under each of classification and measurement, impairment and hedging. (IFRS 9.5.4.4) There should not be a significant impact on recognition and derecognition of financial assets/liabilities because of adopting IFRS 9. IFRS 9 (2014) was issued as a complete standard including the requirements previously issued and the additional amendments to introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding disclosures about investments in equity instruments designated as at FVTOCI, disclosures on risk management activities and hedge accounting and disclosures on credit risk management and impairment. IFRS 9 also allows only the intrinsic value of an option, or the spot element of a forward to be designated as the hedging instrument. [IFRS 9 paragraphs 5.5.13 – 5.5.14]. The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to determine whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2]. On 24 July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited amendments to the classification and measurement requirements for financial assets. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss, the entity may only transfer the cumulative gain or loss within equity. In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness criteria at the beginning of each hedged period: If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, an entity adjusts the hedge ratio of the hedging relationship (i.e. Instead, they set out the principal changes to the disclosure requirements from those under IFRS 7 . Access notes and question bank for CFA® Level 1 authored by me at AlphaBetaPrep.com. IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement.The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. [IFRS 9 paragraphs 5.5.3 and 5.5.10], The Standard considers credit risk low if there is a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. *, *Prepayment Features with Negative Compensation (Amendments to IFRS 9); to be applied retrospectively for fiscal years beginning on or after 1 January 2019; early application permitted. However, IFRS 9 explicitly states that write-offs constitute a derecognition event. .3 In October 2010, the IASB published the updated IFRS 9 (2010), Financial instruments, to include guidance on financial liabilities and derecognition of financial instruments, and in particular the requirement to present changes in own credit risk on liabilities at fair value in other comprehensive income (“OCI”). The treatment of financial liabilities is carried forward essentially unchanged from IAS 39 to IFRS 9. The new guidance allows the recognition of the full amount of change in the fair value in profit or loss only if the presentation of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. If a hybrid contract contains a host which is an asset within the scope of IFRS 9, the whole contract must comply with the classification requirements for financial assets. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. [IFRS 9 paragraph 6.5.4]. On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. Applying IFRS 9.B5.4.6 to modifications and exchanges of financial liabilities. In recent editions of Accounting Alert we have examined the impact that the adoption of IFRS 9 Financial Instruments (“IFRS 9”) will have on accounting for financial assets:. Financial liabilities and equity (IAS 32, IFRS 9) Publication date: 05 Jun 2018 Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic) The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. If the entity does not control the asset then derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. Financial assets measured at amortised cost; Financial assets mandatorily measured at FVTOCI; Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL); Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL); Lease receivables within the scope of IAS 17, Contract assets within the scope of IFRS 15, the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or. [IFRS 9 paragraph 6.5.11], When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12], 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. Amortised cost2. In other cases the amount that has been accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash flows affect profit or loss. [IFRS 9 paragraph 5.5.17], The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. A separate section. [IFRS 9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be reclassified. However, IFRS 9 also includes the fair value option known from IAS 39, which permits entities to elect to measure financial liabilities The IASB completed IFRS 9 in July 2014, by publishing a the purchase or origination of a financial asset at a deep discount that reflects incurred credit losses. 8 ifrs in practice 2016 fi ifrs 9 financial instruments An equity instrument is defined as: – Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Financial Instruments: Disclosures. FVTOCI for equity. FVTPL. IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the project was separated from the IFRS 9 project due to the longer term nature of the macro hedging project which is currently at the discussion paper phase of the due process. the liability is part or a group of financial liabilities or financial assets and financial liabilities that 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. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). [IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that discounts the cash flows expected on initial recognition (explicitly taking account of expected credit losses as well as contractual terms of the instrument) back to the amortised cost at initial recognition. The same election is also separately permitted for lease receivables. [IFRS 9 paragraph 6.5.6]. there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and, the hedge ratio of the hedging relationship is the same as that actually used in the economic hedge [IFRS 9 paragraph 6.4.1(c)], the name of the credit exposure matches the reference entity of the credit derivative (‘name matching’); and. In April 2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation Approach to Macro Hedging. For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February 2015. specifically identified cash flows from an asset (or a group of similar financial assets) or, a fully proportionate (pro rata) share of the cash flows from an asset (or a group of similar financial assets). The application guidance provides a list of factors that may assist an entity in making the assessment. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatility compared to recognising the change in value of forward points or currency basis spreads directly in profit or loss. [IFRS 9, paragraph 5.7.5]. There is no 'cost exception' for unquoted equities. [IFRS 9, paragraphs 3.2.6(a)-(b)], If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. 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