IFRS 9

 

Financial Instruments

 

 

In April 2001 the International Accounting Standards Board (Board) adopted IAS 39 Financial Instruments: Recognition and Measurement, which had originally been issued by the International Accounting Standards Committee in March 1999.

 

The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly, the Board divided its project to replace IAS 39 into three main phases. As the Board completed each phase, it issued chapters in IFRS 9 that replaced the corresponding requirements in IAS 39.

 

In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and measurement of financial assets. In October 2010 the Board added the requirements related to the classification and measurement of financial liabilities to IFRS 9. This includes requirements on embedded derivatives and how to account for changes in own credit risk on financial liabilities designated under the fair value option.

 

In October 2010 the Board also decided to carry forward unchanged from IAS 39 the requirements related to the derecognition of financial assets and financial liabilities. Because of these changes, in October 2010 the Board restructured IFRS 9 and its Basis for Conclusions.  In  December  2011  the  Board  deferred  the  mandatory  effective  date  of IFRS 9.

 

In November 2013 the Board added a Hedge Accounting chapter. IFRS 9 permits an entity to choose as its accounting policy either to apply the hedge accounting requirements of IFRS  9  or  to  continue  to  apply  the  hedge  accounting  requirements  in  IAS  39. Consequently, although IFRS 9 is effective (with limited exceptions for entities that issue insurance contracts and entities applying the IFRS for SMEs Standard), IAS 39, which now contains only its requirements for hedge accounting, also remains effective.

 

In July 2014 the Board issued the completed version of IFRS 9. The Board made limited amendments to the classification and measurement requirements for financial assets by addressing a narrow range of application questions and by introducing a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments.  The  Board  also  added  the  impairment  requirements  relating  to  the accounting for an entity’s expected credit losses on its financial assets and commitments to extend credit. A new mandatory effective date was also set.

 

In May 2017 when IFRS 17 Insurance Contracts was issued, it amended the derecognition requirements in IFRS 9 by permitting an exemption for when an entity repurchases its financial liability in specific circumstances.

 

In October 2017 IFRS 9 was amended by Prepayment Features with Negative Compensation (Amendments to IFRS 9). The amendments specify that particular financial assets with prepayment features that may result in reasonable negative compensation for the early termination of such contracts are eligible to be measured at amortised cost or at fair value through other comprehensive income.

 

 

 

 

 

 

 

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IFRS 9

 

Other Standards have made minor consequential amendments to IFRS 9. They include Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1) (issued December 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011), Annual Improvements to IFRSs 2010–2012 Cycle (issued December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS  16  Leases  (issued  January  2016)  and  Amendments  to  References  to  the  Conceptual Framework in IFRS Standards (issued March 2018).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

CONTENTS

 

 

 

from paragraph

 

 

 

INTERNATIONAL FINANCIAL REPORTING STANDARD 9 FINANCIAL INSTRUMENTS

 

CHAPTERS

 

1 OBJECTIVE

 

 

 

 

1.1

 

 

 

2 SCOPE                                                                                                    2.1

 

 

 

3 RECOGNITION AND DERECOGNITION                                                         3.1.1

 

 

 

3.1 Initial recognition                                                                                  3.1.1

 

 

 

3.2 Derecognition of financial assets                                                              3.2.1

 

 

 

3.3 Derecognition of financial liabilities                                                          3.3.1

 

 

 

4 CLASSIFICATION                                                                                    4.1.1

 

 

 

4.1 Classification of financial assets                                                              4.1.1

 

 

 

4.2 Classification of financial liabilities                                                           4.2.1

 

 

 

4.3 Embedded derivatives                                                                            4.3.1

 

 

 

4.4 Reclassification                                                                                    4.4.1

 

 

 

5 MEASUREMENT                                                                                      5.1.1

 

 

 

5.1 Initial measurement                                                                               5.1.1

 

 

 

5.2 Subsequent measurement of financial assets                                              5.2.1

 

 

 

5.3 Subsequent measurement of financial liabilities                                          5.3.1

 

 

 

5.4 Amortised cost measurement                                                                  5.4.1

 

 

 

5.5 Impairment                                                                                          5.5.1

 

 

 

5.6 Reclassification of financial assets                                                           5.6.1

 

 

 

5.7 Gains and losses                                                                                  5.7.1

 

 

 

6 HEDGE ACCOUNTING                                                                              6.1.1

 

 

 

6.1 Objective and scope of hedge accounting                                                  6.1.1

 

 

 

6.2 Hedging instruments                                                                             6.2.1

 

 

 

6.3 Hedged items                                                                                       6.3.1

 

 

 

6.4 Qualifying criteria for hedge accounting                                                    6.4.1

 

 

 

6.5 Accounting for qualifying hedging relationships                                         6.5.1

 

 

 

6.6 Hedges of a group of items                                                                     6.6.1

 

 

 

6.7 Option to designate a credit exposure as measured at fair value through profit or loss

 

6.7.1

 

 

 

7 EFFECTIVE DATE AND TRANSITION                                                            7.1.1

 

 

 

7.1 Effective date                                                                                       7.1.1

 

 

 

7.2 Transition                                                                                            7.2.1

 

 

 

7.3 Withdrawal of IFRIC 9, IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013)               7.3.1

 

 

 

APPENDICES

 

A Defined terms

 

 

 

continued…

 

 

 

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IFRS 9

 

…continued

 

B Application guidance

 

C Amendments to other Standards

 

APPROVAL BY THE BOARD OF IFRS 9 ISSUED IN NOVEMBER 2009

 

APPROVAL BY THE BOARD OF THE REQUIREMENTS ADDED TO IFRS 9 IN OCTOBER 2010

 

APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 9:

 

MANDATORY EFFECTIVE DATE IFRS 9 AND TRANSITION

DISCLOSURES (AMENDMENTS TO IFRS 9 (2009), IFRS 9 (2010) and IFRS 7) ISSUED IN DECEMBER 2011

 

IFRS 9 FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING AND AMENDMENTS TO IFRS 9, IFRS 7 AND IAS 39) ISSUED IN NOVEMBER 2013

 

APPROVAL BY THE BOARD OF IFRS 9 FINANCIAL INSTRUMENTS ISSUED IN JULY 2014

 

PREPAYMENT FEATURES WITH NEGATIVE

COMPENSATION (AMENDMENTS TO IFRS 9) ISSUED IN OCTOBER 2017

 

FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION

 

ILLUSTRATIVE EXAMPLES

 

GUIDANCE ON IMPLEMENTING IFRS 9 FINANCIAL INSTRUMENTS APPENDIX

Amendments to the guidance on other Standards

 

FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

 

BASIS FOR CONCLUSIONS DISSENTING OPINIONS

APPENDICES TO THE BASIS FOR CONCLUSIONS A Previous dissenting opinions

B Amendments to the Basis for Conclusions on other Standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

International Financial Reporting Standard 9  Financial Instruments (IFRS 9) is set out in paragraphs 1.1–7.3.2 and Appendices A–C. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the IFRS. Definitions of other terms are given in the Glossary for International Financial Reporting Standards. IFRS 9 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the  Conceptual  Framework  for  Financial  Reporting.  IAS  8  Accounting  Policies,  Changes  in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

International Financial Reporting Standard 9 Financial Instruments

 

Chapter 1 Objective

 

 

 

1.1

The  objective  of  this  Standard  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.

 

 

 

Chapter 2 Scope

 

 

 

2.1

This  Standard  shall  be  applied  by  all  entities  to  all  types  of  financial instruments except:

 

(a)       those interests in subsidiaries, associates and joint ventures that are

accounted  for  in  accordance  with  IFRS  10  Consolidated  Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in  Associates  and  Joint  Ventures.  However,  in  some  cases,  IFRS  10, IAS 27 or IAS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard. Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in IAS 32 Financial Instruments: Presentation.

 

(b)       rights and obligations under leases to which IFRS 16 Leases applies.

However:

 

(i)       finance lease receivables (ie net investments in finance leases)

and operating lease receivables recognised by a lessor are subject to the derecognition and impairment requirements of this Standard;

 

(ii)      lease  liabilities  recognised  by  a  lessee  are  subject  to  the

derecognition   requirements   in   paragraph   3.3.1   of   this Standard; and

 

(iii)     derivatives that are embedded in leases are subject to the

embedded derivatives requirements of this Standard.

 

(c)      employers’ rights and obligations under employee benefit plans, to

which IAS 19 Employee Benefits applies.

 

(d)      financial instruments issued by the entity that meet the definition

of an equity instrument in IAS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance  with  paragraphs  16A  and  16B  or  paragraphs  16C and 16D of IAS 32. However, the holder of such equity instruments shall apply this Standard to those instruments, unless they meet the exception in (a).

 

 

 

 

 

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IFRS 9

 

(e)      rights and obligations arising under a contract within the scope of

IFRS  17  Insurance  Contracts,  other  than  an  issuer’s  rights  and obligations  arising  under  an  insurance  contract  that  meets  the definition of a financial guarantee contract. However, this Standard applies to (i) a derivative that is embedded in a contract within the scope of IFRS 17, if the derivative is not itself a contract within the scope of IFRS 17; and (ii) an investment component that is separated from a contract within the scope of IFRS 17, if IFRS 17 requires such separation. Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance  contracts,  the  issuer  may  elect  to  apply  either  this Standard   or   IFRS   17   to   such   financial   guarantee   contracts (see  paragraphs  B2.5–B2.6).  The  issuer  may  make  that  election contract   by   contract,   but   the   election   for   each   contract   is irrevocable.

 

 

 

(f)

any forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination within  the  scope  of  IFRS  3  Business  Combinations  at  a  future acquisition  date.  The  term  of  the  forward  contract  should  not exceed  a  reasonable  period  normally  necessary  to  obtain  any required approvals and to complete the transaction.

 

 

 

(g)      loan commitments other than those loan commitments described

in paragraph 2.3. However, an issuer of loan commitments shall apply  the  impairment  requirements  of  this  Standard  to  loan commitments  that  are  not  otherwise  within  the  scope  of  this Standard.   Also,    all                 loan     commitments                     are                 subject to

the derecognition requirements of this Standard.

 

(h)      financial instruments, contracts and obligations under share-based

payment transactions to which IFRS 2  Share-based Payment applies, except for contracts within the scope of paragraphs 2.4–2.7 of this Standard to which this Standard applies.

 

 

 

(i)

rights to payments to reimburse the entity for expenditure that it is required to make to settle a liability that it recognises as a provision in  accordance  with  IAS  37  Provisions,  Contingent  Liabilities  and Contingent Assets, or for which, in an earlier period, it recognised a provision in accordance with IAS 37.

 

 

 

 

 

 

 

 

2.2

(j)       rights  and  obligations  within  the  scope  of  IFRS  15  Revenue  from

Contracts with Customers that are financial instruments, except for those that IFRS 15 specifies are accounted for in accordance with this Standard.

 

The impairment requirements of this Standard shall be applied to those rights that IFRS 15 specifies are accounted for in accordance with this Standard for the purposes of recognising impairment gains or losses.

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

2.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.4

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

 

 

 

 

 

 

 

 

 

2.6

The following loan commitments are within the scope of this Standard:

 

(a)       loan commitments that the entity designates as financial liabilities

at fair value through profit or loss (see paragraph 4.2.2). An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan commitments in the same class.

 

(b)       loan commitments that can be settled net in cash or by delivering or

issuing  another  financial  instrument.  These  loan  commitments are derivatives. A loan commitment is not regarded as settled net merely because the loan is paid out in instalments (for example, a mortgage construction loan that is paid out in instalments in line with the progress of construction).

 

(c)      commitments  to  provide  a  loan  at  a  belowmarket  interest  rate

(see paragraph 4.2.1(d)).

 

This  Standard  shall  be  applied  to  those  contracts  to  buy  or  sell  a non‑financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were  financial  instruments,  with  the  exception  of  contracts  that  were entered into and continue to be held for the purpose of the receipt or delivery of a non‑financial item in accordance with the entity’s expected purchase,  sale  or  usage  requirements.  However,  this  Standard  shall  be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

 

A contract to buy or sell a nonfinancial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contract was a financial instrument, may be irrevocably designated as measured at fair value through profit or loss even if it was entered into for the purpose of the receipt or delivery of a non‑financial item in accordance with  the  entity’s  expected  purchase,  sale  or  usage  requirements.  This designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from not recognising that contract because it is excluded from the scope of this Standard (see paragraph 2.4).

 

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

 

(a)      when the terms of the contract permit either party to settle it net in

cash  or  another  financial  instrument  or  by  exchanging  financial instruments;

 

(b)      when the ability to settle net in cash or another financial instrument,

or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments   (whether   with   the   counterparty,   by   entering   into

 

 

 

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2.7

IFRS 9

 

offsetting contracts or by selling the contract before its exercise or lapse);

 

(c)      when, for similar contracts, the entity has a practice of taking delivery

of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and

 

(d)      when the non-financial item that is the subject of the contract is

readily convertible to cash.

 

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non‑financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 2.4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non‑financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

 

A written option to buy or sell a non‑financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, in  accordance  with  paragraph  2.6(a)  or  2.6(d)  is  within  the  scope  of  this Standard. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non‑financial item in accordance with the entity’s expected purchase, sale or usage requirements.

 

 

 

Chapter 3 Recognition and derecognition

 

3.1 Initial recognition

 

 

 

3.1.1

 

 

 

 

 

 

 

 

 

 

 

 

3.1.2

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                  (see

paragraphs B3.1.1 and B3.1.2). When an entity first recognises a financial asset,  it  shall  classify  it  in  accordance  with  paragraphs  4.1.1–4.1.5  and measure it in accordance with paragraphs 5.1.1–5.1.3. When an entity first recognises  a  financial  liability,  it  shall  classify  it  in  accordance  with paragraphs   4.2.1   and   4.2.2   and   measure   it   in   accordance   with paragraph 5.1.1.

 

Regular way purchase or sale of financial assets

 

A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting (see paragraphs B3.1.3–B3.1.6).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

3.2 Derecognition of financial assets

 

 

 

3.2.1

 

 

 

 

3.2.2

In consolidated financial statements, paragraphs 3.2.2–3.2.9, B3.1.1, B3.1.2 and B3.2.1–B3.2.17 are applied at a consolidated level. Hence, an entity first consolidates all subsidiaries in accordance with IFRS 10 and then applies those paragraphs to the resulting group.

 

Before evaluating whether, and to what extent, derecognition is appropriate under   paragraphs   3.2.3–3.2.9,   an   entity   determines   whether   those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows.

 

(a)       Paragraphs 3.2.3–3.2.9 are applied to a part of a financial asset (or a

part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions.

 

(i)       The  part  comprises  only  specifically  identified  cash  flows

from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, paragraphs 3.2.3–3.2.9 are applied to the interest cash flows.

 

(ii)      The part comprises only a fully proportionate (pro rata) share

of the cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument, paragraphs 3.2.3–3.2.9 are applied to 90 per cent of those cash  flows.  If  there  is  more  than  one  counterparty,  each counterparty is not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share.

 

(iii)     The part comprises only a fully proportionate (pro rata) share

of specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows  from  a  financial  asset,  paragraphs  3.2.3–3.2.9  are applied to 90 per cent of those interest cash flows. If there is more  than  one  counterparty,  each  counterparty  is  not required to have a proportionate share of the specifically identified cash flows provided that the transferring entity has a fully proportionate share.

 

 

 

 

 

 

 

 

 

 

 

 

 

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3.2.3

 

 

 

 

 

 

 

 

 

3.2.4

 

 

 

 

 

 

 

 

 

3.2.5

IFRS 9

 

(b)       In all other cases, paragraphs 3.2.3–3.2.9 are applied to the financial

asset in its entirety (or to the group of similar financial assets in their entirety). For example, when an entity transfers (i) the rights to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of  the  cash  flows  from  a  group  of  receivables,  but  provides  a guarantee to compensate the buyer for any credit losses up to 8 per cent  of  the  principal  amount  of  the  receivables,  paragraphs

3.2.3–3.2.9 are applied to the financial asset (or a group of similar financial assets) in its entirety.

 

In paragraphs 3.2.3–3.2.12, the term ‘financial asset’ refers to either a part of a financial asset (or a part of a group of similar financial assets) as identified in (a) above or, otherwise, a financial asset (or a group of similar financial assets) in its entirety.

 

An entity shall derecognise a financial asset when, and only when:

 

(a)       the contractual rights to the cash flows from the financial asset

expire, or

 

(b)       it transfers the financial asset as set out in paragraphs 3.2.4 and

3.2.5 and the transfer qualifies for derecognition in accordance with paragraph 3.2.6.

 

(See paragraph 3.1.2 for regular way sales of financial assets.) An entity transfers a financial asset if, and only if, it either:

(a)       transfers the contractual rights to receive the cash flows of the

financial asset, or

 

(b)       retains  the  contractual  rights  to  receive  the  cash  flows  of  the

financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 3.2.5.

 

When an entity retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met.

 

(a)       The  entity  has  no  obligation  to  pay  amounts  to  the  eventual

recipients unless it collects equivalent amounts from the original asset.  Short‑term  advances  by  the  entity  with  the  right  of  full recovery of the amount lent plus accrued interest at market rates do not violate this condition.

 

(b)       The entity is prohibited by the terms of the transfer contract from

selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows.

 

 

 

 

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3.2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2.7

(c)      The entity has an obligation to remit any cash flows it collects on

behalf  of  the  eventual  recipients  without  material  delay.  In addition,  the  entity  is  not  entitled  to  reinvest  such  cash  flows, except for investments in cash or cash equivalents (as defined in IAS 7 Statement of Cash Flows) during the short settlement period from the collection date to the date of required remittance to the eventual  recipients,  and  interest  earned  on  such  investments  is passed to the eventual recipients.

 

When an entity transfers a financial asset (see paragraph 3.2.4), it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:

 

(a)       if  the  entity  transfers  substantially  all  the  risks  and  rewards  of

ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

 

(b)       if  the  entity  retains  substantially  all  the  risks  and  rewards  of

ownership  of  the  financial  asset,  the  entity  shall  continue  to recognise the financial asset.

 

(c)      if the entity neither transfers nor retains substantially all the risks

and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the financial asset. In this case:

 

(i)       if the entity has not retained control, it shall derecognise the

financial asset and recognise separately as assets or liabilities any  rights  and  obligations  created  or  retained  in  the transfer.

 

(ii)      if  the  entity  has  retained  control,  it  shall  continue  to

recognise the financial asset to the extent of its continuing involvement in the financial asset (see paragraph 3.2.16).

 

The  transfer  of  risks  and  rewards  (see  paragraph  3.2.6)  is  evaluated  by comparing  the  entity’s  exposure,  before  and  after  the  transfer,  with  the variability in the amounts and timing of the net cash flows of the transferred asset.  An  entity  has  retained  substantially  all  the  risks  and  rewards  of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer (eg because the entity has sold a financial asset subject to an agreement to buy it back at a fixed price or the sale price plus a lender’s return). An entity has transferred substantially all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of the future net cash flows associated with the financial asset (eg because the entity has sold a financial asset subject only to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of the cash flows from a larger financial asset in an

 

 

 

 

 

 

 

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3.2.8

 

 

 

 

 

 

 

 

 

 

3.2.9

 

 

 

 

 

 

 

 

 

3.2.10

 

 

 

 

 

 

 

 

 

 

 

 

3.2.11

 

 

 

 

 

3.2.12

 

 

 

 

 

 

 

3.2.13

IFRS 9

 

arrangement, such as a loan sub‑participation, that meets the conditions in paragraph 3.2.5).

