IFRS 9

FINANCIAL INSTRUMENTS

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PPLICABLE STANDARDS

 IAS 32 sets out the definitions of financial assets,

liabilities and equity instruments [IAS 32 Financial
Instruments: Presentation]

 IFRS 7 contains many of the disclosure

requirements of IAS 32 as well as new
requirements

 IFRS 9 includes procedures for the recognition and

measurement of financial instruments 2
 ASIC CONCEPTS and TERMINOLOGIE
& CLASSIFICATION of FIs

AS 32 and IFRS 9

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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.’
 Primary instruments:

 Cash, receivables, investments, payables

 Secondary (derivative) instruments:

 Value is derived from underlying item: share price,

interest rate, etc.
 Financial options, forward exchange contracts
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BASIC CONCEPTS AND
TERMINOLOGIES

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unlike other assets or liabilities, financial instruments arise from the
CONTRACT

The financial instrument is a bridging tool between the assets or rights on one
side, and liabilities or equity instruments of another entity on the other side.

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 Example – financial instrument or not?
Imagine you ordered XY barrels of petrol with delivery in 3 months at market price
valid at the time of delivery. You have 2 options:
You can take physical delivery (=petrol)
Instead of physical delivery, you settle in cash (pay or receive the difference in
market prices between the date of the contract and the time of delivery).
If you intend to take physical delivery, then it’s NOT a financial instrument (if you
have no history of similar contracts settling in cash). It’s a regular trading contract,
because you will NOT receive a cash or a financial asset of another entity.
But, if you intend to settle in cash, then here we go, it’s a financial instrument and
you need to recognize a derivative from the day 1.

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CLASSIFICATION OF FIs

In accordance with IFRS 9, financial assets may be

classified under the following three headings:
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
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ECOGNITION AND MEASUREMENT
• Classification criteria:
1. The entity's business model for managing its financial assets
[business model test @ an aggregate level] ; and
2. The contractual cash flow characteristics of the financial asset
[contractual cash flow test @ instrument level].

Held to collect
model

Held to collect
& sell model

Held for
Trading
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Classification of Debt Instruments

A debt instrument is classified as amortized

cost if:
 It is held in order to collect contractual cash
flows – Business Model 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
Classification of Debt Instruments

Debt instrument is classified as FVOCI if:

 It is held to achieve a particular objective by
both collecting contractual cash flows selling
financial assets-Business Model Test
 Cash flows on a specified dates that are
solely payments of principal & interest on the
principal amount outstanding – Contractual
Cash flow Test
 Classification of Debt Instruments
 A debt instrument that is not measured at
amortized cost or at FVOCI must be
measured at FVTPL.
 Apart from the above conditions, a debt
instrument can be designated as FVTPL
upon initial recognition.
Classification of Equity Instruments
Equity instruments and derivatives are normally
measured at FVTPL.
However, the firm can elect to classify them as
FVOCI upon initial recognition.
 Although most gains and losses on investments
in equity instruments designated at FVOCI will
be recognized in OCI, dividends will normally be
recognized in profit or loss.
 If the dividend is a return of investment are not
recognized in profit or loss.
Classification of Equity Instruments
 Meanwhile, gains or losses recognized in
OCI are never reclassified from equity to
profit or loss. Consequently, there is no need
to review such investments for possible
impairment.
Business Model Assessment
 An entity’s business model reflects how it
manages its financial assets in order to
generate cash flows; it determines whether
cash flows will result from collecting
contractual cash flows, selling the financial
assets, or both.
 The Business Model Test is performed on the
basis of scenarios that the entity reasonably
expects to occur
Business Model Assessment
 An entity’s business model is a matter of fact
and it is typically observable through
particular activities that the entity undertakes
to achieve its stated objectives.
 Judgment on various factors/activities is
needed to be assess an entity’s business
model on financial assess.
 The entity must consider all relevant
evidence that is available at the date of the
assessment.
CXS of contractual cash flows
 Aims to identify whether the contractual cash
flows are ‘solely payments of principal and
interest on the principal amount outstanding’.
Also referred to as the ‘SPPI test’.
Principal: the principal is ‘the fair value of the
asset at initial recognition’ and that it may
change over the life of the financial asset (e.g., if
there are repayments of principal).
Interest: time value of money, credit risk; also
liquidity risks and admin costs
CXS of contractual cash flows
• Contractual cash flow characteristics test

