Chapter 16

FINANCIAL INSTRUMENTS RECOGNITION AND MEASUREMENT (IFRS 9)

OBJECTIVE
IFRS 9’s objective is to establish principles for the financial reporting of financial assets
that will present relevant and useful information to users of financial statements for
their assessment of amounts, timing and uncertainty of the entity’s future cash flows.
SCOPE
IFRS 9 applies to all types of financial instruments except for the following, which are
scoped out of IFRS 9:
interests in subsidiaries, associates, and joint ventures accounted for under IAS
27, IAS 28, or IAS 31; however IAS 32 and IFRS 9 apply in cases where under IAS
27, IAS 28, or IAS 31 such interests are to be accounted for under IFRS 9 - for
example, derivatives on an interest in a subsidiary, associate, or joint venture;
employers' rights and obligations under employee benefit plans to which IAS
19 applies;
contracts requiring payment based on climatic, geological, or other physical
variable, except derivatives embedded in such contracts are subject to IFRS
9;
rights and obligations under insurance contracts, except IIFRS 9 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;
financial instruments that meet the definition of own equity under IAS 32,
however, the holder of this instrument will apply this IAS.
Leases IFRS 9 applies to lease receivables and payables only in limited respects:
It applies to lease receivables with respect to de-recognition and impairment
provisions.
It applies to lease payables with respect to the de-recognition provisions. IFRS
9 applies to derivatives embedded in leases.
derivatives that are embedded in leases are subject to the embedded
derivatives provisions of this Standard
Financial guarantees.
The financial guarantees are in the scope of IAS.
Loan Commitments
(a) Loan commitments that the entity designates as financial liabilities at fair
value through profit or loss. An entity that has a past practice of selling the
assets resulting from its loan commitments shortly after origination shall apply
this Standard to all its loan commitments in the same class.
(b) Loan commitments that can be settled net in cash or by delivering or issuing
another financial instrument. These loan commitments are derivatives. A loan
commitment is not regarded as settled net merely because the loan is paid
out in installments (for example, a mortgage construction loan that is paid out
in installments in line with the progress of construction).
(c) C commitments to provide a loan at a below-market interest rate.
Contracts to buy or sell financial items Contracts to buy or sell financial items are
also within the scope of IFRS 9.
Contracts to buy or sell non-financial items Contracts to buy or sell non-financial
items are within the scope of IFRS 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,

