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IFRS 9 Flashcards

1
Q

What does IFRS 9 relate to?

A

It relates to the measurement of Financial Instruments.

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2
Q

How do we measure financial assets under IFRS 9?

A

We measure at amortised cost (if pass 2 tests) or fair value P & L or OCI

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3
Q

How do we measure financial liabilities under IFRS 9?

A

We measure them at
FAFVP&L
FAFVOCI
amortised cost

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4
Q

What is amortised cost?

A

Amortised cost is the present value of future cash flows.

If a financial instrument is held for long term and is principle and interest

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5
Q

What tests must be passed to account for financial assets at amortised cost?

A

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.

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6
Q

How are financial assets measured at fair value?

A

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)

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7
Q

What can be measured at fair value through OCI?

A

Investment in share- can only be recognised at fair value in OCI if pass two tests.

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8
Q

What are the two tests that allow investment of shares to be measured at fair value through OCI?

A
  1. If shares are not held for trading
  2. If we make an irrevocable election

Nb on disposal of shares gains or losses that went through OCI cannot be recycled to P/L

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9
Q

What does held for trading mean?

A

We are not intent on selling in the short term but may sell

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10
Q

What else can be measured at fair value through OCI?

A

We can measure a loan asset - we lent money to someone.

We must pass two tests

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11
Q

What are the two tests to account for a loan asset through OCI?

A

We must pass
1. CASHFLOW CHARACTERISTICS TEST
2. BUSINESS MODEL TO HOLD AND SELL

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12
Q

What does the BUSINESS MODEL TO HOLD AND SELL refer to?

A

Means we don’t know if we will hold it or sell it

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13
Q

Where do we record the gain or loss on the disposal of the loan asset?

A

The gains or losses that went to the OCI HAVE to be recycled to the P/L

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14
Q

When can we derecognise a financial asset as per IFRS 9 Financial Instruments (measurement)?

A

We derecognise a financial asset.

  1. When we lose control by transferring the risks and rewards of ownership to a third party
    OR
  2. If the asset expires
    OR
  3. If the asset is settled (ie trade debtors pay you what they owe you)
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15
Q

When do we measure financial assets at fair value through the P/L?

A

It can be used for any financial asset and it MUST be used for:

  1. Derivatives
  2. Assets held for trading
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16
Q

What model do we use for the Impairment of Financial Assets under IFRS 9?

A

We use the Expected Credit Loss Model.

It’s a bad debt forecast.

Its a 3 stage model.

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17
Q

What is Stage 1 of the Expected Credit Loss Model?

A

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

18
Q

What is Stage 2 in the Expected Credit Loss Model?

A

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

19
Q

What is Stage 3 in the Expected Credit Loss Model?

A

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

20
Q

How many stages in the Expected Credit Loss Model?

A

There are 3 stages

21
Q

Can we switch between stages in the Expected Credit Loss Model?

A

Yes, we can switch and change (1 to 3).
We can move in between stages.

22
Q

How do we account for debtors - trade debtors under IFRS 9?

A

We account for debtors using the simplified approach (matrix approach)

23
Q

What is the matrix approach?

A

We identify how long monies are outstanding for and based on historic experience we create a provision.

24
Q

How do we treat a trade debtor with a significant financing component (IFRS 15)?

A

Is where a customer who we advanced credit of more than 12 months. Choice of accounting for impairments.

  1. We can look at life time losses upfront or immediately (no stages)
  2. We can opt for stages 1,2 and 3
25
What is a derivative?
A contract whose value is derived from the value of an underlying item I.E Spot deal fx Share option Interest rate swap
26
What are the characteristics of derivatives?
There are 4 characteristics 1. Nil cost or a small cost relative to the value of the underlying item. 2. Can be settled net for cash (we can receive our profits and pay our losses net) 3. No physical delivery of the underlying item 4. Underlying item is not part of our stock in trade (we don't use it in the business)
27
How do we account for derivatives?
We account for them at fair value through the P/L
28
What is a purchase order (executory contract)?
It's a contract where we have no obligation until it's executed. We don't account for a purchase order.
29
What is an embedded derivative?
It is a host contract that contains a derivative. i.e., a purchase order that will be paid in a fx currency (not the currency of the buyer or seller)
30
What is the treatment if the host contract is accounted for at fair value in the P/L?
There is no separation of the derivative
31
What is the treatment if the host contract is not accounted for at fair value in the P/L?
We must separate the derivative and account for at fair value in the P/L.
32
What is hedging in financial reporting?
Risk reduction - using a derivative to reduce risk the company is exposed to
33
What is an economic relationship?
It exists between the hedged item and the derivative- a gain on one results in a loss on the other
34
What are the two types of hedges that exist?
1. Cashflow hedge 2. Fair value hedge
35
What is a fair value hedge?
We have an asset or a liability, and we are worried that its fair value will move, causing a loss. (Asset value falls or the liability value rises) We take on a derivative so that any losses are offset by gains on the derivative
36
How is a fair value hedge accounted for?
The derivative is accounted for at fair value in the P/L and the protected asset or liability must be accounted for at fair value in the P/L
37
What are the 4 conditions required for hedge accounting?
1. Designate the hedge (we enter into a derivative and designate it to a specific risk) 2. Document the hedge 3. There must be an economic relationship between the hedged item and the derivative. 4. The hedge ratio must approximate 100%.
38
What is a cashflow hedge?
We have a future cashflow that we want to protect. We take out a derivative to protect the future cash payments/receipts. I.E. FX payment or receipt Variable loan interest payment
39
How do we account for a cashflow hedge?
We account for the derivative at fair value through OCI until the cashflow happens and impacts the P/L. We then recycle the gain or loss on the derivative from the OCI to the P/L
40
What is a Financial instrument?
Is a contract that gives the right to a financial asset to one entity and a financial liability or equity instrument of another entity
41
What is a financial asset? IAS 32
Is cash, An equity instrument (i.e., shares in another company) A contractual right - to receive cash or another financial asset. Contract that can or will be settled in entity own equity instruments I can settle a debt by issuing my own shares. Fixed = equity Variable = debt
42
What is a financial liability? IAS 32
It's a POO 1. A contractual obligation To deliver cash or another financial asset to another entity To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity 2. A contract that will or may be settled in an entity's own Equity instruments (VD)

Sbr (17 decks)

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