C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - FINANCIAL INSTRUMENTS

Question 1

A financial instrument

Answer 1

A financial instrument is a contract that gives rise to both a financial asset in one entity, and a financial liability or equity instrument in another entity.

Question 2

A financial asset

Answer 2

A financial asset is any asset that is:
 Cash;
 An equity instrument of another entity;
 A contractual right:
o to receive cash or another financial asset from another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
 A contract that will or may be settled in the entity’s own equity instruments
Examples: trade receivables, options, shares (as an investment)

Question 3

A financial liability

Answer 3

A financial liability is any liability that is:
 A contractual obligation:
o to deliver cash or another financial asset to another entity; or
o to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.
 A contract that will or may be settled in the entity’s own equity instruments
Examples: trade payables, debenture loans, mandatory redeemable preference shares

Question 4

Equity instrument:

Answer 4

Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Examples: own ordinary shares, warrants, non-cumulative irredeemable preference shares.

Question 5

A derivative

Answer 5

A derivative is a financial instrument with all three of the following characteristics:
 Its value changes in response to an underlying variable (interest rate, commodity price, exchange rate etc.); and
 It requires no or little initial investment; and
 It is settled at a future date
Examples: Foreign currency forward contracts, interest rate swaps, options

Question 6

Classification as liability vs equity.

Answer 6

IAS 32 clarifies that an instrument is only an equity instrument if neither a nor b in the definition of a financial liability are met. The critical feature of a financial liability is the contractual obligation to deliver cash or another financial asset.

Question 7

Compound instruments.

Answer 7

Where financial instrument contains some characteristics of equity and some of financial liability then its separate components need to be classified separately. A common example is convertible debt (loan notes). Method for separating the components:
 Determine the carrying amount of the liability component (by measuring the fait value of a similar liability that does not have an associated equity component)
 Assign the residual amount to the equity component.

Question 8

Treasury shares.

Answer 8

Treasury shares. If an entity reacquires its own equity instruments (‘treasury shares’) the amount paid is presented as a deduction from equity rather than an asset (as an investment by the entity in itself, by acquiring its own shares, cannot be shown as an asset). No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Any premium or discount is recognized in reserves.

Question 9

Amortised cost financial instruments

Answer 9

Amortised cost: the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and for financial assets adjusted for any loss allowance.

Question 10

Effective interest rate:

Answer 10

Effective interest rate: rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or liability to the gross carrying amount of a financial asset or to the amortised cost of financial liability.

Question 11

Financial vs executory contracts.

Answer 11

IFRS 9 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments. These are considered financial contracts. However, contracts that were entered into (and continue to be held) for the entity’s expected purchase, sale or usage requirements of non-financial items are outside the scope of IFRS 9. These are executory contracts – under which neither party has performed any of its obligations (or both parties have partially performed their obligation to an equal extent).

Question 12

Recognition (IFRS 9) financial instruments.

Answer 12

Recognition (IFRS 9). Financial assets and liabilities are required to be recognised in the statement of financial position when the reporting entity becomes a party to the contractual provisions of the instrument.

Question 13

Initial measurement financial instruments

Answer 13

Initial measurement. Financial instruments are initially measured at the transaction price; that is, the fair value of the consideration given.

Question 14

Initial measurement financial assets

Answer 14

In the case of financial assets classified as measured at amortised cost or at fair value through comprehensive income, transaction costs directly attributable to the acquisition of the financial asset are added to this amount. For financial assets classified as measured through profit and loss initial measurement is at fair values with transaction costs expensed in P/L. An exception is where part of the consideration given is for something other than the financial asset. In this case the financial asset is initially measured at fair value evidenced by a quoted price in an active market for an identical asset or based on a valuation technique that uses only data from observable markets. The difference between fair value at initial recognition and the transaction price is recognized as a gain or loss.

Question 15

Initial measurement financial liabilities

Answer 15

Financial liabilities are initially measured at transaction price, ie the fair value of consideration received except where part of the consideration received is for something other than the financial liability. In this case the financial liability is initially measured at fair value measured as for financial asset. Transaction costs are deducted from this amount for financial liabilities classified as measured at amortised cost and financial guarantee contracts.