 

Often  it  will  be  obvious  whether  the  entity  has  transferred  or  retained substantially all risks and rewards of ownership and there will be no need to perform any computations. In other cases, it will be necessary to compute and compare the entity’s exposure to the variability in the present value of the future net cash flows before and after the transfer. The computation and comparison  are  made  using  as  the  discount  rate  an  appropriate  current market interest rate. All reasonably possible variability in net cash flows is considered, with greater weight being given to those outcomes that are more likely to occur.

 

Whether  the  entity  has  retained  control  (see  paragraph  3.2.6(c))  of  the transferred asset depends on the transferee’s ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control.

 

Transfers that qualify for derecognition

 

If  an  entity  transfers  a  financial  asset  in  a  transfer  that  qualifies  for derecognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that servicing contract. If the fee to be received is not expected to  compensate  the  entity  adequately  for  performing  the  servicing,  a servicing liability for the servicing obligation shall be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the servicing right at an amount determined on the basis of an allocation of the  carrying  amount  of  the  larger  financial  asset  in  accordance  with paragraph 3.2.13.

 

If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognise the new financial asset, financial liability or servicing liability at fair value.

 

On derecognition of a financial asset in its entirety, the difference between: (a) the carrying amount (measured at the date of derecognition) and

(b)       the consideration received (including any new asset obtained less

any new liability assumed)

 

shall be recognised in profit or loss.

 

If the transferred asset is part of a larger financial asset (eg when an entity transfers  interest  cash  flows  that  are  part  of  a  debt  instrument,  see paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall

 

 

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3.2.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2.15

 

 

 

 

 

 

 

 

 

 

3.2.16

be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between:

 

(a)       the  carrying  amount  (measured  at  the  date  of  derecognition)

allocated to the part derecognised and

 

(b)       the consideration received for the part derecognised (including any

new asset obtained less any new liability assumed)

 

shall be recognised in profit or loss.

 

When an entity allocates the previous carrying amount of a larger financial asset between the part that continues to be recognised and the part that is derecognised, the fair value of the part that continues to be recognised needs to be measured. When the entity has a history of selling parts similar to the part that continues to be recognised or other market transactions exist for such parts, recent prices of actual transactions provide the best estimate of its fair value. When there are no price quotes or recent market transactions to support the fair value of the part that continues to be recognised, the best estimate of the fair value is the difference between the fair value of the larger financial asset as a whole and the consideration received from the transferee for the part that is derecognised.

 

Transfers that do not qualify for derecognition

 

If  a  transfer  does  not  result  in  derecognition  because  the  entity  has retained  substantially  all  the  risks  and  rewards  of  ownership  of  the transferred asset, the entity shall continue to recognise the transferred asset  in  its  entirety  and  shall  recognise  a  financial  liability  for  the consideration received. In subsequent periods, the entity shall recognise any income on the transferred asset and any expense incurred on the financial liability.

 

Continuing involvement in transferred assets

 

If an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset, and retains control of the transferred asset, the entity continues to recognise the transferred asset to the  extent  of  its  continuing  involvement.  The  extent  of  the  entity’s continuing involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset. For example:

 

(a)       When  the  entity’s  continuing  involvement  takes  the  form  of

guaranteeing  the  transferred  asset,  the  extent  of  the  entity’s continuing involvement is the lower of (i) the amount of the asset and (ii) the maximum amount of the consideration received that the entity could be required to repay (‘the guarantee amount’).

 

 

 

 

 

 

 

 

 

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3.2.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2.18

 

 

 

3.2.19

 

 

 

 

3.2.20

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(b)       When  the  entity’s  continuing  involvement  takes  the  form  of  a

written or purchased option (or both) on the transferred asset, the extent of the entity’s continuing involvement is the amount of the transferred asset that the entity may repurchase. However, in the case of a written put option on an asset that is measured at fair value, the extent of the entity’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price (see paragraph B3.2.13).

 

(c)      When  the  entity’s  continuing  involvement  takes  the  form  of  a

cashsettled option or similar provision on the transferred asset, the extent of the entity’s continuing involvement is measured in the same way as that which results from non‑cash settled options as set out in (b) above.

 

When  an  entity  continues  to  recognise  an  asset  to  the  extent  of  its continuing involvement, the entity also recognises an associated liability. Despite  the  other  measurement  requirements  in  this  Standard,  the transferred asset and the associated liability are measured on a basis that reflects  the  rights  and  obligations  that  the  entity  has  retained.  The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is:

 

(a)       the amortised cost of the rights and obligations retained by the

entity, if the transferred asset is measured at amortised cost, or

 

(b)       equal to the fair value of the rights and obligations retained by the

entity  when  measured  on  a  standalone  basis,  if  the  transferred asset is measured at fair value.

 

The  entity  shall  continue  to  recognise  any  income  arising  on  the transferred asset to the extent of its continuing involvement and shall recognise any expense incurred on the associated liability.

 

For the purpose of subsequent measurement, recognised changes in the fair value of the transferred asset and the associated liability are accounted for consistently with each other in accordance with paragraph 5.7.1, and shall not be offset.

 

If an entity’s continuing involvement is in only a part of a financial asset (eg when an entity retains an option to repurchase part of a transferred asset, or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the entity retains control), the entity allocates the previous carrying amount of the financial asset  between  the  part  it  continues  to  recognise  under  continuing involvement,  and  the  part  it  no  longer  recognises  on  the  basis  of  the relative fair values of those parts on the date of the transfer. For this purpose,  the  requirements  of  paragraph  3.2.14  apply.  The  difference between:

 

(a)       the  carrying  amount  (measured  at  the  date  of  derecognition)

allocated to the part that is no longer recognised and

 

 

 

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3.2.21

 

 

 

 

 

3.2.22

 

 

 

 

3.2.23

(b)       the consideration received for the part no longer recognised

 

shall be recognised in profit or loss.

 

If the transferred asset is measured at amortised cost, the option in this Standard to designate a financial liability as at fair value through profit or loss is not applicable to the associated liability.

 

All transfers

 

If  a  transferred  asset  continues  to  be  recognised,  the  asset  and  the associated liability shall not be offset. Similarly, the entity shall not offset any income arising from the transferred asset with any expense incurred on the associated liability (see paragraph 42 of IAS 32).

 

If  a  transferor  provides  noncash  collateral  (such  as  debt  or  equity instruments) to the transferee, the accounting for the collateral by the transferor and the transferee depends on whether the transferee has the right to sell or repledge the collateral and on whether the transferor has defaulted. The transferor and transferee shall account for the collateral as follows:

 

(a)       If the transferee has the right by contract or custom to sell or

repledge the collateral, then the transferor shall reclassify that asset in its statement of financial position (eg as a loaned asset, pledged equity instruments or repurchase receivable) separately from other assets.

 

(b)       If the transferee sells collateral pledged to it, it shall recognise the

proceeds from the sale and a liability measured at fair value for its obligation to return the collateral.

 

(c)      If the transferor defaults under the terms of the contract and is no

longer entitled to redeem the collateral, it shall derecognise the collateral, and the transferee shall recognise the collateral as its asset initially measured at fair value or, if it has already sold the collateral, derecognise its obligation to return the collateral.

 

(d)      Except as provided in (c), the transferor shall continue to carry the

collateral as its asset, and the transferee shall not recognise the collateral as an asset.

 

 

 

3.3 Derecognition of financial liabilities

 

 

 

3.3.1

 

 

 

 

3.3.2

An entity shall remove a financial liability (or a part of 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.

 

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

 

 

 

 

 

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3.3.3

 

 

 

 

3.3.4

 

 

 

 

 

 

 

3.3.5

IFRS 9

 

an existing financial liability or a part of it (whether or not attributable to the  financial  difficulty  of  the  debtor)  shall  be  accounted  for  as  an extinguishment of the original financial liability and the recognition of a new financial liability.

 

The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non‑cash assets transferred or liabilities assumed, shall be recognised in profit or loss.

 

If an entity repurchases a part of a financial liability, the entity shall allocate the previous carrying amount of the financial liability between the part that continues to be recognised and the part that is derecognised based on the relative fair values of those parts on the date of the repurchase. The difference between (a) the carrying amount allocated to the part derecognised and (b) the consideration paid, including any non‑cash assets transferred or liabilities assumed, for the part derecognised shall be recognised in profit or loss.

 

Some entities operate, either internally or externally, an investment fund that provides  investors  with  benefits  determined  by  units  in  the  fund  and recognise financial liabilities for the amounts to be paid to those investors. Similarly,  some  entities  issue  groups  of  insurance  contracts  with  direct participation features and those entities hold the underlying items. Some such funds or underlying items include the entity’s financial liability (for example, a corporate bond issued). Despite the other requirements in this Standard for the  derecognition  of  financial  liabilities,  an  entity  may  elect  not  to derecognise its financial liability that is included in such a fund or is an underlying item when, and only when, the entity repurchases its financial liability  for  such  purposes.  Instead,  the  entity  may  elect  to  continue  to account for that instrument as a financial liability and to account for the repurchased  instrument  as  if  the  instrument  were  a  financial  asset,  and measure  it  at  fair  value  through  profit  or  loss  in  accordance  with  this Standard.  That  election  is  irrevocable  and  made  on  an  instrument-by- instrument  basis.  For  the  purposes  of  this  election,  insurance  contracts include investment contracts with discretionary participation features. (See IFRS 17 for terms used in this paragraph that are defined in that Standard.)

 

 

 

Chapter 4 Classification

 

4.1 Classification of financial assets

 

 

 

4.1.1

 

 

 

 

 

 

 

4.1.2

Unless paragraph 4.1.5 applies, an entity shall classify financial assets as subsequently  measured  at  amortised  cost,  fair  value  through  other comprehensive income or fair value through profit or loss on the basis of both:

 

(a)       the entity’s business model for managing the financial assets and

 

(b)       the contractual cash flow characteristics of the financial asset.

 

A  financial  asset  shall  be  measured  at  amortised  cost  if  both  of  the following conditions are met:

 

 

 

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4.1.2A

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1.3

 

 

 

 

 

 

 

 

 

 

 

 

4.1.4

 

 

 

 

 

 

 

 

 

 

 

 

4.1.5

(a)       the financial asset is held within a business model whose objective is

to hold financial assets in order to collect contractual cash flows and

 

(b)       the contractual terms of the financial asset give rise on specified

dates  to  cash  flows  that  are  solely  payments  of  principal  and interest on the principal amount outstanding.

 

Paragraphs   B4.1.1–B4.1.26   provide   guidance   on   how   to   apply   these conditions.

 

A   financial   asset   shall   be   measured   at   fair   value   through   other comprehensive income if both of the following conditions are met:

 

(a)       the financial asset is held within a business model whose objective is

achieved  by  both  collecting  contractual  cash  flows  and  selling financial assets and

 

(b)       the contractual terms of the financial asset give rise on specified

dates  to  cash  flows  that  are  solely  payments  of  principal  and interest on the principal amount outstanding.

 

Paragraphs   B4.1.1–B4.1.26   provide   guidance   on   how   to   apply   these conditions.

 

For the purpose of applying paragraphs 4.1.2(b) and 4.1.2A(b):

 

(a)       principal   is   the   fair   value   of   the   financial   asset   at   initial

recognition. Paragraph B4.1.7B provides additional guidance on the meaning of principal.

 

(b)       interest consists of consideration for the time value of money, for

the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and  costs,  as  well  as  a  profit  margin.  Paragraphs  B4.1.7A  and B4.1.9A–B4.1.9E  provide  additional  guidance  on  the  meaning  of interest, including the meaning of the time value of money.

 

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost in accordance with paragraph 4.1.2 or at fair value through other comprehensive income in accordance with paragraph 4.1.2A. However an entity may make an irrevocable election at initial  recognition  for  particular  investments  in  equity  instruments  that would otherwise be measured at fair value through profit or loss to present subsequent  changes  in  fair  value  in  other  comprehensive  income  (see paragraphs 5.7.5–5.7.6).

 

Option to designate a financial asset at fair value through profit or loss

 

Despite  paragraphs  4.1.1–4.1.4,  an  entity  may,  at  initial  recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or  recognition  inconsistency  (sometimes  referred  to  as  an  ‘accounting

 

 

 

 

 

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mismatch’) that would otherwise arise from measuring assets or liabilities or  recognising  the  gains  and  losses  on  them  on  different  bases  (see paragraphs B4.1.29–B4.1.32).

 

4.2 Classification of financial liabilities

 

 

 

4.2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2.2

An entity shall classify all financial liabilities as subsequently measured at amortised cost, except for:

 

(a)       financial liabilities at fair value through profit or loss. Such liabilities,

including  derivatives  that  are  liabilities,  shall  be  subsequently measured at fair value.

 

(b)       financial liabilities that arise when a transfer of a financial asset

does   not   qualify   for   derecognition   or   when   the   continuing involvement approach applies. Paragraphs 3.2.15 and 3.2.17 apply to the measurement of such financial liabilities.

 

(c)      financial guarantee contracts. After initial recognition, an issuer of

such  a  contract  shall  (unless  paragraph  4.2.1(a)  or  (b)  applies) subsequently measure it at the higher of:

 

(i)       the amount of the loss allowance determined in accordance

with Section 5.5 and

 

(ii)      the  amount  initially  recognised  (see  paragraph  5.1.1)  less,

when   appropriate,   the   cumulative   amount   of   income recognised in accordance with the principles of IFRS 15.

 

(d)      commitments to provide a loan at a belowmarket interest rate. An

issuer of such a commitment shall (unless paragraph 4.2.1(a) applies) subsequently measure it at the higher of:

 

(i)       the amount of the loss allowance determined in accordance

with Section 5.5 and

 

(ii)      the  amount  initially  recognised  (see  paragraph  5.1.1)  less,

when   appropriate,   the   cumulative   amount   of   income recognised in accordance with the principles of IFRS 15.

 

(e)      contingent consideration recognised by an acquirer in a business

combination to which IFRS 3 applies. Such contingent consideration shall   subsequently   be   measured   at   fair   value   with   changes recognised in profit or loss.

 

Option to designate a financial liability at fair value through profit or loss

 

An  entity  may,  at  initial  recognition,  irrevocably  designate  a  financial liability as measured at fair value through profit or loss when permitted by paragraph 4.3.5, or when doing so results in more relevant information, because either:

 

 

 

 

 

 

 

 

 

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(a)       it 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 (see paragraphs B4.1.29–B4.1.32); or

 

(b)       a  group  of  financial  liabilities  or  financial  assets  and  financial

liabilities 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 (as  defined  in  IAS  24  Related  Party  Disclosures),  for  example,  the entity’s   board   of   directors   and   chief   executive   officer   (see paragraphs B4.1.33–B4.1.36).

 

4.3 Embedded derivatives

 

 

 

4.3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.3.2

 

 

 

 

 

4.3.3

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. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate,  financial  instrument  price,  commodity  price,  foreign  exchange  rate, index  of  prices  or  rates,  credit  rating  or  credit  index,  or  other  variable, provided in the case of a non‑financial variable that the variable is not specific to a party to the contract. 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.

 

Hybrid contracts with financial asset hosts

 

If a hybrid contract contains a host that is an asset within the scope of this Standard, an entity shall apply the requirements in paragraphs 4.1.1–4.1.5 to the entire hybrid contract.

 

Other hybrid contracts

 

If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative shall be separated from the host and accounted for as a derivative under this Standard if, and only if:

 

(a)       the economic characteristics and risks of the embedded derivative

are not closely related to the economic characteristics and risks of the host (see paragraphs B4.3.5 and B4.3.8);

 

(b)       a  separate  instrument  with  the  same  terms  as  the  embedded

derivative would meet the definition of a derivative; and

 

 

 

 

 

 

 

 

 

 

 

 

 

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4.3.4

 

 

 

 

4.3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

4.3.6

 

 

 

 

 

4.3.7

IFRS 9

 

(c)      the hybrid contract is not measured at fair value with changes in

fair  value  recognised  in  profit  or  loss  (ie  a  derivative  that  is embedded in a financial liability at fair value through profit or loss is not separated).

 

If  an  embedded  derivative  is  separated,  the  host  contract  shall  be accounted for in accordance with the appropriate Standards. This Standard does  not  address  whether  an  embedded  derivative  shall  be  presented separately in the statement of financial position.

 

Despite paragraphs 4.3.3 and 4.3.4, if a contract contains one or more embedded derivatives and the host is not an asset within the scope of this Standard, an entity may designate the entire hybrid contract as at fair value through profit or loss unless:

 

(a)       the embedded derivative(s) do(es) not significantly modify the cash

flows that otherwise would be required by the contract; or

 

(b)       it is clear with little or no analysis when a similar hybrid instrument

is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits  the  holder  to  prepay  the  loan  for  approximately  its amortised cost.

 

If an entity is required by this Standard to separate an embedded derivative from its host, but is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, it shall designate the entire hybrid contract as at fair value through profit or loss.

 

If an entity is unable to measure reliably the fair value of an embedded derivative on the basis of its terms and conditions, the fair value of the embedded derivative is the difference between the fair value of the hybrid contract and the fair value of the host. If the entity is unable to measure the fair value of the embedded derivative using this method, paragraph 4.3.6 applies and the hybrid contract is designated as at fair value through profit or loss.

 

 

 

4.4 Reclassification

 

 

 

4.4.1

 

 

 

 

4.4.2

 

4.4.3

When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with paragraphs 4.1.1–4.1.4. See paragraphs 5.6.1–5.6.7, B4.4.1–B4.4.3 and B5.6.1–B5.6.2 for additional guidance on reclassifying financial assets.

 

An entity shall not reclassify any financial liability.

 

The  following  changes  in  circumstances  are  not  reclassifications  for  the purposes of paragraphs 4.4.1–4.4.2:

 

(a)      an  item  that  was  previously  a  designated  and  effective  hedging

instrument in a cash flow hedge or net investment hedge no longer qualifies as such;

 

 

 

 

 

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(b)      an item becomes a designated and effective hedging instrument in a

cash flow hedge or net investment hedge; and

 

(c)      changes in measurement in accordance with Section 6.7.

 

Chapter 5 Measurement

 

5.1 Initial measurement

 

 

 

5.1.1

 

 

 

 

 

 

5.1.1A

 

 

 

5.1.2

 

 

 

5.1.3

Except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its 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 that are directly attributable to the acquisition or issue of the financial asset or financial liability.

 

However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A.

 

When  an  entity  uses  settlement  date  accounting  for  an  asset  that  is subsequently measured at amortised cost, the asset is recognised initially at its fair value on the trade date (see paragraphs B3.1.3–B3.1.6).

 

Despite the requirement in paragraph 5.1.1, at initial recognition, an entity shall  measure  trade  receivables  at  their  transaction  price  (as  defined in IFRS 15) if the trade receivables do not contain a significant financing component  in  accordance  with  IFRS  15  (or  when  the  entity  applies  the practical expedient in accordance with paragraph 63 of IFRS 15).

