ifrs 9 financial liabilities

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. 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. 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 paragraphs B5.5.22 – B5.5.24]. That determination is made at initial recognition and is not reassessed. the hedging relationship consists only of eligible hedging instruments and eligible hedged items. 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 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. In April 2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro Hedging. (IFRS 9.5.4.4) There should not be a significant impact on recognition and derecognition of financial assets/liabilities because of adopting IFRS 9. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. [IFRS 9, paragraph 4.2.1]. The Standard suggests that ‘investment grade’ rating might be an indicator for a low credit risk. 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 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. If a financial asset is neither measured at amortized cost nor at FVOCI, it is measured at fair value through profit or loss (FVTPL). The treatment of financial liabilities is carried forward essentially unchanged from IAS 39 to IFRS 9. [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. If a hedged forecast transaction subsequently results in the recognition of a non-financial item or becomes a firm commitment for which fair value hedge accounting is applied, the amount that has been accumulated in the cash flow hedge reserve is removed and included directly in the initial cost or other carrying amount of the asset or the liability. [IFRS 9 paragraphs 6.2.1-6.2.2], IFRS 9 allows a proportion (e.g. 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. FVTPL3. A hedging relationship qualifies for hedge accounting only if all of the following criteria are met: Only contracts with a party external to the reporting entity may be designated as hedging instruments. All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. Although IFRS 9 will herald major changes in the accounting for financial assets, the accounting for financial liabilities will remain largely consistent with that applied under IAS 39. b. financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. Some respondents disagreed with applying IFRS 9.B5.4.6 to a modification of a financial … 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. IFRS IN PRACTICE 2019 fi IFRS 9 FINANCIAL INSTRUMENTS 5 1. Please read, International Financial Reporting Standards, Financial instruments — Macro hedge accounting, IBOR reform and the effects on financial reporting — Phase 2, Deloitte e-learning on IFRS 9 - classification and measurement, Deloitte e-learning on IFRS 9 - derecognition, Deloitte e-learning on IFRS 9 - hedge accounting, Deloitte e-learning on IFRS 9 - impairment, IBOR reform and the effects on financial reporting — Phase 1, IFRS Foundation publishes IFRS Taxonomy update, European Union formally adopts IFRS 4 amendments regarding the temporary exemption from applying IFRS 9, Educational material on applying IFRSs to climate-related matters, IASB officially adds PIR of IFRS 9 to its work plan, EFRAG endorsement status report 16 December 2020, A Closer Look — Financial instrument disclosures when applying Interest Rate Benchmark Reform – Phase 1 amendments to IFRS 9 and IAS 39 and Phase 2 amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16, EFRAG endorsement status report 6 November 2020, EFRAG endorsement status report 23 October 2020, Effective date of IBOR reform Phase 2 amendments, Effective date of 2018-2020 annual improvements cycle, IAS 39 — Financial Instruments: Recognition and Measurement, IFRIC 10 — Interim Financial Reporting and Impairment, Different effective dates of IFRS 9 and the new insurance contracts standard, Financial instruments — Effective date of IFRS 9, Financial instruments — Limited reconsideration of IFRS 9, Transition Resource Group for Impairment of Financial Instruments, Original effective date 1 January 2013, later removed, Amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 (removed in 2013), and modified the relief from restating comparative periods and the associated disclosures in IFRS 7, Removed the mandatory effective date of IFRS 9 (2009) and IFRS 9 (2010). 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. 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. 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. For these assets, an entity would recognise changes in lifetime expected losses since initial recognition as a loss allowance with any changes recognised in profit or loss. There is no 'cost exception' for unquoted equities. For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor. The impairment model in IFRS 9 is based on the premise of providing for expected losses. IFRS 9 financial instruments— Understanding the basics . Classification of financial assets. 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. 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. [IFRS 9 paragraph 5.5.18]. [IFRS 9, paragraph 5.7.5]. [IFRS 9 paragraphs B5.5.47], Whilst interest revenue is always required to be presented as a separate line item, it is calculated differently according to the status of the asset with regard to credit impairment. 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. specifically identified cash flows from an asset (or a group of similar financial assets) or, a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). An entity does not restate any previously recognised gains, losses, or interest. [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. In this case, the entity should perform the assessment on appropriate groups or portions of a portfolio of financial instruments. If substantially all the risks and rewards have been retained, derecognition of the asset is precluded. 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). The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified. The fair value at discontinuation becomes its new carrying amount. accounting mismatch).eval(ez_write_tag([[580,400],'xplaind_com-medrectangle-3','ezslot_0',105,'0','0'])); An entity shall classify financial liabilities as subsequently measured at amortized cost except for financial liabilities at FVTPL, financial liabilities resulting from unrecognized transfers, financial guarantee contracts, commitments to provide loan at below market interest rate, and contingent consideration under IFRS 3. Accounting for financial liabilities is not substantially impacted by the adoption of IFRS 9, with one exception . [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. The version of IFRS 9 issued in 2014 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). Also, whilst in principle the assessment of whether a loss allowance should be based on lifetime expected credit losses is to be made on an individual basis, some factors or indicators might not be available at an instrument level. 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. [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]. In other cases the amount that has been accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows affect profit or loss. An approach can be consistent with the requirements even if it does not include an explicit probability of default occurring as an input. IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9, paragraph 4.2.2]: A financial liability which does not meet any of these criteria may still be designated as measured at FVTPL when it contains one or more embedded derivatives that sufficiently modify the cash flows of the liability and are not clearly closely related. Furthermore, the requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt instruments and equity investments. A debt instrument that meets the following two conditions must be measured at amortised cost (net of any write down for impairment) unless the asset is designated at FVTPL under the fair value option (see below): Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments. However, if the host contract is not a financial asset within the scope of IFRS 9, an embedded derivative shall be separated and accounted for under IFRS 9 if and only if (a) economic characteristics and risk of the derivative are not closely related to those of the host, (b) a separate instruments with the same terms as the embedded derivative would meet the definition of a derivative, and (c) the hybrid contract is not measured at FVTPL.eval(ez_write_tag([[580,400],'xplaind_com-medrectangle-4','ezslot_3',133,'0','0'])); Instead of separating the embedded derivative, an entity may designate the hybrid contract as measured at FVTPL except where (a) the embedded derivative does not materially alter the host contract cash flows, or (c) it is evident that separation of the embedded derivative is prohibited. rebalances the hedge) so that it meets the qualifying criteria again. IFRS® 9, Financial Instruments, is the result of work undertaken by the International Accounting Standards Board (the Board) in conjunction with the Financial Accounting Standards Board (FASB) in the US.It was last revised in October 2017. [IFRS 9 paragraph 6.2.4], IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument. 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. In October 2017, the IASB clarified that the compensation payments can also have a negative sign. the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI; and, the ineffective portion is recognised in profit or loss. 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, paragraph 4.3.1]. 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. This paper aims at analyzing the new rules, concepts and principles introduced by IFRS 9. [IFRS 9 Appendix A]. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. 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