Question 16

Financial assets subsequent measurment

Answer 16

Under IFRS 9, financial assets are measured subsequent to recognition either:
 At amortised cost, using the effective interest method
 At fair value through other comprehensive income
 At fair value through profit or loss

Question 17

Basis of classification - financial assets.

Answer 17

Basis of classification. The IFRS 9 classification is made on the basis of both:
 The entity’s business model for managing financial assets (entity’s intention); and
 The contractual cash flow characteristics of the financial asset.

Question 18

Investments in debt instruments at amortised cost.

Answer 18

An investment in a debt instrument is classified as measured at amortised cost where:
 The objective of the business model within which the asset is held is to hold assets in order to collect contractual cash flows; and
 Cash flows that are solely payments of principal and interest.

Question 19

Investments in debt instruments at fair value through other comprehensive income

Answer 19

Investments in debt instruments at fair value through other comprehensive income (with reclassification to profit or loss on derecognition). An investments in a debt instrument is classified and measured at fair value through other comprehensive income if it meets both the following criteria:
 The financial asset is held within a business model whose objective is achieved by both collecting contractual cashflows and selling financial assets; and
 Cash flows that are solely payments of principal and interest.

Question 20

Investments in equity instruments.

Answer 20

Investments in equity instruments. If an investment in an equity instrument is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at fair value through other comprehensive income with only dividend income recognized in profit and loss. This is different from the treatment of investments in debt instruments, where the fair value through other comprehensive income classification is mandatory for assets meeting the criteria, unless the fair value option through profit and loss is chosen.

Question 21

Fair value through profit and loss - financial assets.

Answer 21

Fair value through profit and loss. All other financial assets must be measured at fair value through profit and loss.

Question 22

Financial assets classification mismatch

Answer 22

Even if an instrument meets above criteria for measurement at amortised cost or fair value through other comprehensive income, IFRS 9 allows such financial assets to be designated, at initial recognition, as being measured at fair value through profit and loss if a recognition or measurement inconsistency (;an accounting mismatch’) would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

Question 23

Financial liabilities subsequent measurement

Answer 23

Financial liabilities. After initial recognition, all financial liabilities should be measured at amortised cost with the exception of:
 Financial liabilities at fair value through profit and loss (including most derivatives)
 Financial liabilities when transfer of financial asset does not qualify for derecognition; and
 Financial guarantee contracts and commitments to provide a loan at a below-market interest rate

Question 24

A financial liability is classified at fair value through profit and loss if:

Answer 24

A financial liability is classified at fair value through profit and loss if:
 It is held for trading, ie:
o Is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;
o On initial recognition is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or
o Is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
 Or upon initial recognition it is irrevocably designated at fair value through profit or loss. This is permitted when it results in more relevant information because:
o It eliminates or significantly reduces a measurement or recognition inconsistency (‘accounting mismatch’) that would otherwise arise from measuring assets and liabilities or recognising the gains and losses on them on different bases; or
o It is a group of financial liabilities or financial assets and liabilities and its performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy.

Question 25

Financial liabilities arising when transfer of financial asset does not qualify for derecognition

Answer 25

Financial liabilities arising when transfer of financial asset does not qualify for derecognition are initially measured at consideration received and subsequently measure financial liability on same basis as transferred asset (amortised cost or fair value).

Question 26

Financial guarantee contracts

Answer 26

Financial guarantee contracts are form of financial insurance. The entity guarantees it will make a payment to another party if a specified debtor does not pay that other party. On initial recognition the fair value of the ‘premium’ received (less any transaction costs) are recognized as a liability. This is then amortised as income to profit or loss over the period of the guarantee, representing the revenue earned as the performance obligation (ie providing the guarantee) is satisfied, thereby reducing the liability to zero over the period of cover if no compensation payments are actually made. However, if at the year end, the expected impairment loss that would be payable on the guarantee exceeds the remaining liability, the liability increased to this amount.

Question 27

Commitments to provide a loan at below-market interest rate

Answer 27

Commitments to provide a loan at below-market interest rate arise where an entity has committed itself to make a loan to another party at an interest rate which is lower than the rate the entity itself would pay to borrow the money. These are accounted for in the same way as financial guarantee contracts. The impairment loss in this case would be the present value of the expected interest receipts from the other party less the expected (higher) interest payments the entity would pay.

