IFRS 9 - FINANCIAL INSTRUMENTS

- Exemptions: o Trade receivables with no significant financing component

o Unearned Income/Revenue
o Physical asset (PPE, Inventory, Intangibles, Leased assets, etc)
o Advances to supplier, Advances from customers, Most Warranties, Prepaid expenses
All FAs (exit/sale price) are recorded at FV

A. FINANCIAL ASSETS
i. Equity Instrument  FVTPL OR FVTOCI (irrevocable election)
ii. Debt Instrument (Loan Notes, Debentures, Bonds)  AC, FVTPL, FVTOCI (depending on BM and CCF Test)
iii. Derivative, Favorable  FVTPL (no other option)

1. INVESTMENT IN DEBT INSTRUMENTS (Bond, Debenture, Loan Note, Red. PS)

DEBT INSTRUMENTS AC FVTOC FVTPL
I
Redeemable Pref. Shares P P P
- If they give Dividends O P P
- If they do not give Dividend P P P
If CPI, FOREX fluctuation O O P
Contractual right to receive cash or another FA (inv In loans, debtors, debentures, bonds)
Cash & Bank O O P
Convertible instruments (if debt feature is considered substantive) O O P
Inv. In Loan notes & Advances P O O
M. funds P P P
Trade Receivables O O P
Provident Fund P O O

I. INITIAL RECOGNITION / CLASSIFICATION

Business Model Test: HFT through sale after value appreciation OR HTM for earning dividends
Contractual Cashflows Test: CF on specified dates of solely Principal + Interest (amortization)

i. Amortized Cost: (HELD-TO-MATURITY) Pass two tests

- BMT: Intention to hold and not sell
- CCFT: Intention to collect Principal & Interest only and not Dividends (stock)
 Can be sold in worst case scenario (pandemics, market crash news, disaster, etc)
 Can be sold for unexpected return (unexpected hike in price)
 Can be sold for arranging urgent liquidity
In all these cases, the FI can still be classified as HTM as entity had no intention to sell it originally.

ii. FVTPL: (HELD-FOR-TRADING) /Speculation (trying to flip) All other FAs not meeting the 2 tests
- Residual/Default category and includes FAs not allocated to other categories (no condition).
- FAs can still be classified here even if they pass tests of AC and/or FVTOCI
- If intention is to not only to collect CCFs but also price appreciations and maybe random dividends
 Debt instrument not qualifying for AC or FVOCI
 Equity instruments not included in FVTOCI
 Derivatives, unless part of a properly designated hedging arrangement.
iii. FVTOCI: (AVAILABLE-FOR-SALES) HFT and HTM
BMT: Intention to hold and sell
CCFT: Intention to collect Principal & Interest only and not Dividends (stock)
- Main diff is that FVTOCI’s BM test allows entity to engage in larger and more frequent sales e.g. Sale to buy
another FI for higher returns

FV Remeasurement takes place at each RD, with diff to P/L, effectively incorporating an annual impairment reviews
 II. ACCOUNTING
i. Amortization Cost HTM (loan, debentures, bonds)
 IR: Fair Value (Face value – Discount / + Premium) + T.C applied on Fair Value
 SM: Amortization Schedule
- SoCI - P/L  Finance Income @ EIRR on FV+TC-Dis
 G/L on Disposal (no need to mark to MV on disposal)
- SoFP - NCA  Cl. balance in amortization schedule at RD (no splitting between CA and NCA)
 *Closing of second last year will be shown as C.A
- SoCFs  All amounts received i.e. on coupon rate on Nominal Value and redemption
Openin 2001 2002
Year g EIRR Int. Sub-Total Receipt Closing F. Asset 97,000 Bank 5,000
2001 97,000 8% 7,760 104,760 5,000 99,760 Bank (pur) 95,000 F.A(bf) 2,981
2002 99,760 8% 7,981 107,741 5,000 *102,741 F. Inc 7,981
Bank (TC) 2,000
2003 102,741 8% 8,219 110,960 5,000 105,960
2003
105,960 0% - 105,960 105,960 - Bank 5,000
23,960 120,960 Bank 5,000
F.A (bf) 2,760
F.A 3,219
2001 2002 2003 F. Inc 7,760
SoCFs 5,000 5,000 110,960 120,960 F. Inc 8,219
SoCI 7,760 7,981 8,219 23,960 Bank 105,960
SoFP – NCA 99,760 - - F. A 105,900
– CA - *102,741 -

ii. FVTOCI AFS (loan, debentures, bonds) (strategic investment)

