PFRS 9 (Financial Instruments-Summary) Financial Assets,

Financial Liabilities, and Equity Instruments

Cost accounting (University of Southern Mindanao)

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 PFRS 9

Objective
Establish principles for the financial reporting of financial assets and financial liabilities that will present relevant
and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty
of an entity’s future cash flows.

Scope
PFRS 9 shall be applied by all entities to all types of financial instruments except:

➢ Interests in subsidiaries, associates and joint ventures

➢ Rights and obligations under leases
➢ Employers’ rights and obligations under employee benefit plans
➢ Financial instruments issued by the entity that meet the definition of an equity instrument in PAS 32
➢ Insurance contract
➢ Forward contract under business combinations
➢ Loan commitments
➢ Financial instruments, contracts and obligations under share-based payment
➢ Reimbursements classified as provisions
➢ Rights and obligations rising from revenue from contracts with customers

Definitions

12-month expected The portion of lifetime expected credit losses that represent the expected credit
credit losses losses that result from default events on a financial instrument that are possible within
the 12 months after the reporting date.

Amortized cost of a The amount at which the financial asset or financial liability is measured at initial
financial asset or recognition minus the principal repayments, plus or minus the cumulative amortisation
financial liability using the effective interest method of any difference between that initial amount
and the maturity amount and, for financial assets, adjusted for any loss allowance.

Derecognition The removal of a previously recognised financial asset or financial liability from an
entity’s statement of financial position.

Derivative A financial instrument or other contract within the scope of PFRS 9 with all three of the
following characteristics.
a. its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or other variable, provided in the case of a
non-financial variable that the variable is not specific to a party to the contract
(sometimes called the ‘underlying’).
b. it requires no initial net investment or an initial net investment that is smaller
than would be required for other types of contracts that would be expected to
have a similar response to changes in market factors.

c. it is settled at a future date.

Dividends Distributions of profits to holders of equity instruments in proportion to their

holdings of a particular class of capital.

Effective interest The method that is used in the calculation of the amortised cost of a financial
method asset or a financial liability and in the allocation and recognition of the interest
revenue or interest expense in profit or loss over the relevant period.

Effective interest rate The rate that exactly discounts estimated future cash payments or receipts through the
expected life of the financial asset or financial liability to the gross carrying amount
of a financial asset or to the amortised cost of a financial liability.

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Reclassification date The first day of the first reporting period following the change in business model that
results in an entity reclassifying financial assets.

Solely payments of Returns consistent with a basic lending arrangement, interest may include return not
principal and interest only for the time value of money and credit risk but also for other components such as a
(SPPI) return for liquidity risk, amounts to cover expenses and a profit margin.

Transaction costs Incremental costs that is directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability. An incremental cost is one that would not have been
incurred if the entity had not acquired, issued or disposed of the financial instrument.

INITIAL RECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

➢ When the entity becomes party to the contractual provisions of the instrument.

INITIAL MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

At fair value, plus for those financial assets and liabilities not classified at fair value through profit or loss,
directly attributable transaction costs.
➢ Fair value - is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
➢ Directly attributable transaction costs - incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability.

In other words transaction cost would immediately be recognized as an expense if the financial asset or liability is
classified at fair value through profit or loss.

SUBSEQUENT CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS

➢ Debt instruments shall be classified at Amortized Cost (AC), Fair Value through Other
Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL).
➢ Equity instruments shall be classified at Fair Value through Other Comprehensive Income
(FVOCI) or Fair Value through Profit or Loss (FVPL).

DEBT INSTRUMENTS

Financial Assets at Amortized Cost

Requisites for ➢ The asset is held to collect its contractual cash flows and
Classification ➢ The asset’s contractual cash flows represent ‘solely payments of principal and
interest’
Profit or Loss ➢ Effective interest income
Implications ➢ Impairments losses and reversal gains
➢ Gain or loss on derecognition
Statement of ➢ Measured at amortized cost
financial position ➢ Classified as a non current asset unless maturity is within 12 months after the end of
the reporting period

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for ➢ The objective of the business model is achieved both by collecting contractual cash
Classification flows and selling financial assets; and
➢ The asset’s contractual cash flows represent SPPI.
Profit or Loss ➢ Effective interest (income)
Implications ➢ Impairments losses and reversal gains
➢ Gain or loss on derecognition including reclassification adjustments (PAS 1)
OCI ➢ Changes in fair value due to subsequent measurement
Statement of ➢ Measured at fair value after amortization for the effective interest
Financial ➢ Cumulative gain or loss on fair value in Equity
Position ➢ Since PFRS 5 excludes the scope for financial assets, FVOCI are non current asset
unless maturity is within 12 months after the end of the reporting period

Note that both amortization is applied under the effective interest method before applying the FV

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measurement requirement for the FVOCI classification

Financial Assets at Fair Value Through Profit Or Loss

Requisites for ➢ This is a “residual category” if none of the two previously mentioned (AC and
Classification FVOCI) business models apply or if any of the two business model apply but the
contractual cash flows are NOT SPPI for example if interest will include a profit
participation.
➢ If the two requisites for the AC and FVOCI category are met but the entity
elects to measure debt instruments at FVPL to eliminate an “accounting mismatch”
because financial liabilities are measured at FVPL.
Profit or Loss ➢ Nominal interest (income)
Implications ➢ Direct transaction cost incurred on acquisition
➢ Gain or loss on changes in fair value on subsequent measurement
➢ Gain or loss on derecognition
Statement of ➢ Measured at fair value
Financial ➢ Under the assumption the Financial asset is held for trading, FVPL shall be
Position classified as a current asset (PAS 1)

