IFRS 9 Flashcards
What does IFRS 9 relate to?
It relates to the measurement of Financial Instruments.
How do we measure financial assets under IFRS 9?
We measure at amortised cost (if pass 2 tests) or fair value P & L or OCI
How do we measure financial liabilities under IFRS 9?
We measure them at
FAFVP&L
FAFVOCI
amortised cost
What is amortised cost?
Amortised cost is the present value of future cash flows.
If a financial instrument is held for long term and is principle and interest
What tests must be passed to account for financial assets at amortised cost?
We must pass the
BUSINESS MODEL TEST - we intend to hold the asset to collect the contractual cash flows (hold to maturity)
CASHFLOW CHARACTERISTIC TEST - that there is nothing else in the agreement except the payment of principal and interest.
How are financial assets measured at fair value?
Fair value through the P/L
(Asset on SOFP at fv, gains or losses to P/L)
Fair value through OCI
(Asset on SOFP at fv, gains or losses to OCI)
What can be measured at fair value through OCI?
Investment in share- can only be recognised at fair value in OCI if pass two tests.
What are the two tests that allow investment of shares to be measured at fair value through OCI?
- If shares are not held for trading
- If we make an irrevocable election
Nb on disposal of shares gains or losses that went through OCI cannot be recycled to P/L
What does held for trading mean?
We are not intent on selling in the short term but may sell
What else can be measured at fair value through OCI?
We can measure a loan asset - we lent money to someone.
We must pass two tests
What are the two tests to account for a loan asset through OCI?
We must pass
1. CASHFLOW CHARACTERISTICS TEST
2. BUSINESS MODEL TO HOLD AND SELL
What does the BUSINESS MODEL TO HOLD AND SELL refer to?
Means we don’t know if we will hold it or sell it
Where do we record the gain or loss on the disposal of the loan asset?
The gains or losses that went to the OCI HAVE to be recycled to the P/L
When can we derecognise a financial asset as per IFRS 9 Financial Instruments (measurement)?
We derecognise a financial asset.
- When we lose control by transferring the risks and rewards of ownership to a third party
OR - If the asset expires
OR - If the asset is settled (ie trade debtors pay you what they owe you)
When do we measure financial assets at fair value through the P/L?
It can be used for any financial asset and it MUST be used for:
- Derivatives
- Assets held for trading
What model do we use for the Impairment of Financial Assets under IFRS 9?
We use the Expected Credit Loss Model.
It’s a bad debt forecast.
Its a 3 stage model.
What is Stage 1 of the Expected Credit Loss Model?
Stage 1. We consider 12 month defaults and what losses will occur due to these defaults. This is the bad debt that we provide for
Dr bad debts P/L
Cr bad debt provision SOFP
What is Stage 2 in the Expected Credit Loss Model?
Stage 2. We move to Stage 2, only, if there is a significant increase in credit risk. Consider lifetime defaults and the losses that will occur due to these defaults.
Dr bad debts P/L (increase)
Cr bad debt provision
What is Stage 3 in the Expected Credit Loss Model?
Stage 3. We move to Stage 3 when there is objective evidence of an impairment. We no longer have a provision for bad debt. We have actual bad debt.
Dr bad debt provision
Cr financial asset
How many stages in the Expected Credit Loss Model?
There are 3 stages
Can we switch between stages in the Expected Credit Loss Model?
Yes, we can switch and change (1 to 3).
We can move in between stages.
How do we account for debtors - trade debtors under IFRS 9?
We account for debtors using the simplified approach (matrix approach)
What is the matrix approach?
We identify how long monies are outstanding for and based on historic experience we create a provision.
How do we treat a trade debtor with a significant financing component (IFRS 15)?
Is where a customer who we advanced credit of more than 12 months. Choice of accounting for impairments.
- We can look at life time losses upfront or immediately (no stages)
- We can opt for stages 1,2 and 3