FINANCIAL INSTRUMENTS (IFRS 9) Flashcards
Which are the three measurement categories for financial assets?
Three measurement categories for financial assets:
1. Fair value through Profit or Loss
FVPL: operational performance of the company goes to profit/loss
-
Fair value through Other Comprehensive Income (FVOCI)
Income that impact profit/loss but not to the extend to being recognised in profit/loss -
Amortised cost
example: credits are recorded at the net of the amount paid
Which are the qualifying criteria for amortised cost?
To qualify for amortised cost, the financial asset must meet the following two tests:
- Contractual cash flow characteristics test
- ‘Hold to collect’ business model test
If these two test are successful, then entity can apply for the amortised cost
What is the contractual cash flow charactestics test? How does it works?
The contractual cash flow characteristics test is carried by doing the SPPI test.
The SPPI test is passed only by cash flows that are solely payments of principal and interest.
So, the test is passed if the financial instrument repay the initial capital invested (measured by fair value at initial recognition) plus an interest that take into account the time value of the money and only the credit risk.
What are the consequence of failing the SPPI test? How can a financial instrument be measured in this case?
The financial asset cannot be classified at:
- Amortised cost
- Fair value trough other comprehensive income
The only possible measurement category is Fair value through profit or loss
What is the hold to collect business model test? How does it work?
To pass this test, the financial asset must be hold by the company until it will collect the money.
- Business objective is to collect contractual cash flows.
- The financial asset need to be hold until maturity.
- Can have infrequent sales
What is the consequence of failing the hold to collect business model test?
If the hold to collect business model test is not met, the financial asset cannot be classified at amortised cost.
The other possible measurement categories if SPPI is met (but hold to collect business model test not met) are:
- Fair value through other comprehensive income for debt
- Fair value through profit or loss
In addition to the contractual cash flow characteristic test, what is the other qualifying criteria for Fair value through other comprehensive income for debt?
The other qualifying criteria it that:
Business objective is to both collect the contractual cash flows and sell the financial asset.
- This involve that is permitted a greater frequency and volume of sales that “hold to collect” business model.
- Intention is to sell before the investment matures
Which are common types of debt instrument that may be at FVTOCI? How are measured intercompany loans/trade receivables?
- Investments in government bonds where the investment period is likely to be shorter than maturity
- Investments in corporate bonds where the investment period is likely to be shorter than maturity.
This business model would typically not be expected to apply to intercompany loans/trade receivables. Indeed, they are always measured at armortised cost.
For measurement with FVTOCI for debt, how is measure the balance sheet? What is recognised to profit or loss? What is recognised to OCI?
Balance sheet
* Measured at fair value
Profit or loss
* Recognise interest revenue using the effective interest rate
* Impairment losses/reversals in P&L
* Apply the same impairment model as for financial assets measured at amortised cost
Other comprehensive income
* Recognise cumulative FV changes and recycle to P&L on derecognition (when saled)
What are keys requirement when measuring at Fair value through other comprehensive income for equities? (Scope and recognition)
**SCOPE **
It is applied to equity investments that are not “held for trading”.
RECOGNITION PRINCIPLES
- Recognise all fair value changes in OCI.
- On sale, fair value changes are NOT reclassified to profit or loss
- Recognise dividends in profit or loss
What is an expected credit loss model? What are the steps to measure it?
It is a measure of the asset’s credit risk
Steps to measure it:
1. Identify scenarios in which a loan or receivable defaults
2. Evaluate the cash shortfall that would be incurred in each scenario if a default were to happen
3. Multiply that loss by the probability of the default happening
4. Sum the results of all such possible default events
What instruments are subject to the impairment requirements? What are out of scope?
In scope
* Debt instruments measured at amortized cost or FVTOCI (e.g. trade receivables)
* Lease receivables
* Contract assets in the scope of IFRS 15
Out of scope
* Equity investments
* Financial instruments measured at FVTPL