 IR: Fair Value (Face value – Discount / + Premium) + TC applied on Fair Value
 SM: FV. Amortization Schedule
- SoCI - P/L  Finance Income @ EIRR on FV+TC-Dis/+Prem (i.e. on the same amount that would have
been recognised in P/L if FA had been measured at AC)
 Forex Difference and Impairment
 OCI Reserve reclassified on disposal/derecognitions (no need to mark to MV on disposal)
- OCI  FV at RD LESS Closing Balance
 Recyclable to P/L on derecognition/disposal of asset
 G/L on disposal (no need to mark to MV on disposal)
- SOFP - NCA  FV at RD (no splitting between CA and NCL)
 *Closing of second last year will be shown as C.A
- Reserve  Inv. Revaluation Reserve for OCI figures. Can be recycled on disposal (P/L)
- SoCFs  All amounts received i.e. on coupon rate on Nominal Value and redemption

Year Opening EIRR Interest Sub-Total Receipts CR @ NV Closing FV Diff-> OCI

2001 97,000 8% 7,760 104,760 5,000 99,760 110,000 10,240
2002 110,000 8% 7,981 117,981 5,000 112,981 104,000 (8,981)
2003 104,000 8% 8,219 112,219 5,000 107,219 *105,960 (1,259)
- 0% - - ***105,960 - - -
23,960 120,960 **0
2001 2002 2003
SoCFs 5,000 5,000 110,960 120,960
SoCI - OCI 18,000 (1,000) 8,219 25,219
SoFP - NCA 110,000 - -
- CA - 104,000
- Reserve 10,240 1,259 -
* FV if not specified for the end, always assume same as redemption value as FAs always come to their redemption value at end of life.
** Always becomes ZERO if HTM *** Redemption value

2001 2002 2003

F. Asset 97,000 F.A 7,981 F.A 8,219
Bank (pur) 95,000 F. Inc 7,981 F. Inc 8,219
Bank (TC) 2,000
Bank 5,000 Bank 5,000
F.A 7,760 F. A 5,000 F. A 5,000
F. Inc 7,760
F.A 8,981 OCI 1,259
Bank 5,000
OCI 8,981 F. A 1,259
F. A 5,000
 F.A 10,240 F.A 8,981 Bank 105,960
OCI 10,240 OCI 8,981 F. A 105,900

Sold in Y2 Opening Sub- Receipt

Year FV+TC-DIS EIRR *Int Total CR @ NV Closing FV Diff-> OCI
2001 97,000 8% 7,760 104,760 5,000 99,760 110,000 10,240
2002 110,000 8% 7,981 117,981 5,000 112,981 104,000 (8,981)
- 0% - - 105,960 - - -
15,741 115,960 **1,259
2001 2002 2003
SoCFs 5,000 110,960 110,960 115,960
SoCI - OCI 10,240 ***(10,240) - 25,219
SOFP - NCA 110,000 - -
- Reserve 10,240 ***10,240 -
*EIRR always on historic Closing
**OCI Reserve Balance of 1,259 along with 8,981, totaling 10,240, can be recycled through/L on disposal or can be left alone
***Reversed on left alone

2001 2002
F. Asset 97,000 Bank 5,000 OCI 1,259
Bank (pur) 95,000 F.A 2,981 F.A (recycle) 1,259
Bank (TC) 2,000 F. Inc 7,981

Bank 5,000 OCI 8,981 Bank 105,960

F.A 2,760 F.A 8,981 F.A 104,000
F. Inc 7,760 Gain (P/L) 1,960

F.A 10,240
OCI 10,240

iii. FVTPL - HFT

 IR: Fair Value (Face value – Discount / + Premium)
 TC applied on Fair Value: Expensed in P/L
 SM: NO Amortization Schedule hence, no need for EIRR
- SoCI - P/L  Finance Income @ Coupon rate on Nominal value (EIRR not used in this model)
 Dividends
 FV at RD LESS Closing Balance
 G/L on Disposal (no need to mark to MV on disposal)
- SoFP - NCA  FV at RD (no splitting between CA and NCL)
 *Closing of second last year will be shown as C.A
- SoCFs  All amounts received i.e. Redemption Value + Finance Income (Coupon Rate on Nominal Value)

