CAF 7 – IFRS 9 IFRS 9 Instruments Financial 05

CAF 7 – IFRS 9IFRS 9FinancialInstruments05Page 1INTRODUCTIONRELEVANT IFRSsIAS 32Financial Instruments: Presentation (Definition and Compound FI)IFRS 7Financial Instruments: DisclosuresIFRS 9Financial Instruments (Classification and Measurement)IAS 39Financial Instruments: Recognition and Measurement (not examinable)DEFINITIONSis a contract that gives rise to a financial asset of one entity; and a financial liability or equity instrument of another entity.is any asset that is: cash e.g. cash in hand or at bank an equity instrument of another entity e.g. investment in shares or shareoptionsFinancial a contractual right to receive cash (or another financial asset) e.g.assetreceivables, investment in loan a contractual right to exchange financial instruments under conditionsthat are potentially favourable e.g. favourable forward contract enteredinto by a bankis any liability that is: a contractual obligation to deliver cash (or another financial asset) e.g.Financialpayablesliability a contractual obligation to exchange financial instruments underconditions that are potentially unfavourable e.g. unfavourable forwardcontract entered into by a bankEquityis any contract that evidences a residual interest in the assets of an entityinstruments after deducting all of its liabilities e.g. equity shares issued by the entity.FinancialinstrumentsSUBSTANCESome financial instruments have the legal form of equity but are, in substance, liabilities. Forexample, an issuer has a contractual obligation to either deliver cash or another financialasset e.g. redeemable preference shares.Therefore, dividend on redeemable preference shares is treated as finance cost in profit orloss while dividend on ordinary shares is presented in statement of changes in equity.RECOGNITION OF FINANCIAL INSTRUMENTSAn entity shall recognize a financial asset or a financial liability in its statement of financialposition when, and only when, the entity becomes party to the contractual provisions of theinstrument.A financial asset might be an investment in debt or in equity. kashifadeel.com

CAF 7 – IFRS 9CLASSIFICATIONPage 2FINANCIAL ASSETS – INVESTMENT IN DEBT INSTRUMENTSA financial asset must be measured at amortised cost if both of thefollowing conditions are met: the asset is held within a business model whose objective is toAt amortised costhold assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise onspecified dates to cash flows that are solely payments ofprincipal and interest on the principal amount outstanding.A financial asset must be measured at fair value through othercomprehensive income if both of the following conditions are met:Fair value through the financial asset is held within a business model whoseotherobjective is achieved by both collecting contractual cashcomprehensiveflows and selling financial assets andincome (FVTOCI) the contractual terms of the financial asset give rise onspecified dates to cash flows that are solely payments ofprincipal and interest on the principal amount outstanding.A financial asset must be measured at fair value through profit or lossunless it is measured at amortised cost or at fair value through othercomprehensive income.Fair value throughprofit or loss(FVTPL)A company may, at initial recognition, irrevocably designate a financialasset as measured at fair value through profit or loss if doing soeliminates or significantly reduces a measurement or recognitioninconsistency (sometimes referred to as an ‘accounting mismatch’)that would otherwise arise from measuring assets or liabilities orrecognising the gains and losses on them on different bases.FINANCIAL ASSETS – INVESTMENT IN EQUITY INSTRUMENTSAt amortised cost Not applicableFVTOCIFVTPLFor all equity instruments not held for trading, a company can make anirrevocable election at initial recognition to measure an equity investment atfair value through other comprehensive income.Investments in equity are measured at fair value through profit or loss only ifheld for trading.FINANCIAL LIABILITIESAt initial recognition, financial liabilities are classified as subsequentlymeasured at amortised cost with specific exceptions including: derivatives that are liabilities at the reporting date; andAt amortised cost financial liabilities that might arise when a financial asset istransferred but this transfer does not satisfy the derecognitioncriteria.A company is allowed to designate a financial liability as measured atfair value through profit or loss. This designation can only be made if: it eliminates or significantly reduces a measurement orrecognition inconsistency; orAt fair value this would allow the company to reflect a documented riskmanagement strategy.Any such designation is irrevocable.Latest update: March 2020