Question 28

Offsetting financial assets and financial liabilities (IAS 32).

Answer 28

Offsetting financial assets and financial liabilities (IAS 32). A financial asset and financial liability are required to be offset (ie presented as a single net amount) when the entity:
 Has legally enforceable right to set-off the recognized amounts; and
 Intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Otherwise, financial assets and financial liabilities are presented separately. Disclosure of the gross and net amounts offset is required by IFRS 7 as well as information about right of set-off arrangements and similar agreements.

Question 29

Derecognition (IFRS 9) financial instruments

Answer 29

Derecognition (IFRS 9) is the removal of a previously recognised financial instrument from an entity’s statement of financial position. Derecognition happens:
 Financial assets
o When the contractual rights to the cash flows expire (eg a customer paid their debt or an option has expired worthless); or
o The financial asset is transferred (eg sold), based on whether the entity has transferred substantially all the risks and rewards of ownership of the financial asset.
 Financial liabilities
o When it is extinguished, ie when the obligation is discharged (eg paid off), cancelled or expires.
Where a part of a financial instrument (or group of similar financial instruments) meets the criteria above, that part is derecognized.

Question 30

derecognition financial instruments accounting

Answer 30

On derecognition of a financial asset in its entirety, the difference between:
 The carrying amount (measured at the date of derecognition); and
 The consideration received
Is recognised in profit or loss.
Applying this rule, in the case of investments in equity instruments not held for trading where irrevocable election has been made to report changes in fair value in other comprehensive income, all changes in fair value up to the point of derecognition are reported in other comprehensive income. Therefore, a gain or loss in profit or loss will only arise if the investments in equity instruments are not sold at their fair value and for any transaction costs on derecognition. Gains or losses previously reported in other comprehensive income are not reclassified to profit or loss on derecognition.
For investments in debt held at fair value through other comprehensive income, on derecognition, the cumulative revaluation gain or loss previously recognized in other comprehensive income is reclassified to profit and loss.

Question 31

Reclassification of financial instruments

Answer 31

Financial assets are reclassified under IFRS 9 when, and only when, an entity changes its business model for managing financial assets. The reclassification should be applied prospectively from the reclassification date. These rules apply only to investments in debt instruments as investments in equity instruments are always held at fair value and any election to measure them as fair value through other comprehensive income is an irrevocable one.
Reclassification of a financial liability after initial recognition is not allowed.

Question 32

Reclassification treatment from-to:

 Amortised cost to fair value through profit or loss

Answer 32

o Remeasure to FV at the reclassification date

o Recognise any gain or loss arising in P&L

Question 33

Reclassification treatment from-to:

 Fair value through profit or loss to amortised cost

Answer 33

o FV at reclassification date becomes gross carrying amount
o Calculate effective interest rate using fair value at the reclassification date as the amount at initial recognition
o Recognise credit losses

Question 34

Reclassification treatment from-to:

 Amortised cost to fair value through OCI

Answer 34

o Remeasure to FV at the reclassification date
o Recognise any gain or loss arising in OCI
o There is no adjustment to the effective interest rate or measurement of credit losses as a result of the reclassification
o Credit losses transferred to OCI

Question 35

Reclassification treatment from-to:

 Fair value through OCI to amortised cost

Answer 35

o Remeasure to FV at the reclassification date adjusted for the cumulative gain or loss previously recognised in equity.
o There is no adjustment to the effective interest rate or measurement of credit losses as a result of the reclassification
o Loss allowance transferred out of OCI

Question 36

Reclassification treatment from-to:

 Fair value through profit or loss to fair value through OCI

Answer 36

o Continue to measure the financial asset at fair value

Question 37

Reclassification treatment from-to:

 Fair value through OCI to fair value through profit or loss

Answer 37

o Continue to measure the financial asset at fair value
o Cumulative gain or loss previously recognised in equity is reclassified from equity to P&L as a reclassification adjustment

Question 38

A derivative

Answer 38

A derivative is a financial instrument with all three of the following characteristics:
 Its value changes in response to a specified underlying (interest rate, commodity price, exchange rate etc.); and
 It requires no or little initial investment; and
 It is settled at a future date

Question 39

Categories of derivatives

Answer 39

. Derivatives can be classified into two broad categories:
 Forward arrangements (commit parties to a course of action)
o Forward contracts
o Futures
o Swaps
 Options (gives the option buyer a choice over whether or not to exercise his rights under the contract)

Question 40

Forward contracts.