 

 

 

5.2 Subsequent measurement of financial assets

 

 

 

5.2.1

 

 

 

 

 

 

 

5.2.2

After  initial  recognition,  an  entity  shall  measure  a  financial  asset  in accordance with paragraphs 4.1.1–4.1.5 at:

 

(a)       amortised cost;

 

(b)       fair value through other comprehensive income; or

 

(c)      fair value through profit or loss.

 

An  entity  shall  apply  the  impairment  requirements  in  Section  5.5  to financial  assets  that  are  measured  at  amortised  cost  in  accordance with paragraph 4.1.2 and to financial assets that are measured at fair value through                 other     comprehensive                income  in                      accordance      with

paragraph 4.1.2A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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5.2.3

An    entity   shall   apply    the   hedge   accounting   requirements   in

paragraphs  6.5.8–6.5.14  (and,  if  applicable,  paragraphs  89–94  of  IAS  39 Financial Instruments: Recognition and Measurement for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial asset that is designated as a hedged item.1

 

 

 

5.3 Subsequent measurement of financial liabilities

 

 

 

5.3.1

 

 

5.3.2

After initial recognition, an entity shall measure a financial liability in accordance with paragraphs 4.2.1–4.2.2.

 

An    entity   shall   apply    the   hedge   accounting   requirements   in

paragraphs 6.5.8–6.5.14 (and, if applicable, paragraphs 89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial liability that is designated as a hedged item.

 

 

 

5.4 Amortised cost measurement

 

Financial assets

 

Effective interest method

 

 

 

5.4.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.4.2

Interest revenue shall be calculated by using the effective interest method (see Appendix  A  and  paragraphs  B5.4.1–B5.4.7).  This  shall  be  calculated  by applying the effective interest rate to the gross carrying amount of a financial asset except for:

 

(a)       purchased  or  originated  credit-impaired  financial  assets.  For  those

financial  assets,  the  entity  shall  apply  the  credit-adjusted  effective interest rate to the amortised cost of the financial asset from initial recognition.

 

(b)       financial assets that are not purchased or originated credit-impaired

financial   assets   but   subsequently   have   become   credit-impaired financial assets. For those financial assets, the entity shall apply the effective interest rate to the amortised cost of the financial asset in subsequent reporting periods.

 

An entity that, in a reporting period, calculates interest revenue by applying the effective interest method to the amortised cost of a financial asset in accordance with paragraph 5.4.1(b), shall, in subsequent reporting periods, calculate the interest revenue by applying the effective interest rate to the gross carrying amount if the credit risk on the financial instrument improves so that the financial asset is no longer credit-impaired and the improvement can be related objectively to an event occurring after the requirements in paragraph 5.4.1(b) were applied (such as an improvement in the borrower’s credit rating).

 

 

 

1    In accordance with paragraph 7.2.21, an entity may choose as its accounting policy to continue to

apply the hedge accounting requirements in IAS 39 instead of the requirements in Chapter 6 of this Standard. If an entity has made this election, the references in this Standard to particular hedge accounting requirements in Chapter 6 are not relevant. Instead the entity applies the relevant hedge accounting requirements in IAS 39.

 

 

 

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5.4.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.4.4

Modification of contractual cash flows

 

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this Standard, an entity shall recalculate the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated in accordance with paragraph 6.5.10. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset.

 

Write-off

 

An entity shall directly reduce the gross carrying amount of a financial asset  when  the  entity  has  no  reasonable  expectations  of  recovering  a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event (see paragraph B3.2.16(r)).

 

 

 

5.5 Impairment

 

Recognition of expected credit losses

 

General approach

 

 

 

5.5.1

 

 

 

 

 

5.5.2

 

 

 

 

 

 

5.5.3

 

 

 

 

5.5.4

An entity shall recognise a loss allowance for expected credit losses on a

financial asset that is measured in accordance with paragraphs 4.1.2 or

4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).

 

An entity shall apply the impairment requirements for the recognition and measurement of a loss allowance for financial assets that are measured at fair value      through  other           comprehensive    income             in          accordance         with

paragraph 4.1.2A. However, the loss allowance shall be recognised in other comprehensive  income  and  shall  not  reduce  the  carrying  amount  of  the financial asset in the statement of financial position.

 

Subject to paragraphs 5.5.13–5.5.16, at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to  the  lifetime  expected  credit  losses  if  the  credit  risk  on  that  financial instrument has increased significantly since initial recognition.

 

The  objective  of  the  impairment  requirements  is  to  recognise  lifetime expected credit losses for all financial instruments for which there have been significant increases in credit risk since initial recognition — whether assessed on  an  individual  or  collective  basis  —  considering  all  reasonable  and supportable information, including that which is forward-looking.

 

 

 

 

 

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5.5.5

 

 

 

 

5.5.6

 

 

 

 

5.5.7

 

 

 

 

 

5.5.8

 

 

 

 

 

 

5.5.9

 

 

 

 

 

 

 

 

 

 

 

 

5.5.10

 

 

 

 

5.5.11

Subject to paragraphs 5.5.13–5.5.16, if, at the reporting date, the credit risk on  a  financial  instrument  has  not  increased  significantly  since  initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12‑month expected credit losses.

 

For loan commitments and financial guarantee contracts, the date that the entity becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements.

 

If an entity has measured the loss allowance for a financial instrument at an amount equal to lifetime expected credit losses in the previous reporting period, but determines at the current reporting date that paragraph 5.5.3 is no longer met, the entity shall measure the loss allowance at an amount equal to 12‑month expected credit losses at the current reporting date.

 

An entity shall recognise in profit or loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance  at  the  reporting  date  to  the  amount  that  is  required  to  be recognised in accordance with this Standard.

 

Determining significant increases in credit risk

 

At each reporting date, an entity shall assess whether the credit risk on a financial  instrument  has  increased  significantly  since  initial  recognition. When making the assessment, an entity shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, an  entity  shall  compare  the  risk  of  a  default  occurring  on  the  financial instrument as at the reporting date with the risk of a default occurring on the financial  instrument  as  at  the  date  of  initial  recognition  and  consider reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition.

 

An entity may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined      to          have      low        credit                   risk at        the     reporting        date

(see paragraphs B5.5.22‒B5.5.24).

 

If  reasonable  and  supportable  forward-looking  information  is  available without  undue  cost  or  effort,  an  entity  cannot  rely  solely  on  past  due information when determining whether credit risk has increased significantly since initial recognition. However, when information that is more forward- looking than past due status (either on an individual or a collective basis) is not  available  without  undue  cost  or  effort,  an  entity  may  use  past  due information to determine whether there have been significant increases in credit risk since initial recognition. Regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. An entity can rebut this presumption if the entity has reasonable and supportable

 

 

 

 

 

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5.5.12

 

 

 

 

 

 

 

 

 

 

 

 

5.5.13

 

 

 

 

5.5.14

 

 

 

 

 

 

 

 

 

 

5.5.15

information that is available without undue cost or effort, that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. When an entity determines that there have been significant increases in credit risk before contractual payments are more than 30 days past due, the rebuttable presumption does not apply.

 

Modified financial assets

 

If the contractual cash flows on a financial asset have been renegotiated or modified and the financial asset was not derecognised, an entity shall assess whether there has been a significant increase in the credit risk of the financial instrument in accordance with paragraph 5.5.3 by comparing:

 

(a)      the risk of a default occurring at the reporting date (based on the

modified contractual terms); and

 

(b)      the risk of a default occurring at initial recognition (based on the

original, unmodified contractual terms).

 

Purchased or originated credit-impaired financial assets

 

Despite paragraphs 5.5.3 and 5.5.5, at the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit‑impaired financial assets.

 

At each reporting date, an entity shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition.

 

Simplified approach for trade receivables, contract assets and lease receivables

 

Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for:

 

(a)       trade receivables or contract assets that result from transactions

that are within the scope of IFRS 15, and that:

 

(i)       do   not   contain   a   significant   financing   component   in

accordance  with  IFRS  15  (or  when  the  entity  applies  the practical  expedient  in  accordance  with  paragraph  63  of IFRS 15); or

 

(ii)      contain  a  significant  financing  component  in  accordance

with IFRS 15, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected  credit  losses.  That  accounting  policy  shall  be applied to all such trade receivables or contract assets but

 

 

 

 

 

 

 

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5.5.16

 

 

 

 

5.5.17

 

 

 

 

 

 

 

 

 

 

5.5.18

 

 

 

 

 

5.5.19

 

 

 

 

5.5.20

IFRS 9

 

may be applied separately to trade receivables and contract assets.

 

(b)       lease receivables that result from transactions that are within the

scope of IFRS 16, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all lease receivables but may be applied separately to finance and operating lease receivables.

 

An  entity  may  select  its  accounting  policy  for  trade  receivables,  lease receivables and contract assets independently of each other.

 

Measurement of expected credit losses

 

An entity shall measure expected credit losses of a financial instrument in a way that reflects:

 

(a)       an unbiased and probabilityweighted amount that is determined by

evaluating a range of possible outcomes;

 

(b)       the time value of money; and

 

(c)      reasonable and supportable information that is available without

undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

 

When  measuring  expected  credit  losses,  an  entity  need  not  necessarily identify  every  possible  scenario.  However,  it  shall  consider  the  risk  or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low.

 

The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice.

 

However, some financial instruments include both a loan and an undrawn commitment  component  and  the  entity’s  contractual  ability  to  demand repayment and cancel the undrawn commitment does not limit the entity’s exposure to credit losses to the contractual notice period. For such financial instruments, and only those financial instruments, the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period.

 

 

 

 

 

 

 

 

 

 

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5.6 Reclassification of financial assets

 

 

 

5.6.1

 

 

 

 

 

5.6.2

 

 

 

 

 

 

5.6.3

 

 

 

 

 

5.6.4

 

 

 

 

 

 

 

 

 

5.6.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.6.6

If an entity reclassifies financial assets in accordance with paragraph 4.4.1, it shall apply the reclassification prospectively from the reclassification date. The  entity  shall  not  restate  any  previously  recognised  gains,  losses (including impairment gains or losses) or interest. Paragraphs 5.6.2–5.6.7 set out the requirements for reclassifications.

 

If  an  entity  reclassifies  a  financial  asset  out  of  the  amortised  cost measurement  category  and  into  the  fair  value  through  profit  or  loss measurement category, its fair value is measured at the reclassification date.  Any  gain  or  loss  arising  from  a  difference  between  the  previous amortised cost of the financial asset and fair value is recognised in profit or loss.

 

If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the amortised cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount. (See paragraph B5.6.2 for guidance on determining an effective interest rate and a loss allowance at the reclassification date.)

 

If  an  entity  reclassifies  a  financial  asset  out  of  the  amortised  cost measurement                      category    and   into   the   fair    value    through   other

comprehensive income measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the  previous  amortised  cost  of  the  financial  asset  and  fair  value  is recognised in other comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. (See paragraph B5.6.1.)

 

If an entity reclassifies a financial asset out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. However, the cumulative gain or loss previously recognised in other comprehensive income is removed from equity and adjusted against the fair value of the financial asset at the reclassification date. As a result, the financial asset is measured at the reclassification date as  if  it  had  always  been  measured  at  amortised  cost.  This  adjustment affects other comprehensive income but does not affect profit or loss and therefore  is  not  a  reclassification  adjustment  (see  IAS  1  Presentation  of Financial Statements). The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. (See paragraph B5.6.1.)

 

If an entity reclassifies a financial asset out of the fair value through profit or  loss  measurement  category  and  into  the  fair  value  through  other comprehensive   income   measurement   category,   the   financial   asset continues to be measured at fair value. (See paragraph B5.6.2 for guidance on  determining  an  effective  interest  rate  and  a  loss  allowance  at  the reclassification date.)

 

 

 

 

 

 

 

 

 

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5.6.7

If an entity reclassifies a financial asset out of the fair value through other comprehensive  income  measurement  category  and  into  the  fair  value through profit or loss measurement category, the financial asset continues to  be  measured  at  fair  value.  The  cumulative  gain  or  loss  previously recognised in other comprehensive income is reclassified from equity to profit   or   loss   as   a   reclassification   adjustment   (see   IAS   1)   at   the reclassification date.

 

 

 

5.7 Gains and losses

 

 

 

5.7.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.7.1A

 

 

 

 

 

 

 

5.7.2

A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless:

 

(a)       it is part of a hedging relationship (see paragraphs 6.5.8–6.5.14 and,

if applicable, paragraphs 89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk);

 

(b)       it  is  an  investment  in  an  equity  instrument  and  the  entity  has

elected to present gains and losses on that investment in other comprehensive income in accordance with paragraph 5.7.5;

 

(c)      it is a financial liability designated as at fair value through profit or

loss and the entity is required to present the effects of changes in the   liability’s   credit   risk   in   other   comprehensive   income   in accordance with paragraph 5.7.7; or

 

(d)      it  is  a  financial  asset  measured  at  fair  value  through  other

comprehensive income in accordance with paragraph 4.1.2A and the entity is required to recognise some changes in fair value in other comprehensive income in accordance with paragraph 5.7.10.

 

Dividends are recognised in profit or loss only when:

 

(a)      the entity’s right to receive payment of the dividend is established;

 

(b)      it is probable that the economic benefits associated with the dividend

will flow to the entity; and

 

(c)      the amount of the dividend can be measured reliably.

 

A gain or loss on a financial asset that is measured at amortised cost and is not  part  of  a  hedging  relationship  (see  paragraphs  6.5.8–6.5.14  and,  if applicable, paragraphs 89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk) shall be recognised in profit or loss when the financial asset is derecognised, reclassified in accordance with paragraph 5.6.2, through the amortisation process or in order to recognise impairment        gains      or                losses.           An       entity          shall apply

paragraphs  5.6.2  and  5.6.4  if  it  reclassifies  financial  assets  out  of  the amortised cost measurement category. A gain or loss on a financial liability that is measured at amortised cost and is not part of a hedging relationship (see paragraphs 6.5.8–6.5.14 and, if applicable, paragraphs 89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk) shall be recognised in profit or loss when the financial liability is

 

 

 

 

 

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5.7.3

 

 

 

 

 

5.7.4

 

 

 

 

 

 

 

 

 

 

 

 

5.7.5

 

 

 

 

 

 

 

5.7.6

 

 

 

 

 

5.7.7

derecognised and through the amortisation process. (See paragraph B5.7.2 for guidance on foreign exchange gains or losses.)

 

A gain or loss on financial assets or financial liabilities that are hedged items  in  a  hedging  relationship  shall  be  recognised  in  accordance with  paragraphs  6.5.8–6.5.14  and,  if  applicable,  paragraphs  89–94  of IAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk.

 

If an entity recognises financial assets using settlement date accounting (see paragraphs 3.1.2, B3.1.3 and B3.1.6), any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost. For assets measured at fair value, however, the change in fair value shall be recognised  in  profit  or  loss  or  in  other  comprehensive  income,  as appropriate in accordance with paragraph 5.7.1. The trade date shall be considered the date of initial recognition for the purposes of applying the impairment requirements.

 

Investments in equity instruments

 

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 within the scope of this Standard  that  is  neither  held  for  trading  nor  contingent  consideration recognised  by  an  acquirer  in  a  business  combination  to  which  IFRS  3 applies. (See paragraph B5.7.3 for guidance on foreign exchange gains or losses.)

 

If an entity makes the election in paragraph 5.7.5, it shall recognise in profit or loss dividends from that investment in accordance with paragraph 5.7.1A.

 

Liabilities designated as at fair value through profit or loss

 

An  entity  shall  present  a  gain  or  loss  on  a  financial  liability  that  is designated  as  at  fair  value  through  profit  or  loss  in  accordance  with paragraph 4.2.2 or paragraph 4.3.5 as follows:

 

(a)       The amount of change in the fair value of the financial liability that

is attributable to changes in the credit risk of that liability shall be

 

presented      in       other      comprehensive      income       (see

 

paragraphs B5.7.13–B5.7.20), and

 

(b)       the remaining amount of change in the fair value of the liability

shall be presented in profit or loss

 

unless the treatment of the effects of changes in the liability’s credit risk described in (a) would create or enlarge an accounting mismatch in profit or loss (in which case paragraph 5.7.8 applies). Paragraphs B5.7.5–B5.7.7 and   B5.7.10–B5.7.12   provide   guidance   on   determining   whether   an accounting mismatch would be created or enlarged.

 

 

 

 

 

 

 

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5.7.8

 

 

 

 

5.7.9

 

 

 

 

 

 

5.7.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.7.11

If  the  requirements  in  paragraph  5.7.7  would  create  or  enlarge  an accounting mismatch in profit or loss, an entity shall present all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss.

 

Despite the requirements in paragraphs 5.7.7 and 5.7.8, an entity shall present in profit or loss all gains and losses on loan commitments and financial guarantee contracts that are designated as at fair value through profit or loss.

 

Assets measured at fair value through other comprehensive income

 

A gain or loss on a financial asset measured at fair value through other comprehensive  income  in  accordance  with  paragraph  4.1.2A  shall  be recognised in other comprehensive income, except for impairment gains or losses   (see   Section   5.5)   and   foreign   exchange   gains   and   losses (see paragraphs B5.7.2–B5.7.2A), until the financial asset is derecognised or reclassified. When the financial asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment (see IAS 1). If the  financial  asset  is  reclassified  out  of  the  fair  value  through  other comprehensive income measurement category, the entity shall account for the  cumulative  gain  or  loss  that  was  previously  recognised  in  other comprehensive  income  in  accordance  with  paragraphs  5.6.5  and  5.6.7. Interest calculated using the effective interest method is recognised in profit or loss.

 

As described in paragraph 5.7.10, if a financial asset is measured at fair value   through   other   comprehensive   income   in   accordance   with paragraph 4.1.2A, the amounts that are recognised in profit or loss are the same as the amounts that would have been recognised in profit or loss if the financial asset had been measured at amortised cost.

 

 

 

Chapter 6 Hedge accounting

 

6.1 Objective and scope of hedge accounting

 

 

 

6.1.1

 

 

 

 

 

 

 

 

 

 

6.1.2

The objective of hedge accounting is to represent, in the financial statements, the  effect  of  an  entity’s  risk  management  activities  that  use  financial instruments to manage exposures arising from particular risks that could affect  profit  or  loss  (or  other  comprehensive  income,  in  the  case  of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph  5.7.5).  This  approach  aims  to  convey  the  context  of  hedging instruments for which hedge accounting is applied in order to allow insight into their purpose and effect.

 

An entity may choose to designate a hedging relationship between a hedging instrument and a hedged item in accordance with paragraphs 6.2.1–6.3.7 and B6.2.1–B6.3.25. For hedging relationships that meet the qualifying criteria, an entity shall account for the gain or loss on the hedging instrument and the

 

 

 

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6.1.3

hedged item in accordance with paragraphs 6.5.1–6.5.14 and B6.5.1–B6.5.28. When the hedged item is a group of items, an entity shall comply with the additional requirements in paragraphs 6.6.1–6.6.6 and B6.6.1–B6.6.16.

