Since 1977
FAR
FAR.2926 –Financial Assets Summary (DIY)
1. The scope of PFRS 9 includes all of the following items
except
a. Financial instruments that meet the definition of a
financial asset.
b. Financial instruments that meet the definition of a
financial liability.
c. Financial instruments issued by the entity that
meet the definition of an equity instrument.
d. Contracts to buy or sell nonfinancial items that can
be settled net.
2. Entity X enters into a fixed price forward contract to
purchase one million kilograms of copper in accordance
with its expected usage requirements. The contract
permits X to take physical delivery of the copper at the
end of twelve months or to pay or receive a net
settlement in cash, based on the change in fair value
of copper. Which statement is incorrect regarding this
contract?
a. If X intends to settle the contract by taking
delivery and has no history for similar contracts of
settling net in cash, the contract is accounted for
as an executory contract.
b. If X has a history for similar contracts of taking
delivery of the copper and selling it within a short
period after delivery for the purpose of generating
a profit from short-term fluctuations in price or
dealer’s margin, the contract is accounted for as a
derivative under PFRS 9.
c. This contract meets the definition of a derivative
instrument because there is no initial net
investment, the contract is based on the price of
copper, and it is to be settled at a future date.
d. None of these.
3. The following situations constitute net settlement,
except
a. The terms of the contract permit either
counterparty to settle net.
b. There is a past practice of net settling similar
contracts.
c. There is a past practice, for similar contracts, of
taking delivery of the underlying and selling it
within a short period after delivery to generate a
profit from short-term fluctuations in price, or from
a dealer's margin.
d. The non-financial item is not readily convertible to
cash.
4. Which statement is incorrect regarding financial
instruments?
a. Financial instruments are contracts.
b. Financial instruments give rise to a financial asset
of the holder.
c. Financial instruments include financial assets,
financial liabilities and equity instruments.
d. Financial instruments should be in writing.
5. Financial instruments include
a. Option on silver
b. Forward on corn
c. Futures on copper
d. Interest rate swap
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OCAMPO/CABARLES/SOLIMAN/OCAMPO
OCTOBER 2020
6. Financial assets exclude
a. Cash in bank
b. Investment in associate
c. Investment in debt instrument
d. Call option that is ‘out of the money’
7. Examples of financial assets representing a contractual
right to receive cash in the future exclude
a. Accounts receivable
b. Loans receivable
c. Investment in bonds
d. Derivative financial assets
8. Which of the following is not an example of a
derivative?
a. Interest rate swap. c. Stock option.
b. Forward contract. d. Cash.
9. Which of the following is not a derivative instrument?
a. Futures contracts.
b. Credit indexed contracts.
c. Interest rate swaps.
d. Variable annuity contracts.
10. Which of the following assets is not a financial asset?
a. Cash.
b. An equity instrument of another entity.
c. A contract that may or will be settled in the entity's
own equity instrument and is not classified as an
equity instrument of the entity.
d. Prepaid expenses.
11. Physical assets (such as inventories, property, plant
and equipment) and intangible assets are not financial
assets. Why?
a. Control of such assets creates an opportunity to
generate an inflow of cash or another financial
asset, but it does not give rise to a present right to
receive cash or another financial asset.
b. The future economic benefit from these assets is
the receipt of goods or services, rather than the
right to receive cash or another financial asset
c. Both a and b.
d. Neither a nor b.
12. How does PFRS 9 distinguish between the
measurement methods to be used in the standard?
a. By reviewing the business model of each entity and
the risks and rewards of the transaction.
b. By reviewing the business model of each entity and
the contractual cash flow characteristics of the
instrument.
c. By reviewing the realizability and the contractual
cash flow characteristics of the instrument.
d. By reviewing the realizability of the instrument and
risks and rewards of ownership.
13. Which of the following returns is not consistent with
SPPI on the principal amount outstanding?
a. Return for the time value of money and credit risk
b. Return for liquidity risk
c. Return for amounts to cover expenses and a profit
margin
d. Return for equity price risk
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EXCEL PROFESSIONAL SERVICES, INC.
14. Time value of money is the element of interest that
provides consideration for the
a. Passage of time.
b. Risk that one party to a financial instrument will
cause a financial loss for the other party by failing
to discharge an obligation.
c. Risk that an entity will encounter difficulty in
meeting obligations associated with financial
liabilities that are settled by delivering cash or
another financial asset.
d. Costs associated with holding the financial asset.
15. Which statement is incorrect regarding business
model?
a. A business model refers to how an entity manages
its financial assets in order to generate cash
flows—by collecting contractual cash flows, selling
financial assets or both.
b. The business model should be determined on a
level that reflects how financial assets are
managed to achieve a particular business
objective.
c. The determination of business model is dependent
on management’s intentions for an individual
instrument.
d. A business model is a matter of fact rather than an
assertion.
16. Which of the following is considered ‘Held for
Collection’ business model?
a. An entity manages the performance of a portfolio
of financial assets with the objective of realizing
cash flows through the sale of the assets.
b. A portfolio of financial assets that is managed and
whose performance is evaluated on a fair value
basis.
c. A portfolio of financial assets that meets the
definition of held for trading.
d. None of these.
17. Which of the following sale of financial assets is
inconsistent with a business model whose objective is
to hold financial assets to collect contractual cash
flows?
a. Sale when there is an increase in the assets’ credit
risk.
b. Sale made to manage credit concentration risk
(without an increase in the assets’ credit risk).
c. Sale made close to the maturity of the financial
assets and the proceeds from the sales
approximate the collection of the remaining
contractual cash flows.
d. None of the above.
18. Under PFRS 9, which of the following is not a financial
asset category?
a. Fair value through profit and loss.
b. Fair value through other comprehensive income.
c. Held-to-maturity.
d. Amortized cost.
19. A derivative financial asset may be classified as
financial asset at
a. Amortized cost
b. Fair value through other comprehensive income
c. Either a or b
d. Neither a nor b
20. Which statement is incorrect regarding leverage?
a. Leverage increases the variability of the
contractual cash flows with the result that they do
not have the economic characteristics of interest.