Answer 40

Forward contracts. A forward contract is a tailor-made contract to buy or sell a specified amount of a specified item (commodity or financial item) on a specified date at a specified price. A contract like this will require no initial outlay by the company (it has zero fair value at the date it is entered into). Over the life of the contract its fair value will depend on the spot exchange rates and the time to the end of the contract

Question 41

Futures

Answer 41

Futures. Futures are like forwards but are standardised in terms of amounts, date, currency, commodity etc. A company can enter into a futures contract and then may make a gain or a loss on the market just like any other traded item. If a company holds futures, they might be an asset or a liability at any particular date.

Question 42

Swaps.

Answer 42

Swaps. A swap is an agreement between parties to exchange cash flows related to an underlying obligation. The most common type of swap is an interest rate swap. In an interest rate swap, two parties agree to exchange interest payments on the same notional amount of principal, at regular intervals over an agreed number of years. A swap might be recorded as an asset or liability at any particular date. This depends on the interaction between the amount that an entity has contracted to pay out and the amount that it is entitled to receive.

Question 43

Options.

Answer 43

Options. The holder of the option has entered into a contract that gives it the right but not the obligation to buy (call option) or sell (put option) a specified amount of a specified commodity at a specified price. Holding an option is therefore similar to an insurance policy: it is exercised if the market price moves adversely. As the option holder has a privileged status – deciding whether or not to enforce the contract terms – he is required to pay a sum of money (a premium) to the option seller. From the point of view of the holder the option will only ever be recorded as an asset. At initial recognition this would be the amount of the premium. Subsequently the holder would only exercise the option if it was beneficial to do so. Therefore, it could only ever be an asset.

Question 44

Embedded derivatives.

Answer 44

Embedded derivatives. Some contracts may have derivatives embedded in them. IFRS 9 requires embedded derivatives that would meet the definition of separate derivative instrument to be separated from the host contract (and therefore be measured at fair value through profit or loss like other derivatives).
However, IFRS 9 does not require embedded derivatives to be separated from the host contract if:
 The economic characteristics and risks of the embedded derivative are closely related to those of the host contract; or
 The hybrid (combined) instrument is measured at fair value through profit or loss; or
 The host contract is a financial asset within the scope of IFRS 9; or
 The embedded derivative significantly modifies the cash flows of the contract.

Question 45

Hedging (IFRS 9)

Answer 45

Hedging (IFRS 9) is the process of entering into a transaction in order to reduce risk. Companies may use derivatives to establish ‘positions’, so that gains or losses from holding the position in derivatives will offset losses or gains on the related item that is being hedged. The logic of accounting for hedging should be that if a position is hedged, gains (or losses) on the hedged position that are reported in profit and loss should be offset by matching losses (or gains) on the hedging position in derivatives also reported in profit or loss.

Question 46

Adopting the hedge accounting provisions of IFRS 9 is mandatory where the hedging relationship meets all of the following criteria:

Answer 46

 The hedging relationship consists only of eligible hedging instruments and eligible hedged items.
 It was designated at its inception as a hedge with full documentation of how this hedge fits into the company’s strategy;
 The hedging relationship meets all of the following hedge effectiveness requirements:
o There is an economic relationship between the hedged item and the hedging instrument (ie the hedging instrument and the hedged item have values that generally move in the opposite directions because of the same risk, which is the hedged risk);
o The effect of credit risk does not dominate the value changes that result from that economic relationship (ie the gain or loss from credit risk does not frustrate the effect of changes in the underlyings on the value of the hedging instrument or the hedged item, even if those changes were significant); and
o The hedge ratio of the hedging relationship (quantity of hedging instrument vs quantity of hedged item) is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.
Practically however, hedge accounting is effectively optional in that an entity can choose whether to set up the hedge documentation at inception or not.
An entity discontinues hedge accounting when the hedging relationship ceases to meet the qualifying criteria, which also arises when the hedging instrument expires or is sold, transferred or exercised.

Question 47

different types of hedges

Answer 47

IFRS 9 identifies different types of hedges which determines their accounting treatment. The hedges examinable are fair value hedges and cash flow hedges.