 

For a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities (and only for such a hedge), an entity may apply the  hedge  accounting  requirements  in  IAS  39  instead  of  those  in  this Standard. In that case, the entity must also apply the specific requirements for the fair value hedge accounting for a portfolio hedge of interest rate risk and designate  as  the  hedged  item  a  portion  that  is  a  currency  amount  (see paragraphs 81A, 89A and AG114–AG132 of IAS 39).

 

 

 

6.2 Hedging instruments

 

Qualifying instruments

 

 

 

6.2.1

 

 

 

6.2.2

 

 

 

 

 

 

 

 

 

 

 

 

 

6.2.3

 

 

 

 

 

6.2.4

A  derivative  measured  at  fair  value  through  profit  or  loss  may  be designated as a hedging instrument, except for some written options (see paragraph B6.2.4).

 

A  non-derivative  financial  asset  or  a  non-derivative  financial  liability measured  at  fair  value  through  profit  or  loss  may  be  designated  as  a hedging instrument unless it is a financial liability designated as at fair value through profit or loss for which the amount of its change in fair value that is attributable to changes in the credit risk of that liability is presented      in        other                comprehensive                 income   in                 accordance with

paragraph 5.7.7. For a hedge of foreign currency risk, the foreign currency risk  component  of  a  non-derivative  financial  asset  or  a  non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5.

 

For hedge accounting purposes, only contracts with a party external to the reporting entity (ie external to the group or individual entity that is being reported on) can be designated as hedging instruments.

 

Designation of hedging instruments

 

A  qualifying  instrument  must  be  designated  in  its  entirety  as  a  hedging instrument. The only exceptions permitted are:

 

(a)      separating the intrinsic value and time value of an option contract and

designating as the hedging instrument only the change in intrinsic

value of an option and not the change in its time value (see paragraphs

6.5.15 and B6.5.29–B6.5.33);

 

(b)      separating the forward element and the spot element of a forward

contract and designating as the hedging instrument only the change in the  value  of  the  spot  element  of  a  forward  contract  and  not  the forward element; similarly, the foreign currency basis spread may be separated and excluded from the designation of a financial instrument

 

 

 

 

 

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6.2.5

 

 

 

 

 

 

 

6.2.6

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as the hedging instrument (see paragraphs 6.5.16 and B6.5.34–B6.5.39); and

 

(c)      a proportion of the entire hedging instrument, such as 50 per cent of

the nominal amount, may be designated as the hedging instrument in a hedging relationship. However, a hedging instrument may not be designated for a part of its change in fair value that results from only a portion  of  the  time  period  during  which  the  hedging  instrument remains outstanding.

 

An entity may view in combination, and jointly designate as the hedging instrument, any combination of the following (including those circumstances in which the risk or risks arising from some hedging instruments offset those arising from others):

 

(a)      derivatives or a proportion of them; and

 

(b)      non-derivatives or a proportion of them.

 

However,  a  derivative  instrument  that  combines  a  written  option  and  a purchased option (for example, an interest rate collar) does not qualify as a hedging instrument if it is, in effect, a net written option at the date of designation  (unless  it  qualifies  in  accordance  with  paragraph  B6.2.4). Similarly, two or more instruments (or proportions of them) may be jointly designated as the hedging instrument only if, in combination, they are not, in effect, a net written option at the date of designation (unless it qualifies in accordance with paragraph B6.2.4).

 

 

 

6.3 Hedged items

 

Qualifying items

 

 

 

6.3.1

 

 

 

 

 

 

 

 

 

 

6.3.2

 

6.3.3

 

 

6.3.4

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. The hedged item can be:

 

(a)       a single item; or

 

(b)       a   group   of   items   (subject    to   paragraphs    6.6.1–6.6.6    and

B6.6.1–B6.6.16).

 

A hedged item can also be a component of such an item or group of items (see paragraphs 6.3.7 and B6.3.7–B6.3.25).

 

The hedged item must be reliably measurable.

 

If a hedged item is a forecast transaction (or a component thereof), that transaction must be highly probable.

 

An aggregated exposure that is a combination of an exposure that could qualify  as  a  hedged  item  in  accordance  with  paragraph  6.3.1  and  a derivative   may   be   designated   as   a   hedged   item   (see   paragraphs B6.3.3–B6.3.4).  This  includes  a  forecast  transaction  of  an  aggregated exposure (ie uncommitted but anticipated future transactions that would

 

 

 

 

 

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6.3.5

 

 

 

 

 

 

 

 

 

 

 

6.3.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.3.7

give rise to an exposure and a derivative) if that aggregated exposure is highly  probable  and,  once  it  has  occurred  and  is  therefore  no  longer forecast, is eligible as a hedged item.

 

For hedge accounting purposes, only assets, liabilities, firm commitments or  highly  probable  forecast  transactions  with  a  party  external  to  the reporting entity can be designated as hedged items. Hedge accounting can be applied to transactions between entities in the same group only in the individual or separate financial statements of those entities and not in the consolidated financial statements of the group, except for the consolidated financial statements of an investment entity, as defined in IFRS 10, where transactions between an investment entity and its subsidiaries measured at fair value through profit or loss will not be eliminated in the consolidated financial statements.

 

However, as an exception to paragraph 6.3.5, the foreign currency risk of an intragroup monetary item (for example, a payable/receivable between two subsidiaries)  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 in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. In accordance with IAS 21, foreign exchange rate gains and losses on intragroup monetary items are not fully eliminated on consolidation when the intragroup monetary item is transacted between  two  group  entities  that  have  different  functional  currencies.  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.

 

Designation of hedged items

 

An entity may designate an item in its entirety or a component of an item as the hedged item in a hedging relationship. An entire item comprises all changes in the cash flows or fair value of an item. A component comprises less than the entire fair value change or cash flow variability of an item. In that case,  an  entity  may  designate  only  the  following  types  of  components (including combinations) as hedged items:

 

(a)      only changes in the cash flows or fair value of an item attributable to a

specific risk or risks (risk component), provided that, based on an assessment within the context of the particular market structure, the risk  component  is  separately  identifiable  and  reliably  measurable (see paragraphs    B6.3.8–B6.3.15). Risk        components include              a

designation of only changes in the cash flows or the fair value of a hedged item above or below a specified price or other variable (a one- sided risk).

 

(b)      one or more selected contractual cash flows.

 

(c)      components of a nominal amount, ie a specified part of the amount of

an item (see paragraphs B6.3.16–B6.3.20).

 

 

 

 

 

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6.4 Qualifying criteria for hedge accounting

 

 

 

6.4.1

A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:

 

(a)       the   hedging   relationship   consists   only   of   eligible   hedging

instruments and eligible hedged items.

 

(b)       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.  That  documentation  shall  include  identification  of  the hedging instrument, the hedged item, the nature of the risk being hedged  and  how  the  entity  will  assess  whether  the  hedging relationship meets the hedge effectiveness requirements (including its  analysis  of  the  sources  of  hedge  ineffectiveness  and  how  it determines the hedge ratio).

 

(c)      the   hedging   relationship   meets   all   of   the   following   hedge

effectiveness requirements:

 

(i)       there is an economic relationship between the hedged item

and the hedging instrument (see paragraphs B6.4.4–B6.4.6);

 

(ii)      the effect of credit risk does not dominate the value changes

that result from that economic relationship (see paragraphs B6.4.7–B6.4.8); and

 

(iii)     the hedge ratio of the hedging relationship is the same as

that resulting from the quantity of the hedged item that the entity  actually  hedges  and  the  quantity  of  the  hedging instrument  that  the  entity  actually  uses  to  hedge  that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent   with   the   purpose   of   hedge   accounting (see paragraphs B6.4.9–B6.4.11).

 

 

 

6.5 Accounting for qualifying hedging relationships

 

 

 

6.5.1

 

 

 

6.5.2

An entity applies hedge accounting to hedging relationships that meet the qualifying criteria in paragraph 6.4.1 (which include the entity’s decision to designate the hedging relationship).

 

There are three types of hedging relationships:

 

(a)       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.

 

 

 

 

 

 

 

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6.5.3

 

 

 

 

 

 

6.5.4

 

6.5.5

 

 

 

 

 

 

6.5.6

(b)       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.

 

(c)      hedge  of  a  net  investment  in  a  foreign  operation  as  defined  in

IAS 21.

 

If the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, the hedged exposure referred to in paragraph 6.5.2(a) must be one that could affect other comprehensive income. In that case, and only in that case, the recognised hedge ineffectiveness is presented in other comprehensive income.

 

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.

 

If   a   hedging   relationship   ceases   to   meet   the   hedge   effectiveness requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the risk  management  objective  for  that  designated  hedging  relationship remains the same, an entity shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again (this is referred to in this Standard as ‘rebalancing’—see paragraphs B6.5.7–B6.5.21).

 

An entity shall discontinue hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying  criteria  (after  taking  into  account  any  rebalancing  of  the hedging  relationship,  if  applicable).  This  includes  instances  when  the hedging instrument expires or is sold, terminated or exercised. For this purpose, the replacement or rollover of a hedging instrument into another hedging  instrument  is  not  an  expiration  or  termination  if  such  a replacement  or  rollover  is  part  of,  and  consistent  with,  the  entity’s documented  risk  management  objective.  Additionally,  for  this  purpose there is not an expiration or termination of the hedging instrument if:

 

(a)       as a consequence of laws or regulations or the introduction of laws

or regulations, the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. For this purpose,   a   clearing   counterparty   is   a   central   counterparty (sometimes called a ‘clearing organisation’ or ‘clearing agency’) or an entity or entities, for example, a clearing member of a clearing organisation  or  a  client  of  a  clearing  member  of  a  clearing organisation, that are acting as a counterparty in order to effect clearing by a central counterparty. However, when the parties to the hedging  instrument  replace  their  original  counterparties  with different counterparties the requirement in this subparagraph is met only if each of those parties effects clearing with the same central counterparty.

 

 

 

 

 

 

 

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6.5.7

 

 

 

 

 

 

 

 

 

 

6.5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5.9

IFRS 9

 

(b)       other changes, if any, to the hedging instrument are limited to

those  that  are  necessary  to  effect  such  a  replacement  of  the counterparty. Such changes are limited to those that are consistent with the terms that would be expected if the hedging instrument were  originally  cleared  with  the  clearing  counterparty.  These changes include changes in the collateral requirements, rights to offset receivables and payables balances, and charges levied.

 

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).

 

An entity shall apply:

 

(a)      paragraph 6.5.10 when it discontinues hedge accounting for a fair

value hedge for which the hedged item is (or is a component of) a financial instrument measured at amortised cost; and

 

(b)      paragraph 6.5.12 when it discontinues hedge accounting for cash flow

hedges.

 

Fair value hedges

 

As   long   as   a   fair   value   hedge   meets   the   qualifying   criteria   in paragraph 6.4.1, the hedging relationship shall be accounted for as follows:

 

(a)       the gain or loss on the hedging instrument shall be recognised in

profit  or  loss  (or  other  comprehensive  income,  if  the  hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5).

 

(b)       the  hedging  gain  or  loss  on  the  hedged  item  shall  adjust  the

carrying   amount   of   the   hedged   item   (if   applicable)   and   be recognised in profit or loss. If the hedged item is a financial asset (or a component thereof) that is measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A, the hedging gain or loss on the hedged item shall be recognised in profit or loss. However, if the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, those amounts shall remain in other comprehensive income. When a   hedged   item   is   an   unrecognised   firm   commitment   (or   a component thereof), the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss.

 

When  a  hedged  item  in  a  fair  value  hedge  is  a  firm  commitment  (or  a component  thereof)  to  acquire  an  asset  or  assume  a  liability,  the  initial carrying amount of the asset or the liability that results from the entity meeting the firm commitment is adjusted to include the cumulative change in

 

 

 

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6.5.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5.11

the fair value of the hedged item that was recognised in the statement of financial position.

 

Any adjustment arising from paragraph 6.5.8(b) shall be amortised to profit or loss if the hedged item is a financial instrument (or a component thereof) measured at amortised cost. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted  for  hedging  gains  and  losses.  The  amortisation  is  based  on  a recalculated effective interest rate at the date that amortisation begins. In the case of a financial asset (or a component thereof) that is a hedged item and that  is  measured  at  fair  value  through  other  comprehensive  income  in accordance with paragraph 4.1.2A, amortisation applies in the same manner but to the amount that represents the cumulative gain or loss previously recognised in accordance with paragraph 6.5.8(b) instead of by adjusting the carrying amount.

 

Cash flow hedges

 

As   long   as   a   cash   flow   hedge   meets   the   qualifying   criteria   in paragraph 6.4.1, the hedging relationship shall be accounted for as follows:

 

(a)       the separate component of equity associated with the hedged item

(cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):

 

(i)       the cumulative gain or loss on the hedging instrument from

inception of the hedge; and

 

(ii)      the cumulative change in fair value (present value) of the

hedged item (ie the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge.

 

(b)       the portion of the gain or loss on the hedging instrument that is

determined to be an effective hedge (ie the portion that is offset by the change in the cash flow hedge reserve calculated in accordance with (a)) shall be recognised in other comprehensive income.

 

(c)      any remaining gain or loss on the hedging instrument (or any gain

or  loss  required  to  balance  the  change  in  the  cash  flow  hedge reserve calculated in accordance with (a)) is hedge ineffectiveness that shall be recognised in profit or loss.

 

(d)      the  amount  that  has  been  accumulated  in  the  cash  flow  hedge

reserve in accordance with (a) shall be accounted for as follows:

 

(i)       if a hedged forecast transaction subsequently results in the

recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial liability becomes a firm commitment for which fair  value  hedge  accounting  is  applied,  the  entity  shall remove that amount from the cash flow hedge reserve and include  it  directly  in  the  initial  cost  or  other  carrying

 

 

 

 

 

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6.5.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5.13

 

 

 

 

 

 

 

 

 

6.5.14

IFRS 9

 

amount   of   the   asset   or   the   liability.   This   is   not   a reclassification adjustment (see IAS 1) and hence it does not affect other comprehensive income.

 

(ii)      for cash flow hedges other than those covered by (i), that

amount  shall  be  reclassified  from  the  cash  flow  hedge reserve to profit or loss as a reclassification adjustment (see IAS 1) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognised or when a forecast sale occurs).

 

(iii)     however, if that amount is a loss and an entity expects that

all or a portion of that loss will not be recovered in one or more  future  periods,  it  shall  immediately  reclassify  the amount that is not expected to be recovered into profit or loss as a reclassification adjustment (see IAS 1).

 

When an entity discontinues hedge accounting for a cash flow hedge (see paragraphs 6.5.6 and 6.5.7(b)) it shall account for the amount that has been accumulated   in   the   cash   flow   hedge   reserve   in   accordance   with paragraph 6.5.11(a) as follows:

 

(a)      if the hedged future cash flows are still expected to occur, that amount

shall remain in the cash flow hedge reserve until the future cash flows occur or until paragraph 6.5.11(d)(iii) applies. When the future cash flows occur, paragraph 6.5.11(d) applies.

 

(b)      if the hedged future cash flows are no longer expected to occur, that

amount shall be immediately reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see IAS 1). A hedged future cash flow that is no longer highly probable to occur may still be expected to occur.

 

Hedges of a net investment in a foreign operation

 

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment (see IAS 21), shall be accounted for similarly to cash flow hedges:

 

(a)       the portion of the gain or loss on the hedging instrument that is

determined to be an effective hedge shall be recognised in other comprehensive income (see paragraph 6.5.11); and

 

(b)       the ineffective portion shall be recognised in profit or loss.

 

The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or loss  as  a  reclassification  adjustment  (see  IAS  1)  in  accordance  with paragraphs  48–49  of  IAS  21  on  the  disposal  or  partial  disposal  of  the foreign operation.

 

 

 

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6.5.15

Accounting for the time value of options

 

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 (see paragraph 6.2.4(a)), it shall account for the time value of the option as follows (see paragraphs B6.5.29–B6.5.33):

 

(a)      an entity shall distinguish the time value of options by the type of

hedged item that the option hedges (see paragraph B6.5.29):

 

(i)       a transaction related hedged item; or

 

(ii)      a time-period related hedged item.

 

(b)      the change in fair value of the time value of an option that hedges a

transaction   related   hedged   item   shall   be   recognised   in   other comprehensive income to the extent that it relates to the hedged item and shall be accumulated in a separate component of equity. The cumulative change in fair value arising from the time value of the option that has been accumulated in a separate component of equity (the ‘amount’) shall be accounted for as follows:

 

(i)       if the hedged item subsequently results in the recognition of a

non‑financial  asset  or  a  non-financial  liability,  or  a  firm commitment  for  a  non‑financial  asset  or  a  non‑financial liability for which fair value hedge accounting is applied, the entity shall remove the amount from the separate component of equity and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see IAS 1) and hence does not affect other comprehensive income.

 

(ii)      for hedging relationships other than those covered by (i), the

amount shall be reclassified from the separate component of equity to profit or loss as a reclassification adjustment (see IAS 1) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, when a forecast sale occurs).

 

(iii)     however, if all or a portion of that amount is not expected to be

recovered in one or more future periods, the amount that is not expected to be recovered shall be immediately reclassified into profit or loss as a reclassification adjustment (see IAS 1).

 

(c)      the change in fair value of the time value of an option that hedges a

time-period   related   hedged   item   shall   be   recognised   in   other comprehensive income to the extent that it relates to the hedged item and shall be accumulated in a separate component of equity. The time value at the date of designation of the option as a hedging instrument, to the extent that it relates to the hedged item, shall be amortised on a systematic and rational basis over the period during which the hedge adjustment for the option’s intrinsic value could affect profit or loss (or  other  comprehensive  income,  if  the  hedged  item  is  an  equity

 

 

 

 

 

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6.5.16

IFRS 9

 

instrument for which an entity has elected to present changes in fair value      in         other            comprehensive                       income    in     accordance

with   paragraph   5.7.5).   Hence,   in   each   reporting   period,   the amortisation   amount   shall   be   reclassified   from   the   separate component of equity to profit or loss as a reclassification adjustment (see  IAS  1).  However,  if  hedge  accounting  is  discontinued  for  the hedging relationship that includes the change in intrinsic value of the option  as  the  hedging  instrument,  the  net  amount  (ie  including cumulative amortisation) that has been accumulated in the separate component of equity shall be immediately reclassified into profit or loss as a reclassification adjustment (see IAS 1).

 

Accounting for the forward element of forward contracts and foreign currency basis spreads of financial instruments

 

When an entity separates the forward element and the spot element of a forward contract and designates as the hedging instrument only the change in the value of the spot element of the forward contract, or when an entity separates the foreign currency basis spread from a financial instrument and excludes it from the designation of that financial instrument as the hedging instrument (see paragraph 6.2.4(b)), the entity may apply paragraph 6.5.15 to the forward element of the forward contract or to the foreign currency basis spread in the same manner as it is applied to the time value of an option. In that  case,  the  entity  shall  apply  the  application  guidance  in  paragraphs B6.5.34–B6.5.39.