AFS - FVPL - If NOT sold 2001 2002 2003

Year Opening FV Diff (P/L) Receipts F. A 95,000
2001 95,000 110,000 15,000 5,000 Bank 95,000 Bank 5,000
2002 110,000 104,000 (6,000) 5,000 Bank 5,000 F. Inc 5,000
2003 104,000 105,000 1,000 5,000 P/L(TC) 2,000
F. Inc 5,000
105,000 - - *100,000 Bank 2,000
F.A 1,000
10,000 115,000 Bank 5,000 P/L 6,00 P/L 1,000
2001 2002 2003 F. Inc 5,000 F.A 6,000
SoCFs 5,000 5,000 105,000 115,000 Bank 100,000
SOCI - P/L 15,000 (6,000) 1,000 10,000 F.A 15,000 Loss (bf) 5,000
SOFP - NCA 110,000 - - P/L 15,000 F. A 105,000
- CA - **104,000
*Sales/Redemption price

AFS - FVPL - If Sold in Y-2 2001 2002

Year Opening FV Diff (P/L) Receipts F.A 95,000 Bank 5,000 Bank 5,000
2001 95,000 110,000 15,000 5,000 Bank 95,000 F. Inc 5,000 F. Inc 5,000
2002 110,000 120,000 10,000 5,000
110,000 - - 100,000 P/L(TC) 2,000 F.A 15,000 P/L 10,000
25,000 Bank 2,000 P/L 15,000 F.A 10,000
2001 2002 2003
Bank 100,000
SoCFs 5,000 5,000 - 10,000
SOCI - P/L 15,000 10,000 - 25,000 Loss P/L 10,000
 F.A 110,000
SOFP - NCA 110,000 - -
2. INVESTMENT IN EQUITY INSTRUMENTS (Equity, Shares, Stocks, Irred. PS, etc.)
TYPES FVTOCI FVTPL
 Inv. In shares, share options, Irredeemable. Pref. Shares P P
Like shares, if IPS have no CO for paying capital or dividend, it makes it equity
 Contractual right to exchange FIs u/ fav conditions (fav. Frwd contract by bank) P P
 Inv. equity readily convertible to cash P P
 Convertible Preference Shares O P
 Employee options scheme P P
 Share Appreciation Rights P P
 Residual interest in the NAs (e.g. equity share) BM + CCF If Dividend paying BM + CCF
 Common / Bonus shares BM test BM test
 NCI O P
 Share purchase right P
 Contingently convertible shares O P

I. INITIAL RECOGNITION / CLASSIFICATION

i. FVTPL - HFT (default)
 IR & SM: Fair Value (Face value – Discount / + Premium)
 Disposal: Cash – T. Cost applied on gross
- TC is expensed
- If HFT, then FVTPL is mandatory
- Similar treatment as for Equity FVTOCI

ii. FVTOCI – Long-term + AFS (IE) Dividends

 IR: Fair Value (Face value – Discount / + Premium) + TC applied on Fair Value
 SM: FV
 Disposal: Cash – T. Cost applied on gross
- If NOT HFT, + Irrevocable Election @ IR for classification on security-to-security basis.
- No subsequent reclassification allowed.

II. ACCOUNTING
i. FVTPL – HFT (default category for all unless opted for FVTOCI)
 If HFT then no option but to classify under FVTPL
 SoCI - P/L  Trans. Cost applied on Fair Value
 Dividend
 G/L on FV remeasurement and Disposal (no need to mark to MV on disposal)

Openin Dividen
Year g FV Diff (P/L) d
110,00
2001 80,000 0 30,000 4,000
110,00 120,00
2002 0 0 10,000 -
120,00 125,00
2003 0 0 5,000 2,000
125,00 115,00
2004 0 0 (10,000) 3,000
115,00 100,00
2001 2002 2004
2005 0 0 (15,000) - F. Asset 80,000 F.A 10,000 FV Loss (P/L) 10,000
20,000 9,000 Bank 80,000 F.V Gain (P/L) 10,000 F. A 10,000
2001 2002 2003 2004 2005
(15,000 29,00 P/L 2,000 Bank 3,000
SoCFs 34,000 10,000 7,000 (7,000) ) 0 Bank (TC) 2,000 2003 Div. Inc 3,000
(15,000 20,00
F.A 30,000 F.A 5,000
SOCI - P/L 30,000 10,000 5,000 (10,000) ) 0 F. Inc 30,000 F.V Gain (P/L) 5,000 2005

