IFRS 9 Financial Instruments Overview

1. IFRS 9:
Financial Instruments

2. PRESENTATION
AGENDA
OVERVIEW OF IFRS 9: FINANCIAL INSTRUMENTS
RECOGNIZE & DERECOGNIZE
DERECOGNITION
CLASSIFICATION OF FINANCIAL INSTRUMENTS
MEASUREMENT OF FINANCIAL INSTRUMENTS
IMPAIRMENT OF FINANCIAL ASSETS
IFRS 9 FINANCIAL
INSTRUMENTS
EMBEDDED DERIVATIVES
HEDGE ACCOUNTING

3. OVERVIEW
IFRS 9: FINANCIAL INSTRUMENTS
“
“
IFRS 9 addresses the accounting for
financial instruments containing three
main topics: CLASSIFICATION AND
MEASUREMENT of financial
instruments, IMPAIRMENT of financial
assets and HEDGE ACCOUNTING
IFRS 9 standards incudes requirements for
 RECOGNITION & DERECOGNITION
 CLASSIFICATION
 MEASUREMENT
 IMPAIRMENT
 HEDGE ACCOUNITNG
OBJECTIVE OF IFRS 7
IFRS 9 FINANCIAL INSTRUMENTS is the IASB’s
replacement of IAS 39 FINANCIAL INSTRUMENTS:
RECOGNITION AND MEASUREMENT

4. WHY
IFRS 9?
IFRS 9 establishes principles for the financial reporting
of financial assets and financial liabilities.
TO BE NOTED:
 IFRS 9 DOES NOT DEFINE financial instruments.
 IFRS 9 DOES NOT DEAL WITH YOUR OWN (ISSUED) EQUITY
INSTRUMENTS
 IFRS 9 DOES deal with the equity instruments of someone else
 IFRS 9 DOES NOT DEAL WITH YOUR INVESTMENTS IN
SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES

5. RECOGNITION
& DERECOGNITION: FINANCIAL INSTRUMENTS

6. DERECOGNITION
FINANCIAL ASSETS
Before deciding whether to derecognize or not, need to DETERMINE WHAT
YOU’RE DEALING WITH (IFRS 9 par. 3.2.2):
 A financial asset (or a group of similar financial assets) in its ENTIRETY, or
 A PART of a financial asset (or a part of a group of similar financial assets)
meeting specified conditions
1st
2nd After determining WHAT you derecognize, then you need to DERECOGNIZE
THE ASSET when (IFRS 9 par. 3.2.3):
 The CONTRACTUAL RIGHTS to the cash flows from the financial asset
expire; (easy & clear option) or
 An entity TRANSFERS the financial asset and the TRANSFER QUALIFIES
FOR THE DERECOGNITION (more complicated)

7. SUMMARY CHART
DERECOGNITION: FINANCIAL ASSETS
DERECOGNITION OF FINANCIAL ASSETS
An entity should derecognize a financial asset when:
CONTRACTUAL RIGHTS to the
cash flows from the financial assets
EXPIRE
The entity TRANSFERS:
FINANCIAL ASSETS
RISKS + REWARDS
of ownership
Transfers QUALIFIES
FOR DERECOGNITION

8. TRANSFERS
FINANCIAL ASSETS
Decide whether the asset (or its part) was TRANSFERRED OR
NOT,
Determine whether also RISKS AND REWARDS from the
financial asset were TRANSFERRED.
If all of the risks and rewards of the asset are neither retained
nor transferred substantially, then need to assess whether there
is RETAINED CONTROL OF THE ASSET OR NOT.
The following steps need to be gone through for TRANSFER OF
ASSETS:

9. DERECOGNITION
FINANCIAL LIABILITIES
A n e n t i t y s h a l l d e r e c o g n i z e a f i n a n c i a l
l i a b i l i t y W H E N I T I S E X T I N G U I S H E D .
I t h a p p e n s w h e n t h e o b l i g a t i o n s p e c i f i e d
i n t h e c o n t ra c t i s D I S C H A RG E D ,
C A N C E L L E D o r E X P I R E S .

10. HOW
TO CLASSIFY ? FINANCIAL ASSETS
IFRS 9 CLASSIFIES FINANCIAL ASSETS BASED ON TWO
CHARACTERISTICS:
 What is the objective of holding financial assets?
Collecting the contractual cash flows? Selling?
 Are the cash flows from the financial assets on the
specified dates solely payments of principal and
interest on the principal outstanding? Or,
 Is there something else?
 BUSINESS MODEL
TEST
 CONTRACTUAL
CASH FLOWS’
CHARACTERISTICS
TEST

11. CLASSIFICATION
FINANCIAL ASSETS
01
02
03
AT AMORTIZED COST
AT FAIR VALUE THROUGH
OTHER COMPREHENSIVE
INCOME (FVOCI)
AT FAIR VALUE
THROUGH PROFIT OR
LOSS (FVTPL)
Based on these two tests i.e.
“Business Model Test” & “Contractual
Cash Flows’ Characteristics Test” ,
the financial assets can be classified
in the mentioned categories
“
“

12. CLASSIFICATION
At Amortized Cost
01
02
03
AT AMORTIZED COST
AT FAIR VALUE THROUGH
OTHER COMPREHENSIVE
INCOME (FVOCI)
AT FAIR VALUE
THROUGH PROFIT OR
LOSS (FVTPL)
A financial asset falls into this category if BOTH of the
following conditions are met:
 BUSINESS MODEL TEST IS MET, i.e. you hold the
financial assets only to collect contractual cash flows
(not to sell them), and
 CONTRACTUAL CASH FLOWS’ CHARACTERISTICS
TEST IS MET, i.e. the cash flows from the asset are
only the payments of principal and interest.
Examples: debt securities, receivables, loans.

13. CLASSIFICATION
At Fair Value Through Other Comprehensive Income
01
02
03
AT AMORTIZED COST
AT FAIR VALUE THROUGH
OTHER COMPREHENSIVE
INCOME (FVOCI)
AT FAIR VALUE
THROUGH PROFIT OR
LOSS (FVTPL)
Here, there are 2 subcategories:
 If a financial asset meets contractual cash flows
characteristics test (i.e. debt assets only) and the
business model is to COLLECT CONTRACTUAL
CASH FLOWS AND SELL FINANCIAL ASSETS, then
such an asset mandatorily falls into this category
(unless FVTPL option is chosen; see further)
 You can VOLUNTARILY CHOOSE to measure some
equity instruments at FVOCI. This is an
IRREVOCABLE ELECTION at initial recognition.

14. CLASSIFICATION
At Fair Value Through Profit Or Loss
01
02
03
AT AMORTIZED COST
AT FAIR VALUE THROUGH
OTHER COMPREHENSIVE
INCOME (FVOCI)
AT FAIR VALUE
THROUGH PROFIT OR
LOSS (FVTPL)
ALL OTHER FINANCIAL ASSETS fall in this category.
DERIVATIVE FINANCIAL ASSETS are
AUTOMATICALLY CLASSIFIED at FVTPL.
Moreover, regardless previous 2 categories, ANYONE
MAY DECIDE TO DESIGNATE the financial asset at fair
value through profit or loss (FVTPL) at ITS INITIAL
RECOGNITION.

15. SUMMARY
SCHEME CLASSIFICATION OF FINANCIAL ASSETS
Contractual cash flows SOLELY
for principal & interest?
Equity instrument: FVOCI option
selected?
Business Model: Held to collect
CONTRACTUAL CASH FLOWS
ONLY?
Business Model: Held to collect
CONTRACTUAL CASH FLOWS
AND FOR SALE?
FVTPL option
used?
FVTPL option used?
3. FAIR VALUE THROUGH OTHER
COMPREHENSIVE INCOME
2. FAIR VALUE THROUGH PROFIT &
LOSS
1. AMORTIZED COST
YES
NO
YES
YES
YES
YES
YES
NO
NO
NONO
NO

16. CLASSIFICATION
FINANCIAL LIABILITIES
IFRS 9 CLASSIFIES FINANCIAL LIABILITIES AS FOLLOWS:
These financial liabilities are subsequently
measured at fair value and ALL DERIVATIVES belong
in this section.
Other financial liabilities measured at amortized
cost USING THE EFFECTIVE INTEREST METHOD
 FINANCIAL LIABILITIES
AT FAIR VALUE TROUGH
PROFIT OR LOSS
 MEASURED AT
AMORTIZED COST
IFRS 9 mentions separately some other types of financial liabilities measured in a different way, such as financial guarantee
contracts and commitments to provide a loan at a below market interest rate, but here, we will deal with 2 main categories.

17. MEASUREMENT
FINANCIAL INSTRUMENTS
IFRS 9 CLASSIFIES FINANCIAL ASSETS BASED ON TWO
CHARACTERISTICS:
 Fair value: all financial instruments at fair value
through profit or loss;
 Fair value plus transaction cost: all other
financial instruments (at amortized cost or fair
value through other comprehensive income).
Subsequent measurement depends on the category
of a financial instrument
 Financial assets shall be subsequently measured
either at fair value or at amortized cost;
 Financial liabilities are measured at amortized
cost unless the fair value option is applied.
 INITIAL
MEASUREMENT
 SUBSEQUENT
MEASUREMENT

18. MEASUREMENT
SYNOPSIS Financial Assets + Financial Liabilities:
Subsequent measurement
FA + FL
At Fair Value
FA + FL
At Amortized Cost
Subsequent
Measurement:
Fair Value through P/L Fair Value through OCI
Profit or loss;
Gain/Loss on FL
attributable to
credit risk –
sometimes to OCI
OCI –not
reclassified to
P/L
P/L
OCI
Reclassified
P/L (Effective
Interest
Method)
Profit or Loss
P/L (Effective
Interest Rate)
FV Gains / Losses
Foreign Exchange
Impairment – FA
Interest, Dividends
Equity
instruments
Debt
instruments

