IFRS 9 Financial Instruments
Definitions
A financial instrument is “any contract that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another entity” (IAS 32, para 11)
A Financial Asset is any asset that is:
Cash
an equity instrument of another entity
a contractual right to receive cash or another financial asset from another entity
a contractual right to exchange financial instruments with another entity under conditions that are
potentially favorable (IAS 32, para 11)
A Financial Liability is any liability that is a
Contractual obligation to deliver cash or another financial asset to another entity.
Contractual obligation to exchange financial instruments with another entity under conditions that
are potentially unfavorable.
A contract that will or may be settled in the entity’s own equity instrument, and is non-derivative
for which the entity is or may be obliged to deliver a variable number of the entity’s own equity
instruments. (IAS 32, para 11)
An equity instrument is any “contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities” (IAS 32, para 11)
Financial Liabilities
Initial recognition
At initial recognition, financial liabilities are measured at fair value.
If FL will be held at FVPL, transaction cost should be expensed to SOPL.
If FL will not be held at FVPL, transaction cost should be deducted from carrying amount.
Subsequent Treatment of Financial Liability (either at)
Amortised Cost Fair Value through
Profit or loss (FVPL)
Amortised Cost
This category is used for most of the financial liabilities.
Interest income is calculated using the effective rate. This is charged to profit or loss and increase the
carrying amount of the financial liability. Cash payments reduce the liability’s carrying amount.
Fair value through Profit or loss
This category is used for derivatives or liabilities held for trading.
The Financial liability is revalued to fair value at the reporting date with the gain or loss in profit or
loss.
A designation can be made to use this category in order to reduce an accounting mismatch. In this
instance, the change in the fair value of the liability must be split:
The change due to own credit risk is reported to OCI.
The remaining change is reported to profit or loss.
Compound Financial Instruments
A Compound instrument is a financial instrument that has characteristics of both equity and liabilities.
An example would be debt that can be redeemed either in cash or a fixed number of equity shares.
IAS 32 requires issuers of compound instruments to split them into: -
A financial liability (the liability to repay the debt holder in cash)
An equity instrument (the option to convert into shares)
Convertible Debt
Liability Component Equity Component
Calculated as the present value of Calculated as the proceeds received
the repayments discounted using less the liability component
the rate on non-convertible debt
Financial Assets
Initial Recognition
At Initial recognition financial assets will be held at FVPL, transaction costs should be
expensed to SOPL.
If the financial asset will not be held at FVPL, transaction costs should be added to its
carrying amount.
Investments in equity
Investments in equity instruments (such as investment in the ordinary shares of another entity) are
normally measured at FVPL.
It is possible to measure an equity instrument at fair value through other comprehensive income,
provided that.
The equity instrument is not held for trading.
An irrevocable choice for this designation is made upon initial recognition of the asset.
Investments in equity
FVPL
FVOCI can be used if:
Not held for trade
Irrevocably designated
Investments in Debt
Financial Assets that are debt instruments can be measured in one of the three ways: -
1. An investment in a debt instrument is measured at amortised cost if:
The Financial asset is held within a business model whose aim is to collect contractual cash
flows.
The contractual terms of the financial asset give rise to cash flows that are solely payments
of the principal and interest on the principal amount outstanding.
2. An investment in a debt instrument is measured at fair value through other comprehensive
income if:-
The financial asset is held within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets.
The contractual terms of the financial asset give rise to cash flows that are solely
payments of the principal and interest on the principal amount outstanding.
3. An investment in a debt instrument that is not measured at amortised cost or fair value
through other comprehensive income will be measured at FVPL.
Investments in Debt
Amortised Cost if: FVOCI if: FVPL if not measured at
- Contractual Cash either:
- Contractual
Cash flow flow characteristics - Amortised cost
characteristics test passed
test passed - FVOCI
- Business - Business model
Model is to involves holding
hold until to maturity and
maturity selling
Financial Asset Impairments
The impairment rules in IFRS 9 apply to debt instruments measured at amortised cost or at fair value
through other comprehensive income.
For financial assets within the scope of the impairment rules, entities must calculate a loss allowance.
Increases and decreases in the loss allowance are charged to Profit or loss.
This loss allowance must be equal to:
12 months expected credit losses – if credit risk has not increased significantly.
Lifetime expected credit losses – If credit risk has increased significantly.
Definitions
Credit loss – the present value of the difference between the contractual cash flows due to an entity and
the cash flows that it expects to receive.
Expected credit loss – the weighted average credit losses.
Lifetime expected credit losses – The expected credit losses that results from all possible default
events.
12 month expected credit losses – The proportion of the lifetime expected credit losses that arise from
default events within 12 months of the reporting date.
Derivatives
A derivative is a financial instrument with the following characteristics:
Its value changes in response to an underlying variable.
It requires little or no initial investment.
It is settled at a future date.
Derivatives are measured at fair value through profit or loss (FVPL)
