This Finance Assignment reviews the important of increased globalization and cross-border business relations have made it mandatory for the financial reports of different countries to communicate a similar language. This is achieved through the convergence to IFRS which makes interpretation of financial statements easier and more apt to suit the business requirements.

1. Finance Assignment: Globalization and cross-border
business relations
Part A
1. Financial instrument recognition
IFRS 9 specifies an entity’s classification and its measurement. The Finance Assignment relates
to financial asset or financial liability and other contracts to buy or sell non-financial items.
IFRS 9 allows an entity to account for an asset or liability of financial type only when it has
become a party to the contract in accordance with the contractual provisions affected by the
relevant instruments. At the prior stage, the financial asset recognition and financial liability is
made at the fair value with an addition of the costs of transaction that are incurred to acquire the
asset or issue the liability. Hence, it is imperative that the recognition should happen at the time
when the entity links to obligations of contractual nature, unlike the other IFRS where the
emphasis is laid on the future economic benefits (Horton & Serafeim, 2010).
De-recognition of financial asset or removal happens from the financial statements when the
expiry happens from that of contractual rights or cash flows or when there is a transfer of the
entity and such a transfer leads to the qualification for de-recognition (Deegan, 2005).
De-recognition of a financial liability happens when it gets extinguished or in other words, its
obligations are discharged or canceled or expires.
1. Measurement of financial instruments according to the relevant
AASBs.
Financial Assets
On this Finance Assignment Every entity is expected to follow a business model to manage its
financial assets and the cash flows of contractual nature arising and flowing from the assets.
Based on this business model, the financial asset recognition is made according to the following
criteria:

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a) Amortized Cost:
The financial asset recognition is done at the cost of amortization only if both the conditions
listed below are met:
• The asset is held by the entity for the purpose of collection of cash flows of contractual nature
and the entity aim is to hold the assets for business purposes.
• Due to the possession of the financial asset, cash flow arises that are solely payments of
principal and interest amounts outstanding on the assets (Landsman et. al, 2011)
b) FV from a different comprehensive income
on this Finance Assignment model when the aim of holding financial assets is both for the
generation of cash flows and for selling financial assets, the classification happens through fair
value through income of comprehensive nature (IFRS, 2016).
IFRS 9 also provides guidance on whether the business model is meant for managing the assets
or for the contractual cash flows or collection of both.
c) FV through P/L
If the recognition of financial assets is not done in any of the above two methods, then the
financial assets are recognized at FV through P/L.
IFRS 9 states that when the business models changes, then a reclassification of all the financial
assets has to be done.
Financial Liabilities:
Financial liabilities are ascertained in the following ways:
a) At FV through PL
The financial liabilities that are not ascertained at amortized cost fall in this category like
derivative instruments, other financial liabilities for trading and such liabilities that the entity has
specifically classified to be evaluated at the concept (Lai et. al, 2013).

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b) At cost of Amortization
All financial liabilities are evaluated at amortized cost leaving those measured at fair value
through profit and loss (Maria, 2016).
Equity Instruments:
IFRS 9 states that the measurement of equity instruments has to be done at FV. The changes in
the equity instruments have to be recognized in the P/L account. The exception being for the
equity instruments that the entity has opted to present the variances in the comprehensive
income.
IFRS 9 provides the option to designate the instrument of equity at FV through other
comprehensive income and this option can opt at the initial time. It is an irrevocable option. This
classification will result in all the gains and losses being presented under the other
comprehensive income except the dividend income which is seen in the income statement.
IFRS 9 even projects way on when the cost might is feasible for FV and when should not be used
for fair value.
Thus these are the measurement criteria laid down in IFRS 9.
1. Different types of financial instruments available in ARB Corporation
Limited
The company selected for discussion and analysis is ARB Corporation Limited. It deals with the
manufacture, design, and other engineering matter related to motor vehicles.
This Finance Assignment outlines the performance of the company has been pretty good and in a
growing phase. The revenue, profits, and dividends have all seen a steady increase. It needs to be
noted that the companies demand for the products are healthy. It is thus well poised for a long-
term business growth (ARB Corporation, 2017).
The financial statements notes contain the details and explanations about the financial assets,
financial liabilities, and equity. The below has been extracted from the same. The derivatives that

