IFRS-9

Financial Instruments
Akshay Santhosh
Angel Rose P B
Anjitha M
Rose Mary Joseph
 BACKGROUND
 IFRS 9 Financial Instruments is the IASB’s replacement of IAS 39 Financial Instruments:
Recognition and Measurement.
 IAS 39 came into effect in its current form in 2005.

 The Key Issues with IAS 39:

 Existing Accounting requirements were too complicated

 Impairment losses were reported too little, too late.

 Earlier IAS 39 reported losses only when they actually incurred and it doesn’t look in to the
future.
 Later, people suggested the change in model that does anticipate future losses not just that already
incurred.
 Therefore in 2008, IASB decided to rewrite IAS-39 and launched the project of IAS-39
replacement.
 Board tried to simplify the accounting treatment and identify bigger losses on the books earlier
 In 2018 IFRS-9 was implemented.
 The Changes introduced in IFRS 9 were:
1. Logical and principle based approach to classify and measure financial instruments
2. Expected Credit loss model (framework for the recognition of impairment)

 Areas Considered under IFRS 9

 classification and measurement of financial assets;
 impairment;
 classification and measurement of financial liabilities; and
 hedge accounting.
The derecognition model in IFRS 9 is carried over unchanged from IAS 39.
 CLASSIFICATION OF FINANCIAL
ASSETS
 Why we need to classify financial assets under different categories?

 IFRS classify assets into different types as it will determine the accounting

treatment for the assets.

 CLASSIFICATION OF FINANCIAL ASSETS
Financial Assets

FVOCI
FVTPL
(Fair Value
(Fair Value
Amortized through
through
Costs Other
Profit and
Comprehens
Loss)
ive Income)

Business Model Test Contractual Cash Flow Test

Amortized Cost
 For an asset to be classified at Amortized Cost it has to satisfy 2 conditions

1. Cash flow Contractual Test: The Contractual terms of the financial asset give rise on specified
dates to cash flow that are Solely Payments of Principal and Interest(SPPI) on the principal
amount outstanding.
2. Business Model Test: The Asset is held within a busiess model whose objective is to hold assets
in order to collect contractual cash flows.
 Example: Simple Loans, Trade Receivables.
 Suppose if in case of $100 is lend at an interest rate of 10% , and the repayment is at the end of
the year.
Here, there is a specified date to cash flow and SPPI(100+10). Thus it satisfies Cash flow contractual
test. Also, here intention is to hold the asset to collect contractual cash(Business model test).
 Can Equity be classified at Amortized Cost?
 TREATMENT FOR INITIAL RECOGNITION OF AN ASSET
CLASSIFIED UNDER AMORTIZED COST

 Initial Recognition = Fair Value (using effective interest method) + Transaction

Cost
 Fair Value in most of the cases is the money spent to purchase and if there is any
transaction cost, that should also be added to Fair Value.
 FVOCI
 Assets Classified under FVCOI includes Debt or Equity.
 If an asset is a derivative it cannot be classified.
• DEBT INSTRUMENT

It must satisfy 2 conditions

 SPPI-repayment should be solely payment of principal and interest.
 It should not be classified as FVTPL.
• EQUITY INSTRUMENT(Optional)
 Equity can be only classified on the option of an entity

• INITIAL RECOGNITION = Fair Value + Transaction Cost

 FVTPL
 Residual Category
 Assets which are classified as FVTPL includes

1. All assets held for trading

2. Derivative Instruments
3. Instrument with embedded derivatives
4. Debt Instruments(Optional)
5. Equity Instruments (Optional)
 In case of Debt/Equity the entity has an option to classify the asset through P&L.
 Example:In case of Debt Instruments,
 Optional-FVTPL (Irrecoverable)
Pass contractual Cash Flow Test and Business Model Test – Amortized Cost
Pass Contractual Cash Flow Test and do nt elected as FVTPL-FVOCI
DEBT INSTRUMENTS
AMORTIZED COST
Initial Recognition
Fair Value + Transaction Cost
Subsequent Measurement
1. Interest Income using
effective interest rate – in
P&L
2. Change in FV- ignored
Impairment
Based on Expected Loss
Derecognition Gain/Loss
P&L
FVOCI
Initial Recognition
Fair Value + Transaction Cost
Subsequent Measurement
1. Interest Income – in P&L
2. Change in FV- – Other
Comprehensive Income
Impairment
Based on Expected Loss
Derecognition Gain/Loss
Transfer from OCI to P&L
FVTPL
Initial Recognition
Fair Value + Transaction Cost
Subsequent Measurement
1. Interest Income – in P&L
2. Change in FV- in P&L
Impairment
------
Derecognition Gain/Loss
P&L
 EQUITY INSTRUMENTS