 

 

 

6.6 Hedges of a group of items

 

Eligibility of a group of items as the hedged item

 

 

 

6.6.1

A group of items (including a group of items that constitute a net position; see paragraphs B6.6.1–B6.6.8) is an eligible hedged item only if:

 

(a)       it  consists  of  items  (including  components  of  items)  that  are,

individually, eligible hedged items;

 

(b)       the items in the group are managed together on a group basis for

risk management purposes; and

 

(c)      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 so that offsetting risk positions arise:

 

(i)       it is a hedge of foreign currency risk; and

 

(ii)      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 (see paragraphs B6.6.7–B6.6.8).

 

 

 

 

 

 

 

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6.6.2

 

 

 

6.6.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.6.4

 

 

 

 

 

 

 

6.6.5

 

 

 

 

 

 

 

6.6.6

Designation of a component of a nominal amount

 

A component that is a proportion of an eligible group of items is an eligible hedged item provided that designation is consistent with the entity’s risk management objective.

 

A layer component of an overall group of items (for example, a bottom layer) is eligible for hedge accounting only if:

 

(a)      it is separately identifiable and reliably measurable;

 

(b)      the risk management objective is to hedge a layer component;

 

(c)      the items in the overall group from which the layer is identified are

exposed to the same hedged risk (so that the measurement of the hedged layer is not significantly affected by which particular items from the overall group form part of the hedged layer);

 

(d)      for  a  hedge  of  existing  items  (for  example,  an  unrecognised  firm

commitment or a recognised asset) an entity can identify and track the overall group of items from which the hedged layer is defined (so that the entity is able to comply with the requirements for the accounting for qualifying hedging relationships); and

 

(e)      any items in the group that contain prepayment options meet the

requirements   for   components   of    a    nominal   amount   (see

paragraph B6.3.20).

 

Presentation

 

For a hedge of a group of items with offsetting risk positions (ie in a hedge of a net position) whose hedged risk affects different line items in the statement of profit or loss and other comprehensive income, any hedging gains or losses in that statement shall be presented in a separate line from those affected by the hedged items. Hence, in that statement the amount in the line item that relates to the hedged item itself (for example, revenue or cost of sales) remains unaffected.

 

For assets and liabilities that are hedged together as a group in a fair value hedge, the gain or loss in the statement of financial position on the individual assets and liabilities shall be recognised as an adjustment of the carrying amount of the respective individual items comprising the group in accordance with paragraph 6.5.8(b).

 

Nil net positions

 

When the hedged item is a group that is a nil net position (ie the hedged items among themselves fully offset the risk that is managed on a group basis), an entity is permitted to designate it in a hedging relationship that does not include a hedging instrument, provided that:

 

 

 

 

 

 

 

 

 

 

 

 

 

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(a)      the hedge is part of a rolling net risk hedging strategy, whereby the

entity routinely hedges new positions of the same type as time moves on (for example, when transactions move into the time horizon for which the entity hedges);

 

(b)      the hedged net position changes in size over the life of the rolling net

risk hedging strategy and the entity uses eligible hedging instruments to hedge the net risk (ie when the net position is not nil);

 

(c)      hedge accounting is normally applied to such net positions when the

net  position  is  not  nil  and  it  is  hedged  with  eligible  hedging instruments; and

 

(d)      not applying hedge accounting to the nil net position would give rise

to inconsistent accounting outcomes, because the accounting would not recognise the offsetting risk positions that would otherwise be recognised in a hedge of a net position.

 

6.7 Option to designate a credit exposure as measured at fair value through profit or loss

 

Eligibility of credit exposures for designation at fair value through profit or loss

 

 

 

6.7.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.7.2

If an entity uses a credit derivative that is measured at fair value through profit or loss to manage the credit risk of all, or a part of, a financial instrument (credit exposure) it may designate that financial instrument to the extent that it is so managed (ie all or a proportion of it) as measured at fair value through profit or loss if:

 

(a)       the name of the credit exposure (for example, the borrower, or the

holder of a loan commitment) matches the reference entity of the credit derivative (‘name matching’); and

 

(b)       the  seniority  of  the  financial  instrument  matches  that  of  the

instruments that can be delivered in accordance with the credit derivative.

 

An entity may make this designation irrespective of whether the financial instrument that is managed for credit risk is within the scope of this Standard (for example, an entity may designate loan commitments that are outside the scope of this Standard). The entity may designate that financial instrument  at,  or  subsequent  to,  initial  recognition,  or  while  it  is unrecognised. The entity shall document the designation concurrently.

 

Accounting for credit exposures designated at fair value through profit or loss

 

If a financial instrument is designated in accordance with paragraph 6.7.1 as measured at fair value through profit or loss after its initial recognition, or was  previously  not  recognised,  the  difference  at  the  time  of  designation between the carrying amount, if any, and the fair value shall immediately be

 

 

 

 

 

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6.7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.7.4

recognised in profit or loss. For financial assets measured at fair value through other  comprehensive  income  in  accordance  with  paragraph  4.1.2A,  the cumulative gain or loss previously recognised in other comprehensive income shall  immediately  be  reclassified  from  equity  to  profit  or  loss  as  a reclassification adjustment (see IAS 1).

 

An entity shall discontinue measuring the financial instrument that gave rise to the credit risk, or a proportion of that financial instrument, at fair value through profit or loss if:

 

(a)      the  qualifying  criteria  in  paragraph  6.7.1  are  no  longer  met,  for

example:

 

(i)       the credit derivative or the related financial instrument that

gives rise to the credit risk expires or is sold, terminated or settled; or

 

(ii)      the credit risk of the financial instrument is no longer managed

using credit derivatives. For example, this could occur because of improvements in the credit quality of the borrower or the loan commitment holder or changes to capital requirements imposed on an entity; and

 

(b)      the  financial  instrument  that  gives  rise  to  the  credit  risk  is  not

otherwise required to be measured at fair value through profit or loss (ie the entity’s business model has not changed in the meantime so that  a  reclassification  in  accordance  with  paragraph  4.4.1  was required).

 

When an entity discontinues measuring the financial instrument that gives rise to the credit risk, or a proportion of that financial instrument, at fair value through profit or loss, that financial instrument’s fair value at the date of discontinuation becomes its new carrying amount. Subsequently, the same measurement that was used before designating the financial instrument at fair value through profit or loss shall be applied (including amortisation that results from the new carrying amount). For example, a financial asset that had originally been classified as measured at amortised cost would revert to that measurement and its effective interest rate would be recalculated based on its new gross carrying amount on the date of discontinuing measurement at fair value through profit or loss.

 

 

 

Chapter 7 Effective date and transition

 

7.1 Effective date

 

 

 

7.1.1

An entity shall apply this Standard for annual periods beginning on or after

1 January 2018. Earlier application is permitted. If an entity elects to apply this  Standard  early,  it  must  disclose  that  fact  and  apply  all  of  the requirements in this Standard at the same time (but see also paragraphs 7.1.2,

7.2.21 and 7.3.2). It shall also, at the same time, apply the amendments in Appendix C.

 

 

 

 

 

 

 

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7.1.2

 

 

 

 

 

 

 

 

 

 

7.1.3

 

 

 

 

 

7.1.4

 

 

 

 

7.1.5

 

 

 

7.1.6

 

 

 

7.1.7

Despite the requirements in paragraph 7.1.1, for annual periods beginning

before  1  January  2018,  an  entity  may  elect  to  early  apply  only  the

requirements for the presentation of gains and losses on financial liabilities

designated  as  at  fair  value  through  profit  or  loss  in  paragraphs  5.7.1(c),

5.7.7–5.7.9,    7.2.14    and   B5.7.5–B5.7.20    without   applying   the   other

requirements  in  this  Standard.  If  an  entity  elects  to  apply  only  those paragraphs, it shall disclose that fact and provide on an ongoing basis the related disclosures set out in paragraphs 10–11 of IFRS 7 Financial Instruments: Disclosures (as amended by IFRS 9 (2010)). (See also paragraphs 7.2.2 and 7.2.15.)

 

Annual  Improvements  to  IFRSs  2010–2012  Cycle,  issued  in  December  2013, amended paragraphs 4.2.1 and 5.7.5 as a consequential amendment derived from  the  amendment  to  IFRS  3.  An  entity  shall  apply  that  amendment prospectively to business combinations to which the amendment to IFRS 3 applies.

 

IFRS 15, issued in May 2014, amended paragraphs 3.1.1, 4.2.1, 5.1.1, 5.2.1,

5.7.6, B3.2.13, B5.7.1, C5 and C42 and deleted paragraph C16 and its related heading. Paragraphs 5.1.3 and 5.7.1A, and a definition to Appendix A, were added. An entity shall apply those amendments when it applies IFRS 15.

 

IFRS  16,  issued  in  January  2016,  amended  paragraphs  2.1,  5.5.15,  B4.3.8, B5.5.34 and B5.5.46. An entity shall apply those amendments when it applies IFRS 16.

 

IFRS 17, issued in May 2017, amended paragraphs 2.1, B2.1, B2.4, B2.5 and B4.1.30, and added paragraph 3.3.5. An entity shall apply those amendments when it applies IFRS 17.

 

Prepayment Features with Negative Compensation (Amendments to IFRS 9), issued in October 2017, added paragraphs 7.2.29–7.2.34 and B4.1.12A and amended paragraphs B4.1.11(b) and B4.1.12(b). An entity shall apply these amendments for annual periods beginning on or after 1 January 2019. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall disclose that fact.

 

 

 

7.2 Transition

 

 

 

7.2.1

 

 

 

 

7.2.2

An entity shall apply this Standard retrospectively, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except as specified in paragraphs 7.2.4–7.2.26 and 7.2.28. This Standard shall not be applied to items that have already been derecognised at the date of initial application.

 

For the purposes of the transition provisions in paragraphs 7.2.1, 7.2.3–7.2.28 and 7.3.2, the date of initial application is the date when an entity first applies those requirements of this Standard and must be the beginning of a reporting period after the issue of this Standard. Depending on the entity’s chosen approach to applying IFRS 9, the transition can involve one or more than one date of initial application for different requirements.

 

 

 

 

 

 

 

 

 

 

 

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7.2.3

 

 

 

 

 

7.2.4

 

 

 

 

 

 

 

 

 

 

7.2.5

 

 

 

 

 

 

 

 

 

 

7.2.6

 

 

 

 

 

 

 

7.2.7

 

 

 

 

 

 

7.2.8

Transition for classification and measurement (Chapters 4 and 5)

 

At the date of initial application, an entity shall assess whether a financial asset meets the condition in paragraphs 4.1.2(a) or 4.1.2A(a) on the basis of the facts and circumstances that exist at that date. The resulting classification shall be applied retrospectively irrespective of the entity’s business model in prior reporting periods.

 

If, at the date of initial application, it is impracticable (as defined in IAS 8) for an entity to assess a modified time value of money element in accordance with paragraphs B4.1.9B–B4.1.9D on the basis of the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the requirements related to the modification           of                      the    time   value    of          money            element     in

paragraphs B4.1.9B–B4.1.9D. (See also paragraph 42R of IFRS 7.)

 

If, at the date of initial application, it is impracticable (as defined in IAS 8) for an  entity  to  assess  whether  the  fair  value  of  a  prepayment  feature  was insignificant in accordance with paragraph B4.1.12(c) on the basis of the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the exception for prepayment features in paragraph B4.1.12. (See also paragraph 42S of IFRS 7.)

 

If an entity measures a hybrid contract at fair value in accordance with paragraphs 4.1.2A, 4.1.4 or 4.1.5 but the fair value of the hybrid contract had not been measured in comparative reporting periods, the fair value of the hybrid contract in the comparative reporting periods shall be the sum of the fair values of the components (ie the non-derivative host and the embedded derivative)  at  the  end  of  each  comparative  reporting  period  if  the  entity restates prior periods (see paragraph 7.2.15).

 

If an entity has applied paragraph 7.2.6 then at the date of initial application the entity shall recognise any difference between the fair value of the entire hybrid contract at the date of initial application and the sum of the fair values of the components of the hybrid contract at the date of initial application in the opening retained earnings (or other component of equity, as appropriate) of the reporting period that includes the date of initial application.

 

At the date of initial application an entity may designate:

 

(a)      a financial asset as measured at fair value through profit or loss in

accordance with paragraph 4.1.5; or

 

(b)      an investment in an equity instrument as at fair value through other

comprehensive income in accordance with paragraph 5.7.5.

 

 

 

 

 

 

 

 

 

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7.2.9

 

 

 

 

 

 

 

 

 

 

 

 

 

7.2.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.2.11

IFRS 9

 

Such a designation shall be made on the basis of the facts and circumstances that exist at the date of initial application. That classification shall be applied retrospectively.

 

At the date of initial application an entity:

 

(a)      shall revoke its previous designation of a financial asset as measured at

fair value through profit or loss if that financial asset does not meet the condition in paragraph 4.1.5.

 

(b)      may revoke its previous designation of a financial asset as measured at

fair  value  through  profit  or  loss  if  that  financial  asset  meets  the condition in paragraph 4.1.5.

 

Such a revocation shall be made on the basis of the facts and circumstances that exist at the date of initial application. That classification shall be applied retrospectively.

 

At the date of initial application, an entity:

 

(a)      may designate a financial liability as measured at fair value through

profit or loss in accordance with paragraph 4.2.2(a).

 

(b)      shall  revoke  its  previous  designation  of  a  financial  liability  as

measured at fair value through profit or loss if such designation was made at initial recognition in accordance with the condition now in paragraph 4.2.2(a) and such designation does not satisfy that condition at the date of initial application.

 

(c)      may revoke its previous designation of a financial liability as measured

at fair value through profit or loss if such designation was made at initial   recognition   in   accordance   with   the   condition   now   in paragraph 4.2.2(a) and such designation satisfies that condition at the date of initial application.

 

Such a designation and revocation shall be made on the basis of the facts and circumstances that exist at the date of initial application. That classification shall be applied retrospectively.

 

If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively the effective interest method, the entity shall treat:

 

(a)      the fair value of the financial asset or the financial liability at the end

of each comparative period presented as the gross carrying amount of that financial asset or the amortised cost of that financial liability if the entity restates prior periods; and

 

(b)      the fair value of the financial asset or the financial liability at the date

of  initial  application  as  the  new  gross  carrying  amount  of  that financial asset or the new amortised cost of that financial liability at the date of initial application of this Standard.

 

 

 

 

 

 

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7.2.12

 

 

 

 

 

 

 

 

 

 

7.2.13

 

 

 

 

 

 

 

 

 

7.2.14

 

 

 

 

 

7.2.14A

 

 

 

 

 

7.2.15

If an entity previously accounted at cost (in accordance with IAS 39), for an investment in an equity instrument that does not have a quoted price in an active  market  for  an  identical  instrument  (ie  a  Level  1  input)  (or  for  a derivative asset that is linked to and must be settled by delivery of such an equity instrument) it shall measure that instrument at fair value at the date of initial application. Any difference between the previous carrying amount and the fair value shall be recognised in the opening retained earnings (or other component of equity, as appropriate) of the reporting period that includes the date of initial application.

 

If an entity previously accounted for a derivative liability that is linked to, and must be settled by, delivery of an equity instrument that does not have a quoted price in an active market for an identical instrument (ie a Level 1 input) at cost in accordance with IAS 39, it shall measure that derivative liability at fair value at the date of initial application. Any difference between the previous carrying amount and the fair value shall be recognised in the opening retained earnings of the reporting period that includes the date of initial application.

 

At the date of initial application, an entity shall determine whether the treatment in paragraph 5.7.7 would create or enlarge an accounting mismatch in profit or loss on the basis of the facts and circumstances that exist at the date of initial application. This Standard shall be applied retrospectively on the basis of that determination.

 

At  the  date  of  initial  application,  an  entity  is  permitted  to  make  the designation in paragraph 2.5 for contracts that already exist on the date but only  if  it  designates  all  similar  contracts.  The  change  in  the  net  assets resulting from such designations shall be recognised in retained earnings at the date of initial application.

 

Despite  the  requirement  in  paragraph  7.2.1,  an  entity  that  adopts  the classification and measurement requirements of this Standard (which include the requirements related to amortised cost measurement for financial assets and impairment in Sections 5.4 and 5.5) shall provide the disclosures set out in paragraphs 42L–42O of IFRS 7 but need not restate prior periods. The entity may restate prior periods if, and only if, it is possible without the use of hindsight. If an entity does not restate prior periods, the entity shall recognise any  difference  between  the  previous  carrying  amount  and  the  carrying amount at the beginning of the annual reporting period that includes the date of initial application in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application. However, if an entity restates prior periods, the restated financial statements must reflect all of the requirements in this Standard. If an entity’s chosen approach to applying IFRS 9 results in more than one date of initial application for different requirements, this paragraph applies at each date of initial application (see paragraph 7.2.2). This would be the case, for example, if an entity elects to early apply only the requirements for the presentation of gains and losses on financial liabilities designated as at fair value  through  profit  or  loss  in  accordance  with  paragraph  7.1.2  before applying the other requirements in this Standard.

 

 

 

 

 

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7.2.16

 

 

 

 

 

 

7.2.17

 

 

 

7.2.18

 

 

 

 

 

 

 

7.2.19

 

 

 

 

 

 

 

 

 

 

7.2.20

 

 

 

 

 

 

 

 

 

7.2.21

 

 

 

 

 

 

 

7.2.22

 

 

7.2.23

If an entity prepares interim financial reports in accordance with IAS 34 Interim Financial Reporting the entity need not apply the requirements in this Standard to interim periods prior to the date of initial application if it is impracticable (as defined in IAS 8).

 

Impairment (Section 5.5)

 

An   entity   shall   apply   the   impairment   requirements   in   Section   5.5 retrospectively  in  accordance  with  IAS  8  subject  to  paragraphs  7.2.15 and 7.2.18–7.2.20.

 

At  the  date  of  initial  application,  an  entity  shall  use  reasonable  and supportable information that is available without undue cost or effort to determine the credit risk at the date that a financial instrument was initially recognised (or for loan commitments and financial guarantee contracts at the date  that  the  entity  became  a  party  to  the  irrevocable  commitment  in accordance with paragraph 5.5.6) and compare that to the credit risk at the date of initial application of this Standard.

 

When determining whether there has been a significant increase in credit risk since initial recognition, an entity may apply:

 

(a)      the requirements in paragraphs 5.5.10 and B5.5.22–B5.5.24; and

 

(b)      the  rebuttable  presumption  in  paragraph  5.5.11  for  contractual

payments that are more than 30 days past due if an entity will apply the impairment requirements by identifying significant increases in credit risk since initial recognition for those financial instruments on the basis of past due information.

 

If, at the date of initial application, determining whether there has been a significant  increase  in  credit  risk  since  initial  recognition  would  require undue cost or effort, an entity shall recognise a loss allowance at an amount equal to lifetime expected credit losses at each reporting date until that financial instrument is derecognised (unless that financial instrument is low credit risk at a reporting date, in which case paragraph 7.2.19(a) applies).

 

Transition for hedge accounting (Chapter 6)

 

When an entity first applies this Standard, it may choose as its accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in Chapter 6 of this Standard. An entity shall apply that policy to all of its hedging relationships. An entity that chooses that policy shall also apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without   the   amendments   that   conform   that   Interpretation   to   the requirements in Chapter 6 of this Standard.

 

Except  as  provided  in  paragraph  7.2.26,  an  entity  shall  apply  the  hedge accounting requirements of this Standard prospectively.

