LOS 16+ IFRS 9

IFRS 9

RECOGNITION AND MEASUREMENT

IFRS 9

replacement of IAS 39

recognition and measurement

impairment

derecognition

general hedge accounting

IFRS 9 includes requirements for

2014

IFRS 9 issued in ____ supersedes all previous versions

beginning on or after 1 January 2018

IFRS 9 is mandatorily effective for periods with early adoption permitted (subject to local endorsement requirements).

before 1 February 2015

For a limited period, previous versions of IFRS 91 may be adopted early, provided the relevant date of initial application is ______(again, subject to local endorsement requirements).

International Accounting Standards Board (IASB)

has published an exposure draft (ED/2015/11) that proposes amendments to IFRS 4 Insurance Contracts that are intended to address concerns about the different effective dates of IFRS 9 Financial Instruments and the forthcoming new insurance contracts standard

8 February

The deadline of comments ended on _____and at the time of writing the IASB was considering the responses received.

Initial measurement of financial instruments

Financial assets: subsequent measurement

Debt instruments

Contractual cash flow characteristics test

Classification and measurement of financial instruments

fair value plus or minus

Under IFRS 9 all financial instruments are initially measured at this, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs.

Financial asset classification and measurement

is an area where many changes have been introduced by IFRS 9.

initial recognition

Consistent with IAS 39, the classification of a financial asset is determined at this, however, if certain conditions are met, an asset may subsequently need to be reclassified.

amortized cost;

fair value through other comprehensive income (FVTOCI); or

fair value through profit or loss (FVTPL).

Subsequent to initial recognition, all assets within the scope of IFRS 9 are measured at

FVTOCI

this classification is mandatory for certain debt instrument assets unless the option to FVTPL ('the fair value option') is taken.

election

Whilst for equity investments, the FVTOCI classification is an

interest income

debt instruments measured at FVTOCI, (calculated using the effective interest rate method),

foreign currency gains or losses and impairment gains or losses

debt instruments measured at FVTOCI (are recognized directly in profit or loss)

profit or loss.

The difference between cumulative fair value gains or losses and the cumulative amounts recognized in profit or loss is recognized in OCI until derecognition, when the amounts in OCI are reclassified to

debt instrument

meets the two conditions must be measured at amortised cost unless the asset is designated at FVTPL under the fair value option

Business model test

Cash flow characteristics test

two conditions of debt instrument

Business model test

The financial asset is held whose objective is to hold financial assets to collect their contractual cash flows (rather than to sell the assets prior to their contractual maturity to realize changes in fair value).

Cash flow characteristics 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.

FVTOCI

debt instrument that meets the cash flow characteristics test and is not designated at FVTPL under the fair value option must be measured at this if it is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and sell financial assets.

profit or loss (FVTPL).

All other debt instrument assets are measured at fair value through

debt instruments

only this are capable of meeting the contractual cash flows characteristics test required by IFRS 9

Contractual cash flows

that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement

basic lending arrangement

consideration for the time value of money and credit risk are typically the most significant elements of interest

liquidity risk

administrative costs

interest can also include consideration for other basic lending risks

interest

can include a profit margin that is consistent with a basic lending arrangement

Judgement

is needed in assessing whether a payment (or non- payment) of a contractual cash flow that only arises as a result of the occurrence or non-occurrence of a contingent event leads to the instrument failing the contractual cash flow characteristics test

asset - prepaid

the contractual cash flow characteristics assessment requires consideration of the contractual cash flows both before and after the timing of the prepayment option, irrespective of the probability that the instrument may be repaid prior to maturity.

IFRS 9

contains detailed guidance regarding the assessment of the contractual cash flows of an asset and has specific requirements for non-recourse assets and contractually linked instruments.

FVTOCI

category for debt instruments is not the same as the available-for-sale category under IAS 39

fair value

FVTOCI Under IAS 39, impairment gains and losses are based on

amortized cost assets

FVTOCI under IFRS 9, impairment is based on expected losses and is measured consistently with

available-for-sale

FVTOCI Under IAS 39 certain instruments can be elected to be classified as

debt instruments

FVTOCI under IFRS 9 the FVTOCI classification cannot be elected for

Business model assessment

is fundamental to the classification of financial 4 iii assets

Business model assessment

is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective

Business model assessment

model does not depend on management's intentions for an individual instrument

instrument-by-instrument

Business model assessment is not this approach to classification and should be determined at a higher level of aggregation

IFRS 9

provides guidance on how to determine whether a business model is to manage assets to collect contractual cash flows or to both collect contractual cash flows and to sell financial assets.

sales of financial assets

may be consistent with the objective of collecting contractual cash flows if they are made close to the maturity of the financial assets and the proceeds from the sales approximate to the collection of the remaining contractual cash flows

contractual cash flows

sales of financial assets insignificant in value (either individually or in aggregate) an assessment is needed to determine whether such sales are consistent with an objective of collecting this

Fair value option

IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL

accounting mismatch

if doing so eliminates or significantly reduces this that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.

Equity investments

IFRS 9 are measured at fair value in the statement of financial position, with value changes recognized in profit or loss, except for those equity investments for which the entity has elected to present value changes in other comprehensive income.

irrevocable

The option to designate an equity instrument at FVTOCI is available at initial recognition and is this

dividend income

This designation results in all gains and losses being presented in OCI except this which is recognized in profit or loss.