19. IMPAIRMENT
FINANCIAL ASSETS
The new rules about the impairment of financial assets were added only in July 2014.
It does NOT affect all financial assets. E.g. shares and other equity instruments are excluded,
because their potential impairment is taken into account when re-measuring these investments
to their fair value.
IFRS 9 requires entities to estimate and account for EXPECTED CREDIT LOSSES
FOR ALL RELEVANT FINANCIAL ASSETS (mostly debt securities, receivables
including lease receivables, contract assets under IFRS 15, loans), starting from
when they first acquire a financial instrument.
When measuring expected credit losses, entities will be required to use all relevant information
that is available to them (without undue cost or effort).

20. IMPAIRMENT
FINANCIAL ASSETS
Generalmodel
Simplifiedmodel
IFRS 9 offers TWO approaches:
 GENERAL MODEL
 SIMPLIFIED MODEL

21. IMPAIRMENT
GENERAL MODEL
GENERALMODEL
Simplifiedmodel
GENERAL MODEL recognizes loss allowance depending on the stage in
which the financial asset is. There are 3 stages:
STAGE 1 STAGE 2STAGE 1 STAGE 3
PERFORMING
ASSETS: Loss
allowance is
recognized in the
amount of 12-month
expected credit loss
FINANCIAL ASSETS
WITH SIGNIFICANTLY
INCREASED CREDIT
RISK: Loss allowance
is recognized in the
amount of lifetime
expected credit loss
CREDIT-IMPAIRED
FINANCIAL
ASSETS: Loss allowance
is recognized in the
amount of lifetime
expected credit loss and
interest revenue is
recognized based on
amortized cost

22. IMPAIRMENT
SIMPLIFIED MODEL
Generalmodel
SIMPLIFIEDMODEL
NO NEED to determine the stage of a financial asset, because a loss
allowance is recognized always at a lifetime expected credit loss.
FINANCIAL
ASSETS
LOSS
ALLOWANCE
INTEREST
REVENUE
STAGE 1 STAGE 2 STAGE 3
Performing Credit Risk
significantly increased
Credit-Impaired
12-month expected
credit losses
Lifetime expected
credit loss
Lifetime expected
credit loss
On-gross carrying
amount
On-gross carrying
amount
At amortized cost

23. EMBEDDED
DERIVATIVES
DEFINTION: AN EMBEDDED DERIVATIVE is simply a component of a hybrid instrument that also
includes a non-derivative host contract.
EMBEDDED DERIVATIVES
EMBEDDED DERIVATIVES NON-DERIVATIVE HOST CONTRACT EMBEDDED DERIVATIVE
CONTRACT OUTSIDE
SCOPE OF IFRS 9
FINANCIAL
LIABILITY
FINANCIAL
ASSET
FOREIGN CURRENCY FORWARD
INTEREST RATE FLOOR / CAP
EXTENSION / PAYMENT OPTION
PAYMENT LINKED TO INDICES
MEASURED AS ONE
& NOT SEPARATED
SEPERATED WHEN
CONDITIONS MET
SEPERATED WHEN
CONDITIONS MET
Separation means that you account for embedded derivative separately in line with IFRS 9 and the host contract in line with other appropriate standard.
If an entity is not able to do this, then the whole contract must be accounted for as a financial instrument at fair value through profit or loss.
N.B.

24. HEDGE
ACCOUNTING
HEDGE ACCOUNTING is designating one or more hedging instruments so that their
change in fair value is an offset to the change in fair value or cash flows of a hedged item.
If an entity wants to apply hedge accounting, 3
criteria must be met (IFRS 9, par. 6.4.1):
1. There are only ELIGIBLE hedging
instruments and eligible hedged items in
the relationship;
2. You have the HEDGE DOCUMENTATION AT
THE INCEPTION of the hedge, in which you
designate and describe your hedging,
3. Hedge EFFECTIVENESS CRITERIA are met.
IFRS 9 sets the rules for 3 types of hedges:
I. CASH FLOW HEDGE,
II. FAIR VALUE HEDGE, and
III. HEDGE OF THE NET INVESTMENT IN
THE FOREIGN OPERATION.
Remark: Hedge accounting is NOT MANDATORY!

25. HEDGE ACCOUNTING
SYNOPSIS
ACCOUNTING FOR HEDGES
1. FAIR VALUE HEDGE 2. CASH FLOW HEDGE 3. HEDGE OF A NET INVESTMENT
in a foreign operation
HEDGING INSTRUMENT:
 Change in FV to P/L
(OCI)
HEDGED ITEM:
 Adjust carrying amount
through P/L (OCI)
HEDGING INSTRUMENT:
 Effective portion to OCI
 Remaining part to P/L
 Reclassify “Cash Flow
Hedge Reserve” in
equity
As Cash Flow Hedge