IFRS 9 - Financial Instruments Flashcards
List some examples of financial instruments
Investment in shares, investment in bonds, long term loans, share capital, derivatives, share options, lease of a building, trade receivables etc
What are financial instruments?
“A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”
What is a contract?
“an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable at law”
Need not be in writing
What is a financial asset?
A financial asset is an asset that is:
Cash
An equity instrument (e.g., shares)
A contractual right to receive cash or another financial asset (e.g., trade/loan receivable)
A right to a favourable exchange (e.g., forwards, futures, options, swaps)
What is a financial liability?
A liability that is:
An obligation to deliver cash or another financial asset (e.g., loan, loan stock issued)
An obligation to an unfavourable exchange
E.g., trade payable, debentures, forward contract standing at a loss.
What is an equity instrument?
A contract involving settlement in a company’s own shares e.g., equity shares, equity options over company’s own shares.
What is a derivative?
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets.
The derivative itself is a contract between two or more parties based upon the asset or assets.
It’s value is determined by fluctuations in the underlying asset.
Most commonly, the underlying assets are stocks, bonds, commodities, currencies, interest rates and market indexes.
What tests must be passed to measure debt at amortised cost?
Business model test: Objective is to hold the debt to collect contractual cash flows.
Cash flow characteristics test: Contractual terms of asset give rise to payments of principal and interest only.
What tests must be passed to measure debt at Fair Value through Other Comprehensive Income (FVTOCI)?
Business model test: Objective is achieved by both collecting contractual cash flows and selling the asset.
Cash flow characteristics test: Contractual terms of asset gives rise to payments of principal and interest only.
When is debt measured at Fair Value through Profit or Loss (FVTPL)?
If the debt does not meet the criteria for amortised cost or FVTOCI.
If the company elects FVTPL
(E.g., holdings bonds purely waiting for the opportune moment to sell, when prices are high)
How are equity instruments classified?
Equity instruments are always classified and measured at Fair Value.
If held for trading - FVTPL
If not held for trading - can elect FVTOCI (but dividend income always goes through P&L)
How are financial liabilities classified?
If held for trading - FVTPL
Not held for trading - Amortised cost
Can elect FVTPL: to reduce an “accounting mismatch” or if it includes embedded derivatives.
Changes due to credit risk - go through OCI
Why can convertible bonds never measured at amortised cost?
Convertible bonds can never pass the Contractual Terms Test as the interest element of convertible bonds is also made up of the costs of converting debt to equity (which is from the secondary instrument) and hence fails the CT test as it does not give rise to payments of interest and principal only.
Fair value measurement through FVTPL:
Initial measurement: fair value (transaction costs expensed)
Subsequent measurement: fair value (IFRS 13)
Gains & losses through P&L
Fair value measurement through FVTOCI:
Initial measurement: fair value +/- transaction costs
Subsequent measurement: fair value (IFRS 13)
Gains & losses through OCI