Interest on the principal

Principal
amount outstanding

Time value Other basic lending

Credit risk
of money risks or costs

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DERECOGNITION

IFRS 9

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DERECOGNITION OF FINANCIAL
ASSETS
Removal of a previously recognised financial asset from
an entity’s statement of financial position.
Derecognized when substantially all the risks and rewards
have been transferred for instance the contractual rights

to the cash flows related to the asset expire (e.g. a

receivable would be derecognised when the customer
pays their debt)
 If substantially all the risks and rewards have been
retained, derecognition of the asset is precluded 20
DEBT INVESTMENTS–FVTPL
Sale of Debt Investments [Derecognition]

If a company sells bonds carried as fair value investments before

the maturity date, it must make entries to remove from the Debt
Investments account the amortized cost of bonds sold. To illustrate,
assume that BBB Corporation sold the ABC bonds on July 1,
20X2, for Br. 90,000, at which time it had an amortized cost of
Br.94,214. BBB records the sale of the ABC bonds as follows.

20X2 Cash 90,000

July 1 Loss on sale of 4,214
investments
Debt investments 94,214

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IMPAIRMENT

IFRS 9

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IMPAIRMENT OF VALUE

Use the impairment test to determine whether “it is probable that

the investor will be unable to collect all amounts due according to
the contractual terms.”

Impairment loss = difference between the carrying amount plus

accrued interest and the expected future cash flows discounted at
the investment’s historical effective-interest rate.

Impairment tests are conducted only for debt investments that are
held-for-collection (accounted at amortized cost). Other debt and
equity investments are measured at fair value each period; thus,
an impairment test is not needed.
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 Expected Loss Model
General impairment model

Change of credit risk since initial recognition

Significant Objective
Initial increase in evidence for
recognition credit risk? impairment?

Stage 1 Stage 2 Stage 3

Loss 12-month expected Lifetime expected Lifetime expected

allowance credit loss credit losses credit losses

Interest income Gross carrying Gross carrying Net carrying

on… amount amount amount

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 Expected loss model
Assumptions and level of assessment

Initial recognition Significant increase in Objective evidence

credit risk of default

Stage 1 Stage 2 Stage 3

Rebuttable Low 90
30
presumption credit days
days
risk

… assessment performed at a … assessment performed at an

portfolio level individual level

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Transfer out of Stage 1
Significant increase in credit risk

Significant
increase in
credit risk?
Stage 1
Stage 2

Relative model

Credit risk on initial

Current credit risk
recognition compare

Initial recognition Reporting date

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Transfer out of Stage 2
Credit-impaired
Lenders grant a
Breach of contract concession relating to
(e.g. past due or default) the borrower’s financial
difficulty

Probable
Significant financial bankruptcy or other
Events
difficulty of the financial
borrower indicating
a credit reorganisation
impairment

Disappearance of an Purchase or origination of a

active market for that financial asset at a deep
financial asset because of discount that reflects the
financial difficulties incurred credit losses
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RECOVERY OF IMPAIRMENT LOSS

If subsequently the impairment loss decreases, some or all of

the previously recognized impairment loss shall be reversed
with a

• debit to the Debt Investments account and

• crediting Recovery of Impairment Loss.

 Reversal of impairment losses shall not result in a
carrying amount of the investment that exceeds the
amortized cost that would have been reported had the
impairment not been recognized.
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RECOVERY OF IMPAIRMENT LOSS

For instance in our previous example early in 20X3, Baro’s

prospects have improved considerably and as a result Sunshine
determines the fair value of its investment is now Br.195,000 and
makes the following entry under IFRS.

20X3 Debt investments 7,680

Dec. Recovery of investment Loss (195,000- 7,680
31 187,320)

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RECLASSIFICATION OF FINANCIAL ASSETS
Transferring an investment from one classification to another

 Should occur only when the business model for managing

the investment changes.

 Companies account for transfers between classifications

prospectively, at the beginning of the accounting period
after the change in the business model.
IFRS 9 does not allow reclassification where the:
OCI option has been exercised for equity instrument; or
Fair value option has been exercised in any circumstance for a
financial asset.
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REPORTING AND DISCLOSURE

IFRS 7

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REPORTING AND DISCLOSURE

 The purpose of disclosures prescribed by IFRS 7 is to assist

users in assessing the risk related to financial instruments

 Market risk

 Credit risk

 Liquidity risk

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Nature and extent of exposure to risks arising from
financial instruments

Qualitative Disclosures Quantitative Disclosures

• Risk exposures for each • Credit Risk

type of financial
instrument • Liquidity Risk
• Management’s • Market Risk
objectives, policies, and
processes for managing
those risks

• Changes from the prior

period
REPORTING AND DISCLOSURE
Nature and Extent of Risks from Financial Instruments
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
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REPORTING AND 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
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