Financial liabilities held for trading

( e.g. derivative liabilities), as well as loan commitments and financial guarantee contracts that are designated at FVTPL under the fair value option, will continue to be measured at fair value with all changes being recognized in profit or loss

measurement mismatch

, for all other financial liabilities designated as at FVTPL using the fair value option, IFRS 9 requires the amount of the change in the liability's fair value attributable to changes in the credit risk to be recognized in OCI with the remaining amount of change in fair value recognized in profit or loss, unless this treatment of the credit risk component creates or enlarges a

specified assets

amounts payable under an obligation are only paid when amounts are due on this (e.g. with some asset-backed securities

asset-specific performance risk

IFRS 9 is not related to the risk that an entity will fail to discharge a particular obligation but rather it is related to the risk that a single asset or a group of assets will perform poorly (or not at all)

profit or loss

any changes in fair value attributable to asset-specific performance should be recognized in this, not in other comprehensive income

unquoted equity instruments.

The elimination of the cost exemption for derivative liabilities to be settled by the delivery of this

cost exemption

IFRS 9 dealing with financial assets removed this in IAS 39 for unquoted equity instruments and related derivative assets where fair value is not reliably determinable

IFRS 9

also removed the cost exemption for derivative liabilities that will be settled by delivering unquoted equity instruments whose fair value cannot be determined reliably (e.g. a written option where, on exercise, an entity would deliver unquoted shares to the holder of the option)

fair value

all derivatives on unquoted equity instruments, whether assets or liabilities, are measured at this under IFRS 9

Fair value option

The IFRS 9 eligibility requirements for applying this to measure financial liabilities at FVTPL are consistent with those of IAS 39.

derivatives

All are in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value

Fair value changes

are recognized in profit or loss unless the entity has elected to apply hedge accounting by designating the derivative as a hedging instrument in an eligible hedging relationship in which some or all gains or losses may be recognized in other comprehensive income.

embedded derivative

is a component of a hybrid contract that also includes a non-derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative

embedded derivative

concept that exists in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets within the scope of the Standard

leases

purchase contracts

service contracts,

financial liabilities and host contacts not in the scope of IFRS 9, such as

embedded derivative

under IAS 39, would have been separately accounted for at FVTPL, because they were not closely related to a host financial asset will no longer be separated

embedded derivative

help identify closely related to a financial liability host contract or a host contract not within the scope of the Standard (e.g. lease contracts, insurance contracts, contracts for the purchase or sale of non-financial items)

FVTPL

Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at ____if the contractual cash flow characteristics test is not passed.

reclassification

financial assets, this is required between FVTPL, FVTOCI and amortised cost; if and only if the entity's business model objective for its financial assets changes so its previous business model assessment would no longer apply

fair value option elected for financial asset;

equity investments (measured at FVTPL or FVTOCI);

financial liabilities

IFRS 9 does not allow reclassification

reclassification

If an entity reclassifies a financial asset, it is required to apply this prospectively from the reclassification date

reclassification date

defined as the first day of the first reporting period following the change in business model 8 iii that results in the entity reclassifying financial assets

recognized/impairment gains, losses / interest

are not restated.

Impairment

IFRS 9 introduces this model based on expected losses, (rather than incurred loss as per IAS 39) which has a wider scope of application than IAS 39

amortised cost;

financial assets measured at (impairment)

FVTOCI

financial assets mandatorily measured at (impairment)

FVTPL

loan commitments when there is a present obligation to extend credit (except where these are measured at this)

financial guarantee contracts

to which IFRS 9 is applied (except those measured at FVTPL);

lease receivables

within the scope of IAS 17 Leases (or, when applied, IFRS 16 Leases)

Revenue from Contracts with Customers

contract assets within the scope of IFRS 15

Forwards

Interest Rate Swaps and Forward Rate Agreements

Futures

Options

Caps and Floors

Examples of derivatives

Forwards

Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency at a specified price determined at the outset, with delivery or settlement at a specified future date

Forwards

Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash settlement.

Interest Rate Swaps and Forward Rate Agreements

Contracts to exchange cash flows as of a specified date or a series of specified dates based on a notional amount and fixed and floating rates.

Futures

Contracts similar to forwards but with the following differences: Futures are generic exchange-traded, whereas forwards are individually tailored

Futures

are generally settled through an offsetting (reversing) trade, whereas forwards are generally settled by delivery of the underlying item or cash settlement.

Options

Contracts that give the purchaser the right, but not the obligation, to buy (call option) or sell (put option) a specified quantity of a particular financial instrument, commodity, or foreign currency, at a specified price (strike price), during or at a specified period of time. .

Options

These can be individually written or exchange-traded.

Options

The purchaser of the option pays the seller (writer) of this a fee (premium) to compensate the seller for the risk of payments under this

Caps and Floors

These are contracts sometimes referred to as interest rate options

Caps and Floors

will compensate the purchaser of the cap if interest rates rise above a predetermined rate (strike rate) while an interest rate floor will compensate the purchaser if rates fall below a predetermined rate.

effective interest method

is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period

effective interest rate

is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

effective interest rate

an entity shall estimate cash flows considering all contractual terms of the financial instrument but shall not consider future credit losses

effective interest rate

The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts