IFRS 9 | Financial instruments

1.1

Objective

The objective is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity's future cash flows.

2.1

Scope

This Standard applies to all types of financial instruments except: (a) interests in subsidiaries, associates and joint ventures (unless accounted for under IFRS 9 per other standards); (b) rights and obligations under leases (with specific exceptions for receivables and derivatives); (c) employers' rights and obligations under employee benefit plans; (d) financial instruments issued by the entity that meet the definition of equity; (e) rights and obligations arising under insurance contracts (with exceptions for certain derivatives, investment components, and financial guarantees); (f) forward contracts between an acquirer and a selling shareholder in a business combination; (g) loan commitments other than those specified; (h) share-based payment transactions; (i) rights to reimbursement for provisions; and (j) rights and obligations under IFRS 15 Revenue from Contracts with Customers.

2.3

Loan Commitments

Loan commitments are within the scope if they are designated at fair value through profit or loss, can be settled net in cash or by delivering another financial instrument, or are commitments to provide a loan at a below-market interest rate.

2.4

Non-Financial Items

Contracts to buy or sell non-financial items that can be settled net in cash or another financial instrument are within the scope, unless entered into and held for the purpose of receipt or delivery in accordance with the entity's expected purchase, sale or usage requirements.

2.5

Designation Option

A contract to buy or sell a non-financial item that can be settled net may be irrevocably designated as measured at fair value through profit or loss at inception if it eliminates or significantly reduces a recognition inconsistency.

3.1.1

Initial Recognition

An entity shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.

3.2.3

Derecognition of Assets

An entity shall derecognise a financial asset when contractual rights to cash flows expire or it transfers the financial asset and the transfer qualifies for derecognition.

3.2.6

Transfer Evaluation

When an entity transfers a financial asset, it evaluates the extent to which it retains risks and rewards. If substantially all are transferred, the asset is derecognised. If substantially all are retained, the asset continues to be recognised. If neither transferred nor retained, the entity checks if it retained control.

3.3.1

Derecognition of Liabilities

An entity shall remove a financial liability from its statement of financial position when, and only when, it is extinguished—ie when the obligation specified in the contract is discharged or cancelled or expires.

3.3.2

Exchange/Modification

An exchange between an existing borrower and lender of debt instruments with substantially different terms, or a substantial modification of terms, is accounted for as an extinguishment of the original liability and recognition of a new one.

4.1.1

Asset Classification

Unless the fair value option is applied, financial assets are classified as subsequently measured at amortised cost, fair value through other comprehensive income, or fair value through profit or loss based on: (a) the entity's business model for managing the financial assets and (b) the contractual cash flow characteristics of the financial asset.

4.1.2

Amortised Cost

A financial asset is measured at amortised cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows and the contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

4.1.2A

FVOCI (Debt)

A financial asset is measured at fair value through other comprehensive income if it is held within a business model achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms give rise to cash flows that are solely payments of principal and interest.

4.1.4

FVPL (Residual)

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income. However, an irrevocable election is available for equity instruments to present changes in other comprehensive income.

4.1.5

Fair Value Option

Despite the criteria above, an entity may irrevocably designate a financial asset as measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch).

4.2.1

Liability Classification

Financial liabilities are classified as measured at amortised cost, except for: (a) financial liabilities at fair value through profit or loss (including derivatives); (b) financial liabilities arising when a transfer of a financial asset does not qualify for derecognition; (c) financial guarantee contracts; (d) commitments to provide a loan at a below-market interest rate; and (e) contingent consideration recognised by an acquirer in a business combination.

4.3.3

Embedded Derivatives

If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative is separated if its economic characteristics and risks are not closely related to the host, a separate instrument with the same terms would meet the definition of a derivative, and the hybrid contract is not measured at fair value through profit or loss.

4.4.1

Reclassification

When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. Financial liabilities are not reclassified.

5.1.1

Initial Measurement

Except for trade receivables, a financial asset or liability is measured initially at fair value plus or minus, for items not at fair value through profit or loss, transaction costs directly attributable to the acquisition or issue.

5.2.1

Subsequent Asset Measurement

After initial recognition, financial assets are measured at amortised cost, fair value through other comprehensive income, or fair value through profit or loss.

5.3.1

Subsequent Liability Measurement

After initial recognition, financial liabilities are measured in accordance with paragraphs 4.2.1-4.2.2 (generally amortised cost or FVPL).

5.4.1

Effective Interest Method

Interest revenue is calculated using the effective interest method. This involves applying the effective interest rate to the gross carrying amount of a financial asset, except for purchased or originated credit-impaired assets (use credit-adjusted effective interest rate) or assets that subsequently become credit-impaired (apply rate to amortised cost).

