IFRS 9

Accounting for Financial

Instruments
 Overview
 OBJECTIVE

 SCOPE

 RECOGNITION AND DERECOGNITION

 CLASSIFICATION

 MEASUREMENT
 Objective
.

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
 Overview

» Classifying financial instruments

» Recognising and derecognising financial assets
» Impairment of financial assets

Note: other aspects of accounting for financial

instruments have been covered in other sessions at this
workshop.
 Financial instruments definitions
5
Classification Nature
Financial Any contract that gives rise to:
instrument • A financial asset of one entity; and
IAS 32 • A financial liability or equity instrument
of another entity
Equity A contract that evidences a residual
instrument interest in the assets of an entity after
IAS 32 deducting all of its liabilities.
 Financial instruments definitions
Classificati Nature
on
Financial • cash
asset • a contractual right to receive cash or another
financial asset
IFRS 9/IAS
• a contractual right to exchange financial assets or
39 liabilities with another entity on potentially
favourable terms
• an equity instrument (for example, plain vanilla
ordinary shares of another entity).
Financial • a contractual obligation to deliver cash or another
liability financial asset
• a contractual obligation to exchange financial
IFRS 9/IAS
assets or liabilities with another entity on
39
 Financial assets
which Standard to apply?
IFRS
Scope, IFRS 9 replaces IAS 39 with effect from 1 January
classification, 2018. However:
recognition, • early application is permitted (many transitional
derecognition provisions)
and • IFRS 9 is required (subject to transition
measurement exceptions and exemptions) for non-insurer
entities whose first IFRS financial statements are
on or after 1 January 2018 (ie apply IFRS 9 from
the date of transition)
• expect (in September 2016) deferral and overlay
approach for qualifying insurers (including first-
time adopters) with a fixed expiry date of 2021
Disclosure IFRS 7 (read with IFRS 12)
 Recognition

• recognize a financial asset or financial liability

when, and only when, the entity becomes a
party to the contractual provisions of the
instrument (ie trade date)
Derecognition financial
assets
 Derecognition

• When should an entity

Issue remove a financial asset
from its financial position?

• An entity has ongoing

Complicated when involvement with a
transferred financial asset

• Removal of a previously
recognised financial asset
Definition from the statement of
financial position
 Derecognition financial assets 11

When
when substantia
the lly all risks
rights to OR and
cash reward
are
flows transferre
expires d
Derecognition financial liabilities 12

Financial liabilities (or a part of a liability) shall be

derecognized when, and only when, they are
extinguished—ie when the obligation specified in the
contract is discharged or cancelled or expires.
 Financial assets write-off

No reasonable Reduce the

expectations of
recovering a financial gross
asset in its entirety or a carrying
portion thereof amount
 Continuing involvement in only a part of
transferred financial assets

Allocate previous Recognise gain or

carrying amount loss
between the part equal to difference
that continues to between carrying
be recognized and amount (measured at
date of
the part Derecognition)
derecognized on allocated to the part
the basis of the derecognised and
relative fair consideration
values received
 Initial Meseuremnt of Fianacial assets
and liablities
» Initially all financial asset and liabilities shall be
recognized at fair value. Except for trade receivables

» Trade receivables shall initially be recognized at their

transaction price.
Subsequent Meseurement

In Subsquent years, fiancial liablites shall be measured

through amortized cost
Classification of financial
assets (subsequent
measurement)
Classification financial assets
Business
Business
model = Other
model=
hold to business
hold to
collect model
collect
and sell
Cash flows are
solely
Amortised FVOCI*
payments of cost FVTPL
principal and
interest (SPPI)

Other types of FVTPL FVTPL FVTPL

cash flows
 Classification of financial assets
fair value through profit or loss (FVTPL)

Residual
Fair value option
category
Designated at initial
recognition -
If a financial asset eliminates or reduces
does not fit in another accounting mismatch
category it is
automatically FVTPL Note: the option to
designate is
irrevocable
 Contractual cash flow characteristics

» Financial assets with contractual cash flows that are solely

payments of principal and interest (SPPI) are
measured at amortised cost or FVOCI depending on the
business model in which the asset is held.
» Principal = amount transferred by holder (fair value at
initial recognition)
» Interest is consideration for:
» time value of money and credit risk;
» other lending risks (for example, liquidity risk);
» other associated costs (for example, administrative costs); and
» a profit margin
 Example :* business model
holding financial assets to collect the contractual cash flows
(accounting = amortised cost)

» Entity A holds investments to collect their contractual cash

flows.
» Entity A performs credit risk management activities – to
minimise credit losses.
» In the past, sales have typically occurred when the financial assets’
credit risk has increased, ie credit criteria specified in the entity’s
documented investment policy no longer met.
» Infrequent sales have occurred as a result of unanticipated funding
needs.
» Reports to key management personnel focus on the credit quality of
the financial assets and the contractual return.
» Entity A also monitors fair values of the financial assets, among other
information.
*
Refer to Example 1 in paragraph B4.1.4 of IFRS 9
 Definition of derivative
(accounting = FVPL)