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b. Stand-alone option, forward and swap contracts
are examples of financial assets that include such
leverage.
c. Contracts that include such leverage cannot be
subsequently measured at amortized cost or fair
value through other comprehensive income.
d. None of these.
21. Under what circumstances can the profit or loss on an
equity instrument carried at fair value be dealt with in
Other Comprehensive Income?
a. When the equity investment is not held for trading.
b. When the profit or loss is capable of recycling.
c. When the equity investment is available for sale.
d. When the equity investment is held for trading.
22. An entity has the following four financial instruments
and wishes to know whether they will be valued at fair
value or valued at amortized cost.
1. Bond with stated maturity and payments of
principal and interest linked to unleveraged
inflation index of the currency in which the
instrument is issued.
2. Bond convertible into equity of the issuer.
3. An inverse floating interest rate loan.
4. Bond with a variable interest rate and an interest
cap.
a. 1 and 2 at amortized cost, 3 and 4 at fair value.
b. 1 and 4 at amortized cost, 2 and 3 at fait value.
c. 2 and 3 at amortized cost, 1 and 4 at fair value.
d. 3 and 4 at amortized cost, 1 and 2 at fair value
23. Reclassification adjustments are amounts reclassified
to profit or loss in the current period that were
recognized in other comprehensive income in the
current or previous periods. Reclassification
adjustments arise on disposal of which of the following
FA@FVTOCI?
a. Investments in debt instruments.
b. Investments in equity instruments.
c. Both a and b.
d. Neither a nor b.
24. An entity is not required to separately recognize
interest revenue or impairment gains or losses for a
financial asset measured at
a. Fair value through profit or loss.
b. Fair value through other comprehensive income.
c. Amortized cost.
d. Both a and b.
25. Which of the following financial assets may be
reclassified out fair value through profit or loss
measurement category?
a. A derivative
b. A non-derivative equity instrument
c. A non-derivative debt instrument
d. All of the above
26. The effective interest rate is determined on the basis
of the fair value of the asset at the reclassification date
when an entity reclassifies a financial asset out of
a. FVTPL measurement category
b. FVTOCI measurement category
c. AC measurement category
d. None of the above.
27. Which of the following reclassification of financial
assets will result in ‘reclassification adjustment’?
a. If an entity reclassifies a financial asset out of the
FVTOCI measurement category and into the FVTPL
measurement category.
FAR.2926
EXCEL PROFESSIONAL SERVICES, INC.
b. If an entity reclassifies a financial asset out of the
FVTOCI measurement category and into the AC
measurement category.
c. Both a and b.
d. Neither a nor b.
28. Which of the following financial assets are initially
measured at fair value plus transaction costs?
a. Derivatives.
b. Those that the entity intends to sell immediately or
in the near term.
c. Those that the entity upon initial recognition
designates as at fair value through profit or loss.
d. None of these.
29. Transaction costs do not include
a. Fees and commissions paid to agents
b. Levies by regulatory agencies and securities
exchanges
c. Transfer taxes and duties
d. Internal administrative costs
30. Transaction costs include
a. Fees and commissions paid employees acting as
agents
b. Debt premiums or discounts
c. Financing costs
d. Internal administrative costs
31. Holding gains and losses on trading securities are
included in earnings because:
a. They measure the success or failure of taking
advantage of short-term price changes.
b. The BIR mandates the inclusion.
c. The SEC mandates the inclusion.
d. They measure the book value of the securities in
the balance sheet date.
32. PFRS 9 impairment requirements apply to
a. Financial assets that are equity instruments
measured at fair value through profit or loss.
b. Financial assets that are equity instruments
measured at fair value through other
comprehensive income.
c. Financial assets that are debt instruments
measured at fair value through profit or loss.
d. Financial assets that are debt instruments
measured at either amortized cost or fair value
through other comprehensive income.
33. Which of the following describes the ‘general approach’
of accounting for impairment of financial assets?
a. At each reporting date, an entity shall recognize a
loss allowance based on either 12-month ECLs or
lifetime ECLs, depending on whether there has
been a significant increase in credit risk on the
financial instrument since initial recognition.
b. An entity shall always measure the loss allowance
at an amount equal to lifetime expected credit
losses.
c. An entity shall only recognize the cumulative
changes in lifetime expected credit losses since
initial recognition as a loss allowance.
d. An entity shall recognize a loss allowance if, and
only if, there is objective evidence of impairment.
34. Which statement is incorrect regarding impairment of
financial assets in accordance with PFRS 9?
a. As soon as a financial instrument is originated or
purchased, 12-month expected credit losses are
recognized in profit or loss and a loss allowance is
established.
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b. If the credit risk increases significantly and the
resulting credit quality is not considered to be low
credit risk, full lifetime expected credit losses are
recognized.
c. If the credit risk of a financial asset increases to
the point that it is considered credit-impaired,
interest revenue is calculated based on the
amortized cost.
d. An entity shall recognize a loss allowance for
expected credit losses on all financial assets.
35. An entity shall measure expected credit losses of a
financial instrument in a way that reflects:
a. An unbiased and probability-weighted amount that
is determined by evaluating a range of possible
outcomes.
b. The time value of money.
c. Reasonable and supportable information that is
available without undue cost or effort at the
reporting date about past events, current
conditions and forecasts of future economic
conditions.
d. All of the above.
36. At each reporting date, an entity shall assess whether
the credit risk on a financial instrument has increased
significantly since initial recognition. Which statement
is incorrect regarding the determination of significant
increase in credit risk?
a. When making the assessment, an entity shall use
the change in the risk of a default occurring over
the expected life of the financial instrument instead
of the change in the amount of expected credit
losses.
b. To make that assessment, an entity shall compare
the risk of a default occurring on the financial
instrument as at the reporting date with the risk of
a default occurring on the financial instrument as
at the date of initial recognition.
c. An entity may assume that the credit risk on a
financial instrument has not increased significantly
since initial recognition if the financial instrument
is determined to have low credit risk at the
reporting date.
d. Regardless of the way in which an entity assesses
significant increases in credit risk, there is a
rebuttable presumption that the credit risk on a
financial asset has increased significantly since
initial recognition when contractual payments are
more than 60 days past due.
