IFRS 9 Overview (For all Accountants)

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It is the description of IFRS 9 with some of the revisions. Will be helpful for all accountants. *not owned by me*

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<ul><li> 1. Introduction Classification Recognition and Measurement Impairment Derecognition</li></ul><p> 2. Date Phase CompletedNovember 12, 2009 IASB issued IFRS 9 Financial Instrumentsas the first step in its project to replaceIAS 39. Introduced new requirements forclassification and measurement offinancial assets. Effective date January 1,2013 with early adoption permitted.October 28, 2010 IASB reissued IFRS 9, incorporating newrequirements on accounting for financialliabilities, carrying over IAS 39requirements of derecognition. 3. Date Phase CompletedDecember 16, 2011 Amended effective date of IFRS 9 to January1, 2015.November 19, 2013 IASB issued IFRS 9 Financial Instruments toinclude the new general hedge accountingmodel, allow early adoption of the treatmentof fair value changes due to own credit onliabilities designated at FVPL and removeJanuary 1, 2015 effective date.July 24, 2014 IASB issued the final version of IFRS 9incorporating a new expected credit lossimpairment model. Supersedes all versions.Effective January 1, 2018 with early adoptionpermitted. 4. IAS 39 IFRS 9Classification offinancial assetsFour categories:-Fair value throughprofit or loss (FVTPL)-Loans and receivables-Held to maturity(HTM)-Available-for-salefinancial assetsThree categories:-Amortized cost-Fair value throughothercomprehensiveincome (FVTOCI)-Fair value throughprofit or loss(FVTPL) 5. IAS 39 IFRS 9Classification offinancialliabilitiesTwo categories:-Fair value throughprofit or loss (FVTPL)-Amortized costNo change tocategories. However,for financial liabilitiesdesignated at FVTPLunder the fair valueoption, the fair valuechanges arising fromchanges in the entitysown credit risk arerecognized in OCI. 6. IAS 39 IFRS 9Hybrid contracts(contracts withembeddedderivatives)Separate (bifurcate)if the embeddedderivative is notclosely related to thehost contract and theentire contract is notmeasured at FVTPL.No separation(bifurcation) forfinancial assets.Separation(bifurcation) remainsfor financial liabilitiesand contracts for non-financialassets andliabilities 7. vDebtinstrument?Derivative?Equityinstrument?Hold-to-collectcontractual cash flowsbusiness model?Cash flows that aresolely payments ofprincipal and interest(SPPI)?Conditional fair valueoption (FVO) elected?Financial assets atfair value throughprofit or loss(FVTPL)Financial assets atamortized costFinancial assets atFVTOCI(with recycling)Held fortrading?FVOCI optionelected?Financial assets atFVTOCI(no recycling)NO NOYESYESYESNONOYESNOYES YESNOYESYESNO 8. IFRS 9 paragraph 4.1.2:A financial asset shall be measured at amortizedcost if both of the following conditions are met:a. the financial asset is held within a businessmodel whose objective is to hold financial assetsin order to collect contractual cash flows (hold-to-collect business model test); andb. the contractual terms of the financial asset giverise on specified dates to cash flows that aresolely payments of principal and interest on theprincipal amount outstanding (SPPI contractualcash flow characteristics test). 9. Examples of financial instruments that arelikely to be classified and measured atamortized cost under IFRS 9 include: Trade receivables Loan receivables Investments in government bonds that are notheld for trading Investments in term deposits at standard interestrates 10. Hold-to-collect business model test The entitys objective is to hold the financial asset tocollect the contractual cash flows from the financialasset, done at an aggregate level. IFRS 9 does not require that the financial asset isalways held until its maturity. Key management personnel (KMP) determinewhether a financial asset meets the business modeltest (facts and circumstances, how an entity ismanaged, type of information provided tomanagement). 11. SPPI contractual cash flow characteristics test Contractual terms of the financial asset give rise tocash flows that are solely payments of principal andinterest on the principal amount outstanding onspecified dates , done at an instrument level Interest is deemed to be the consideration for thetime value of money and credit risk Prepayment and extension options do not necessarilyviolate the SPPI contractual cash flow characteristicstest 12. IFRS 9 paragraph 4.1.2A:A financial asset shall be measured at fair value throughother comprehensive income if both of the followingconditions are met:a. the financial asset is held within a business modelwhose objective is achieved by both collectingcontractual cash flows and selling financial assets(business model test); andb. the contractual terms of the financial asset give riseon specified dates to cash flows that are solelypayments of principal and interest on the principalamount outstanding (SPPI contractual cash flowcharacteristics test). 