FVOCI FVTPL

Initial Recognition Initial Recognition

Fair Value + Transaction Cost Fair Value + Transaction Cost

Subsequent Measurement
Subsequent Measurement
1. Dividend Income – in P&L
2. Change in FV- – Other
1. Dividend Income – in P&L
Comprehensive Income
2. Change in FV- in P&L

Impairment
Impairment
Based on Expected Loss
------

Derecognition Gain/Loss Derecognition Gain/Loss

Transfer from OCI to P&L P&L
Recognition of financial
instrument
Recognise the financial instrument in the statement of
financial positon when an entity becomes party to the
contract
Initial measurement of
financial instrument
 Points to consider on initial measurement:

 1. Calculation of fair value, if different from

transaction price (TP)
 2. Accounting for difference between fair value and
TP
 3. Accounting of transaction cost
 4. Calculation of Effective Interest Rate (EIR)
Calculation of fair value
 The best evidence of fair value on initial recognition is normally the
‘transaction price’. If contractual terms of the financial instrument are off market, for e.g.
interest rate which is different from market terms, then transaction price may not equal to fair
value.

 Calculate fair value of the instrument by using ‘income approach’

 technique mentioned in IFRS 13 – Fair value measurements

 All the future cash flows with respect to the financial instrument (using quoted interest
rate) are discounted using market rate of interest. Summation of those cash flows is
considered as fair value of the instrument
Accounting for difference
between fair value and TP
 The difference between fair value and transaction price is recognised as a gain or
loss to income statement if and only if the underlying financial instrument is Level
1 (quoted) financial instrument.
 In all other cases, such difference is recognised either as asset or liability / equity
in the financial statements
Illustration of application of amortised
cost and effective interest method
 Entity A purchases a bond on a stock exchange for $900. All the relevant data for
this example is presented below:
 Face value: $1,000
Transaction price (incl. coupon accrued to date): $900
Transaction fee: $10
Coupon: 5%, that is $50 (calculated on face value, fixed and paid annually on 31
December)
Acquisition date: 20X1-05-01
Redemption date: 20X5-12-31
 Based on the data above, Entity A is able to prepare a schedule for cash flows and
calculate the effective interest rate (‘EIR’) as presented below. 
 What is Hedging?
Designating one or more hedging instruments so that their change in
fair value is an offset to the change in fair value or cash flows of a
hedged item.

Hedged item Enters into a forward Hedging instrument

contract to sell 20 million
Sell goods for 20 million EUR, EUR in 9 months
Payment expected in 9 months.

Pays 20 mil. EUR

EU Customer US Producer Receives 25.6 mil. USD

Receives 20 million EUR

after 9 months
 Protects
Hedging Against
Hedged Items
instrument Hedged Risk
Specific Risk being
hedged against:
Foreign Currency risk
Commodity Price risk
Interest rate risk
 Accounting for Forward Contract

Without hedge accounting With hedge accounting

Debit:
Other Comprehensive Income
Debit: (Effective portion of a cash flow hedge)
P/L- Finance Expenses P/L-Finance expenses
(Loss on forward contract) (the ineffective portion of cash flow
hedge)
Credit:
Liabilities from derivatives Credit:
Liabilities from derivatives
 Why Hedge Accounting?
• Risks faced by the company such as ;
Foreign Currency risk
Commodity Price Risk
Interest rate risk

• Hedging Strategies for mitigating risk

• How effective these strategies are.

IAS 39 • Rules too strict

• Difficult to apply

19 November 2013: IFRS 9 amended

 Hedge Accounting IAS 39 vs IFRS 9

HEDGING INSTRUMENT HEDGED ITEM

IAS 39 IFRS 9 IAS 39 IFRS 9

• Non financial item • Risk component

• Derivatives • Derivatives only in its entirety of non-financial
• Non-derivative in a • Non-derivative item
foreign currency at Fair Value
risk through Profit or
Loss (FVTPL)
 THREE TYPES OF HEDGES

1. Cash flow hedge: This reduces the risk of change in the fair value of future cash flows.

2. Fair value hedge: This reduces the risk of change in the fair value of existing assets and
liabilities or firm commitments.

3. Net investment hedge: This reduces the risk of change in the value of net foreign asset values
due to changes in foreign currency rates.