CAF 7 – IFRS 9MEASUREMENTFINANCIAL ASSETS – INVESTMENT IN DEBT INSTRUMENTSCategoryAmortised costFVTOCIFVTPLInitialmeasurementFair value transaction costsFair value transaction costsFair valueSubsequentmeasurementChangesDisposalgain/ lossAmortised costEffective Interest PLPLFair value(after effective interest)Fair value(after interest)Effective Interest PLChange in FV OCIInterest PLChange in FV PLPL(Note 2)PLNote 1:However, trade receivable is an exception to this treatment. Trade receivableare measured in accordance with IFRS 15.Note 2:The balance in “Other reserves” i.e. accounted for in OCI is transferred to“Retained earnings” in statement of changes in equity. (No recycling)FINANCIAL ASSETS – INVESTMENT IN EQUITY INSTRUMENTSCategoryInitialmeasurementAmortised costFVTOCIFair value transaction costsFVTPLFair valueNote 3:SubsequentChangesmeasurementNot applicableDividend PLFair valueChange in FV OCIDividend PLFair valueChange in FV PLDisposalgain/ lossPLPLThe balance in “Other reserves” i.e. accounted for in OCI is transferred to“profit or loss”. (Recycling of gains)FINANCIAL LIABILITIESCategoryAmortised costFair valueInitialmeasurementFair value –transaction costsFair valueSubsequentmeasurementChangesDisposalgain/ lossAmortised costEffective Interest PLPLFair valueChange due to owncredit risk OCIRemaining change PLPL kashifadeel.comPage 3

CAF 7 – IFRS 9Page 4ADDITIONAL POINTSAmortisedAmortised cost is present value of future cash flows using effective interestcostrate.Transaction costs are incremental costs that are directly attributable to theacquisition, issue or disposal of a financial asset or financial liability.Examples of transaction costs are: fees and commissions paid to agents, advisers, brokers and dealers; levies by regulatory agencies and securities exchanges; transfer taxes and duties;Transaction credit assessment fees;costs registration charges and similar costs.Transaction costs are expensed in case of FVTPL.Non-transaction costs are always charged to PL. Examples of costs that donot qualify as transaction costs are financing costs, internal administrationcosts and holding costs.InterestNominal interest Cash par value x coupon rateEffective interest PL Outstanding balance x effective rateSYLLABUSReferenceContent/Learning outcomeIFRS 9 Classification, recognition and measurement of financial assetsand liabilities Other than derivatives -Financial InstrumentsApply requirements of IFRS 9 in respect of recognition, classification andLO2.1.1measurement of financial assets and liabilities.Proficiency level: 1Testing level: 1B1Past Paper AnalysisA14 S15 A15 S16A16S17A17S18Latest update: March 2020A18S19A1906S2007

CAF 7 – IFRS 9PRACTICE Q&ASr.# 2HFA Classification3CFA / FL ClassificationMEASUREMENT4CGoal Limited: FA – Debt – Amortised cost5CBall Limited: FA – Debt – Amortised cost6CJack Limited: FL – Amortised cost7HFA – Equity – FVTOCI8CXYZ Limited: FA – Equity – FVTPL & FVTOCI9HKangaroo Limited – FVTPL & FVTOCI10H Tokyo Limited: FA – Debt – AC & FVTOCI & FVTPL11C Gypsum Limited – Debt AC and FVTPL12C Aji Panca Limited: Shares (including redeemable) issue13H Passila Limited: Issue of debentures14C Alpha Limited: Liability at FV (own credit risk issue) 8071206081210KAKAKASTKAQBSBR KAPE A19QBQBOtherPage 5

CAF 7 – IFRS 9QUESTIONPage 601Identify the following items as a financial asset, a non-financial asset, a financial liability, anon-financial liability or an equity instrument.(05)ITEMSANSWERCreditorsInvestment in loan notes of another entityBank loan obtainedOrdinary shares issuedIrredeemable preference shares issuedUnfavourable forward currency contractShare options issuedRedeemable preference shares issuedInvestment in redeemable preference sharesCurrent tax payableInventoryQUESTION02XYZ Limited makes a large bond issue to the market. Three companies (A Limited, B Limitedand C Limited) each buy identical Rs. 10,000,000 bonds. How they should classify thesefinancial asset?(03)CompanyA LimitedB LimitedC LimitedBusiness modelClassification of bond?A Limited holds bonds for the purpose ofcollecting contractual cash flows to maturityB Limited holds bonds for the purpose ofcollecting contractual cash flows but sells themon the market when prices are favourableC Limited buys bonds to trade in themQUESTION03Identify the most likely classification of following items:(07)ITEMSANSWERFINANCIAL ASSETSInvestments held for trading purposes.Investment in interest bearing debt instruments. The instrument is redeemablein five years. The intention is to collect cash flows (which are interest andprincipal amounts only)Investment in interest bearing debt instruments. The instrument is redeemablein five years. The intention is to collect cash flows (which are interest andprincipal amounts only). However, the entity may sell the loan notes earlier ifany good offer is received.A trade receivableDerivatives held for speculation purposeInvestment in equity shares. The entity has no intention of selling these sharesin foreseeable future.Investment in loan notes. The objective is to collect contractual cash flows whichconsist of interest, changes in oil prices in next five years and principal amountat the end of year 5.Investment in loan notes. The objective is to collect contractual cash flows whichconsist of interest, changes in oil prices in next five years and principal amountat the end of year 5. However, the entity may sell the loan notes earlier if anygood offer is received.Investment in convertible debenturesLatest update: March 2020