37. A financial asset is past due when a counterparty has
failed to make a payment when that payment was
contractually due. There is a rebuttable presumption
that default does not occur later than when a financial
asset is
a. 30 days past due c. 90 days past due.
b. 60 days past due d. 120 days past due
38. For a financial asset that is credit-impaired at the
reporting date, but that is not a purchased or
originated credit-impaired financial asset, an entity
shall measure the expected credit losses as
a. The asset’s gross carrying amount.
b. The present value of estimated future cash flows
discounted at the financial asset’s original effective
interest rate.
c. The difference between a and b.
d. The lower of a and b.
FAR.2926
EXCEL PROFESSIONAL SERVICES, INC.
39. In subsequent reporting periods, if the credit quality of
the financial asset improves so that the financial asset
is no longer credit-impaired and the improvement can
be related objectively to the occurrence of an event
(such as an improvement in the borrower’s credit
rating), then the entity should
a. Calculate the interest revenue by applying the EIR
to the gross carrying amount of the financial asset.
b. Calculate the interest revenue by applying the EIR
to the amortized of the financial asset.
c. Either a or b.
d. Neither a nor b.
40. An entity may use practical expedients when
measuring expected credit losses. An example of a
practical expedient is the calculation of the expected
credit losses on trade receivables using
a. Direct write off method.
b. Incurred loss method.
c. Percent of net sales method.
d. A provision matrix.
41. Which statement is incorrect regarding the introduction
of forward-looking ECL model?
a. The IASB has sought to address a key concern that
arose as a result of the financial crisis, that the
incurred loss model in IAS 39 contributed to the
delayed recognition of credit losses.
b. Since losses are rarely incurred evenly over the
lives of loans, there is a mismatch in the timing of
the recognition of the credit spread inherent in the
interest charged on the loans over their lives and
any impairment losses that only get recognized at
a later date.
c. The need to assess whether there has been a
significant increase in credit risk will require new
data and processes and the exercise of judgment.
d. The effect of the new requirements will be to
require smaller loss allowances for banks and
similar financial institutions and for investors in
debt securities.
42. A financial asset is recognized when, and only when,
the entity becomes a party to the contractual
provisions of the instrument. Which is an inappropriate
application of the recognition principle in PFRS 9?
a. Assets to be acquired and liabilities to be incurred
as a result of a firm commitment to purchase or
sell goods or services are generally not recognized
until at least one of the parties has performed
under the agreement.
b. A forward contract that is within the scope of PFRS
9 is recognized as an asset or a liability on the
commitment date, rather than on the date on
which settlement takes place.
c. Option contracts that are within the scope of PFRS
9 are recognized as assets or liabilities when the
holder or writer becomes a party to the contract.
d. Highly probable future transactions are recognized
as assets and liabilities.
43. A regular way purchase or sale of financial assets shall
be recognized and derecognized, as applicable,
a. Using trade date accounting
b. Using settlement date accounting
c. As a derivative
d. Either a or b
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44. When settlement date accounting is applied an entity
accounts for any change in the fair value of the asset
to be received during the period between the trade
date and the settlement date in the same way as it
accounts for the acquired asset. Therefore, change in
the fair value of the asset to be received during the
period between the trade date and the settlement date
is not recognized for assets measured at
a. Amortized cost.
b. Fair value through profit or loss.
c. Fair value through OCI.
d. All of the above.
45. When an entity uses settlement date accounting for an
asset that is subsequently measured at amortized cost,
the asset is recognized initially
a. At its fair value on the trade date.
b. At its fair value on the settlement date.
c. At the higher of a and b.
d. At the lower of a and b.
46. A contract that requires or permits net settlement of
the change in the value of the contract is accounted for
a. Using trade date accounting
b. Using settlement date accounting
c. As a derivative
d. Either a or b
47. Which statement is correct regarding accounting for
transfers of receivables in accordance with PFRS 9?
a. The transfer of risks and rewards evaluated is
evaluated by determining the transferee’s ability to
sell the asset.
b. A sale of a financial asset together with a total
return swap that transfers the market risk
exposure back to the entity is an example of a
transfer that qualifies for derecognition.
c. The entity shall determine whether it has retained
control of the financial asset if an entity neither
transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset.
d. The entity shall continue to recognize the
transferred asset in its entirety if an entity neither
transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset, and
retains control of the transferred asset
48. If an entity neither transfers nor retains substantially
all the risks and rewards of ownership of a transferred
asset, and retains control of the transferred asset, the
entity shall
a. Derecognize the financial asset and recognize
separately as assets or liabilities any rights and
obligations created or retained in the transfer.
b. Continue to recognize the transferred asset in its
entirety.
c. Recognize a financial liability for the consideration
received.
d. Continue to recognize the transferred asset to the
extent of its continuing involvement.
49. Gain or loss on derecognition of a financial asset shall
be recognized in
a. Profit or loss from continuing operations.
b. Profit or loss from discontinued operations.
c. Profit or loss from continuing operations, except
for available-for-sale financial assets.
d. Other comprehensive income.
50. On the basis of the facts and circumstances that exist
at the date of initial application. An entity may
a. Designate a financial asset as measured at fair
value through profit or loss.
FAR.2926
EXCEL PROFESSIONAL SERVICES, INC.

b. Designate an investment in an equity instrument d. To require disclosures about the significance of

as at fair value through other comprehensive financial instruments for an entity's financial
income in accordance. position and financial performance and qualitative
c. Revoke its previous designation of a financial asset and quantitative information about exposure to
as measured at fair value through profit or loss. risks arising from financial instruments.
d. Do any of the above.
