12.1 - IFRS 9 Financial Instruments Overview

This set of flashcards summarizes key concepts and rules related to IFRS 9 governing financial instruments, including impairment, recognition, and reporting requirements.

What are the main standards governing financial instruments?

IAS 32, IFRS 9, and IFRS 7.

What credit loss model is used under IFRS 9 for financial assets?

An expected credit loss model.

How is expected credit loss defined?

The estimated amount of credit losses anticipated over the entire life of a financial instrument.

Which types of financial assets are impaired under IFRS 9?

Debt assets held under FVOCI and amortized cost models.

What assets are not impaired under IFRS 9?

FVPL debt assets and equity assets.

What is required of an entity upon initial recognition of a financial asset?

To create a credit loss allowance/impairment allowance.

How is the impairment allowance calculated on initial recognition?

Probability of default in next 12 months (%) x lifetime expected credit losses (£).

How are lifetime expected credit losses calculated if not given?

Loss given default (%) x total exposure (£).

What is the ‘allowance for doubtful debts’?

A simple application of the impairment model.

What approach does IFRS 9 take to impairment?

A three-stage approach.

What is Stage 1 in the IFRS 9 impairment model?

Recognition of assets at 12-month expected credit losses (ECL).

What occurs if there is a significant increase in credit risk?

The asset is moved to Stage 2, which is lifetime ECL.

What does Stage 3 represent in the IFRS 9 approach to impairment?

Assets that are credit-impaired with lifetime ECL and calculation of interest on net carrying amount.

What is a rebuttable presumption indicating significant increase in credit risk?

Payments more than 30 days past due.

List two internal indicators of significant increase in credit risk.

1. Increases in credit risk of other financial instruments of the borrower. 2. Changes in the quality of the guarantee provided by the borrower.

List two external indicators of significant increase in credit risk.

1. Credit ratings. 2. Adverse economic conditions.

What is an indicator of impairment?

Significant financial difficulty of the issuer.

What should be reported to recognize increases in impairment allowance for amortized cost assets?

Dr Profit or loss, Cr Impairment allowance.

How should impairment allowance for FVOCI assets be adjusted?

Dr Profit or loss, Cr Other comprehensive income.

On January 1, 20X2, what was the amount of the loan originated by Dexter Lee plc?

£500,000.

What hazard rate was assigned to the loan initially on January 1, 20X2?

1% probability of default.

What is the expected lifetime credit loss estimated for the loan?

£125,000.

During which year was a significant deterioration of credit quality observed for the loan?

Year ended 31 December 20X3.

What interest income is calculated during the year ended 31 December 20X5?

£15,000.

What adjustments are made when accounting for a modification of debt terms?

Calculate the PV of remaining cash flows under the existing agreement and new cash flows.

What treatment is required for a difference of 10% or more in debt modification?

Account for the transaction as an 'extinguishment'.

What is the implication for financial liabilities recognized at FVPL when credit risk increases?

Reduction in value of liability leads to gain recognized in profit or loss.

How must transaction fees be treated for extinguished debt?

They should be expensed to profit or loss.

What is the general reporting treatment for derivatives upon initial recognition?

Recognized at their fair value.

What is an embedded derivative with respect to non-derivative contracts?

A derivative embedded within the terms of a non-derivative contract.

When is an embedded derivative not separated from the host contract?

When the combined contract is FVPL.

What examples might indicate a closely related embedded derivative?

An embedded interest rate change that alters payments or a currency clause in a loan.

What happens to fair value changes of derivatives?

They are taken to profit or loss.

What treatment occurs for traded receivables without an IFRS 15 financing element?

Loss allowance measured at lifetime expected credit losses.