EQUITY INSTRUMENTS

Financial Assets at Fair Value Through Profit Or Loss

Requisites for
Classification ➢ Both held for Trading or Non Trading
Profit or Loss ➢ Dividends
Implications ➢ Direct transaction cost incurred on acquisition
➢ Gain or loss on changes in fair value on subsequent measurement
➢ Gain or loss on derecognition
Statement of ➢ Measured at fair value
Financial Position ➢ Under the assumption the Financial asset is held for trading, FVPL shall be
classified as a current asset (PAS 1)

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for ➢ An irrevocable election to present in OCI an investment in equity instruments that
Classification
is not held for trading
Profit or Loss ➢ Dividends
Implications
OCI ➢ Changes in fair value due to subsequent measurement
➢ Gain or loss on derecognition and may be transferred within Equity (Retained
Earnings)
Statement of ➢ Measured at fair value
Financial Position ➢ Cumulative gain or loss on fair value in Equity
➢ Non trading investments are classified under the non current assets section of the
statement of financial position

Note that PFRS 9 has eliminated the impairment loss category for equity instruments

RECLASSIFICATIONS OF DEBT INSTRUMENTS

Original category New category Accounting impact

Fair value is measured at

reclassification date.
Amortized cost FVPL Difference from carrying amount
should be recognized in profit or
loss.
Fair value at the reclassification
FVPL Amortized Cost date becomes its new gross
carrying amount
Amortized cost FVOCI Fair value is measured at

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 reclassification date. Difference
from amortized cost should be
recognized in OCI. Effective
interest rate is not adjusted as a
result of the reclassification.

Fair value at the reclassification

date becomes its new amortized
cost carrying amount. Cumulative
FVOCI Amortized cost gain or loss in OCI is adjusted
against the fair value of the
financial asset at reclassification
date.
Fair value at reclassification date
FVPL FVOCI becomes its new carrying
amount.
Fair value at reclassification date
becomes carrying amount.
Cumulative gain or loss on OCI
FVOCI FVPL
is reclassified to profit or loss at
reclassification date

IMPAIRMENT OF FINANCIAL ASSETS

Scope

A single set of an impairment model will be applied to:

a. Financial assets measured at amortised cost including trade receivables
b. Financial assets measured at fair value through OCI
c. Loan commitments and financial guarantees contracts where losses are currently accounted for under
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
d. Lease receivables

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial
instrument that determine
a. The recognition of impairment, and
b. The recognition of interest revenue

THREE STAGE APPROACH TO IMPAIRMENT

Stage 1 – Applied at initial recognition and subsequent measurement when there is no significant increase in
credit risk

a. As soon as a financial instrument is originated or purchased, 12-month expected credit losses are
recognised in profit or loss and a loss allowance is established.
b. Entities continue to recognise 12 month expected losses that are updated at each reporting date
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.

Stage 2 – Applied at subsequent measurement when there is a significant increase in credit risk.

a. 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 recognised.
b. Lifetime expected credit losses are only recognised if the credit risk increases significantly from when the
entity originates or purchases the financial instrument.
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.
Stage 3 – Applied at subsequent measurement when there is credit impairment

a. 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 net amortised cost
b. Financial assets in this stage will generally be individually assessed.
c. Lifetime expected credit losses are still recognized on the financial assets.

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MEASUREMENT OF CREDIT LOSSES

Credit losses are the present value of all cash shortfalls. Expected credit losses are an estimate of credit losses over
the life of the financial instrument.

Factors in measuring credit losses:

a. The probability-weighted outcome: expected credit losses should represent neither a best or worst-case
scenario. Rather, the estimate should reflect the possibility that a credit loss occurs and the possibility that
no credit loss occurs.
b. The time value of money: expected credit losses should be discounted to the reporting date.
c. Reasonable and supportable information that is available without undue cost or effort.

FINANCIAL LIABILITIES

Classification Subsequent Measurement

➢ Amortized Cost Amortized cost using the effective interest method of

➢ FVPL for financial liabilities that are:
a. Held for trading
b. Derivative financial liabilities
c. Designated at initial recognition at
FV
➢ Financial guarantee contracts and
➢ Commitments to provide a loan at a
below market interest rate
➢ Financial liabilities resulting from
the transfer of a financial asset
amortization
At fair value with all gains and losses recognized in profit or
loss
Higher amount between the amount determined in
accordance with IAS 37 and the amount initially recognized
minus cumulative amortization recognized.
Amortized cost of the rights and obligations retained of the
fair value of the rights and obligations retained by the entity
when measured on a stand alone basis.

DERECOGNITION

FINANCIAL LIABILITIES

a. A financial liability is derecognised only when extinguished

b. An exchange between an existing borrower and lender of debt instruments with substantially different
terms or substantial modification of the terms of an existing financial liability of part thereof is
accounted for as an extinguishment
c. The difference between the carrying amount of a financial liability extinguished or transferred to a 3rd
party and the consideration paid is recognized in profit or loss.

FINANCIAL ASSETS

The following criteria should be met in order for an entity to derecognize a financial asset:

a. The rights to the cash flows from the asset has expired.
b. The entity has transferred its rights to receive the cash flows from the asset and transferred
substantially all the risk and rewards.
c. If the entity does not retain control of the asset

The recognition for the gains and losses from derecognition will depend if the financial asset is a debt instrument or
equity instrument and its classification as AC, FVOCI or FVPL.

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