56. Which of the following types of information does PFRS
51. An entity may choose as its accounting policy to 7 not require to be disclosed about the significance of
continue to apply the requirements of PAS 39 instead financial instruments?
of PFRS 9 in relation to a. Carrying amounts of categories of financial
a. Classification and measurement instruments.
b. Impairment methodology b. Fair values of financial instruments.
c. Hedge accounting c. Information about the use of hedge accounting.
d. All of the above d. Information about financial instruments, contracts,
and obligations under share-based payment
52. Which statement is incorrect regarding PFRS 9? transactions.
a. Financial asset classification based on business
model and contractual cash flows test. 57. Which of the following types of information does PFRS
b. Impairment model amended from incurred to 7 not require to be disclosed about exposure to risks
expected credit losses. arising from financial instruments?
c. Hedge accounting aligned to how the entity a. Qualitative and quantitative information about
manages the risks. market risk.
d. None of these. b. Qualitative and quantitative information about
credit risk.
53. Which of the following requirements in PFRS 9 were
c. Qualitative and quantitative information about
carried forward unchanged from PAS 39?
liquidity risk.
a. Classification and measurement
d. Qualitative and quantitative information about
b. Impairment methodology
operational risk.
c. Hedge accounting
d. Recognition and derecognition
58. Credit risk is
a. The risk that one party to a financial instrument
54. Which of the following events will not necessarily be a
will cause a financial loss for the other party by
consequence of PFRS 9?
failing to discharge an obligation.
a. Some instruments that may under PAS 39 have
b. The risk that an entity will encounter difficulty in
been measured entirely at amortized cost or as
meeting obligations associated with financial
available for sale, will more likely be measured at
liabilities that are settled by delivering cash or
FVTPL.
another financial asset.
b. Some financial assets that are currently
c. The risk that the fair value or future cash flows of a
disaggregated into host financial assets that are
financial instrument will fluctuate because of
not at FVTPL will instead be measured at FVTPL in
changes in market prices.
their entirety.
d. All of the above.
c. Assets that are currently classified as held to
maturity are likely to continue to be measured at
59. Market risk excludes:
amortized cost, as they are held to collect the
a. Currency risk c. Other price risk
contractual cash flows and often give rise to only
b. Interest rate risk d. Credit risk
payments of principal and interest.
d. Entities will have to delay recognition of credit
60. Currency risk is
losses.
a. The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
55. What are the principal objectives of PFRS 7?
changes in foreign exchange rates.
a. To provide presentation and disclosure
b. The risk that the fair value or future cash flows of a
requirements for financial instruments.
financial instrument will fluctuate because of
b. To set out specified balance sheet and income
changes in market interest rates.
statement formats for financial entities.
c. The risk that the fair value or future cash flows of a
c. To require disclosures about an entity's exposure
financial instrument will fluctuate because of
to off-balance sheet instruments and other
changes in market prices other than those arising
complex transactions.
from interest rate risk or currency risk.
d. The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
changes in market prices.
- done -
SUGGESTED ANSWERS
1. C 7. D 13. D 19. D 25. C 31. A 37. C 43. D 49. A 55. D
2. D 8. D 14. A 20. D 26. A 32. D 38. C 44. A 50. D 56. D
3. D 9. D 15. C 21. A 27. A 33. A 39. A 45. A 51. C 57. D
4. D 10. D 16. D 22. B 28. D 34. D 40. D 46. C 52. D 58. A
5. D 11. A 17. D 23. A 29. D 35. D 41. D 47. C 53. D 59. D
6. D 12. B 18. C 24. A 30. A 36. D 42. D 48. D 54. D 60. A

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EXCEL PROFESSIONAL SERVICES, INC.
LECTURE NOTES
SUMMARY of PFRS 9 in relation to Financial Assets
The phased completion of IFRS 9
On 12 November 2009, the IASB issued IFRS 9 Financial
Instruments as the first step in its project to replace IAS
39 Financial Instruments: Recognition and Measurement.
IFRS 9 introduced new requirements for classifying and
measuring financial assets that had to be applied starting 1
January 2013, with early adoption permitted.
On 28 October 2010, the IASB reissued IFRS 9,
incorporating new requirements on accounting for financial
liabilities, and carrying over from IAS 39 the requirements
for derecognition of financial assets and financial liabilities.
On 16 December 2011, the IASB issued Mandatory
Effective Date and Transition Disclosures (Amendments to
IFRS 9 and IFRS 7), which amended the effective date of
IFRS 9 to annual periods beginning on or after 1 January
2015, and modified the relief from restating comparative
periods and the associated disclosures in IFRS 7.
On 19 November 2013, the IASB issued IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS
9, IFRS 7 and IAS 39) amending IFRS 9 to include the new
general hedge accounting model, allow early adoption of
the treatment of fair value changes due to own credit on
liabilities designated at fair value through profit or loss and
remove the 1 January 2015 effective date.
On 24 July 2014, the IASB issued the final version of IFRS
9 incorporating a new expected loss impairment model and
introducing limited amendments to the classification and
measurement requirements for financial assets. This
version supersedes all previous versions and is
mandatorily effective for periods beginning on or after 1
January 2018 with early adoption permitted (subject to
local endorsement requirements). For a limited period,
previous versions of IFRS 9 may be adopted early if not
already done so provided the relevant date of initial
application is before 1 February 2015.
Scope exclusions
PFRS 9 applies to all types of financial instruments except
for the following, which are scoped out of PFRS 9:
• interests in subsidiaries, associates, and joint ventures
accounted for under PFRS 10 and PAS 28; however
PFRS 9 applies in cases where under PFRS 10 and PAS
28 such interests are to be accounted for under PFRS 9.
The standard also applies to derivatives on an interest
in a subsidiary, associate, or joint venture
• rights and obligations under leases to which PFRS 16
Leases applies.
• employers' rights and obligations under employee
benefit plans to which PAS 19 applies
• financial instruments that meet the definition of own
equity under PAS 32
• rights and obligations under insurance contracts, except
PAS 39 does apply to financial instruments that take
the form of an insurance (or reinsurance) contract but
that principally involve the transfer of financial risks and
derivatives embedded in insurance contracts
• contracts in a business combination to buy or sell an
acquire at a future date
• some loan commitments
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• financial instruments, contracts and obligations under
share-based payment transactions to which PFRS 2
applies
• rights to reimbursement payments to which PAS 37
applies
• rights and obligations within the scope of IFRS 15
Revenue from Contracts with Customers that are
financial instruments
Contracts to buy or sell financial items
Contracts to buy or sell financial items are always within
the scope of PAS 39.