13. Business model test: Both collecting contractual cash flows and sellingfinancial assets are integral to achieving the objectiveof the business model Example: the objective of the business model may beto manage everyday liquidity needs, to maintain aparticular interest yield profile or to match theduration of the financial assets to the duration of theliabilities that those assets are funding This will typically involve greater frequency and valueof sales of financial assets 14. For debt financial instruments classified asFVTOCI: Fair value changes are recognized in OCI Interest revenue, foreign exchange revaluationand impairment losses or reversals are recognizedin profit or loss Upon derecognition, the net cumulative fair valuegains or losses are recycled to profit or loss (withrecycling) 15. IFRS 9 paragraph 4.1.4:However, an entity may make an irrevocableelection at initial recognition for particularinvestments in equity instruments that wouldotherwise be measured at fair value throughprofit or loss to present subsequent changesin fair value through other comprehensiveincome. 16. For equity investments elected to beclassified as FVTOCI: Not held for trading Fair value changes are recognized in OCI Dividends are recognized in profit or loss On disposal, cumulative fair value changes arerequired to remain in OCI, however entities havethe ability to transfer amounts between reserveswithin equity (no recycling) 17. IFRS 9 paragraph 4.1.4:A financial asset shall be measured at fairvalue through profit or loss unless it ismeasured at amortized cost in accordancewith paragraph 4.1.2 or at fair value throughother comprehensive income in accordancewith paragraph 4.1.2A. 18. IFRS 9 paragraph 4.1.5:Despite paragraphs 4.1.1-4.1.4, an entity may, atinitial recognition, irrevocably designate afinancial asset as measured at fair value throughprofit or loss if doing so eliminates orsignificantly reduces a measurement orrecognition inconsistency (sometimes referredto as an accounting mismatch) that wouldotherwise arise from measuring assets orliabilities or recognizing the gains and losses onthem on different bases. (fair value option) 19. A financial asset is classified and measured atfair value through profit or loss (FVTPL) if it is: A held-for-trading financial asset (a derivative thathas not been designated in a hedging relationship, ora financial asset that is held for the purposes of short-termsale or repurchase) A debt instrument that does not qualify to bemeasured at amortized cost An equity instrument for which the entity has notelected to classify the instrument as FVTOCI A financial asset where the entity has elected tomeasure the asset at FVTPL under the fair valueoption (FVO) 20. Examples of financial instruments that are likelyto fall under the FVTPL category include: Investments in shares of listed companies that theentity has not elected to account for it as at FVTOCI Derivatives that have not been designated in ahedging relationship (interest rate swaps, commodityfutures/options contracts, foreign exchangefutures/options contracts) Investments in convertible notes, commodity linkedbonds Contingent consideration receivable from the sale of abusiness 21. The fair value option (FVO) The designation is irrevocable. More commonly used by financial institutions. 22. Financial liabilitiesat amortized costFinancial liabilitiesat fair valuethrough profit orloss (FVTPL)Guidance onspecific financialliabilities 23. IFRS 9 requires all financial liabilities to bemeasured at amortized cost unless: The financial liability is required to be measured atFVTPL because it is held for trading The financial liability arise when a transfer offinancial asset does not qualify for derecognitionor when the continuing involvement approachapplies The financial liability is a financial guaranteecontract 24. IFRS 9 requires all financial liabilities to bemeasured at amortized cost unless: The financial liability commits to provide a loan ata below-market interest rate The financial liability is a contingent considerationrecognized by an acquirer in a businesscombination to which IFRS 3 applies The entity elects to measure the financial liabilityat FVTPL (fair value option) 25. Examples of financial liabilities that are likelyto be classified and measured at amortizedcost include: Trade payables Loan payable with standard interest rates (such asbenchmark rate plus a margin) Bank borrowings 26. In accordance with IFRS 9, financial liabilitiesare to be measured at fair value throughprofit or loss if either: The financial liability is required to be measured atFVTPL because it is held for trading (e.g.Derivatives that have not been designated in ahedging relationship) The entity elects to measure the financial liabilityat FVTPL (fair value option) 27. Examples of financial liabilities that are likely tobe classified and measured at fair value throughprofit or loss (FVTPL) include: Derivatives that have not been designated in ahedging relationship (interest rate swaps, commodityfutures/options contracts, foreign exchangefutures/options contracts) Convertible note liabilities that have been designatedas FVTPL Contingent consideration payable that arise frombusiness combination 28. Fair value option (FVO) IFRS 9 permits an entity to designate financialliabilities at FVTPL if any of the following apply: If electing fair value will eliminate or reduce anaccounting mismatch If the financial liability is managed and evaluated on afair value basis with other financial liabilities or financialassets and liabilities as a group A hybrid contract (e.g. A convertible note or a loan witha leveraged interest rate) contains an embeddedderivative that would otherwise be required to beseparated. 