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Invesrment in Debt Instruments

This document discusses the classification and measurement of debt instruments under IFRS 9. It states that debt securities represent creditor claims with fixed payments and interest. They must be classified as measured at amortized cost, fair value through profit/loss, or fair value through other comprehensive income based on the business model and whether the contractual cash flows are solely payments of principal and interest. Financial assets are generally measured at amortized cost if held under a business model to collect contractual cash flows, where those cash flows are solely principal and interest. They are measured at fair value through other comprehensive income if held under a business model to both collect contractual cash flows and sell assets, where the cash flows are solely principal and interest. All other

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68 views2 pages

Invesrment in Debt Instruments

This document discusses the classification and measurement of debt instruments under IFRS 9. It states that debt securities represent creditor claims with fixed payments and interest. They must be classified as measured at amortized cost, fair value through profit/loss, or fair value through other comprehensive income based on the business model and whether the contractual cash flows are solely payments of principal and interest. Financial assets are generally measured at amortized cost if held under a business model to collect contractual cash flows, where those cash flows are solely principal and interest. They are measured at fair value through other comprehensive income if held under a business model to both collect contractual cash flows and sell assets, where the cash flows are solely principal and interest. All other

Uploaded by

Ella Montefalco
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Investment in Debt Instruments (PFRS 9)

Investment in debt securities – representing creditor’s claim with fixed amount and usually some interest
obligation (e.g. government securities, corporate bonds, convertible bonds, commercial paper, etc.)

Classification of debt securities: an entity shall classify financial assets as subsequently measured at amortized
cost, fair value through profit or loss or fair value through other comprehensive income on the basis of both:

a. The entity’s business profit or loss or fair value through other comprehensive income on the basis of
both:
b. The contractual cash flow characteristics of the financial asset.

A financial asset shall be measured at amortized cost if both of the following conditions are met
a. The financial asset is held within a business model whose objectives 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.

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

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortized
cost or at fair value through other comprehensive income.

Business model for managing financial assets (IFRS 9)

The business model approach is a fundamental building block of IFRS 9 and aligns the accounting with the way
that management deploys assets in its business while also considering the characteristics of assets. The
business model is determined by the company’s key management personnel and does not depend on
management’s intentions for an individual asset. It is instead determined at a higher level. A company could
have more than one business model for managing assets and may manage different portfolios of assets with
different objectives.

Measurement at the date of acquisition (IFRS 9)

At amortized cost – is measured at the fair value of the financial instrument acquired plus any transaction
costs incurred in relation to its acquisition.

At fair value to profit or loss – is measured at the fair value of the security. Any transaction cost incurred is
recognized outright as an expense.

At fair value to other comprehensive income – is measured at fair value of the security plus any transaction
cost incurred in relation to its acquisition.

Measurement Subsequent to Date of Acquisition (IFRS 9)

At amortized cost – is re-measured at amortized cost

At fair value to profit or loss – is re-measured at fair value with changes in fair value to be recognized in the
current year profit or loss.
At fair value to other comprehensive income – is re-measured at the fair value of the security with changes in
the fair value included in part in the profit or loss and the other part in the other comprehensive income.

Method of Amortization-Effective Interest Method (IFRS 9)

The effective interest method is a method of calculating the amortized cost of a financial asset or liability (or
group of financial assets or financial liabilities) and of allocating the interest income or interest expense over
the relevant period.

Rate to be used-Effective Rate

The effective rate is the rate that exactly discounts estimated cash payments or receipts through the
expected life of the financial instrument or, when appropriate, a shorter period to the next carrying
amount of the financial asset or financial liability. When calculating the effective interest rate, an entity
shall estimate cash flows considering all contractual terms of the financial instrument but shall not
consider future credit losses. The calculation shall include all fees and points paid or received between
parties to the contract that are integral part of the effective interest rate transaction costs, and all
other premiums or discounts, on the 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 estimate reliably the cash flows or the expected life of a financial instrument (or group of
financial instruments) for example, investment in available for sale, the entity shall use the contractual
cash flows over the full contractual term of the financial instrument (or group of financial instruments).

Reclassification (IFRS 9) – if an entity reclassifies financial assets it shall apply the reclassification prospectively
from reclassification date. The entity shall not restate any previously recognized gains, losses (including
impairment gains or losses) or interest.

If an entity reclassifies a financial asset out of fair value through profit or loss measurement category and into
amortized cost measurement category, its fair value at the date of reclassification becomes its new gross
carrying amount. The effective interest rate is determined on the basis of the fair value on the date of
reclassification. The date of reclassification is treated as the date of initial recognition.

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