Contracts to buy or sell non-financial items
Contracts to buy or sell non-financial items are within the
scope of PFRS 9 if they can be settled net in cash or
another financial asset and are not entered into and held
for the purpose of the receipt or delivery of a non-financial
item in accordance with the entity's expected purchase,
sale, or usage requirements. Contracts to buy or sell non-
financial items are inside the scope if net settlement
occurs. The following situations constitute net settlement:
• the terms of the contract permit either counterparty to
settle net
• there is a past practice of net settling similar contracts
• there is a past practice, for similar contracts, of taking
delivery of the underlying and selling it within a short
period after delivery to generate a profit from short-
term fluctuations in price, or from a dealer's margin, or
• the non-financial item is readily convertible to cash
Key definitions
Financial instrument: a contract that gives rise to a
financial asset of one entity and a financial liability or
equity instrument of another entity.
Financial asset: any asset that is:
• cash
• an equity instrument of another entity
• a contractual right
◦ to receive cash or another financial asset from
another entity; or
◦ to exchange financial assets or financial liabilities
with another entity under conditions that are
potentially favorable to the entity; or
• a contract that will or may be settled in the entity's own
equity instruments and is:
◦ a non-derivative for which the entity is or may be
obliged to receive a variable number of the entity's
own equity instruments
◦ a derivative that will or may be settled other than by
the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity's own
equity instruments. For this purpose the entity's own
equity instruments do not include instruments that
are themselves contracts for the future receipt or
delivery of the entity's own equity instruments
◦ puttable instruments classified as equity or certain
liabilities arising on liquidation classified by PAS 32
as equity instruments
Initial Recognition
PFRS 9 requires recognition of a financial asset when, and
only when, the entity becomes a party to the contractual
provisions of the instrument, subject to the following
provisions in respect of regular way purchases.
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Regular way purchases or sales of a financial asset.
A regular way purchase or sale of financial assets is
recognized and derecognized using either trade date or
settlement date accounting. The method used is to be
applied consistently for all purchases and sales of financial
assets that belong to the same category of financial asset
as defined in PFRS 9 (note that for this purpose assets
held for trading form a different category from assets
designated at fair value through profit or loss). The choice
of method is an accounting policy.
PFRS 9 requires that all financial assets be recognized on
the balance sheet. That includes all derivatives.
Historically, in many parts of the world, derivatives have
not been recognized on company balance sheets. The
argument has been that at the time the derivative contract
was entered into, there was no amount of cash or other
assets paid. Zero cost justified non-recognition,
notwithstanding that as time passes and the value of the
underlying variable (rate, price, or index) changes, the
derivative has a positive (asset) or negative (liability)
value.
Mesurement
Initial measurement of financial instruments
All financial instruments are initially measured at fair value
plus or minus, in the case of a financial asset or financial
liability not at fair value through profit or loss, transaction
costs. [PFRS 9, paragraph 5.1.1]
Subsequent measurement of financial assets
PFRS 9 divides all financial assets that are currently in the
scope of PAS 39 into two classifications - those measured
at amortised cost and those measured at fair value.
Where assets are measured at fair value, gains and losses
are either recognised entirely in profit or loss (fair value
through profit or loss, FVTPL), or recognised in other
comprehensive income (fair value through other
comprehensive income, FVTOCI).
For debt instruments the FVTOCI classification is
mandatory for certain assets unless the fair value option is
elected. Whilst for equity investments, the FVTOCI
classification is an election. Furthermore, the requirements
for reclassifying gains or losses recognised in other
comprehensive income are different for debt instruments
and equity investments.
A debt instrument that meets the following two conditions
must be measured at FVTOCI unless the asset is
designated at FVTPL under the fair value option (see
below):
[PFRS 9, paragraph 4.1.2A]
• Business model test: The financial asset is held within
a business model whose objective is achieved by both
collecting contractual cash flows and selling financial
assets.
• Cash flow characteristics test: The contractual terms
of the financial asset give rise on specified dates to
cash flows that are solely payments of principal and
interest on the principal amount outstanding.
All other debt instruments must be measured at fair value
through profit or loss (FVTPL). [PFRS 9, paragraph 4.1.4]
Fair value option
Even if an instrument meets the two requirements to be
measured at amortised cost or FVTOCI, IFRS 9 contains an
option to designate, at initial recognition, a financial asset
as measured at FVTPL if doing so eliminates or significantly
reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that
would otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on different
bases. [PFRS 9, paragraph 4.1.5]
Equity instruments
All equity investments in scope of PFRS 9 are to be
measured at fair value in the statement of financial
position, with value changes recognised in profit or loss,
except for those equity investments for which the entity
has elected to present value changes in 'other
comprehensive income'. There is no 'cost exception' for
unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity
can make an irrevocable election at initial recognition to
measure it at FVTOCI with only dividend income
recognised in profit or loss. [PFRS 9, paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity
investments, PFRS 9 contains guidance on when cost may
be the best estimate of fair value and also when it might
not be representative of fair value.

The classification of a financial asset is made at the time it

Impairment
is initially recognised, namely when the entity becomes a
The impairment model in PFRS 9 is based on the premise
party to the contractual provisions of the instrument.
of providing for expected losses.
[PFRS 9, paragraph 4.1.1] If certain conditions are met,
the classification of an asset may subsequently need to be
Scope
reclassified.
PFRS 9 requires that the same impairment model apply to
all of the following:
Debt instruments
[PFRS 9 paragraph 5.5.1]
A debt instrument that meets the following two conditions
• Financial assets measured at amortised cost;
must be measured at amortised cost (net of any write
• Financial assets mandatorily measured at FVTOCI;
down for impairment) unless the asset is designated at
• Loan commitments when there is a present obligation to
FVTPL under the fair value option (see below):
extend credit (except where these are measured at
[PFRS 9, paragraph 4.1.2]
FVTPL);
• Business model test: The objective of the entity's
- Financial guarantee contracts to which IFRS 9 is
business model is to hold the financial asset to collect
applied (except those measured at FVTPL);
the contractual cash flows (rather than to sell the
- Lease receivables within the scope of IAS 17 Leases;
instrument prior to its contractual maturity to realise its
and
fair value changes).