Question 48

Fair value hedges.

Answer 48

Fair value hedges. These hedge the change in value of a recognized asset or liability (or unrecognized firm commitment) that could affect profit or loss, eg hedging the fair value of fixed rate loan notes due to changes in interest rates. All gains and losses on both the hedged item and hedging instrument are recognized as follows:
 Immediately in profit or loss (except for hedges of investments in equity instruments held at fair value through other comprehensive income).
 Immediately in other comprehensive income if the hedged item is an investment in an equity instrument held at fair value through other comprehensive income.
In both cases, the gain or loss on the hedged item adjusts the carrying amount of the hedged item.

Question 49

Cash flow hedges

Answer 49

Cash flow hedges. These hedge the risk of change in value of future cash flows from a recognized asset or liability (or highly probable forecast transaction) that could affect profit or loss, eg hedging a variable rate interest income stream. The hedging instrument is accounted for as follows:
 The portion of the gain or loss on the hedging instrument that is effective (ie up to the value of the loss or gain on cash flow hedged) is recognized in other comprehensive income (‘items that may be reclassified subsequently to profit or loss’) and the cash flow hedge reserve.
 Any excess is recognised immediately in profit or loss
The amount that has been accumulated in the cash flow hedge reserve is then accounted for as follows:
 If a hedged forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the amount shall be removed from the cash flow reserve and be included directly in the initial cost or carrying amount of the asset or liability.
 For all other cash flow hedges, the amount shall be reclassified from other comprehensive income to profit or loss in the same period that the hedged expected future cash flows affect profit or loss.

Question 50

IFRS 9 impairment model

Answer 50

IFRS 9 uses a forward-looking impairment model. Under this model future expected credit losses are recognized. IFRS 9’s impairment rules apply primarily to certain financial assets:
 Financial assets measured at amortised cost (business model: to collect contractual cashflows of principal and interest)
 Investments in debt instruments measured at fair value through other comprehensive income (business model: to collect contractual cashflows of principal and interest and to sell financial assets)

Question 51

Loss allowance:

Answer 51

Loss allowance: the allowance for expected credit losses on financial assets.

Question 52

Credit loss:

Answer 52

Credit loss: the difference between all contractual cash floes that are due to an entity…and all the cash flows that the entity expects to receive, discounted.

Question 53

Expected credit losses:

Answer 53

Expected credit losses: weighted average of credit losses with the respective risks of a default occurring as the weights.

Question 54

Lifetime expected credit losses:

Answer 54

Lifetime expected credit losses: The expected credit losses that result from all possible default events over the expected life of a financial instrument.

Question 55

Initial recognition financial instruments losses.

Answer 55

Initial recognition. At initial recognition of a financial asset, a loss allowance equal to 12-month expected credit losses must be recognized. 12-month expected credit losses: The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. They are calculated by multiplying the probability of default in the next 12 months by the present value of the lifetime expected credit losses that would result from the default.

Question 56

Subsequent recognition financial instruments losses.

Answer 56

Subsequent recognition. At each subsequent reporting date, the loss allowance required depends on whether there has been a significant increase in credit risk of that financial instrument since initial recognition.
 No significant increase in credit risk since initial recognition (Stage 1)
o Recognize 12-month expected credit losses and Effective interest calculated on gross carrying amount of financial asset
 Significant increase in credit risk since initial recognition (Stage 2)
o Recognize lifetime expected credit losses and Effective interest calculated on gross carrying amount of financial asset
 Objective evidence of impairment at the reporting date (Stage 3)
o Recognize lifetime expected credit losses and Effective interest calculated on net carrying amount of financial asset
To determine whether credit risk has increased significantly, management should assess whether there has been a significant increase in the risk of default. There is a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due.

Question 57

Presentation financial instruments losses.

Answer 57

Presentation.
 Investments in debt instruments measured at amortised cost
o Recognized in profit or loss
o Credit losses held in a separate allowance account offset against the carrying amount of the asset:
Financial asset X
Allowance for credit losses (X)
Carrying amount (net of allowance for credit losses) X
 Investments in debt instruments measured at fair value through other comprehensive income
o Portion of the fall in fair value relating to credit losses recognized in profit or loss
o Remainder recognized in other comprehensive income
o No allowance account necessary because already carried at fair value (which is automatically reduced for any fall in value, including credit losses.