5.5.1

Impairment Recognition

An entity shall recognise a loss allowance for expected credit losses on a financial asset measured at amortised cost or FVOCI, a lease receivable, a contract asset, or a loan commitment and a financial guarantee contract.

5.5.3

Lifetime ECL

At each reporting date, an entity measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

5.5.5

12-Month ECL

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity measures the loss allowance at an amount equal to 12-month expected credit losses.

5.5.15

Simplified Approach

An entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables or contract assets that do not contain a significant financing component. A policy choice exists for trade receivables with a significant financing component and lease receivables.

5.6.1

Reclassification Accounting

Reclassifications are applied prospectively from the reclassification date. The entity does not restate previously recognised gains, losses, or interest.

5.7.1

Gain or Loss Recognition

A gain or loss on a financial asset or financial liability measured at fair value shall be recognised in profit or loss unless it is part of a hedging relationship, is an equity investment designated at FVOCI, or is a liability designated at FVPL where own credit risk changes are presented in OCI.

5.7.5

Equity Investments Election

At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument that is not held for trading. Dividends are recognised in profit or loss.

5.7.7

Liabilities at FVPL

For financial liabilities designated as at fair value through profit or loss, the amount of change in fair value attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless this creates or enlarges an accounting mismatch in profit or loss. The remaining amount of change is presented in profit or loss.

6.1.1

Hedge Accounting Objective

The objective of hedge accounting is to represent the effect of risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or OCI).

6.2.1

Hedging Instruments

A derivative measured at fair value through profit or loss may be designated as a hedging instrument (except for some written options). A non-derivative financial asset or liability measured at fair value through profit or loss may also be designated as a hedging instrument.

6.3.1

Hedged Items

A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction, or a net investment in a foreign operation. It can be a single item or a group of items.

6.4.1

Qualifying Criteria

A hedging relationship qualifies for hedge accounting only if: (a) it consists of eligible instruments and items; (b) there is formal designation and documentation at inception; and (c) it meets hedge effectiveness requirements (economic relationship exists, credit risk does not dominate, and hedge ratio is consistent with risk management).

6.5.2

Types of Hedges

Three types: (a) fair value hedge (exposure to changes in fair value); (b) cash flow hedge (exposure to variability in cash flows); (c) hedge of a net investment in a foreign operation.

6.5.8

Fair Value Hedges

Gain or loss on the hedging instrument is recognised in profit or loss. The hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item and is recognised in profit or loss.

6.5.11

Cash Flow Hedges

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income (cash flow hedge reserve). The ineffective portion is recognised in profit or loss.

6.5.15

Time Value of Options

When separating the intrinsic value and time value of an option, the change in fair value of the time value can be recognised in OCI and accumulated in a separate component of equity, to be amortised or reclassified to profit or loss depending on the nature of the hedged item.

6.7.1

Credit Exposure Option

If an entity uses a credit derivative to manage the credit risk of a financial instrument, it may designate that financial instrument as measured at fair value through profit or loss if specific conditions (name matching, seniority matching) are met.

6.8.1

IBOR Reform Exceptions

Provides temporary exceptions to specific hedge accounting requirements for hedging relationships directly affected by interest rate benchmark reform (e.g., assuming the benchmark is not altered when assessing the highly probable requirement).

7.1.1

Effective Date

An entity shall apply this Standard for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

7.2.1

Transition

An entity generally applies this Standard retrospectively in accordance with IAS 8, with certain exceptions (e.g., hedge accounting is generally prospective).

Appendix A

Definitions

• 12-month expected credit losses: The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
• amortised cost of a financial asset or financial liability: The amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
• credit-impaired financial asset: A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.
• credit loss: The difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (ie all cash shortfalls), discounted at the original effective interest rate.
• derecognition: The removal of a previously recognised financial asset or financial liability from an entity's statement of financial position.
• derivative: A financial instrument or other contract with three characteristics: value changes in response to a specified variable, requires no/small initial net investment, and is settled at a future date.
• effective interest method: The method that is used in the calculation of the amortised cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period.
• expected credit losses: The weighted average of credit losses with the respective risks of a default occurring as the weights.
• financial guarantee contract: A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
• held for trading: A financial asset or financial liability that is acquired/incurred principally for selling/repurchasing in the near term, is part of a portfolio with a pattern of short-term profit-taking, or is a derivative (not a hedge).
• lifetime expected credit losses: The expected credit losses that result from all possible default events over the expected life of a financial instrument.
• loss allowance: The allowance for expected credit losses on financial assets measured at amortised cost, lease receivables and contract assets, the accumulated impairment amount for financial assets measured at FVOCI and the provision for expected credit losses on loan commitments and financial guarantee contracts.