- P/L 4,000 - 2,000 3,000 - 9,000 Bank 4,000 Bank 4,000 FV Loss 15,000
SOFP - 110,00 120,00 100,00 Div. Inc. 4,000 Div. Inc. 4,000 F. A 15,000
NCA 0 0 125,000 115,000 0 -
I. FVTOCI – HTM + Dividends
- IR  FV+TC applied on Fair Value
- Reclassification: Can NEVER go back to FVTPL
- SOFP  o OCI to Investment Revaluation Reserve (other components of equity)
(Reserve may have a negative balance as well)
o Disposal: No recycling but realized gain/loss can be transferred to Retained Earnings or left alone
- SoCI: P/L  Dividend
 Forex differences and Impairments
OCI  G/L on FV remeasurement
 G/L on Disposal (this reserve is then transferred to R.E at the same time of disposal) (no need to mark to MV on disposal)

Year Opening FV Diff (P/L) Div (P/L) 2001 2002 2004

2001 82,000 110,000 28,000 4,000 F. Asset 82,000 F.A 10,000 FV Loss (OCI) 10,000
2002 110,000 120,000 10,000 - Bank 80,000 FV Gain (OCI) 10,000 F. A 10,000
2003 120,000 125,000 5,000 2,000 Bank (TC) 2,000
2004 125,000 115,000 (10,000) 3,000 Bank 3,000
2005 115,000 100,000 (15,000) - F.A. 28,000 2003
Div. Inc 3,000
18,000 9,000 FV Gain (OCI) F.A 5,000
2001 2002 2003 2004 2005 28,000 FV Gain (OCI) 5,000
2005
SoCFs 32,000 10,000 7,000 (7,000) (15,000)
SOCI - P/L 28,000 10,000 5,000 (10,000) (15,000) Bank 4,000 Bank 2,000
- P/L 4,000 - 2,000 3,000 - Div. Inc. 2,000 FV Loss (OCI) 15,000
Div. Inc (P/L) 4,000
SOFP - NCA 110,000 120,000 125,000 115,000 100,000 F. A 15,000
-Reserve 28,000 38,000 43,000 33,000 18,000
 B. FINANCIAL LIABILITIES
FINANCIAL LIABILITIES A.C FVTPL
A CO to deliver cash or another FI to another entity (loan)
A CO to exchange FIs u/ potentially unfav conditions P
(Derivatives, unfav. Forward contract)
Trade payable P O
Liabilities for debt securities HFT, which are measured at FV. P
Convertible bonds, Liability Liability component, when conversion feature
component doesn’t meet equity classification criteria
Red. Pref shares, or PS with fixed cumulative dividend
Contingent Consideration Related to BC, often based on future
performance targets.
Trade Payable O P
Bonds , Debentures, Loan Notes issued O P
Borrowing/loans P P Entity has option to classify here if the
related asset for which it is obtained is recorded
at FVTPL
Accrual payments O O
Warranty provisions & Contingent prov P O
Dividend payable O P
Red. Debentures P
Red. Pref shares  dividend to P/L P
If Ir PS have no obligation to pay capital or Div

I. INITIAL RECOGNITION / CLASSIFICATION

 A.C: Default + Not HFT

 IR: Fair Value (Face value – Discount / + Premium) – TC applied on Fair Value
 SoCI: P/L  Finance Income @ EIRR on Opening Balance
 G/L on disposal (no need to mark to MV on disposal)
 SoFP - NCL  Cl. balance in amortization schedule at RD (no splitting between CL and NCL)
- CL  Closing of second last year will be shown as C.L
- Can NOT be reclassified

 FVTPL HFT OR Irrevocable Election (NO reclassification)

 IR: Fair Value (Face value – Discount / + Premium)- TC applied on Fair Value
 SoCI: P/L  Transaction Cost applied on Fair Value
 FV Differences
 G/L on disposal (no need to mark to MV on disposal)
 SoFP - NCL  Clo. balance in amortization schedule at RD (no splitting between CL and NCL)

Other Matters
Equity Instrument issued at Premium with Transaction Cost
Share Premium A/c
Bank (T. cost)
1,000 Shares issued at Rs. 12 with IC of Rs. 200

Bank ((1,000*12)-200) 11,800

Ord. Share Capital (1,000*10) 10,000
Share Premium (b/f) 1,800
FACTORING OF RECEIVABLES
An entity has receivables of $1m which it sells to a factor for $940,000.

 If "with recourse" NO derecognition

Bank $940,000
Loan $ 940,000
with $60,000 finance costs.

 If "without recourse"
Bank $940,000
Loss $ 60,000
A/R $ 1,000,000