- Contract assets within the scope of IFRS 15 Revenue
• Cash flow characteristics test: The contractual terms
from Contracts with Customers (i.e. rights to
of the financial asset give rise on specified dates to
consideration following transfer of goods or
cash flows that are solely payments of principal and
services).
interest on the principal amount outstanding.

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EXCEL PROFESSIONAL SERVICES, INC.
General approach
With the exception of purchased or originated credit
impaired financial assets (see below), expected credit
losses are required to be measured through a loss
allowance at an amount equal to:
[PFRS 9 paragraphs 5.5.3 and 5.5.5]
• the 12-month expected credit losses (expected credit
losses that result from those default events on the
financial instrument that are possible within 12 months
after the reporting date); or
• full lifetime expected credit losses (expected credit
losses that result from all possible default events over
the life of the financial instrument).
A loss allowance for full lifetime expected credit losses is
required for a financial instrument if the credit risk of that
financial instrument has increased significantly since initial
recognition, as well as to contract assets or trade
receivables that do not constitute a financing transaction in
accordance with PFRS 15. [PFRS 9 paragraphs 5.5.3 and
5.5.15]
Additionally, entities can elect an accounting policy to
recognise full lifetime expected losses for all contract
assets and/or all trade receivables that do constitute a
financing transaction in accordance with PFRS 15. The
same election is also separately permitted for lease
receivables. [PFRS 9 paragraph 5.5.16]
For all other financial instruments, expected credit losses
are measured at an amount equal to the 12-month
expected credit losses. [PFRS 9 paragraph 5.5.5]
Significant increase in credit risk
With the exception of purchased or originated credit-
impaired financial assets (see below), the loss allowance
for financial instruments is measured at an amount equal
to lifetime expected losses if the credit risk of a financial
instrument has increased significantly since initial
recognition, unless the credit risk of the financial
instrument is low at the reporting date in which case it can
be assumed that credit risk on the financial instrument has
not increased significantly since initial recognition. [PFRS 9
paragraphs 5.5.3 and 5.5.10]
The Standard considers credit risk low if there is a low risk
of default, the borrower has a strong capacity to meet its
contractual cash flow obligations in the near term and
adverse changes in economic and business conditions in
the longer term may, but will not necessarily, reduce the
ability of the borrower to fulfill its contractual cash flow
obligations. The Standard suggests that ‘investment grade’
rating might be an indicator for a low credit risk. [PFRS 9
paragraphs B5.5.22 – B5.5.24]
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The assessment of whether there has been a significant
increase in credit risk is based on an increase in the
probability of a default occurring since initial recognition.
Under the Standard, an entity may use various approaches
to assess whether credit risk has increased significantly
(provided that the approach is consistent with the
requirements). An approach can be consistent with the
requirements even if it does not include an explicit
probability of default occurring as an input. The application
guidance provides a list of factors that may assist an entity
in making the assessment. Also, whilst in principle the
assessment of whether a loss allowance should be based
on lifetime expected credit losses is to be made on an
individual basis, some factors or indicators might not be
available at an instrument level. In this case, the entity
should perform the assessment on appropriate groups or
portions of a portfolio of financial instruments.
The requirements also contain a rebuttable presumption
that the credit risk has increased significantly when
contractual payments are more than 30 days past due.
IFRS 9 also requires that (other than for purchased or
originated credit impaired financial instruments) if a
significant increase in credit risk that had taken place since
initial recognition and has reversed by a subsequent
reporting period (i.e., cumulatively credit risk is not
significantly higher than at initial recognition) then the
expected credit losses on the financial instrument revert to
being measured based on an amount equal to the 12-
month expected credit losses. [PFRS 9 paragraph 5.5.11]
Purchased or originated credit-impaired financial
assets
Purchased or originated credit-impaired financial assets are
treated differently because the asset is credit-impaired at
initial recognition. For these assets, an entity would
recognise changes in lifetime expected losses since initial
recognition as a loss allowance with any changes
recognised in profit or loss. Under the requirements, any
favourable changes for such assets are an impairment gain
even if the resulting expected cash flows of a financial
asset exceed the estimated cash flows on initial
recognition. [PFRS 9 paragraphs 5.5.13 – 5.5.14]
Credit-impaired financial asset
Under PFRS 9 a financial asset is credit-impaired when one
or more events that have occurred and have a significant
impact on the expected future cash flows of the financial
asset. It includes observable data that has come to the
attention of the holder of a financial asset about the
following events:
[IFRS 9 Appendix A]
• significant financial difficulty of the issuer or borrower;
• a breach of contract, such as a default or past-due
event;
• the lenders for economic or contractual reasons relating
to the borrower’s financial difficulty granted the
borrower a concession that would not otherwise be
considered;
• it becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
• the disappearance of an active market for the financial
asset because of financial difficulties; or
• the purchase or origination of a financial asset at a deep
discount that reflects incurred credit losses.
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Basis for estimating expected credit losses
Any measurement of expected credit losses under PFRS 9
shall reflect an unbiased and probability-weighted amount
that is determined by evaluating the range of possible
outcomes as well as incorporating the time value of
money. Also, the entity should consider reasonable and
supportable information about past events, current
conditions and reasonable and supportable forecasts of
future economic conditions when measuring expected
credit losses. [PFRS 9 paragraph 5.5.17]
The Standard defines expected credit losses as the
weighted average of credit losses with the respective risks
of a default occurring as the weightings. [PFRS 9 Appendix
A] Whilst an entity does not need to consider every
possible scenario, it must consider the risk or probability
that a credit loss occurs by considering the possibility that
a credit loss occurs and the possibility that no credit loss
occurs, even if the probability of a credit loss occurring is
low. [PFRS 9 paragraph 5.5.18]
In particular, for lifetime expected losses, an entity is
required to estimate the risk of a default occurring on the
financial instrument during its expected life. 12-month
expected credit losses represent the lifetime cash shortfalls
that will result if a default occurs in the 12 months after
the reporting date, weighted by the probability of that
default occurring.
