IFRS 9-Financial Instruments (summary)
Summary of IFRS 9-Financial Instruments
IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted.
IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.
IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.
Financial assets
When an entity first recognises a financial asset, it classifies it based on the entityβs business model for managing the asset and the assetβs contractual cash flow characteristics, as follows:
- Amortised costβa financial asset is measured at amortised cost if both of the following conditions are met:
- the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
- 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.
- Fair value through other comprehensive incomeβfinancial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
- Fair value through profit or lossβany financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.
When, and only when, an entity changes its business model for managing financial assets it must reclassify all affected financial assets.
Initial measurement
Financial assets that are classified as amortised cost or Fair value through other comprehensive income are initially measured at fair value plus any transaction costs.
Financial assets that are classified as Fair value through profit or loss are initially measured at fair value and any transaction costs are immediately written off to the statement of profit or loss.
Transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.
Subsequent measurement
Equity instruments
- Fair value through profit or loss (default)
Re-measure to fair value at the reporting date, with gains or losses through profit or loss
- Fair value through other comprehensive income
If there is a strategic intent to hold the asset the option to hold at fair value through other comprehensive income is available. Re-measure to fair value at reporting date, with gains or losses through other comprehensive income.
Debt instruments
- Amortised cost
- Fair value through other comprehensive income
Derecognition
Financial assets are derecognised when sold, with gains or losses on disposal through profit or loss. Gains or losses previously recognised through other comprehensive income are transferred to retained earnings through the statement of changes in equity.
Financial LiabilitiesΒ
All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss.
Financial liabilities at amortised cost (default)
Financial liabilities that are classified as amortised cost are initially measured at fair value minus any transaction costs.
Accounting for a financial liability at amortised cost means that the liability’s effective rate of interest is charged as a finance cost to the statement of profit or loss (not the interest paid in cash) and changes in market rates of interest are ignored β ie the liability is not revalued at the reporting date.
Financial liabilities at FVTPL
Financial liabilities are only classified as FVTPL if they are held for trading or the entity so chooses.
Financial liabilities that are classified as FVTPL are initially measured at fair value and any transaction costs are immediately written off to the statement of profit or loss.
By accounting for a financial liability at FVTPL, the financial liability is also increased by a finance cost and reduced by cash repaid but is then revalued at each reporting date with any gains and losses immediately recognised in the statement of profit or loss. The measurement of the new fair value at the year end will be its market value or, if not known, the present value of the future cash flows, using the current market interest rates.
Equity instruments
Equity instruments are initially measured at fair value less any issue costs. In many legal jurisdictions when equity shares are issued they are recorded at a nominal value, with the excess consideration received recorded in a share premium account and the issue costs being written off against the share premium.
Equity instruments are not remeasured. Any change in the fair value of the shares is not recognised by the entity, as the gain or loss is experienced by the investor, the owner of the shares. Equity dividends are paid at the discretion of the entity and are accounted for as reduction in the retained earnings, so have no effect on the carrying value of the equity instruments.
Source:
- Phnom Penh HR
- ifr s. org/issued-standards/list-of-standards/ifrs-9-financial-instruments/
- accaglobal . com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/what-financial-instrument.html