 

To apply hedge accounting from the date of initial application of the hedge accounting requirements of this Standard, all qualifying criteria must be met as at that date.

 

 

 

 

 

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7.2.24

 

 

 

 

 

7.2.25

 

 

 

 

 

 

 

 

 

 

7.2.26

Hedging relationships that qualified for hedge accounting in accordance with IAS 39 that also qualify for hedge accounting in accordance with the criteria of  this  Standard  (see  paragraph  6.4.1),  after  taking  into  account  any rebalancing of the hedging relationship on transition (see paragraph 7.2.25(b)), shall be regarded as continuing hedging relationships.

 

On initial application of the hedge accounting requirements of this Standard, an entity:

 

(a)      may start to apply those requirements from the same point in time as

it ceases to apply the hedge accounting requirements of IAS 39; and

 

(b)      shall consider the hedge ratio in accordance with IAS 39 as the starting

point  for  rebalancing  the  hedge  ratio  of  a  continuing  hedging relationship, if applicable. Any gain or loss from such a rebalancing shall be recognised in profit or loss.

 

As   an   exception   to   prospective   application   of   the   hedge   accounting requirements of this Standard, an entity:

 

(a)      shall apply the accounting for the time value of options in accordance

with paragraph 6.5.15 retrospectively if, in accordance with IAS 39, only the change in an option’s intrinsic value was designated as a hedging  instrument  in  a  hedging  relationship.  This  retrospective application applies only to those hedging relationships that existed at the beginning of the earliest comparative period or were designated thereafter.

 

(b)      may  apply  the  accounting  for  the  forward  element  of  forward

contracts in accordance with paragraph 6.5.16 retrospectively if, in accordance with IAS 39, only the change in the spot element of a forward contract was designated as a hedging instrument in a hedging relationship.  This  retrospective  application  applies  only  to  those hedging relationships that existed at the beginning of the earliest comparative period or were designated thereafter. In addition, if an entity elects retrospective application of this accounting, it shall be applied to all hedging relationships that qualify for this election (ie on transition this election is not available on a hedging-relationship-by- hedging-relationship basis). The accounting for foreign currency basis spreads (see paragraph 6.5.16) may be applied retrospectively for those hedging relationships that existed at the beginning of the earliest comparative period or were designated thereafter.

 

(c)      shall apply retrospectively the requirement of paragraph 6.5.6 that

there is not an expiration or termination of the hedging instrument if:

 

(i)       as a consequence of laws or regulations, or the introduction of

laws  or  regulations,  the  parties  to  the  hedging  instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties; and

 

 

 

 

 

 

 

 

 

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7.2.27

 

 

 

 

 

 

7.2.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.2.29

 

 

 

7.2.30

IFRS 9

 

(ii)      other changes, if any, to the hedging instrument are limited to

those that are necessary to effect such a replacement of the counterparty.

 

Entities that have applied IFRS 9 (2009), IFRS 9 (2010) or IFRS 9 (2013) early

 

An entity shall apply the transition requirements in paragraphs 7.2.1–7.2.26 at the relevant date of initial application. An entity shall apply each of the transition provisions in paragraphs 7.2.3–7.2.14A and 7.2.17–7.2.26 only once (ie if an entity chooses an approach of applying IFRS 9 that involves more than one date of initial application, it cannot apply any of those provisions again if they were already applied at an earlier date). (See paragraphs 7.2.2 and 7.3.2.)

 

An  entity  that  applied  IFRS  9  (2009),  IFRS  9  (2010)  or  IFRS  9  (2013)  and subsequently applies this Standard:

 

(a)      shall revoke its previous designation of a financial asset as measured at

fair value through profit or loss if that designation was previously made in accordance with the condition in paragraph 4.1.5 but that condition is no longer satisfied as a result of the application of this Standard;

 

(b)      may designate a financial asset as measured at fair value through

profit or loss if that designation would not have previously satisfied the condition in paragraph 4.1.5 but that condition is now satisfied as a result of the application of this Standard;

 

(c)      shall  revoke  its  previous  designation  of  a  financial  liability  as

measured at fair value through profit or loss if that designation was previously made in accordance with the condition in paragraph 4.2.2(a) but that condition is no longer satisfied as a result of the application of this Standard; and

 

(d)      may designate a financial liability as measured at fair value through

profit or loss if that designation would not have previously satisfied the condition in paragraph 4.2.2(a) but that condition is now satisfied as a result of the application of this Standard.

 

Such a designation and revocation shall be made on the basis of the facts and circumstances that exist at the date of initial application of this Standard. That classification shall be applied retrospectively.

 

Transition for Prepayment Features with Negative Compensation

 

An   entity   shall   apply   Prepayment   Features   with   Negative   Compensation (Amendments to IFRS 9) retrospectively in accordance with IAS 8, except as specified in paragraphs 7.2.30–7.2.34.

 

An entity that first applies these amendments at the same time it first applies this  Standard  shall  apply  paragraphs  7.2.1–7.2.28  instead  of  paragraphs 7.2.31–7.2.34.

 

 

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7.2.31

 

 

 

 

 

 

 

7.2.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.2.33

 

 

 

 

 

 

 

 

 

 

 

7.2.34

An  entity  that  first  applies  these  amendments  after  it  first  applies  this Standard shall apply paragraphs 7.2.32–7.2.34. The entity shall also apply the other transition requirements in this Standard necessary for applying these amendments. For that purpose, references to the date of initial application shall be read as referring to the beginning of the reporting period in which an entity first applies these amendments (date of initial application of these amendments).

 

With regard to designating a financial asset or financial liability as measured at fair value through profit or loss, an entity:

 

(a)      shall revoke its previous designation of a financial asset as measured at

fair value through profit or loss if that designation was previously made in accordance with the condition in paragraph 4.1.5 but that condition is no longer satisfied as a result of the application of these amendments;

 

(b)      may designate a financial asset as measured at fair value through

profit or loss if that designation would not have previously satisfied the condition in paragraph 4.1.5 but that condition is now satisfied as a result of the application of these amendments;

 

(c)      shall  revoke  its  previous  designation  of  a  financial  liability  as

measured at fair value through profit or loss if that designation was previously made in accordance with the condition in paragraph 4.2.2(a) but that condition is no longer satisfied as a result of the application of these amendments; and

 

(d)      may designate a financial liability as measured at fair value through

profit or loss if that designation would not have previously satisfied the condition in paragraph 4.2.2(a) but that condition is now satisfied as a result of the application of these amendments.

 

Such a designation and revocation shall be made on the basis of the facts and circumstances   that   exist   at   the   date   of   initial   application   of   these amendments. That classification shall be applied retrospectively.

 

An entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight and the restated financial statements reflect all the requirements in this Standard. If an entity does not restate prior periods,  the  entity  shall  recognise  any  difference  between  the  previous carrying amount and the carrying amount at the beginning of the annual reporting  period  that  includes  the  date  of  initial  application  of  these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these amendments.

 

In the reporting period that includes the date of initial application of these amendments, the entity shall disclose the following information as at that date  of  initial  application  for  each  class  of  financial  assets  and  financial liabilities that were affected by these amendments:

 

 

 

 

 

 

 

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(a)      the previous measurement category and carrying amount determined

immediately before applying these amendments;

 

(b)      the new measurement category and carrying amount determined after

applying these amendments;

 

(c)      the carrying amount of any financial assets and financial liabilities in

the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated; and

 

(d)      the reasons for any designation or de-designation of financial assets or

financial liabilities as measured at fair value through profit or loss.

 

7.3 Withdrawal of IFRIC 9, IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013)

 

 

 

7.3.1

 

 

 

 

 

 

7.3.2

This  Standard  supersedes  IFRIC  9  Reassessment  of  Embedded  Derivatives.  The requirements added to IFRS 9 in October 2010 incorporated the requirements previously  set  out  in  paragraphs  5  and  7  of  IFRIC  9.  As  a  consequential amendment,   IFRS   1   First-time  Adoption  of  International  Financial  Reporting Standards incorporated the requirements previously set out in paragraph 8 of IFRIC 9.

 

This  Standard  supersedes  IFRS  9  (2009),  IFRS  9  (2010)  and  IFRS  9  (2013).

However, for annual periods beginning before 1 January 2018, an entity may

elect to apply those earlier versions of IFRS 9 instead of applying this Standard

if,  and  only  if,  the  entity’s  relevant  date  of  initial  application  is  before

1 February 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Appendix A Defined terms

 

This appendix is an integral part of the Standard.

 

 

 

12month 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.

 

 

 

contract assets

Those   rights   that   IFRS   15   Revenue   from   Contracts   with

Customers specifies are accounted for in accordance with this Standard  for  the  purposes  of  recognising  and  measuring impairment gains or losses.

 

 

 

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. Evidence that a financial asset is credit-impaired include observable data about the following events:

 

(a)      significant  financial  difficulty  of  the  issuer  or  the

borrower;

 

(b)      a  breach  of  contract,  such  as  a  default  or  past

due event;

 

(c)      the   lender(s)   of   the   borrower,   for   economic   or

contractual reasons relating to the borrower’s financial difficulty,          having   granted                to          the         borrower a

concession(s)  that  the  lender(s)  would  not  otherwise consider;

 

(d)      it is becoming probable that the borrower will enter

bankruptcy or other financial reorganisation;

 

(e)      the disappearance of an active market for that financial

asset because of financial difficulties; or

 

(f)       the purchase or origination of a financial asset at a deep

discount that reflects the incurred credit losses.

 

It may not be possible to identify a single discrete event— instead, the combined effect of several events may have caused financial assets to become credit-impaired.

 

 

 

 

 

 

 

 

 

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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 (or credit- adjusted effective interest rate for purchased or originated credit-impaired financial assets). An entity shall estimate cash flows  by  considering  all  contractual  terms  of  the  financial instrument  (for  example,  prepayment,  extension,  call  and similar  options)  through  the  expected  life  of  that  financial instrument. The cash flows that are considered shall include cash  flows  from  the  sale  of  collateral  held  or  other  credit enhancements that are integral to the contractual terms. There is  a  presumption  that  the  expected  life  of  a  financial instrument can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the expected life of a financial instrument, the entity shall use the remaining contractual term of the financial instrument.

 

 

 

credit-adjusted

effective interest rate

The  rate  that  exactly  discounts  the  estimated  future  cash payments or receipts through the expected life of the financial asset  to  the  amortised  cost  of  a  financial  asset  that  is a  purchased  or  originated  credit‑impaired  financial  asset. When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows by considering all contractual   terms   of   the   financial   asset   (for   example, prepayment, extension, call and similar options) and expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part  of  the  effective  interest  rate  (see  paragraphs  B5.4.1‒ B5.4.3), transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably  estimate  the  cash  flows  or  the  remaining  life  of  a financial instrument (or group of financial instruments), the entity  shall  use  the  contractual  cash  flows  over  the  full contractual  term  of  the  financial  instrument  (or  group  of financial instruments).

 

 

 

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 within the scope of this Standard with all three of the following characteristics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(a)      its  value  changes  in  response  to  the  change  in  a

specified   interest   rate,   financial   instrument   price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non‑financial variable that the variable  is  not  specific  to  a  party  to  the  contract (sometimes called the ‘underlying’).

 

(b)      it requires no initial net investment or an initial net

investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

 

(c)      it is settled at a future date.

 

 

 

dividends

Distributions  of  profits  to  holders  of  equity  instruments  in proportion to their holdings of a particular class of capital.

 

 

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.

 

 

 

effective interest rate  The rate that exactly discounts estimated future cash payments

or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability. When calculating the effective interest rate, an entity shall estimate the  expected  cash  flows  by  considering  all  the  contractual terms of the financial instrument (for example, prepayment, extension,  call  and  similar  options)  but  shall  not  consider the expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an    integral    part    of     the     effective     interest    rate

(see paragraphs B5.4.1–B5.4.3), transaction costs, and all other premiums or discounts. There is a presumption that the cash flows  and  the  expected  life  of  a  group  of  similar  financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or  the  expected  life  of  a  financial  instrument  (or  group  of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

 

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.

 

 

 

 

 

 

 

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financial liability at fair value through profit or loss

A financial liability that meets one of the following conditions: (a)        it meets the definition of held for trading.

(b)      upon initial recognition it is designated by the entity as

at  fair  value  through  profit  or  loss  in  accordance with paragraph 4.2.2 or 4.3.5.

 

(c)      it  is  designated  either  upon  initial  recognition  or

subsequently as at fair value through profit or loss in accordance with paragraph 6.7.1.

 

 

 

firm commitment

A binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.

 

 

 

forecast transaction    An uncommitted but anticipated future transaction.

 

 

 

gross carrying amount of a financial asset

The amortised cost of a financial asset, before adjusting for any loss allowance.

 

 

 

hedge ratio

The   relationship   between   the   quantity   of   the   hedging instrument and the quantity of the hedged item in terms of their relative weighting.

 

 

 

held for trading

A financial asset or financial liability that:

 

(a)      is acquired or incurred principally for the purpose of

selling or repurchasing it in the near term;

 

(b)      on initial recognition is part of a portfolio of identified

financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

 

(c)      is a derivative (except for a derivative that is a financial

guarantee   contract   or   a   designated   and   effective hedging instrument).

 

 

 

impairment gain or loss

Gains  or  losses  that  are  recognised  in  profit  or  loss  in accordance with paragraph 5.5.8 and that arise from applying the impairment requirements in Section 5.5.

 

 

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 in accordance with paragraph 4.1.2, lease receivables and contract assets, the accumulated impairment amount for

 

financial        assets       measured        in        accordance

 

with paragraph 4.1.2A and the provision for expected credit losses   on   loan   commitments   and   financial   guarantee contracts.

 

 

 

modification gain or loss

The amount arising from adjusting the gross carrying amount of a financial asset to reflect the renegotiated or modified contractual  cash  flows.  The  entity  recalculates  the  gross carrying amount of a financial asset as the present value of the

 

 

 

 

 

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estimated  future  cash  payments  or  receipts  through  the expected life of the renegotiated or modified financial asset that are discounted at the financial asset’s original effective interest rate (or the original credit‑adjusted effective interest rate  for  purchased  or  originated  credit-impaired  financial assets)  or,  when  applicable,  the  revised  effective  interest rate  calculated  in  accordance  with  paragraph  6.5.10.  When estimating  the  expected  cash  flows  of  a  financial  asset,  an entity shall consider all contractual terms of the financial asset (for example, prepayment, call and similar options) but shall not consider the expected credit losses, unless the financial asset is a purchased or originated credit‑impaired financial asset, in which case an entity shall also consider the initial expected credit losses that were considered when calculating the original credit‑adjusted effective interest rate.

 

 

 

past due

A financial asset is past due when a counterparty has failed to make a payment when that payment was contractually due.

 

 

 

purchased or originated credit‑impaired financial asset

Purchased     or     originated     financial     asset(s)      that

are creditimpaired on initial recognition.

 

 

 

reclassification date        The first day of the first reporting period following the change

in  business  model  that  results  in  an  entity  reclassifying financial assets.

 

 

 

regular way purchase or sale

A purchase or sale of a financial asset under a contract whose terms  require  delivery  of  the  asset  within  the  time  frame established  generally  by  regulation  or  convention  in  the marketplace concerned.

 

 

 

transaction costs

Incremental   costs   that   are   directly   attributable   to   the acquisition, issue or disposal of a financial asset or financial liability (see paragraph B5.4.8). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.

 

 

 

The   following   terms   are   defined   in   paragraph   11   of   IAS   32,   Appendix   A   of IFRS 7, Appendix A of IFRS 13 or Appendix A of IFRS 15 and are used in this Standard with the meanings specified in IAS 32, IFRS 7, IFRS 13 or IFRS 15:

 

(a)      credit risk;2

 

(b)      equity instrument;

 

(c)      fair value;

 

(d)      financial asset;

 

(e)      financial instrument;

 

 

2    This term (as defined in IFRS 7) is used in the requirements for presenting the effects of changes

in credit risk on liabilities designated as at fair value through profit or loss (see paragraph 5.7.7).

 

 

 

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(f)       financial liability;

 

 

 

(g)      transaction price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Appendix B Application guidance

 

This appendix is an integral part of the Standard.

 

Scope (Chapter 2)

 

 

 

B2.1

 

 

 

 

B2.2

 

 

 

 

B2.3

 

 

 

 

 

 

B2.4

 

 

 

B2.5

Some  contracts  require  a  payment  based  on  climatic,  geological  or  other physical variables. (Those based on climatic variables are sometimes referred to as ‘weather derivatives’.) If those contracts are not within the scope of IFRS 17 Insurance Contracts, they are within the scope of this Standard.

 

This Standard does not change the requirements relating to employee benefit plans that comply with IAS 26 Accounting and Reporting by Retirement Benefit Plans and royalty agreements based on the volume of sales or service revenues that are accounted for under IFRS 15 Revenue from Contracts with Customers.

 

Sometimes, an entity makes what it views as a ‘strategic investment’ in equity instruments issued by another entity, with the intention of establishing or maintaining a long‑term operating relationship with the entity in which the investment  is  made.  The  investor  or  joint  venturer  entity  uses  IAS  28 Investments in Associates and Joint Ventures  to  determine  whether  the  equity method of accounting shall be applied to such an investment.

 

This  Standard  applies  to  the  financial  assets  and  financial  liabilities  of insurers, other than rights and obligations that paragraph 2.1(e) excludes because they arise under contracts within the scope of IFRS 17.

 

Financial  guarantee  contracts  may  have  various  legal  forms,  such  as  a guarantee, some types of letter of credit, a credit default contract or an insurance contract. Their accounting treatment does not depend on their legal form.  The  following  are  examples  of  the  appropriate  treatment  (see paragraph 2.1(e)):

 

(a)      Although a financial guarantee contract meets the definition of an

insurance contract in IFRS 17 (see paragraph 7(e) of IFRS 17) if the risk transferred                  is   significant,  the   issuer   applies  this   Standard.

Nevertheless, if the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the issuer may elect to apply either this Standard or IFRS 17 to such financial guarantee contracts. If this Standard applies, paragraph 5.1.1 requires the issuer to recognise a financial  guarantee  contract initially  at fair  value. If  the  financial guarantee contract was issued to an unrelated party in a stand-alone arm’s length transaction, its fair value at inception is likely to equal the  premium  received,  unless  there  is  evidence  to  the  contrary. Subsequently, unless the financial guarantee contract was designated at  inception  as  at  fair  value  through  profit  or  loss  or  unless paragraphs 3.2.15–3.2.23 and B3.2.12–B3.2.17 apply (when a transfer of a financial asset does not qualify for derecognition or the continuing involvement approach applies), the issuer measures it at the higher of:

 

 

 

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(i)       the amount determined in accordance with Section 5.5; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B2.6

(ii)      the  amount  initially  recognised  less,  when  appropriate,  the

cumulative amount of income recognised in accordance with the principles of IFRS 15 (see paragraph 4.2.1(c)).

 

(b)      Some credit-related guarantees do not, as a precondition for payment,

require that the holder is exposed to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed asset when due. An example of such a guarantee is one that requires payments in response to changes in a specified credit rating or credit index. Such guarantees are not financial guarantee contracts as defined in this Standard, and are not insurance contracts as defined in IFRS 17. Such guarantees  are  derivatives  and  the  issuer  applies  this  Standard  to them.

