financial asset definition ifrs 9

An asset is transferred if either the entity has transferred the contractual rights to receive the cash flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has assumed a contractual obligation to pass those cash flows on under an arrangement that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5], Once an entity has determined that the asset has been transferred, it then determines whether or not it has transferred substantially all of the risks and rewards of ownership of the asset. [IFRS 9 paragraphs 6.5.2(a) and 6.5.3], For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss (or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is recognised in profit or loss. IFRS 9 identifies two different types of cash flows that might arise from the contractual terms of a financial asset: 1. [IFRS 9 paragraph 5.4.1], In the case of a financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired, interest revenue is calculated by applying the effective interest rate to the amortised cost balance, which comprises the gross carrying amount adjusted for any loss allowance. [IFRS 9 paragraph 5.5.18]. Proficiency level: 1 Testing level: 1 Past Paper Analysis All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are measured at fair value. La NIIF 9 establece las características de los flujos de efectivo contractuales y el modelo del negocio de la entidad a partir de la gestión de los activos. IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is currently at the discussion paper phase of the due process. [IFRS 9, paragraphs 3.2.6(a)-(b)], If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. 90 IFRS IN PRACTICE 2019 fi IFRS 9 FINANCIAL INSTRUMENTS. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply. leasing contracts, insurance contracts, contracts for the purchase or sale of a non-financial items). In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. An 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. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is low. [IFRS 9 paragraph 5.5.5], With the exception of purchased or originated credit-impaired financial assets (see below), the loss allowance for financial instruments is measured at an amount equal to lifetime expected losses if the credit risk of a financial instrument has increased significantly since initial recognition, unless the credit risk of the financial instrument is low at the reporting date in which case it can be assumed that credit risk on the financial instrument has not increased significantly since initial recognition. IFRS 9 (2014) was issued as a complete standard including the requirements previously issued and the additional amendments to introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. [IFRS 9 paragraph 5.4.1], In the case of purchased or originated credit-impaired financial assets, interest revenue is always recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying amount. IFRS 9 requires that the same impairment model apply to all of the following: With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be measured through a loss allowance at an amount equal to: A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15. [IFRS 9 paragraph 6.6.4], Accounting for qualifying hedging relationships. IFRS 9 Changes to Financial Assets Accounting and its Tax Implications. A “credit-adjusted effective interest” rate should be used for expected credit losses of purchased or originated credit-impaired financial assets.  In contrast to the “effective interest rate” (calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected credit losses of the financial asset. [IFRS 9 paragraph 6.2.4], IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument. IFRS 9 follows a principles approach based on assessing the entity's business model for managing financial assets and the contractual cash flow characteristics of the financial asset. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be approximately proportional to the overall variability in cash flows of the group: it is a hedge of foreign currency risk; and, the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume [IFRS 9 paragraph 6.6.1], the cumulative gain or loss on the hedging instrument from inception of the hedge; and. [IFRS 9, paragraph 4.3.1]. or, a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets), the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset. [IFRS 9 paragraphs 6.2.1-6.2.2], IFRS 9 allows a proportion (e.g. IFRS 9 does not define this term, instead, an NFI has to define it in the context of its type of financial instruments. So far, the result consists of the publication of IFRS 9 “Financial Instruments” issued by IASB and an exposure draft on financial instruments issued by FASB. IFRS 9 requires entities to estimate and account for expected credit losses for all relevant financial assets (mostly debt securities, receivables including lease receivables, contract assets under IFRS 15, loans), starting from when they first acquire a financial instrument. it consists of items individually, eligible hedged items; the items in the group are managed together on a group basis for risk management purposes; and. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. An entity does not restate any previously recognised gains, losses, or interest. [IFRS 9 paragraph 6.5.15] This reduces profit or loss volatility compared to recognising the change in value of time value directly in profit or loss. In the case of a financial asset that is not a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at the reporting date, interest revenue is calculated by applying the effective interest rate method to the gross carrying amount. [IFRS 9 paragraphs 5.5.13 – 5.5.14]. Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such). The component may be a risk component that is separately identifiable and reliably measurable; one or more selected contractual cash flows; or components of a nominal amount. The difference relates not just to the measurement options available, but also to the process that is followed when determining the measurement basis that will apply. One of the key differences introduced by IFRS 9 Financial Instruments (“IFRS 9”) relates to the manner in which financial assets are classified. This includes instances when the hedging instrument expires or is sold, terminated or exercised. It was last revised in October 2017. The consequence of credit risk increasing significantly since initial recognition is that a loss allowance, equal to lifetime ECLs, must be recognised. [IFRS 9 paragraph 5.5.17], The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. Under IFRS 9, Financial Instruments, banks will have to estimate the present value of expected credit losses in a way that reflects not only past events but also current and prospective economic conditions.Clearly, complying with the 160-page standard will require advanced financial modeling skills. [IFRS 9, paragraphs 5.7.7-5.7.8]. Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow hedges: The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign operation. Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition. at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. According to IFRS 9, financial assets and/or liabilities are recognised in a financial statement when the organisation becomes party to the financial instrument contract. We’ll have much more to say about the modeling challenges in upcoming posts. an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach. For these assets, entity recognises only the cumulative changes in lifetime ECL since initial recognition of such an asset (IFRS 9.5.5.13-14). Financial assets under IFRS 9 - The basis for classification has changed. the liability is part or a group of financial liabilities or financial assets and financial liabilities that is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel. On initial recognition, a financial asset is classified into one of the three primary measurement categories: – amortised cost; –air value through other comprehensive income (FVOCI); or f However, an entity may designate an equity instrument to be measured at FVOCI. In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of each hedged period: If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e. It addresses the accounting for financial instruments. [IFRS 9, paragraph 4.4.1]. For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the following (in absolute amounts): The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is recognised in profit or loss. [IFRS 9 paragraph 6.5.10], Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. Example 1 An entity holds investments to collect their contractual cash flows. For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. If substantially all the risks and rewards have been transferred, the asset is derecognised. IFRS 9 sets out a specific approach for purchased or originated credit-impaired financial assets (often abbreviated to ‘POCI’ assets). Recognition and measurement – financial assets. The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open, dynamic portfolios. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss. Each word should be on a separate line. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortised cost unless the fair value option is applied. [IFRS 9 paragraph 6.2.5], Combinations of purchased and written options do not qualify if they amount to a net written option at the date of designation. The entity may designate that financial instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall document the designation concurrently. For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. It includes observable data that has come to the attention of the holder of a financial asset about the following events: Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. … Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not passed (see above). These statements are key to both financial modeling and accounting. (IAS 32 par.11) include the new general hedge accounting model; allow early adoption of the requirement to present fair value changes due to own credit on liabilities designated as at fair value through profit or loss to be presented in other comprehensive income; and, doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, or. [IFRS 9, paragraph 3.2.6(c)]. Let's connect. there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and, the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph 6.4.1(c)], the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and. [IFRS 9 paragraph 6.7.1], If designated after initial recognition, any difference in the previous carrying amount and fair value is recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2]. If the entire contract is designated as the hedging instrument, hedge. [IFRS 9 paragraph 5.5.16], For all other financial instruments, expected credit losses are measured at an amount equal to the 12-month expected credit losses. The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. 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. On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7. rebalances the hedge) so that it meets the qualifying criteria again. [IFRS 9, paragraph 4.1.5]. All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in 'other comprehensive income'. A financial asset is classified as measured at amortized cost if (a) the company’s objective of holding the asset is to collect contractual cash flows, and (b) those contractual cash flows are solely payments of principal and interest (SPPI).eval(ez_write_tag([[300,250],'xplaind_com-box-3','ezslot_2',104,'0','0'])); A financial asset is classified as measured at FVOCI if (a) the company’s objective is to collect the contractual cash flows or sell the asset, and (b) those cash flows are solely payments of principal and interest. IFRS 9 is built on a logical, single [IFRS 9 paragraph 6.5.4]. On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. [IFRS 9, paragraph 3.3.1] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. NZ IFRS 9 Financial Instruments For-profit Specifies the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. At initial recognition, an entity may irrevocably elect to measure certain financial liabilities at FVTPL if doing so would improve recognition and measurement consistency or the liabilities relate to a group of assets/liabilities which are managed collectively and measured at fair value. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. [IFRS 9 paragraph 6.1.3], In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9 [IFRS 9 paragraph 7.2.21]. [IFRS 9 paragraph 6.3.4], The hedged item must generally be with a party external to the reporting entity, however, as an exception the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation. An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. A financial asset is a liquid asset that represents—and derives value from—a claim of ownership of an entity or contractual rights to future payments from … The embedded derivative concept that existed 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. [IFRS 9, paragraph 4.2.1]. [IFRS 9, paragraph 4.3.5], IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into the amount of change in fair value attributable to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented in profit or loss. IFRS 9 also requires that (other than for purchased or originated credit impaired financial instruments) if a significant increase in credit risk that had taken place since initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial recognition) then the expected credit losses on the financial instrument revert to being measured based on an amount equal to the 12-month expected credit losses. Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a significant impact on the expected future cash flows of the financial asset. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. the cumulative change in fair value of the hedged item from inception of the hedge. These words serve as exceptions. The funding needs of the entity the hedging relationship meets all of the hedge effectiveness requirements (see below) [IFRS 9 paragraph 6.4.1]. IFRS 9 also allows only the intrinsic value of an option, or the spot element of a forward to be designated as the hedging instrument.  An entity may also exclude the foreign currency basis spread from a designated hedging instrument. Those that are These various derecognition steps are summarised in the decision tree in paragraph B3.2.1. The following decision tree shows how financial assets that are debt instruments are classified under IFRS 9: As shown in the table and decision tree above, the classification of a financial asset that is a debt instrument is based on whether that financial asset will pass the contractual cash flow characteristics test and a business model test. This paper aims at analyzing the new rules, concepts and principles introduced by IFRS 9. [IFRS 9 paragraph 6.5.14].   This version supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. If a hybrid contract contains a host which is an asset within the scope of IFRS 9, the whole contract must comply with the classification requirements for financial assets. [IFRS 9 paragraphs B5.5.44-45], Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation thereof) that will be applied when recognising the financial asset resulting from the commitment. It might even be the case for those only holding short-term receivables. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with only dividend income recognised in profit or loss. the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient), the entity has an obligation to remit those cash flows without material delay, for equity investments measured at FVTOCI, or. A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. When a hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. The application guidance provides a list of factors that may assist an entity in making the assessment. [IFRS 9, paragraph 5.1.1], Subsequent measurement of financial assets. The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payment where applicable. When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option, it recognises some or all of the change in the time value in OCI which is later removed or reclassified from equity as a single amount or on an amortised basis (depending on the nature of the hedged item) and ultimately recognised in profit or loss. The amendments are to be applied retrospectively for fiscal years beginning on or after 1 January 2019; early application is permitted. Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting continues for the remainder of the hedging relationship). Effective for annual periods beginning on or after 1 January 2022. If certain eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on financial hedging instruments with losses or gains on the risk exposures they hedge. July 25, 2019. A debt instrument that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under the fair value option (see below): All other debt instruments must be measured at fair value through profit or loss (FVTPL). Subsequent measurement of financial liabilities, IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. IFRS 9 EXAMPLES AND EXERCISES Acknowledgement This material is based on IFRS 9 (published by IASB) and Get ready for IFRS 9 (published by Grant Thornton) Required For Examples 1 to 7, determine the objective of the business model. IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). There are three types of hedging relationships: Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity instrument designated as at FVTOCI). 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. Whilst for equity investments, the FVTOCI classification is an election. Possible consequences of IFRS 9 include: • More income statement volatility. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9 paragraph 6.5.2(b)]. [IFRS 9 paragraph 6.5.11], When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12], A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only transfer the cumulative gain or loss within equity. The hedge accounting requirements in IFRS 9 are optional. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. [IFRS 9 paragraphs 5.5.3 and 5.5.15], Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for all contract assets and/or all trade receivables that do constitute a financing transaction in accordance with IFRS 15. the hedging relationship consists only of eligible hedging instruments and eligible hedged items. At each reporting date, an entity assesses whether the credit risk on a financial asset has increased significantly since initial recognition.

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