Question 58

Measurement. The measurement of expected credit losses should reflect:

Answer 58

 An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes
 The time value of money; and
 Reasonable and supportable information that is available without undue cost and effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Question 59

Impairment loss reversal.

Answer 59

Impairment loss reversal. If an entity has measured the loss allowance at an amount equal to lifetime expected credit losses in the previous reporting period, but determines that the conditions are no longer met, it should revert to measuring the loss allowance at the amount equal to 12 month expected credit losses. The resulting impairment gain is recognized in profit or loss.

Question 60

Simplified approach

Answer 60

Trade receivables, contract assets and lease receivables. A simplified approach is permitted. For trade receivables or contract assets that do not have a significant IFRS 15 financing element, the loss allowance is measured at the lifetime expected credit losses, from initial recognition. For other trade receivables and contract assets and for lease receivables, the entity can choose (as a separate accounting policy for trade receivables, contract assets and for lease receivables) to apply the three stage approach or to recognize an allowance for lifetime expected credit losses from initial recognition.

Question 61

Discuss the implications of a significant increase in credit risk

Answer 61

At each reporting date, an assessment is needed about whether the credit risk on a financial instrument has increased significantly since initial recognition. This assessment is based on the change in the risk of a default occurring over the expected life of the financial instrument. This assessment compares the risk of a default occurring as at the reporting date with the risk of a default occurring as at the date of initial recognition. This comparison should be based on reasonable and supportable information, that is available without undue cost or effort that is indicative of significant increases in credit risk since initial recognition.
 If a financial asset is determined to have low credit risk at the reporting date then its credit risk cannot have increased significantly since initial recognition.
 If there is no significant increase in credit risk the loss allowance for that asset is remeasured to the 12 month expected credit loss as at that date.
 If there is a significant increase in credit risk the loss allowance for that asset is remeasured to the lifetime expected credit losses as at that date.
 If there is credit impairment, the financial asset is written down to its estimated recoverable amount.

Question 62

purchase originated credit impaired financial assets

Answer 62

An entity might purchase or issue a credit-impaired financial asset. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include (but is not limited to) observable data about the following events:
 Significant financial difficulty of the issuer or the borrower;
 A breach of contract, such as a default or past due event;
 It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
 The disappearance of an active market for that financial asset because of financial difficulties

Question 63

purchase originated credit impaired financial assets recognition

Answer 63

Such financial assets might need to be carried at amortised cost.
 On initial recognition: Measured as a net amount (amortised cost) that anticipates future credit losses arising as a result of the impairment event (single figure with no separate allowance for credit losses).
 Revenue recognition: By applying the credit-adjusted effective rate to the amortised cost.
Credit-adjusted effective interest rate: The rate that exactly discounts the estimated future cash flows over the expected life of the financial asset to its amortised cost.
A financial asset might become credit impaired after initial recognition. If an entity revises its estimates of receipts it must adjust the gross carrying amount of the financial asset to reflect actual and revised estimated contractual cash flows. The financial asset must be remeasured to the present value of estimated future cash flows from the asset discounted at the original effective rate.

Question 64

Disclosures IFRS 7

Answer 64

The objective of IFRS 7 is to provide disclosures that enable users of financial statements to evaluate:
 The significance of financial instruments for the entity’s financial position and financial performance. Key disclosures:
o Breakdown of carrying amount by class of financial instrument
o Details of any financial assets reclassified
o Details of any financial assets and liabilities offset
o Financial assets pledged as collateral
o The allowance account for investments in debt measured at fair value through OCI
o Details of any default in payment of principal or interest on loans payable during the period or breaches of terms
o Effect of financial instruments on profit or loss line items
o Summary of significant accounting policies regarding financial instruments
o Hedging – risk management strategy and numerical table showing effect on financial position and financial performance
o Methods used to measure fair value
 The nature and extent of risks arising from financial instruments to which the entity is exposed, and how entity manages those risks
o Qualitative disclosures include:
 Exposure to risk
 Policies for risk management
o Quantitative disclosures relate to:
 Credit risk – the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation
 Liquidity risk – the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset
 Market risk – the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.