Value changes in
response to the Requires little or no
change in the Settled at a future
initial net
underlying date
investment
item
 Examples of derivatives and underlyings
(accounting = FVPL)
Main pricing-settlement
Type of contract variable (underlying variable)

Interest rate swap Interest rates

Currency swap (foreign exchange swap) Currency rates
Purchased or written treasury bond Interest rates
option (call or put)

Currency futures Currency rates

Currency forward Currency rates
Measurement of financial
assets:
an introduction
 Subsequent measurement of financial asset
Amortised cost

Statement of Other
financial Profit or loss Comprehensiv
position e Income
Interest revenue
using effective
interest method

Amortis Impairment
Nil
ed cost Foreign exchange
gains & losses
Gain or loss on
derecognition
 Subsequent measurement of financial asset
fair value through OCI (FVOCI debt
instruments)

Statement Other
of financial Profit or loss Comprehensive
position Income
Interest revenue using
effective interest
method

Fair Impairment
Fair value
value change
Foreign
exchange gains
& losses
 Subsequent measurement of financial asset
fair value through OCI (investments in equity instruments)

Statement of
Profit or Other Comprehensive
financial
position loss Income

Changes in fair
Fair value and
Dividend
value foreign
s
exchange
component
 Subsequent measurement of financial asset
fair value through profit or loss

Statement of Other
financial Profit or loss comprehensive
position income (OCI)

Changes in
Fair value
Fair value Nil
Gain or loss
on
derecognitio
n
 Effective interest method /Amortised cost

» Effective interest method is 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 is 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.
 Promissory notes

» Promissory notes
» Promissory notes ethio telecom has are financial liabilities that
are to be paid in long term arrangement. They are denominated
in foreign currency which will result in a foreign exchange gain or
loss to be accounted as per IAS 21 and 23. Promissory notes are
initially measured at their transaction price (which is their fair
value) and through amortized cost in subsequent periods. All
interest incurred and exchange gain/or loss recognized shall be
recorded in profit or loss statement unless they are initially
assumed/taken to build/construct a qualifying asset in which case
they will be capitalized as per the requirements of IAS 20.
IFRS 9 (expected loss model):
impairment of financial assets
carried at cost or amortised cost
Summary: impairment requirements
at reporting date
Calculate a credit-
Is the financial instrument a purchased or Yes adjusted effective
originated credit-impaired financial asset? interest rate and
No always recognise a
loss allowance for
Is the simplified approach for trade
changes in lifetime
receivables, contract assets and lease
receivables applicable? expected credit
losses
No
Does the financial instrument have low Yes Is the low credit risk
Yes credit risk at the reporting date? simplification applied?
No Yes
No
Has there been a significant increase in Recognise 12-month
credit risk since initial recognition? No expected credit
Yes
losses and calculate
interest revenue on
Recognise lifetime expected credit gross carrying
losses amount
And
Is the financial instrument a credit-
impaired financial asset?
Overview of the impairment requirements 32

Change in credit risk since initial recognition

Stage 1 Stage 2 Stage 3
Impairment recognition
12-month Lifetime Lifetime
expected credit losses expected credit losses expected credit losses

When significant increase in credit risk occurs

Interest revenue

Gross basis Gross basis Net basis

‘Performing’ ‘Under-performing’ ‘Non-performing’

(12 month expected loss) (life-time expected loss) (lifetime expected loss)
(rebuttable (rebuttable
presumption = presumption = earlier
+30 days past due) than 90 days past due)
 Disclosures (IFRS 7)
Objective: enable users of financial statements to understand the effect of credit risk on the amount,
timing and uncertainty of future cash flows

Quantitative Qualitative
• Reconciliation of allowance accounts showing key • Basis of inputs, assumptions and estimation techniques
drivers for change used to:
o Measure 12-month and lifetime expected credit losses
o determine ‘significant increase in credit risk’
o determine ‘credit-impaired’
• Explanation of gross carrying amounts showing • How forward-looking information has been incorporated
key drivers for change
• Gross carrying amount by credit risk rating • Changes in estimation techniques or significant
grades assumptions made and reasons for changes
• Maximum exposure to credit risk (net of • Basis for grouping if expected credit losses were
collateral) and collateral for credit impaired measured on a collective basis
financial assets
• Modification to contractual cash flows • Entity’s default definition and reasons for selecting
those definitions
• Contractual amount outstanding for assets • Write off policies, modification policies, collateral
written off but still subject to enforcement
activity
Credit risk disclosures → refer to IFRS 7 Financial Instruments: Disclosures paragraphs 35F–
Thank You
Questions and Discussion