An entity is required to incorporate reasonable and
supportable information (i.e., that which is reasonably
available at the reporting date). Information is reasonably
available if obtaining it does not involve undue cost or
effort (with information available for financial reporting
purposes qualifying as such).
For applying the model to a loan commitment an entity will
consider the risk of a default occurring under the loan to
be advanced, whilst application of the model for financial
guarantee contracts an entity considers the risk of a
default occurring of the specified debtor. [PFRS 9
paragraphs B5.5.31 and B5.5.32]
An entity may use practical expedients when estimating
expected credit losses if they are consistent with the
principles in the Standard (for example, expected credit
losses on trade receivables may be calculated using a
provision matrix where a fixed provision rate applies
depending on the number of days that a trade receivable is
outstanding). [PFRS 9 paragraph B5.5.35]
To reflect time value, expected losses should be
discounted to the reporting date using the effective
interest rate of the asset (or an approximation thereof)
that was determined at initial recognition. A “credit-
adjusted effective interest” rate should be used for
expected credit losses of purchased or originated credit-
impaired financial assets. In contrast to the “effective
interest rate” (calculated using expected cash flows that
ignore expected credit losses), the credit-adjusted
effective interest rate reflects expected credit losses of the
financial asset. [PFRS 9 paragraphs B5.5.44-45]
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Expected credit losses of undrawn loan commitments
should be discounted by using the effective interest rate
(or an approximation thereof) that will be applied when
recognising the financial asset resulting from the
commitment. If the effective interest rate of a loan
commitment cannot be determined, the discount rate
should reflect the current market assessment of time value
of money and the risks that are specific to the cash flows
but only if, and to the extent that, such risks are not taken
into account by adjusting the discount rate. This approach
shall also be used to discount expected credit losses of
financial guarantee contracts. [PFRS 9 paragraphs
B5.5.47]
Presentation
Whilst interest revenue is always required to be presented
as a separate line item, it is calculated differently
according to the status of the asset with regard to credit
impairment. In the case of a financial asset that is not a
purchased or originated credit-impaired financial asset and
for which there is no objective evidence of impairment at
the reporting date, interest revenue is calculated by
applying the effective interest rate method to the gross
carrying amount. [PFRS 9 paragraph 5.4.1]
In the case of a financial asset that is not a purchased or
originated credit-impaired financial asset but subsequently
has become credit-impaired, interest revenue is calculated
by applying the effective interest rate to the amortised
cost balance, which comprises the gross carrying amount
adjusted for any loss allowance. [PFRS 9 paragraph 5.4.1]
In the case of purchased or originated credit-impaired
financial assets, interest revenue is always recognised by
applying the credit-adjusted effective interest rate to the
amortised cost carrying amount. [PFRS 9 paragraph 5.4.1]
The credit-adjusted effective interest rate is the rate that
discounts the cash flows expected on initial recognition
(explicitly taking account of expected credit losses as well
as contractual terms of the instrument) back to the
amortised cost at initial recognition. [PFRS 9 Appendix A]
Consequential amendments of PFRS 9 to PAS 1 require
that impairment losses, including reversals of impairment
losses and impairment gains (in the case of purchased or
originated credit-impaired financial assets), are presented
in a separate line item in the statement of profit or loss
and other comprehensive income.
Derecognition of a Financial Asset
The basic premise for the derecognition model in PFRS 9 is
to determine whether the asset under consideration for
derecognition is:
• an asset in its entirety or
• specifically identified cash flows from an asset or
• a fully proportionate share of the cash flows from an
asset or
• a fully proportionate share of specifically identified cash
flows from a financial asset
Once the asset under consideration for derecognition has
been determined, an assessment is made as to whether
the asset has been transferred, and if so, whether the
transfer of that asset is subsequently eligible for
derecognition.
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An asset is transferred if either the entity has transferred
the contractual rights to receive the cash flows, or the
entity has retained the contractual rights to receive the
cash flows from the asset, but has assumed a contractual
obligation to pass those cash flows on under an
arrangement that meets the following three conditions:
• the entity has no obligation to pay amounts to the
eventual recipient unless it collects equivalent amounts
on the original asset
• the entity is prohibited from selling or pledging the
original asset (other than as security to the eventual
recipient),
• the entity has an obligation to remit those cash flows
without material delay
Once an entity has determined that the asset has been
transferred, it then determines whether or not it has
transferred substantially all of the risks and rewards of
ownership of the asset. If substantially all the risks and
rewards have been transferred, the asset is derecognized.
If substantially all the risks and rewards have been
retained, derecognition of the asset is precluded.
If the entity has neither retained nor transferred
substantially all of the risks and rewards of the asset, then
the entity must assess whether it has relinquished control
of the asset or not. If the entity does not control the asset
then derecognition is appropriate; however if the entity
has retained control of the asset, then the entity continues
to recognize the asset to the extent to which it has a
continuing involvement in the asset.
SUMMARY of PFRS 7 in relation to Financial Assets
Overview of PFRS 7
• adds certain new disclosures about financial instruments
to those currently required by PAS 32;
• replaces the disclosures previously required by PAS 30;
and
• puts all of those financial instruments disclosures
together in a new standard on Financial Instruments:
Disclosures. The remaining parts of PAS 32 deal only
with financial instruments presentation matters.
Disclosure Requirements of PFRS 7
PFRS 7 requires certain disclosures to be presented by
category of instrument based on the PAS 39 measurement
categories. Certain other disclosures are required by class
of financial instrument. For those disclosures an entity
must group its financial instruments into classes of similar
instruments as appropriate to the nature of the information
presented. [PFRS 7.6]
The two main categories of disclosures required by PFRS 7
are:
• information about the significance of financial
instruments.