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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.
Definitions
A derivative is a financial instrument:
Whose value changes in response to the change in an underlying variable
such as an interest rate, commodity or security price, or index;
That requires no initial investment, or one that is smaller than would be
required for a contract with similar response to changes in market factors;
and
That is settled at a future date.
Examples of derivatives
Forwards: Contracts to purchase or sell a specific quantity of a financial instrument,
a commodity, or a foreign currency at a specified price determined at the outset,
with delivery or settlement at a specified future date. Settlement is at maturity by
actual delivery of the item specified in the contract, or by a net cash settlement.
Interest Rate Swaps and Forward Rate Agreements: Contracts to exchange cash
flows as of a specified date or a series of specified dates based on a notional
amount and fixed and floating rates.
Futures: Contracts similar to forwards but with the following differences: Futures are
generic exchange-traded, whereas forwards are individually tailored. Futures are
generally settled through an offsetting (reversing) trade, whereas forwards are
generally settled by delivery of the underlying item or cash settlement.
Options: Contracts that give the purchaser the right, but not the obligation, to buy
(call option) or sell (put option) a specified quantity of a particular financial
instrument, commodity, or foreign currency, at a specified price (strike price), during
or at a specified period of time. These can be individually written or exchange-
traded. The purchaser of the option pays the seller (writer) of the option a fee
(premium) to compensate the seller for the risk of payments under the option.
Caps and Floors: These are contracts sometimes referred to as interest rate options.
An interest rate cap will compensate the purchaser of the cap if interest rates rise
above a predetermined rate (strike rate) while an interest rate floor will compensate
the purchaser if rates fall below a predetermined rate.
The amortized cost of a financial asset or financial liability is the amount at which the
financial asset or financial liability is measured at initial recognition minus principal
repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount,
and minus any reduction for impairment or un-collectability.
The effective interest method is a method of calculating the amortized cost of a
financial asset or a financial liability and of allocating the interest income or interest
expense over the relevant period. The effective interest rate is the rate that exactly
discounts estimated future cash payments or receipts through the expected life of
the financial instrument or, when appropriate, a shorter period to the net carrying
amount of the financial asset or financial liability. When calculating the effective
interest rate, an entity shall estimate cash flows considering all contractual terms of
the financial instrument but shall not consider future credit losses. The calculation
includes all fees and points paid or received between parties to the contract that
are an integral part of the effective interest rate, transaction costs, and all other
premiums or discounts.
INITIAL RECOGNITION AND MEASUREMENT
An entity shall recognize a financial asset or financial liability in its statement of
financial position when and only and only when it becomes party to contractual
provisions of the instrument.
All financial assets and financial liability in IFRS 9 are to be initially recognized at fair
value, plus, in the case of a financial asset or financial liability that is not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition
of the financial asset.
Regular way purchase or sale of financial assets
A regular way purchase or sale of financial asset is recognized using either trade
date accounting or settlement date accounting.
When an entity uses settlement date accounting for an asset that is subsequently
measured at amortized cost, the asset is recognized initially at its fair value on the
trade date.
CLASSIFICATION AND MEASUREMENT
IFRS 9 has two measurement categories: amortized cost and fair value. In order to
determine the financial assets that fall into each measurement category, it may be
helpful for management to consider whether the financial asset is an investment in
an equity instrument as defined in IAS 32, 'Financial instruments: Presentation'. If the
financial asset is not an investment in an equity instrument, management should
consider the guidance for debt instruments below.
Classification and measurement - Debt instruments
An entity shall classify financial assets as subsequently measured at amortized cost,
fair value through other comprehensive income or fair value through profit or loss on
the basis of both:
a) the entity’s business model for managing the financial assets; and
b) the contractual cash flow characteristics of the financial asset.
The financial asset should be measured at amortized cost if both of the following
conditions are met: -
 The objective of the entity's business model is to hold the asset to collect the
contractual cash flows.
 The asset's contractual cash flows represent only payments of principal and
interest.
Interest is consideration for the time value of money and the credit risk
associated with the principal amount outstanding during a particular period
of time.
A financial asset shall be measured at fair value through other comprehensive
income if both of the following conditions are met:
(a) the financial asset is held within a business model whose objective is achieved
by both collecting contractual cash flows and selling financial assets and
(b) 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.
A financial asset shall be measured at fair value through profit or loss unless it is
measured at amortized cost or at fair value through other comprehensive income.
However an entity may make an irrevocable election at initial recognition for
particular investments in equity instruments that would otherwise be measured at fair

