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IFRS-9 Financial Instruments


IFRS 9 is effective for annual periods initializing on or after 1 January 2018, with early application permitted. IFRS 9 describes how an entity should classify and measure financial assets, financial liabilities, and a few contracts to shop for or sell non-financial items.

If we start with the classification of monetary assets, IFRS 9 classifies financial assets under three headings as follows:

Classification of monetary assets under IFRS 9

  1. Financial assets at fair value through profit or loss (FVTPL)
    FVTPL is the traditional default classification for financial assets. Apart from financial assets designated to be measured or accounted for somehow, FVTPL can be applied to all. This systematization includes any financial assets held for trading purposes and derivatives unless they’re a part of a properly designated hedging arrangement. For example, debt instruments will be classified to be measured and accounted for at FVTPL unless they must be correctly specified to be measured at amortized cost (see later). Initial recognition at fair value is generally cost incurred, and this may reject transactions costs, which are imposed to profit or loss as incurred. Re-measurement to fair value occurs at each reporting date, with any change in upright value taken to profit or loss for the year, which successfully includes a yearly impairment review.
  1. Financial assets at fair value through other comprehensive income (FVTOCI)
    This categorization applies to instruments of equity and straightforward debt instruments and must be designated upon initial recognition. It’ll apply to an entity’s financial assets within a business model whose objective is achieved by collecting the contractual cash flows and trading the financial assets. The contractual cash flows will usually be collected on a selected date containing principal and interest payments. Initial recognition at fair value would ordinally include the associated agreement costs of purchase. The accounting treatment automatically consolidates an impairment review, with any change in fair value taken to other comprehensive income within the year.

    Upon de-recognition, any gain or loss is predicated upon the carrying amount at the date of disposal. One crucial point is that there’s no recycling of any amounts previously taken to equity in earlier accounting periods. Instead, at de-recognition, an entity may prefer to make an equity transfer from other equity components to retained earnings as any amounts formerly taken to equity can now be considered having been realized.

  1. Financial assets measured at amortized cost
    This categorization can apply only to debt instruments and must be designated upon first recognition. For the designation to be successful, the financial asset must pass two assessments as follows:
  • Business model test
    The establishment must be holding the financial asset to gather within the contractual cash flows related to that financial asset. If this is often not the case, like the financial asset being held then traded to require advantage of changes in fair value, then the test is failed. Therefore, the financial asset reverts to the default classification to be measured at FVTPL.
  • Income characteristics test
    The contractual cash flows collected must consist solely of payment of interest and capital to pass this test. If this is often not the case, the test is failed and therefore, the financial asset reverts to the default classification to be measured at FVTPL.

    One example of a financial asset that might fail this test may be a bond. While there’s receipt of the nominal rate of interest payable by the bond issuer, and therefore the bonds are going to be converted into shares or cash at a later date, the cash flows are suffering from the very fact that the bondholder features an option to make at some later date – either to get shares or cash at the time the bond is redeemed. As a result, the nominal rate of interest received will be less than for the same financial asset without transformational rights to reflect the bondholder’s proper choice at some later date.

This classification of monetary asset requires annual review for evidence of possible impairment and, if there’s evidence, there must be an impairment review. Any impairment recognized must be charged to profit or loss immediately.

One problem regarding financial assets measured at fair value is whether or not a reliable fair value is often determined at the reporting date. It might be a comparatively straightforward process for exchange-traded financial assets, like equity shares during a listed entity. If, however, the financial assets in question aren’t traded on an exchange, there could also be no definitive method to work out fair value at a specific date. It might end in the exercise of judgment or discretion, which could compromise the reliability or pertinent of any amounts accounted for as a good value.

At AJSH, we assist our clients in bookkeeping, payroll, auditing, taxation, secretarial compliances and preparation of financial statements ensuring compliance with applicable accounting standards. If you have any questions or wish to know more about IFRS 9, kindly contact us


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