IFRS 9 and IAS 32 - Financial Instruments

Question 1

What does IFRS 9 replace:

Answer 1

IAS 39

Question 2

What do IFRS 9 and IAS 32 cover:

Answer 2

IFRS 9:
Recognition and measurement of Financial Instruments

IAS 32: Classification of Financial Instruments and their presentation in the financial statements.

Question 3

What is a financial instrument?

Answer 3

It’s a contract that gives rise to a financial asset if one entity

and a financial liability or equity instrument of another entity.

Question 4

What does IFRS 9 cover: (4 areas of financial instruments)

Answer 4

1. Classification and measurement of financial assets
   2 Classification and measurement of financial liabilities
2. Impairment
3. Hedge accounting

Question 5

Examples of financial instruments and financial assets:

Answer 5

• Trade Receivables
• Bonds
• Ordinary shares
• Derivative financial assets

Question 6

What is a financial asset:

Answer 6

1. Cash
2. An equity instrument of another entity
3. A contractual right to receive cash or another financial asset from another entity
4. A contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable to the entity.

This is an instrument that is purchased.

Question 7

What is a financial liability?

Answer 7

1. A contractual obligation to deliver cash or another financial asset to another entity
2. A contractual obligation to exchange financial assets or liabilities with another entity under conditions that are potentially unfavourable to the entity.

This is an instrument that Issued and contains an obligation. If there is no obligation, it an Equity, not a Financial Liability.

Question 8

Examples of financial liabilities:

Answer 8

• Accounts Payables
• loans
• bonds issued by an entity
• derivative financial liabilities

Question 9

What is an Equity Instrument:

Answer 9

This is a contract that evidences a residual interest in the assets of any entity after deducting all of its liabilities.

For example, investment in ordinary shares of another entity that does NOT result in consolidation.

Question 10

IFRS9:
Initial recognition of a financial instrument:

Answer 10

At Fair Value

Question 11

Types of Financial Instruments: 3

Answer 11

• Financial Assets
• Financial Liabilities
• Equity instruments

Question 12

How are interest and dividend relating to Financial Instruments classified

Answer 12

They follow the financial instrument:

• Interest on a liability is a finance cost in the statement of profit and loss
• Dividends paid on preference shares are also a liability. (Preference shares are like a loan)
• Dividends paid on Equity is reported as a change in equity.

Question 13

Initial recognition and measurement: Financial liabilities
+
Subsequent measurement

Answer 13

They are recognised at Fair Value.
Costs are dealt with based on their classification.

Subsequent measurement:
Measured at amortised cost, unless Held for Trading. In that case at Fair Value through Profit and Loss.

Question 14

How to account for initial recognition of a financial liability

Answer 14

Dr. Cash £1m
Cr. Financial liability £1m

When fall in fair value due to a rise in interest rates:
Dr. Financial Liability £200k
Cr. Profit or loss £200k

Option 2: if Fair Value, we need to calculate the PV.
The recognition is the same, but thr calculation of the Fair Value is different (complicated - TO LOOK AT AGAIN)

Option 3:
If fair value has fallen due to interest rate and credit risk:
Dr, Financial liability
Cr. Other comprehensive income (credit risk component)
Cr. Profit or Loss due to change in interest rate