained control
48
DERECOGNITION OF FINANCIAL ASSETS 49
Continuing
Continued recognition involvement
No Yes
Yes
Have Have rights Obligatio Transferred Retained
rights to No to cash No n to ‘pass Yes substantiall No substantiall No Retained
cash flows been through’ y all risks y all risks control of
flows transferred of cash and and the asset?
expired? ? flows rewards? rewards?
Yes Yes Yes No
Derecognition
DERECOGNITION OF FINANCIAL ASSETS
Cases
1. A company sells an investment in shares, but retains the right to repurchase the
shares at any time at a price equal to their current fair value.
(Derecognise the asset. )
2. If the company sells an investment in shares and enters into an agreement whereby
the buyer will return any increases in value to the company and the company will
pay the buyer interest plus compensation for any decrease in the value of the
investment.
( Do not derecognise the asset as it has retained substantially all the risks and
rewards.) 50
DISCLOSURE
 The purpose of disclosures prescribed by IFRS 7 is to assist users in assessing the
nature and extent of risks related to financial instruments: Qualitative &

Quantitative Disclosures about:
 Market risk
 Credit risk
 Liquidity risk
51
DISCLOSURE
Credit Risk: An entity should disclose the following by class of financial instrument:
• The maximum exposure to credit risk
• A description of collateral held
• Information about credit quality of financial assets, and
• Carrying amounts of renegotiated financial assets that would otherwise be past
due or impaired
Liquidity Risk: The entity should disclose:
• A maturity analysis for financial liabilities that shows the remaining contractual
maturities, and
• A description of how it manages the liquidity risk
52
DISCLOSURE
Market Risk
 An entity shall disclose a sensitivity analysis for each type of market risk,
including methods and assumptions used to calculate the risk and any
changes from the previous period
 The various market risks that are defined in IFRS 7
 Currency risk is the risk that future cash flows or fair values will fluctuate
due to foreign currency changes

 Interest rate risk is the risk that fair values or the cash flow will change due
to changes in interest rates

 Other price risks include the risks that fair value and prices will fluctuate
due to changes in other market prices, for example, share prices
53
DISCLOSURE
Objective: enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty
of future cash flows
Quantitative Qualitative
• Reconciliation of allowance accounts showing key • Basis of inputs, assumptions and estimation techniques
drivers for change used to:
o Measure 12-month and lifetime expected credit losses
o determine ‘significant increase in credit risk’
o determine ‘credit-impaired’
• Explanation of gross carrying amounts showing • How forward-looking information has been incorporated
key drivers for change
• Gross carrying amount by credit risk rating grades • Changes in estimation techniques or significant
assumptions made and reasons for changes
• Maximum exposure to credit risk (net of collateral) • Basis for grouping if expected credit losses were measured
and collateral for credit impaired financial assets on a collective basis
• Modification to contractual cash flows • Entity’s default definition and reasons for selecting those
definitions
• Contractual amount outstanding for assets written • Write off policies, modification policies, collateral 54
THANK YOU!!!
55

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IFRS 7,9, & 32

Seek Wisdom, Elevate Your

 IFRS 9 Recognition and Measurement

 IAS 32 Financial Instruments: Presentation

 To present information about financial instruments.

Test your understanding

Which of the following meet the definition of a financial instrument:

a. Issue of ordinary share capital/State capital

b. Issue of debt (or borrowing)

c. Sale of service on credit

d.Purchase of goods on credit

f. On January 1, 2009 Company X agrees to buy from Company Y 100 pounds of

An entity shall recognise a financial asset/liability in its statement of financial

contractual provisions of the instrument as a consequence, has a legal right to

receive/pay cash or another financial instrument.

Beginning of contract End of contract

Compare this with the recognition criteria for non-financial assets.

Interest on the principal amount

Consideration for Time value of Other basic lending risks

Asset or Liability Asset Liability

SOFP SOPL OCI

Gain or loss on derecognition

Computation of Amortised Cost

SOFP SOPL OCI

Fair value Impairment

SOFP SOPL OCI

Fair value Dividends

SOFP SOPL OCI

impairment of a financial asset or group of financial assets.

 Impairment is determined based on reasonable and supportable forward-looking

information that is available without undue cost or effort.

Example-Reasonable and supportable forward-looking information:

 Information about past events, current conditions and forecasts of future

Expected Credit Loss are a probability-weighted estimate of credit losses.

General approach Simplified approach

Loss allowance Loss allowance

12-month ECL / Life-time ECL Life-time ECL

Trade receivables or Contract assets (IFRS 15) that result from

General approach Simplified approach

Loss allowance Loss allowance

12-month ECL / Life-time ECL Life-time ECL

500 [individual] 500 500

1,500 [cumulative/aggregate]-3-stage model

‘Performing’ ‘Under-performing’ ‘Non-performing’

Breach of contract Lenders grant a concession

Disappearance of an active market Purchase or origination of a financial asset

An entity purchased a five-year bond on 1 January 2012 at a cost of Br5m with

(a) Amortised cost; and

(a) If classified to be measured at amortised cost

(b) If classified as FVTPL/FVOCI

Therefore, impairment amounting to the change in carrying value of (5,000,000 – 4,329,081)

2015 Debt investments 67,100

Determining the accounting for interests in other entities

Consolidation (IFRS 10) Joint control?

Determine type of joint arrangement Significant influence?

Joint Operation Joint Venture

Jan 1, 2016 Equity investments 10,000

Dec. 31, 2016 Cash 200

Dec. 31, 2016 Equity investments 6,000

Jan. 31, 2017 Cash 16,400

The classification of an equity investment as non-trading is irrevocable. The entity

The following entry is then made to record the sale of the

Yes Yes Yes No