Lecture 31: SBR IFRS 9 - Financial Instruments

Introduction

• Main standard on financial instruments.
• Covers measurement, recognition, derivatives, hedge accounting, impairment.
• Previous standards: IAS 32 (financial instruments presentation) and IFRS 7 (disclosure).
• IFRS 9 is complex but crucial; not heavily tested in exams (5-6 marks typically).

Key Components of IFRS 9

• Financial Liabilities

  • Initially recognized at fair value.
  • Subsequent measurement: amortized cost or fair value through profit and loss.
  • Email borrowing examples: loans, bonds, debentures.
  • Effective interest method for amortized cost.

• Financial Assets

  • Recognition rules: recognized when entity becomes party to the contractual provisions.
  • Application to trading, forward contracts, and option contracts.

• Equity Instruments

  • Measured at fair value through profit and loss or through other comprehensive income.
  • Conditions for OCI: not held for trading and irrevocable choice.

• Debt Instruments

  • Measurement: amortized cost, fair value through OCI, fair value through profit and loss.
  • Conditions for measurement methods based on business models and cash flow characteristics.

Impairment of Financial Assets

• Loss allowances for debt instruments measured at amortized cost or fair value through OCI.
• Mechanisms: 12-month expected credit losses or lifetime expected credit losses.
• Significant increase in credit risk impacts the allowance.

Derecognition of Financial Instruments

• Financial asset: Derecognize when contractual rights expire or asset is sold.
• Financial liability: Derecognize when obligation is discharged.

Derivatives

• Defined by changes in underlying variables, little initial investment.
• Examples include forwards, futures, swaps, options.
• Measured at fair value with gains/losses in profit and loss.

Embedded Derivatives

• Part of hybrid contracts; separation based on economic characteristics.
• Host contract dictates measurement if within IFRS 9 scope.
• Conditions for separation involve mismatches between derivative and host.

Hedge Accounting

• Fair Value Hedge: Adjusts carrying amount of hedged item for fair value changes.
• Cash Flow Hedge: Gain/loss on hedging instrument recognized in OCI.
• Criteria for hedge accounting: eligibility, documentation, effectiveness.

Conclusion

• IFRS 9 is a comprehensive and challenging standard.
• Requires understanding of various components and their interactions.
• Essential for handling financial risk through instruments in financial statements.