• information about the nature and extent of risks arising
from financial instruments
Information about the significance of financial
instruments
Statement of Financial Position
• Disclose the significance of financial instruments for an
entity's financial position and performance. [PFRS 7.7]
This includes disclosures for each of the following
categories: [PFRS 7.8]
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◦ financial assets measured at fair value through profit
and loss, showing separately those held for trading
and those designated at initial recognition
◦ held-to-maturity investments
◦ loans and receivables
◦ available-for-sale assets
• Other balance sheet-related disclosures:
◦ special disclosures about financial assets designated
to be measured at fair value through profit and loss,
including disclosures about credit risk and market
risk, changes in fair values attributable to these risks
and the methods of measurement.[PFRS 7.9-11]
◦ reclassifications of financial instruments from one
category to another (e.g. from fair value to
amortized cost or vice versa) [PFRS 7.12-12A]
◦ information about financial assets pledged as
collateral and about financial or non-financial assets
held as collateral [PFRS 7.14-15]
◦ reconciliation of the allowance account for credit
losses (bad debts) by class of financial assets[PFRS
7.16]
Statement of Comprehensive Income
• Items of income, expense, gains, and losses, with
separate disclosure of gains and losses from: [PFRS
7.20(a)]
◦ financial assets measured at fair value through profit
and loss, showing separately those held for trading
and those designated at initial recognition.
◦ held-to-maturity investments.
◦ loans and receivables.
◦ available-for-sale assets.
• Other income statement-related disclosures:
◦ total interest income and total interest expense for
those financial instruments that are not measured at
fair value through profit and loss [PFRS 7.20(b)]
◦ fee income and expense [PFRS 7.20(c)]
◦ amount of impairment losses by class of financial
assets [PFRS 7.20(e)]
◦ interest income on impaired financial assets [PFRS
7.20(d)]
Other Disclosures
• accounting policies for financial instruments [PFRS 7.21]
• information about the fair values of each class of
financial asset, along with: [PFRS 7.25-30]
◦ comparable carrying amounts
◦ description of how fair value was determined
◦ the level of inputs used in determining fair value
◦ reconciliations of movements between levels of fair
value measurement hierarchy additional disclosures
for financial instruments whose fair value is
determined using level 3 inputs including impacts on
profit and loss, other comprehensive income and
sensitivity analysis
◦ information if fair value cannot be reliably measured
The fair value hierarchy introduces 3 levels of inputs based
on the lowest level of input significant to the overall fair
value (PFRS 7.27A-27B):
• Level 1 – quoted prices for similar instruments
• Level 2 – directly observable market inputs other than
Level 1 inputs
• Level 3 – inputs not based on observable market data
Note that disclosure of fair values is not required when the
carrying amount is a reasonable approximation of fair
value, such as short-term trade receivables and payables,
or for instruments whose fair value cannot be measured
reliably. [PFRS 7.29(a)]
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Nature and extent of exposure to risks arising from
financial instruments
Qualitative disclosures [PFRS 7.33]
• The qualitative disclosures describe:
◦ risk exposures for each type of financial instrument
◦ management's objectives, policies, and processes for
managing those risks
◦ changes from the prior period
Quantitative disclosures
• The quantitative disclosures provide information about
the extent to which the entity is exposed to risk, based
on information provided internally to the entity's key
management personnel. These disclosures include:
[PFRS 7.34]
◦ summary quantitative data about exposure to each
risk at the reporting date
◦ disclosures about credit risk, liquidity risk, and
market risk and how these risks are managed as
further described below
◦ concentrations of risk
Credit Risk
• Credit risk is the risk that one party to a financial
instrument will cause a loss for the other party by
failing to pay for its obligation. [PFRS 7. Appendix A]
• Disclosures about credit risk include: [PFRS 7.36-38]
◦ maximum amount of exposure (before deducting the
value of collateral), description of collateral,
information about credit quality of financial assets
that are neither past due nor impaired, and
information about credit quality of financial assets
whose terms have been renegotiated [PFRS 7.36]
◦ for financial assets that are past due or impaired,
analytical disclosures are required [PFRS 7.37]
◦ information about collateral or other credit
enhancements obtained or called [PFRS 7.38]
Liquidity Risk
• Liquidity risk is the risk that an entity will have
difficulties in paying its financial liabilities. [PFRS 7.
Appendix A]
• Disclosures about liquidity risk include: [PFRS 7.39]
◦ a maturity analysis of financial liabilities
◦ description of approach to risk management
Market Risk [PFRS 7.40-42]
• Market risk is the risk that the fair value or cash flows of
a financial instrument will fluctuate due to changes in
market prices. Market risk reflects interest rate risk,
currency risk and other price risks. [PFRS 7. Appendix
A]
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• Disclosures about market risk include:
◦ a sensitivity analysis of each type of market risk to
which the entity is exposed
◦ additional information if the sensitivity analysis is
not representative of the entity's risk exposure (for
example because exposures during the year were
different to exposures at year-end).
◦ PFRS 7 provides that if an entity prepares a
sensitivity analysis such as value-at-risk for
management purposes that reflects
interdependencies of more than one component of
market risk (for instance, interest risk and foreign
currency risk combined), it may disclose that
analysis instead of a separate sensitivity analysis for
each type of market risk
Transfers of Financial Assets [PFRS 7.42A-H]
An entity shall disclose information that enables users of
its financial statements:
• to understand the relationship between transferred
financial assets that are not derecognized in their
entirety and the associated liabilities; and
• to evaluate the nature of, and risks associated with, the
entity's continuing involvement in derecognized
financial assets. [PFRS 7 42B]
Transferred financial assets that are not
derecognized in their entirety
• Required disclosures include description of the nature of
the transferred assets, nature of risk and rewards as
well as description of the nature and quantitative
disclosure depicting relationship between transferred
financial assets and the associated liabilities. [PFRS
7.42D]
Transferred financial assets that are derecognized in
their entirety
• Required disclosures include the carrying amount of the
assets and liabilities recognized, fair value of the assets
and liabilities that represent continuing involvement,
maximum exposure to loss from the continuing
involvement as well as maturity analysis of the
undiscounted cash flows to repurchase the
derecognized financial assets. [PFRS 7.42E]
• Additional disclosures are required for any gain or loss
recognized at the date of transfer of the assets, income
or expenses recognize from the entity's continuing
involvement in the derecognized financial assets as well
as details of uneven distribution of proceed from
transfer activity throughout the reporting period. [PFRS
7.42G]
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FAR.2926