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are designated as effective hedging instruments are forward exchange contracts and these are
carried at fair values (ARB Corporation, 2017).
a) Derivative Financial Instruments are classified under Current Assets.
Example – Loans & Receivables
Recognition – These financial assets are recognized when the company enters into a contract and
the other party is under an obligation and also bound by the performance of the contact.
Measurement – These assets are ascertained at the fair value at inception. The subsequent
measurement is at the cost of amortization utilizing the method of interest rate. It is tested for
impairment at the date of reporting and any impairment gain or loss is recognized in the profit
and loss account (ARB Corporation, 2017).
b) Derivative financial instruments are classified under current liabilities.
Recognition – On similar lines as a financial asset, financial liabilities are recognized upon
entering into contractual obligations where both the parties agree to undertake their obligations
(Hanlon et. al, 2014).
Measurement – The financial liabilities mentioned above from third parties are measured at the
amortized cost since these are fixed sums of liabilities and do not alter with time (ARB
Corporation, 2017). Hence fair value measurement is not adopted for these liabilities. The
amortized cost is checked for on the reporting date and the amount of liability outstanding is
disclosed in the statement.
c) Consolidated statement of changes in equity presents the movements and profit or loss
made by the company.
Retained Earnings recognize and take into account the movements in FV of cash flow hedges,
net of tax (Goodwin, 2008).
Example – Cash Flow Hedges
Recognition – There are derivatives of specific nature that are allotted to be instruments of
hedging and such derivatives are recognized as Cash flow hedges. For classification under this

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category of cash flow hedge, the items that generate the cash flows should be realistic (Hanlon
et. al, 2014).
Measurement – The changes in the FV of the derivatives on the reporting date are recognized
under the equity account in a reserve of hedging of cash flow. The profit or loss arising is passed
on to the Income Statement during the same period when such transactions occur, thus mitigating
the chances of fluctuations of exchange rate that would have occurred when hedging is not
present (Goodwin, 2008).
Part B
As the adoption of IFRS is at a phased stage, there are a few standards that are currently in force
and being adopted by the company whereas the other IFRS are not currently to be mandatorily
followed but available for early adoption by the company (Byard, 2011).
As IFRS 9 simplifies the approach towards the financial assets and liabilities classification and
measurement in comparison to AASB 139, there could be a change in the recognition,
classification, and measurement of financial assets when the standard is adopted (ARB
Corporation, 2017). The change is due to the fact that the standard allows the provision of the
fair value of gains or losses in income of comprehensive nature that are not held for trading. This
would be the impact of the change in the financial assets recognition and measurement (Byard et.
al, 2011).
As per the Finance Assignment the IFRS 9, the financial liabilities accounting that are provided
at FV through PL will only be influenced. Hence no influence will be there on the accounting for
entity’s for financial liabilities (ARB Corporation, 2017).
With reference to the cash flow hedge, the requirements of IFRS 9 state that a new model has to
be developed which is deeply aligned with the risk management and application will be easy.
The implementation cost will be reduced but the model requires extended disclosures. Thus the
impact of this new hedge accounting model is yet to be assessed by the company as it is
applicable from 1 January 2018.

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Out of the items discussed above, financial assets like loans and receivables will not be
influenced by IFRS 9. Financial liabilities like trade payables, other creditors and liabilities will
also not undergo a significant change in the adoption of IFRS 9 (ARB Corporation, 2017).
The debt-equity ratio of the company is currently Nil as the company is not having borrowings as
per the statement of financial position.
Hence another ratio is discussed which is a return on equity which is currently 18.83. Upon
adoption of IFRS 9, it is possible that due to the recognition of the financial assets and liabilities
which are to be concerned at FV through P/L account, the net profits of the company might
increase or decrease (ARB Corporation, 2017). This increase or decrease outlined on this
Finance Assignment is largely dependent upon the measurement of fair value which is a result of
the overall market conditions on the reporting date. Hence the ratio will accordingly increase or
decrease.

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Conclusion
The significance of IFRS 9 is thus seen in terms of recognition and measurement of financial
assets, financial liabilities, and equity. The accounting and disclosure for cash flow hedge is the
only item that will require more efforts in terms of the development of a model and extended
disclosures. From the investor perspective, it would be evident that the adoption of IFRS 9 will
bring the financial statements closer to the current market scenario. Most of the items that were
being shown at the current or historical cost figures will now be disclosed at fair values and
hence the profitability of the company can either increase or decrease. This Finance Assignment
will also not facilitate one on one comparison with the prior year figures due to the changed
recognition and measurement criteria.