IFRS 9 / IAS 32

Question 1

What is the definition of an embedded derivative?

Answer 1

A component of a hybrid contract that also includes a non derivative host, with the effect that some of the cash flows of the combined instrument vary in a way similar to a standalone derivative

Question 2

How do you account for an embedded derivative when the host is in scope of IFRS 9?

Answer 2

The entire contract must be classified and measured in accordance with that standard

Question 3

How do you account for an embedded derivative when the host is NOT in scope of IFRS 9?

Answer 3

Can be separated out and measured at FVTPL if:

i) Economic risks and characteristics of the ED are not closely related to the host contract
ii) A separate instrument which the same terms of the ED would meet the definition of a derivative
iii) the entire instrument is not measured at FV with changes in the FV recognised in profit or loss.

Can measure the lot at FVTPL though

Question 4

Define a financial asset:

Answer 4

• Cash
• an equity instrument or another entity
• contractual right to receive cash
• contractual right to exchange financial instruments with another entity under favourable conditions
• A non derivative contract which the entity is or may be obliged to receive a variable number of the entities own equity instruments.

Question 5

Define a financial liability

Answer 5

• Contractual obligation to deliver cash or a financial asset to another entity
• contractual obligation to exchange financial instruments under potentially unfavourable conditions
• A non derivative contract to deliver a variable number of the entities own equity instruments.

Question 6

Define an equity instrument

Answer 6

Any contract which evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Question 7

IFRS 9 - Financial assets initial measurement

Answer 7

Initial measurement must be at Fair Value + any transaction costs.

Question 8

What are subsequent measurement options for an equity instrument?

Answer 8

FVTPL
Recognise asset but expense transaction costs
Gains/losses to P&L

FVTOCI
Must be a longer term investment
Must decide at acquisition and cannot change
Transaction costs capitalised (can have a negative reserve for this instruments measured using FVTOCI)

Question 9

How do you subsequently measure a financial asset Debt instrument?

Answer 9

FVTPL
FVTOCI
Amortised Cost

Two tests to decide:

1. Business model test
2. Contractual cash flow test

Question 10

When measuring Debt instrument using amortised costs, what are the criteria?

Answer 10

BML - must be held to maturity

CCFT - Must be held SPPI

Question 11

When measuring Debt instrument using FVTOCI, what are the criteria?

Answer 11

BML Held to maturity must can be sold if replaced by an investment giving higher returns.

CCFT - SSPI

Question 12

Financial liability - initial measurement and subsequent measurement

Answer 12

Fair Value less issue costs

Amortised cost ( always deduct transaction costs)

Question 13

Disclosures required for financial instruments (IFRS 7)

Answer 13

• Carrying amounts of each one
• Any income/ expenditure, gain or loss within SPLOCI
• Risk associated with the financial liability and steps being taken to mitigate the risk

Question 14

What is a derivative?

Answer 14

A contract which derives its value from the movement in an underlying financial market.

Question 15

What are the 3 characteristics of a derivative?

Answer 15

It requires little or no initial net investment

It’s value changes in response to the change in a specified interest rate, security price, commodity price etc

Settled at a future date

Question 16

How do you account for a derivative initially ( including any transaction costs)?

Answer 16

FAIR VALUE

Transaction costs are expensed.

Question 17

How do you account for a derivative subsequently?

Answer 17

FAIR VALUE - Marked to Market.

Generates a financial asset or liability in the SoFP

99% of the time - P&L
Unless hedging a cash flow

Question 18

What are the rules for the use of hedge accounting?

Answer 18

Designation- formal designation of economic relationship from outset.

Effectiveness - mist meet hedging effectiveness requirements

Assessment - using hedging ratio

Credit Risk - must not dominate value changes

Question 19

IFRS 9 - Fair value hedge accounting.

What is the risk being hedge?
What are the rules?

Answer 19

The risk being hedged in the change in fair value of an asset or liability.

The hedged item must be in the SoFP

Both hedged item and hedging instrument are remeasured to FV at each reporting date - gains and loss to P&L to offset each other.

Only the gain or loss is recognised as a derivative asset or liability

Question 20

IFRS 9 - CASH FLOW HEDGE

What is the risk being hedged

What are the rules?

Answer 20

The risk being hedged is the variability of a cashflow

The portion of the gain or loss of the hedging instrument that is determined to be an effective hedging is taken to OCI.

Recylced to P&L in the period the cashflow arises.

Question 21

IFRS 9 - Define a credit loss

Answer 21

The difference between all contractual cashflows due to an entity in accordance with the contract and the cashflow an entity expects to receive, discounted at the original effective interest rate.

Question 22

IFRS 9 - Define an expected credit loss

Answer 22

The weight average credit loss within the respective risk of a default occurring as the weight.

Question 23

Life time expected credit losses

Answer 23

The expect losses that result from all possible default events over the lifetime of the financial instrument.

Question 24

12 month expect credit losses

Answer 24

The portion of the life time expected losses that represent the expected default events on a financial instrument within 12months of the reporting date.

Question 25

What are the three requirements for hedging effectiveness?

Answer 25

1. There must be an economic relationship between the hedged item and instrument.
2. The effect of the credit risk cannot dominate the value of changes that results from the economic relationship
3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.