29. Fair value option (FVO) If the entity uses the fair value option (FVO),changes in fair value that relate to changes in theentitys own credit status are presented in othercomprehensive income instead of profit or loss.However, if it creates or enlarges an accountingmismatch in profit or loss, then all gains or lossare required to be presented in profit or loss. This is not subsequently recycled to profit or losswhen the financial liability is derecognized. 30. Financial guarantee contracts Commitments to provide a loan at a belowmarket interest rate Financial liabilities resulting from the transferof a financial asset that does not qualify forderecognition or when the continuinginvolvement approach applies These are subsequently measured differently(neither at amortized cost or fair value) 31. IFRS 9 has eliminated the requirement toseparately account for embedded derivativesfor financial assets. Instead, IFRS 9 requiresentities to assess the hybrid contract as awhole for classification. Bifurcation is still applicable for embeddedderivatives for financial liabilities as alsorequired by IAS 39 previously. 32. IFRS 9 requires the reclassification of financialassets if an entity changes its business model. Must be determined by senior management as aresult of an external or internal change Must be a significant change to the entitysoperation These are expected to be rare and infrequentevents An entity shall not reclassify any financialliability. 33. The following changes in circumstances areNOT considered changes in the overallbusiness model of the entity: An entity changes its intention in relation to aspecific financial asset The temporary disappearance of a particularmarket for financial assets The transfer of financial assets between differentparts of an entity that have different businessmodels 34. Reclassification mechanics: Accounted for prospectively from thereclassification date Entities are not permitted to restate previouslyrecognized gains, losses or interest Additional disclosures apply when an entityreclassifies its debt instruments 35. Initial Measurement: At fair value, plus for those financial assets andliabilities not classified at fair value through profitor loss, directly attributable transaction costs. Subsequent Measurement:Classification Valuation FVChangesInterest/DividendsImpair-mentForexFAFVPL FV PL PL PL PLFAFVOCI FV OCI* PL PL/OCI PL/OCIFAAC AmortizedCostNone PL PL PL 36. An entity shall recognize a loss allowance forexpected credit losses on a financial asset that ismeasured as FAAC or FAFVOCI, a leasereceivable, a contract asset or a loancommitment and a financial guarantee. The new impairment model establishes a three-stageapproach, based on changes in expectedcredit losses of a financial instrument. Thisdetermines the recognition of impairment (aswell as the recognition of interest revenue). 37. At initial recognition, an entity recognizes a loss allowance equalto 12 months expected credit losses (present value of all cashshortfalls over the remaining life, discounted at the originaleffective interest rate). After initial recognition, the 3-stage expected credit loss modelapplies as follow: Stage 1: credit risk has not increased significantly since initialrecognition entities continue to recognize 12 months expectedlosses, updated at each reporting date Stage 2: credit risk has increased significantly since initial recognition entities recognize lifetime expected losses and interest is presentedon a gross basis Stage 3: the financial asset is credit impaired entities recognizelifetime expected losses but present interest on a net basis (based onthe gross carrying amount less credit allowance) 38. Stage 1 2 3Recognition ofimpairment12 monthexpectedcredit lossesLifetime expected credit lossRecognition ofinterestEffective interest on the grosscarrying amount (beforededucting expected losses)Effectiveinterest on thenet (carrying)amount 39. GeneralApproachSimplifiedApproachShort-term trade receivables Long-term trade receivables Policy election at entity levelOther debt financial assets measured at ACor FVOCILoan commitments and financial guaranteecontracts not accounted for at FVPLLease receivables Policy election at entity levelContract assets (do not contain a significantfinancing component)Contract assets (contain...</p>

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