 

(c)      If a financial guarantee contract was issued in connection with the sale

of goods, the issuer applies IFRS 15 in determining when it recognises the revenue from the guarantee and from the sale of goods.

 

Assertions that an issuer regards contracts as insurance contracts are typically found   throughout   the   issuer’s   communications   with   customers   and regulators,  contracts,  business  documentation  and  financial  statements. Furthermore,   insurance   contracts   are   often   subject   to   accounting requirements  that  are  distinct  from  the  requirements  for  other  types  of transaction, such as contracts issued by banks or commercial companies. In such cases, an issuer’s financial statements typically include a statement that the issuer has used those accounting requirements.

 

 

 

Recognition and derecognition (Chapter 3)

 

Initial recognition (Section 3.1)

 

 

 

B3.1.1

 

 

 

 

 

 

 

B3.1.2

As a consequence of the principle in paragraph 3.1.1, an entity recognises all of its contractual rights and obligations under derivatives in its statement of financial position as assets and liabilities, respectively, except for derivatives that prevent a transfer of financial assets from being accounted for as a sale (see paragraph B3.2.14). If a transfer of a financial asset does not qualify for derecognition, the transferee does not recognise the transferred asset as its asset (see paragraph B3.2.15).

 

The following are examples of applying the principle in paragraph 3.1.1:

 

(a)      Unconditional  receivables  and  payables  are  recognised  as  assets  or

liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash.

 

(b)      Assets to be acquired and liabilities to be incurred as a result of a firm

commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not

 

 

 

 

 

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B3.1.3

 

 

 

 

 

 

 

 

 

 

B3.1.4

 

 

 

 

B3.1.5

generally recognise an asset (and the entity that places the order does not recognise a liability) at the time of the commitment but, instead, delays  recognition  until  the  ordered  goods  or  services  have  been shipped, delivered or rendered. If a firm commitment to buy or sell non‑financial items is within the scope of this Standard in accordance with paragraphs 2.4–2.7, its net fair value is recognised as an asset or a liability  on  the  commitment  date  (see  paragraph  B4.1.30(c)).  In addition, if a previously unrecognised firm commitment is designated as a hedged item in a fair value hedge, any change in the net fair value attributable to the hedged risk is recognised as an asset or a liability after the inception of the hedge (see paragraphs 6.5.8(b) and 6.5.9).

 

(c)      A  forward  contract  that  is  within  the  scope  of  this  Standard  (see

paragraph  2.1)  is  recognised  as  an  asset  or  a  liability  on  the commitment date, instead of on the date on which settlement takes place. When an entity becomes a party to a forward contract, the fair values of the right and obligation are often equal, so that the net fair value of the forward is zero. If the net fair value of the right and obligation is not zero, the contract is recognised as an asset or liability.

 

(d)      Option  contracts  that  are  within  the  scope  of  this  Standard  (see

paragraph 2.1) are recognised as assets or liabilities when the holder or writer becomes a party to the contract.

 

(e)      Planned future transactions, no matter how likely, are not assets and

liabilities because the entity has not become a party to a contract.

 

Regular way purchase or sale of financial assets

 

A regular way purchase or sale of financial assets is recognised using either trade  date  accounting  or  settlement  date  accounting  as  described  in paragraphs  B3.1.5  and  B3.1.6.  An  entity  shall  apply  the  same  method consistently for all purchases and sales of financial assets that are classified in the same way in accordance with this Standard. For this purpose assets that are mandatorily measured at fair value through profit or loss form a separate classification from assets designated as measured at fair value through profit or loss. In addition, investments in equity instruments accounted for using the option provided in paragraph 5.7.5 form a separate classification.

 

A contract that requires or permits net settlement of the change in the value of the contract is not a regular way contract. Instead, such a contract is accounted for as a derivative in the period between the trade date and the settlement date.

 

The trade date is the date that an entity commits itself to purchase or sell an asset. Trade date accounting refers to (a) the recognition of an asset to be received and the liability to pay for it on the trade date, and (b) derecognition of an asset that is sold, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment on the trade date. Generally, interest does not start to accrue on the asset and corresponding liability until the settlement date when title passes.

 

 

 

 

 

 

 

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IFRS 9

 

 

 

B3.1.6

The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a) the recognition of an asset on the day it  is  received  by  the  entity,  and  (b)  the  derecognition  of  an  asset  and recognition of any gain or loss on disposal on the day that it is delivered by the entity. When settlement date accounting is applied an entity accounts for any change in the fair value of the asset to be received during the period between the trade date and the settlement date in the same way as it accounts for the acquired asset. In other words, the change in value is not recognised for assets measured  at  amortised  cost;  it  is  recognised  in  profit  or  loss  for  assets classified as financial assets measured at fair value through profit or loss; and it is recognised in other comprehensive income for financial assets measured at  fair  value  through  other  comprehensive  income  in  accordance  with paragraph 4.1.2A and for investments in equity instruments accounted for in accordance with paragraph 5.7.5.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

 

B3.2.1

Derecognition of financial assets (Section 3.2)

 

The following flow chart illustrates the evaluation of whether and to what extent a financial asset is derecognised.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A422                                 © IFRS Foundation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.2.2

 

 

 

 

 

 

 

B3.2.3

 

 

 

 

 

 

 

B3.2.4

 

 

 

 

 

 

 

 

 

 

B3.2.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.2.6

IFRS 9

 

Arrangements under which an entity retains the contractual rights to receive the cash flows of a financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients

(paragraph 3.2.4(b))

 

The situation described in paragraph 3.2.4(b) (when an entity retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients) occurs, for example, if the entity is a trust, and issues to investors beneficial interests in the underlying financial assets that it owns and provides servicing of   those   financial   assets.   In   that   case,   the   financial   assets   qualify for derecognition if the conditions in paragraphs 3.2.5 and 3.2.6 are met.

 

In applying paragraph 3.2.5, the entity could be, for example, the originator of the financial asset, or it could be a group that includes a subsidiary that has acquired the financial asset and passes on cash flows to unrelated third party investors.

 

Evaluation of the transfer of risks and rewards of ownership (paragraph 3.2.6)

 

Examples of when an entity has transferred substantially all the risks and rewards of ownership are:

 

(a)       an unconditional sale of a financial asset;

 

(b)      a sale of a financial asset together with an option to repurchase the

financial asset at its fair value at the time of repurchase; and

 

(c)      a sale of a financial asset together with a put or call option that is

deeply out of the money (ie an option that is so far out of the money it is highly unlikely to go into the money before expiry).

 

Examples  of  when  an  entity  has  retained  substantially  all  the  risks  and rewards of ownership are:

 

(a)       a sale and repurchase transaction where the repurchase price is a fixed

price or the sale price plus a lender’s return;

 

(b)       a securities lending agreement;

 

(c)       a  sale  of  a  financial  asset  together  with  a  total  return  swap  that

transfers the market risk exposure back to the entity;

 

(d)       a sale of a financial asset together with a deep in‑the‑money put or call

option (ie an option that is so far in the money that it is highly unlikely to go out of the money before expiry); and

 

(e)      a sale of short‑term receivables in which the entity guarantees to

compensate the transferee for credit losses that are likely to occur.

 

If an entity determines that as a result of the transfer, it has transferred substantially all the risks and rewards of ownership of the transferred asset, it does not recognise the transferred asset again in a future period, unless it reacquires the transferred asset in a new transaction.

 

 

 

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IFRS 9

 

 

 

 

B3.2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.2.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.2.9

Evaluation of the transfer of control

 

An entity has not retained control of a transferred asset if the transferee has the practical ability to sell the transferred asset. An entity has retained control of a transferred asset if the transferee does not have the practical ability to sell the  transferred  asset.  A  transferee  has  the  practical  ability  to  sell  the transferred asset if it is traded in an active market because the transferee could repurchase the transferred asset in the market if it needs to return the asset to the entity. For example, a transferee may have the practical ability to sell a transferred asset if the transferred asset is subject to an option that allows the entity to repurchase it, but the transferee can readily obtain the transferred asset in the market if the option is exercised. A transferee does not have the practical ability to sell the transferred asset if the entity retains such an option and the transferee cannot readily obtain the transferred asset in the market if the entity exercises its option.

 

The transferee has the practical ability to sell the transferred asset only if the transferee can sell the transferred asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional  restrictions  on  the  transfer.  The  critical  question  is  what  the transferee is able to do in practice, not what contractual rights the transferee has concerning what it can do with the transferred asset or what contractual prohibitions exist. In particular:

 

(a)      a  contractual  right  to  dispose  of  the  transferred  asset  has  little

practical effect if there is no market for the transferred asset, and

 

(b)      an ability to dispose of the transferred asset has little practical effect if

it cannot be exercised freely. For that reason:

 

(i)       the transferee’s ability to dispose of the transferred asset must

be  independent  of  the  actions  of  others  (ie  it  must  be  a unilateral ability), and

 

(ii)      the transferee must be able to dispose of the transferred asset

without needing to attach restrictive conditions or ‘strings’ to the transfer (eg conditions about how a loan asset is serviced or an option giving the transferee the right to repurchase the asset).

 

That the transferee is unlikely to sell the transferred asset does not, of itself, mean  that  the  transferor  has  retained  control  of  the  transferred  asset. However, if a put option or guarantee constrains the transferee from selling the  transferred  asset,  then  the  transferor  has  retained  control  of  the transferred asset. For example, if a put option or guarantee is sufficiently valuable it constrains the transferee from selling the transferred asset because the transferee would, in practice, not sell the transferred asset to a third party without attaching a similar option or other restrictive conditions. Instead, the transferee would hold the transferred asset so as to obtain payments under the guarantee or put option. Under these circumstances the transferor has retained control of the transferred asset.

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

 

B3.2.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.2.11

 

 

 

 

 

 

B3.2.12

 

 

 

 

 

 

 

 

B3.2.13

Transfers that qualify for derecognition

 

An  entity  may  retain  the  right  to  a  part  of  the  interest  payments  on transferred assets as compensation for servicing those assets. The part of the interest payments that the entity would give up upon termination or transfer of the servicing contract is allocated to the servicing asset or servicing liability. The part of the interest payments that the entity would not give up is an interest‑only strip receivable. For example, if the entity would not give up any interest upon termination or transfer of the servicing contract, the entire interest  spread  is  an  interest‑only  strip  receivable.  For  the  purposes  of applying  paragraph  3.2.13,  the  fair  values  of  the  servicing  asset  and interest‑only strip receivable are used to allocate the carrying amount of the receivable between the part of the asset that is derecognised and the part that continues to be recognised. If there is no servicing fee specified or the fee to be received is not expected to compensate the entity adequately for performing the servicing, a liability for the servicing obligation is recognised at fair value.

 

When measuring the fair values of the part that continues to be recognised and   the   part   that   is   derecognised   for   the   purposes   of   applying paragraph 3.2.13, an entity applies the fair value measurement requirements in IFRS 13 Fair Value Measurement in addition to paragraph 3.2.14.

 

Transfers that do not qualify for derecognition

 

The following is an application of the principle outlined in paragraph 3.2.15. If a guarantee provided by the entity for default losses on the transferred asset prevents a transferred asset from being derecognised because the entity has retained  substantially  all  the  risks  and  rewards  of  ownership  of  the transferred  asset,  the  transferred  asset  continues  to  be  recognised  in  its entirety and the consideration received is recognised as a liability.

 

Continuing involvement in transferred assets

 

The following are examples of how an entity measures a transferred asset and the associated liability under paragraph 3.2.16.

 

All assets

 

(a)      If a guarantee provided by an entity to pay for default losses on a

transferred   asset   prevents   the   transferred   asset   from   being derecognised  to  the  extent  of  the  continuing  involvement,  the transferred asset at the date of the transfer is measured at the lower of (i) the carrying amount of the asset and (ii) the maximum amount of the consideration received in the transfer that the entity could be required to repay (‘the guarantee amount’). The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee  (which  is  normally  the  consideration  received  for  the guarantee). Subsequently, the initial fair value of the guarantee is recognised in profit or loss when (or as) the obligation is satisfied (in accordance with the principles of IFRS 15) and the carrying value of the asset is reduced by any loss allowance.

 

 

 

 

 

 

 

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IFRS 9

 

 

 

Assets measured at amortised cost

 

(b)      If a put option obligation written by an entity or call option right held

by an entity prevents a transferred asset from being derecognised and the  entity  measures  the  transferred  asset  at  amortised  cost,  the associated  liability  is  measured  at  its  cost  (ie  the  consideration received) adjusted for the amortisation of any difference between that cost and the gross carrying amount of the transferred asset at the expiration date of the option. For example, assume that the gross carrying amount of the asset on the date of the transfer is CU98 and that the consideration received is CU95. The gross carrying amount of the asset on the option exercise date will be CU100. The initial carrying amount of the associated liability is CU95 and the difference between CU95 and CU100 is recognised in profit or loss using the effective interest method. If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognised in profit or loss.

 

Assets measured at fair value

 

(c)      If a call option right retained by an entity prevents a transferred asset

from being derecognised and the entity measures the transferred asset at fair value, the asset continues to be measured at its fair value. The associated liability is measured at (i) the option exercise price less the time value of the option if the option is in or at the money, or (ii) the fair value of the transferred asset less the time value of the option if the option is out of the money. The adjustment to the measurement of the associated liability ensures that the net carrying amount of the asset and the associated liability is the fair value of the call option right. For example, if the fair value of the underlying asset is CU80, the option exercise price is CU95 and the time value of the option is CU5, the carrying amount of the associated liability is CU75 (CU80 – CU5) and the carrying amount of the transferred asset is CU80 (ie its fair value).

 

(d)      If a put option written by an entity prevents a transferred asset from

being derecognised and the entity measures the transferred asset at fair value, the associated liability is measured at the option exercise price plus the time value of the option. The measurement of the asset at fair value is limited to the lower of the fair value and the option exercise price because the entity has no right to increases in the fair value of the transferred asset above the exercise price of the option. This  ensures  that  the  net  carrying  amount  of  the  asset  and  the associated liability is the fair value of the put option obligation. For example, if the fair value of the underlying asset is CU120, the option exercise price is CU100 and the time value of the option is CU5, the carrying amount of the associated liability is CU105 (CU100 + CU5) and the carrying amount of the asset is CU100 (in this case the option exercise price).

 

 

 

 

 

 

 

 

 

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B3.2.14

 

 

 

 

 

 

 

 

 

B3.2.15

 

 

 

 

 

 

 

 

 

 

 

B3.2.16

IFRS 9

 

(e)      If a collar, in the form of a purchased call and written put, prevents a

transferred asset from being derecognised and the entity measures the asset at fair value, it continues to measure the asset at fair value. The associated liability is measured at (i) the sum of the call exercise price and fair value of the put option less the time value of the call option, if the call option is in or at the money, or (ii) the sum of the fair value of the asset and the fair value of the put option less the time value of the call option if the call option is out of the money. The adjustment to the associated liability ensures that the net carrying amount of the asset and the associated liability is the fair value of the options held and written  by  the  entity.  For  example,  assume  an  entity  transfers  a financial asset that is measured at fair value while simultaneously purchasing a call with an exercise price of CU120 and writing a put with an exercise price of CU80. Assume also that the fair value of the asset is CU100 at the date of the transfer. The time value of the put and call are CU1 and CU5 respectively. In this case, the entity recognises an asset of CU100 (the fair value of the asset) and a liability of CU96 [(CU100 + CU1) – CU5]. This gives a net asset value of CU4, which is the fair value of the options held and written by the entity.

 

All transfers

 

To  the  extent  that  a  transfer  of  a  financial  asset  does  not  qualify  for derecognition, the transferor’s contractual rights or obligations related to the transfer are not accounted for separately as derivatives if recognising both the derivative and either the transferred asset or the liability arising from the transfer would result in recognising the same rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer of financial assets from being accounted for as a sale. In that case, the call option is not separately recognised as a derivative asset.

 

To  the  extent  that  a  transfer  of  a  financial  asset  does  not  qualify  for derecognition, the transferee does not recognise the transferred asset as its asset. The transferee derecognises the cash or other consideration paid and recognises a receivable from the transferor. If the transferor has both a right and an obligation to reacquire control of the entire transferred asset for a fixed amount (such as under a repurchase agreement), the transferee may measure  its  receivable  at  amortised  cost  if  it  meets  the  criteria  in paragraph 4.1.2.

 

Examples

 

The  following  examples  illustrate  the  application  of  the  derecognition principles of this Standard.

 

(a)      Repurchase agreements and securities lending. If a financial asset is sold

under an agreement to repurchase it at a fixed price or at the sale price plus a lender’s return or if it is loaned under an agreement to return it to the transferor, it is not derecognised because the transferor retains substantially all the risks and rewards of ownership. If the transferee obtains the right to sell or pledge the asset, the transferor reclassifies

 

 

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IFRS 9

 

 

 

the asset in its statement of financial position, for example, as a loaned asset or repurchase receivable.

 

(b)      Repurchase agreements and securities lending—assets that are substantially the

same. If a financial asset is sold under an agreement to repurchase the same or substantially the same asset at a fixed price or at the sale price plus a lender’s return or if a financial asset is borrowed or loaned under an agreement to return the same or substantially the same asset to the transferor, it is not derecognised because the transferor retains substantially all the risks and rewards of ownership.

 

(c)      Repurchase  agreements  and  securities  lending—right  of  substitution.  If  a

repurchase agreement at a fixed repurchase price or a price equal to the sale price plus a lender’s return, or a similar securities lending transaction, provides the transferee with a right to substitute assets that are similar and of equal fair value to the transferred asset at the repurchase date, the asset sold or lent under a repurchase or securities lending transaction is not derecognised because the transferor retains substantially all the risks and rewards of ownership.

 

(d)      Repurchase right of first refusal at fair value. If an entity sells a financial

asset  and  retains  only  a  right  of  first  refusal  to  repurchase  the transferred asset at fair value if the transferee subsequently sells it, the entity derecognises the asset because it has transferred substantially all the risks and rewards of ownership.

 

(e)      Wash sale transaction. The repurchase of a financial asset shortly after it

has  been  sold  is  sometimes  referred  to  as  a  wash  sale.  Such  a repurchase does not preclude derecognition provided that the original transaction  met  the  derecognition  requirements.  However,  if  an agreement to sell a financial asset is entered into concurrently with an agreement to repurchase the same asset at a fixed price or the sale price plus a lender’s return, then the asset is not derecognised.

 

 

 

(f)

Put options and call options that are deeply in the money. If a transferred financial asset can be called back by the transferor and the call option is deeply in the money, the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership. Similarly, if the financial asset can be put back by the transferee and the put option is deeply in the money, the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership.

 

 

 

(g)      Put options and call options that are deeply out of the money. A financial asset

that is transferred subject only to a deep out‑of‑the‑money put option held by the transferee or a deep out‑of‑the‑money call option held by the  transferor  is  derecognised.  This  is  because  the  transferor  has transferred substantially all the risks and rewards of ownership.

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

(h)      Readily obtainable assets subject to a call option that is neither deeply in the

money nor deeply out of the money. If an entity holds a call option on an asset that is readily obtainable in the market and the option is neither deeply  in  the  money  nor  deeply  out  of  the  money,  the  asset  is derecognised. This is because the entity (i) has neither retained nor transferred substantially all the risks and rewards of ownership, and

(ii)  has  not  retained  control.  However,  if  the  asset  is  not  readily obtainable in the market, derecognition is precluded to the extent of the amount of the asset that is subject to the call option because the entity has retained control of the asset.

 

 

 

(i)

A not readily obtainable asset subject to a put option written by an entity that is neither deeply in the money nor deeply out of the money. If an entity transfers a financial asset that is not readily obtainable in the market, and writes a put option that is not deeply out of the money, the entity neither retains nor transfers substantially all the risks and rewards of ownership because of the written put option. The entity retains control of the asset if the put option is sufficiently valuable to prevent the transferee from selling the asset, in which case the asset continues to be recognised to the extent of the transferor’s continuing involvement (see paragraph B3.2.9). The entity transfers control of the asset if the put option is not sufficiently valuable to prevent the transferee from selling the asset, in which case the asset is derecognised.

 

 

 

(j)

Assets  subject  to  a  fair  value  put  or  call  option  or  a  forward  repurchase agreement. A transfer of a financial asset that is subject only to a put or call option or a forward repurchase agreement that has an exercise or repurchase price equal to the fair value of the financial asset at the time of repurchase results in derecognition because of the transfer of substantially all the risks and rewards of ownership.

 

 

 

(k)      Cashsettled  call  or  put  options.  An  entity  evaluates  the  transfer  of  a

financial asset that is subject to a put or call option or a forward repurchase agreement that will be settled net in cash to determine whether it has retained or transferred substantially all the risks and rewards of ownership. If the entity has not retained substantially all the  risks  and  rewards  of  ownership  of  the  transferred  asset,  it determines whether it has retained control of the transferred asset. That the put or the call or the forward repurchase agreement is settled net  in  cash  does  not  automatically  mean  that  the  entity  has transferred control (see paragraphs B3.2.9 and (g), (h) and (i) above).

 

 

 

(l)

Removal of accounts provision.  A  removal  of  accounts  provision  is  an unconditional repurchase (call) option that gives an entity the right to reclaim assets transferred subject to some restrictions. Provided that such an option results in the entity neither retaining nor transferring substantially  all  the  risks  and  rewards  of  ownership,  it  precludes derecognition only to the extent of the amount subject to repurchase (assuming that the transferee cannot sell the assets). For example, if the carrying amount and proceeds from the transfer of loan assets are CU100,000  and  any  individual  loan  could  be  called  back  but  the

 

 

 

 

 

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IFRS 9

 

 

 

aggregate amount of loans that could be repurchased could not exceed CU10,000, CU90,000 of the loans would qualify for derecognition.

 

(m)     Cleanup  calls.  An  entity,  which  may  be  a  transferor,  that  services

transferred assets may hold a clean‑up call to purchase remaining transferred assets when the amount of outstanding assets falls to a specified level at which the cost of servicing those assets becomes burdensome in relation to the benefits of servicing. Provided that such a clean‑up call results in the entity neither retaining nor transferring substantially all the risks and rewards of ownership and the transferee cannot sell the assets, it precludes derecognition only to the extent of the amount of the assets that is subject to the call option.

 

(n)      Subordinated retained interests and credit guarantees. An entity may provide

the transferee with credit enhancement by subordinating some or all of its interest retained in the transferred asset. Alternatively, an entity may provide the transferee with credit enhancement in the form of a credit guarantee that could be unlimited or limited to a specified amount. If the entity retains substantially all the risks and rewards of ownership  of  the  transferred  asset,  the  asset  continues  to  be recognised  in  its  entirety.  If  the  entity  retains  some,  but  not substantially  all,  of  the  risks  and  rewards  of  ownership  and  has retained  control,  derecognition  is  precluded  to  the  extent  of  the amount of cash or other assets that the entity could be required to pay.

 

(o)      Total return swaps. An entity may sell a financial asset to a transferee

and enter into a total return swap with the transferee, whereby all of the  interest  payment  cash  flows  from  the  underlying  asset  are remitted to the entity in exchange for a fixed payment or variable rate payment  and  any  increases  or  declines  in  the  fair  value  of  the underlying  asset  are  absorbed  by  the  entity.  In  such  a  case, derecognition of all of the asset is prohibited.

 

(p)      Interest rate swaps. An entity may transfer to a transferee a fixed rate

financial asset and enter into an interest rate swap with the transferee to receive a fixed interest rate and pay a variable interest rate based on a  notional  amount  that  is  equal  to  the  principal  amount  of  the transferred financial asset. The interest rate swap does not preclude derecognition of the transferred asset provided the payments on the swap are not conditional on payments being made on the transferred asset.

 

(q)      Amortising interest rate swaps. An entity may transfer to a transferee a

fixed rate financial asset that is paid off over time, and enter into an amortising interest rate swap with the transferee to receive a fixed interest  rate  and  pay  a  variable  interest  rate  based  on  a  notional amount. If the notional amount of the swap amortises so that it equals the principal amount of the transferred financial asset outstanding at any  point  in  time,  the  swap  would  generally  result  in  the  entity retaining substantial prepayment risk, in which case the entity either continues to recognise all of the transferred asset or continues to

 

 

 

 

 

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B3.2.17

IFRS 9

 

recognise  the  transferred  asset  to  the  extent  of  its  continuing involvement. Conversely, if the amortisation of the notional amount of the swap is not linked to the principal amount outstanding of the transferred asset, such a swap would not result in the entity retaining prepayment   risk   on   the   asset.   Hence,   it   would   not   preclude derecognition of the transferred asset provided the payments on the swap are not conditional on interest payments being made on the transferred asset and the swap does not result in the entity retaining any  other  significant  risks  and  rewards  of  ownership  on  the transferred asset.

 

(r)       Writeoff. An entity has no reasonable expectations of recovering the

contractual cash flows on a financial asset in its entirety or a portion thereof.

 

This  paragraph  illustrates  the  application  of  the  continuing  involvement approach when the entity’s continuing involvement is in a part of a financial asset.

 

Assume an entity has a portfolio of prepayable loans whose coupon and effective interest rate is 10 per cent and whose principal amount and amortised cost is CU10,000. It enters into a transaction in which, in return for a payment of CU9,115, the transferee obtains the right to CU9,000 of any collections of principal plus interest thereon at 9.5 per cent. The entity retains rights to CU1,000 of any collections of principal plus interest thereon at 10 per cent, plus the excess spread of 0.5 per cent on the remaining CU9,000 of principal. Collections from prepayments are allocated between the entity and the transferee proportionately in the ratio of 1:9, but any defaults are deducted from the entity’s interest of CU1,000 until that

interest is exhausted. The fair value of the loans at the date of the transac- tion is CU10,100 and the fair value of the excess spread of 0.5 per cent is CU40.

 

The entity determines that it has transferred some significant risks and rewards of ownership (for example, significant prepayment risk) but has also retained some significant risks and rewards of ownership (because of its subordinated retained interest) and has retained control. It therefore applies the continuing involvement approach.

 

To apply this Standard, the entity analyses the transaction as (a) a retention of a fully proportionate retained interest of CU1,000, plus (b) the subordina- tion of that retained interest to provide credit enhancement to the transfer- ee for credit losses.

 

continued…

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

…continued

 

The entity calculates that CU9,090 (90% × CU10,100) of the consideration received of CU9,115 represents the consideration for a fully proportionate

90 per cent share. The remainder of the consideration received (CU25) represents consideration received for subordinating its retained interest to provide credit enhancement to the transferee for credit losses. In addition, the excess spread of 0.5 per cent represents consideration received for the credit enhancement. Accordingly, the total consideration received for the credit enhancement is CU65 (CU25 + CU40).

 

The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair values of the 90 per cent part transferred and the 10 per cent part retained are not available at the date of the transfer, the entity allocates the carrying amount of the asset in accord- ance with paragraph 3.2.14 of IFRS 9 as follows:

 

 

 

 

 

Fair value      Percentage

Allocated carrying amount

 

 

 

Portion transferred                         9,090               90%             9,000

 

 

 

Portion retained                            1,010               10%             1,000

 

 

 

Total                                        10,100                                10,000

 

 

 

 

 

The entity computes its gain or loss on the sale of the 90 per cent share of the cash flows by deducting the allocated carrying amount of the portion transferred from the consideration received, ie CU90 (CU9,090 – CU9,000). The carrying amount of the portion retained by the entity is CU1,000.

 

In addition, the entity recognises the continuing involvement that results from the subordination of its retained interest for credit losses. Accordingly, it recognises an asset of CU1,000 (the maximum amount of the cash flows it would not receive under the subordination), and an associated liability of CU1,065 (which is the maximum amount of the cash flows it would not receive under the subordination, ie CU1,000 plus the fair value of the subordination of CU65).

 

continued…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

…continued

 

The entity uses all of the above information to account for the transaction as follows:

 

 

 

Debit             Credit

 

 

 

Original asset                                                       —             9,000

 

 

 

Asset recognised for subordination or the residual interest

 

1,000

 

 

 

 

Asset for the consideration received in the form of excess spread

 

40

 

 

 

 

Profit or loss (gain on transfer)                                 —                 90

 

 

 

Liability                                                               —             1,065

 

 

 

Cash received                                                  9,115                  —

 

 

 

Total                                                             10,155            10,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B3.3.1

 

 

 

 

 

 

 

B3.3.2

Immediately following the transaction, the carrying amount of the asset is CU2,040 comprising CU1,000, representing the allocated cost of the portion retained, and CU1,040, representing the entity’s additional continuing involvement from the subordination of its retained interest for credit losses (which includes the excess spread of CU40).

 

In subsequent periods, the entity recognises the consideration received for the credit enhancement (CU65) on a time proportion basis, accrues interest on the recognised asset using the effective interest method and recognises any impairment losses on the recognised assets. As an example of the latter, assume that in the following year there is an impairment loss on the underlying loans of CU300. The entity reduces its recognised asset by CU600 (CU300 relating to its retained interest and CU300 relating to the additional continuing involvement that arises from the subordination of its retained interest for impairment losses), and reduces its recognised liability by CU300. The net result is a charge to profit or loss for impairment losses of CU300.

 

Derecognition of financial liabilities (Section 3.3)

 

A financial liability (or part of it) is extinguished when the debtor either:

 

(a)      discharges the liability (or part of it) by paying the creditor, normally

with cash, other financial assets, goods or services; or

 

(b)      is legally released from primary responsibility for the liability (or part

of it) either by process of law or by the creditor. (If the debtor has given a guarantee this condition may still be met.)

 

If an issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a market maker in that instrument or intends to resell it in the near term.

 

 

 

 

 

 

 

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IFRS 9

 

 

 

B3.3.3

 

 

 

B3.3.4

 

 

 

 

 

 

 

 

 

B3.3.5

 

 

 

 

 

 

B3.3.6

 

 

 

 

 

 

 

 

 

 

 

 

B3.3.7

Payment to a third party, including a trust (sometimes called ‘in‑substance defeasance’), does not, by itself, relieve the debtor of its primary obligation to the creditor, in the absence of legal release.

 

If a debtor pays a third party to assume an obligation and notifies its creditor that the third party has assumed its debt obligation, the debtor does not derecognise the debt obligation unless the condition in paragraph B3.3.1(b) is met. If the debtor pays a third party to assume an obligation and obtains a legal release from its creditor, the debtor has extinguished the debt. However, if the debtor agrees to make payments on the debt to the third party or direct to its original creditor, the debtor recognises a new debt obligation to the third party.

 

Although  legal  release,  whether  judicially  or  by  the  creditor,  results  in derecognition of a liability, the entity may recognise a new liability if the derecognition criteria in paragraphs 3.2.1–3.2.23 are not met for the financial assets transferred. If those criteria are not met, the transferred assets are not derecognised,  and  the  entity  recognises  a  new  liability  relating  to  the transferred assets.

 

For the purpose of paragraph 3.3.2, the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

 

In some cases, a creditor releases a debtor from its present obligation to make payments, but the debtor assumes a guarantee obligation to pay if the party assuming primary responsibility defaults. In these circumstances the debtor:

 

(a)      recognises  a  new  financial  liability  based  on  the  fair  value  of  its

obligation for the guarantee, and

 

(b)      recognises  a  gain  or  loss  based  on  the  difference  between  (i)  any

proceeds paid and (ii) the carrying amount of the original financial liability less the fair value of the new financial liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IFRS 9

 

 

 

Classification (Chapter 4)

 

Classification of financial assets (Section 4.1)

 

The entity’s business model for managing financial assets

 

 

 

B4.1.1

 

 

 

 

 

 

B4.1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B4.1.2A

Paragraph 4.1.1(a) requires an entity to classify financial assets on the basis of the  entity’s  business  model  for  managing  the  financial  assets,  unless paragraph 4.1.5 applies. An entity assesses whether its financial assets meet the condition in paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a) on the basis of the business model as determined by the entity’s key management personnel (as defined in IAS 24 Related Party Disclosures).

 

An entity’s business model is determined at a level that reflects how groups of financial  assets  are  managed  together  to  achieve  a  particular  business objective. The entity’s business model does not depend on management’s intentions for an individual instrument. Accordingly, this condition is not an instrument‑by‑instrument             approach             to     classification       and       should   be

determined on a higher level of aggregation. However, a single entity may have more than one business model for managing its financial instruments. Consequently, classification need not be determined at the reporting entity level. For example, an entity may hold a portfolio of investments that it manages in order to collect contractual cash flows and another portfolio of investments that it manages in order to trade to realise fair value changes. Similarly, in some circumstances, it may be appropriate to separate a portfolio of financial assets into subportfolios in order to reflect the level at which an entity manages those financial assets. For example, that may be the case if an entity originates or purchases a portfolio of mortgage loans and manages some of the loans with an objective of collecting contractual cash flows and manages the other loans with an objective of selling them.

 

An entity’s business model refers to how an entity manages its financial assets in  order  to  generate  cash  flows.  That  is,  the  entity’s  business  model determines whether cash flows will result from collecting contractual cash flows, selling financial assets or both. Consequently, this assessment is not performed on the basis of scenarios that the entity does not reasonably expect to occur, such as so-called ‘worst case’ or ‘stress case’ scenarios. For example, if an entity expects that it will sell a particular portfolio of financial assets only in a stress case scenario, that scenario would not affect the entity’s assessment of the business model for those assets if the entity reasonably expects that such a scenario will not occur. If cash flows are realised in a way that is different from the entity’s expectations at the date that the entity assessed the business model (for example, if the entity sells more or fewer financial assets than it expected when it classified the assets), that does not give rise to a prior period error in the entity’s financial statements (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) nor does it change the classification of the remaining financial assets held in that business model (ie those assets that the entity recognised in prior periods and still holds) as long as the entity considered all relevant information that was available at the time that it made the business model assessment. However, when an entity

 

 

 

 

 

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IFRS 9

 

 

 

 

 

 

 

B4.1.2B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B4.1.2C

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B4.1.3

assesses the business model for newly originated or newly purchased financial assets, it must consider information about how cash flows were realised in the past, along with all other relevant information.

 

An entity’s business model for managing financial assets is a matter of fact and not merely an assertion. It is typically observable through the activities that the entity undertakes to achieve the objective of the business model. An entity will need to use judgement when it assesses its business model for managing financial assets and that assessment is not determined by a single factor or activity. Instead, the entity must consider all relevant evidence that is available at the date of the assessment. Such relevant evidence includes, but is not limited to:

 

(a)      how the performance of the business model and the financial assets

held within that business model are evaluated and reported to the entity’s key management personnel;

 

(b)      the risks that affect the performance of the business model (and the

financial assets held within that business model) and, in particular, the way in which those risks are managed; and

 

(c)      how managers of the business are compensated (for example, whether

the compensation is based on the fair value of the assets managed or on the contractual cash flows collected).

 

A business model whose objective is to hold assets in order to collect contractual cash flows

 

Financial assets that are held within a business model whose objective is to hold assets in order to collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the life of the instrument. That is, the entity manages the assets held within the portfolio to collect those particular contractual cash flows (instead of managing the overall return on the portfolio by both holding and selling assets). In determining whether cash flows are going to be realised by collecting the financial assets’ contractual cash flows, it is necessary to consider the frequency, value and timing of sales in prior periods, the reasons for those sales and expectations about future sales activity. However sales in themselves do not determine the business model and therefore cannot be considered in isolation. Instead, information about past sales and expectations about future sales provide evidence related to  how  the  entity’s  stated  objective  for  managing  the  financial  assets  is achieved  and,  specifically,  how  cash  flows  are  realised.  An  entity  must consider information about past sales within the context of the reasons for those sales and the conditions that existed at that time as compared to current conditions.

 

Although the objective of an entity’s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity’s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur or are expected to occur in the future.

 

 

 

 

 

 

 

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IFRS 9

 

 

 

B4.1.3A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B4.1.3B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B4.1.4

The business model may be to hold assets to collect contractual cash flows even if the entity sells financial assets when there is an increase in the assets’ credit risk. To determine whether there has been an increase in the assets’ credit  risk,  the  entity  considers  reasonable  and  supportable  information, including forward looking information. Irrespective of their frequency and value, sales due to an increase in the assets’ credit risk are not inconsistent with a business model whose objective is to hold financial assets to collect contractual cash flows because the credit quality of financial assets is relevant to   the   entity’s   ability   to   collect   contractual   cash   flows.   Credit   risk management activities that are aimed at minimising potential credit losses due to credit deterioration are integral to such a business model. Selling a financial asset because it no longer meets the credit criteria specified in the entity’s  documented  investment  policy  is  an  example  of  a  sale  that  has occurred due to an increase in credit risk. However, in the absence of such a policy, the entity may demonstrate in other ways that the sale occurred due to an increase in credit risk.

 

Sales that occur for other reasons, such as sales made to manage credit concentration risk (without an increase in the assets’ credit risk), may also be consistent with a business model whose objective is to hold financial assets in order  to  collect  contractual  cash  flows.  In  particular,  such  sales  may  be consistent with a business model whose objective is to hold financial assets in order to collect contractual cash flows if those sales are infrequent (even if significant  in  value)  or  insignificant  in  value  both  individually  and  in aggregate (even if frequent). If more than an infrequent number of such sales are made out of a portfolio and those sales are more than insignificant in value (either individually or in aggregate), the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash  flows.  Whether  a  third  party  imposes  the  requirement  to  sell  the financial assets, or that activity is at the entity’s discretion, is not relevant to this assessment. An increase in the frequency or value of sales in a particular period is not necessarily inconsistent with an objective to hold financial assets in order to collect contractual cash flows, if an entity can explain the reasons for those sales and demonstrate why those sales do not reflect a change in the entity’s business model. In addition, sales may be consistent with the objective of holding financial assets in order to collect contractual cash flows if the sales are made close to the maturity of the financial assets and the proceeds from the sales approximate the collection of the remaining contractual cash flows.

 

The following are examples of when the objective of an entity’s business model may be to hold financial assets to collect the contractual cash flows. This list of examples is not exhaustive. Furthermore, the examples are not intended to discuss all factors that may be relevant to the assessment of the entity’s business model nor specify the relative importance of the factors.