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value through profit or loss to present subsequent changes in fair value in other
comprehensive income.
Option to designate a financial asset at fair value through profit or loss
An entity may, at initial recognition, irrevocably designate a financial asset as
measured at fair value through profit or loss 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 recognizing the gains and losses on them on different bases.
Classification and measurement - Business model
Financial assets are subsequently measured at amortized cost or fair value based on
the entity’s business model for managing the financial assets. An entity assesses
whether its financial assets meet this condition based on its business model as
determined by the entity’s key management personnel.
Management will need to apply judgment to determine at what level the business
model condition is applied. That determination is made on the basis of how an entity
manages its business; it is not made at the level of an individual asset. Therefore, the
entity’s business model is not a choice and does not depend on management’s
intentions for an individual instrument; it is a matter of fact that can be observed by
the way an entity is managed and information is provided to its management.
Although the objective of an entity’s business model may be to hold financial assets
in order to collect contractual cash flows, some sales or transfers of financial
instruments before maturity would not be inconsistent with such a business model.
The following are examples of sales before maturity that would not be inconsistent
with a business model of holding financial assets to collect contractual cash flows:
 an entity may sell a financial asset if it no longer meets the entity’s investment
policy, because its credit rating has declined below that required by that
policy;
 when an insurer adjusts its investment portfolio to reflect a change in the
expected duration (that is, payout) for its insurance policies; or
 when an entity needs to fund capital expenditure.
However, if more than an infrequent number of sales are made out of a portfolio,
management should assess whether and how such sales are consistent with an
objective of collecting contractual cash flows. There is no set rule for how many sales
constitutes ‘infrequent’; management will need to use judgment based on the facts
and circumstances to make its assessment.
An entity’s business model is not to hold instruments to collect the contractual cash
flows − for example, where an entity manages the portfolio of financial assets with
the objective of realizing cash flows through sale of the assets. Another example is
when an entity actively manages a portfolio of assets in order to realize fair value
changes arising from changes in credit spreads and yield curves, which results in
active buying and selling of the portfolio.
Example 1 – Factoring
An entity has a past practice of factoring its receivables. If the significant risks and
rewards have transferred from the entity, resulting in the original receivable being
derecognized from the balance sheet, the entity is not holding these receivables to
collect its cash flows but to sell them.
However, if the significant risks and rewards of these receivables are not transferred
from the entity, and the receivables do not, therefore, qualify for de-recognition, the
client's business objective may still be to hold the assets in order to collect the
contractual cash flows.
Example 2 – Syndicated loans
An entity’s business model is to lend to customers and hold the resulting loans for the
collection of contractual cash flows. However, sometimes the entity syndicates out
portions of loans that exceed their credit approval limits. This means that, at
inception, part of such loans will be held to collect contractual cash flows and part
will be held-for-sale. The entity, therefore, has two business models to apply to the
respective portions of the loans.
Example 3 – Portfolio of sub-prime loans
An entity that operates in the sub-prime lending market purchases a portfolio of sub-
prime loans from a competitor that has gone out of business. The loans are
purchased at a substantial discount from their face value, as most of the loans are
not currently performing (that is, no payments are being received, in many cases
because the borrower has failed to make payments when due). The entity has a
good record of collecting sub-prime loan arrears. It plans to hold the purchased
loan balances to recover the outstanding cash amounts relating to the loans that
have been purchased. As the business model is to hold the acquired loans and not
to sell them, the business model test is met.
Classification and measurement - Contractual cash flows that are solely payments of
principal and interest
The other condition that must be met in order for a financial asset to be eligible for
amortized cost accounting is that 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". In this case, interest is defined as
consideration for the time value of money and for the credit risk associated with the
principal amount outstanding during a particular period of time.
In order to meet this condition, there can be no leverage of the contractual cash
flows. Leverage increases the variability of the contractual cash flows with the result
that they do not have the economic characteristics of interest. Leverage is generally
viewed as any multiple above one.
However, unlike leverage, certain contractual provisions will not cause the ‘solely
payments of principal and interest’ test to be failed. For example, contractual
provisions that permit the issuer to pre-pay a debt instrument or permit the holder to
put a debt instrument, back to the issuer before maturity result in contractual cash
flows that are solely payments of principal and interest as long as the following
certain conditions are met:
The pre-payment amount substantially represents unpaid amounts of principal and
interest on the principal amount outstanding (which may include reasonable
additional compensation for the early termination of the contract).
Contractual provisions that permit the issuer or holder to extend the contractual
term of a debt instrument are also regarded as being solely payments of principal
and interest, provided during the term of the extension the contractual cash flows
are solely payments of principal and interest as well (for example, the interest rate
does not step up to some leveraged multiple of LIBOR) and the provision is not
contingent on future events.
The following are examples of contractual cash flows that are not solely payments of
principal and interest:
 Links to equity index, borrower’s net income or other non-financial variables.
 Deferrals of interest payments where additional interest does not accrue on
those deferred amounts.
 Convertible bond (from the holder’s perspective).

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If a contractual cash flow characteristic is not genuine, it does not affect the
financial asset's classification. In this context, ‘not genuine’ means the occurrence of
an event that is extremely rare, highly abnormal and very unlikely to occur.
Example 1 – Changing credit spread
An entity has a loan agreement that specifies that the interest rate will change
depending on the borrower’s credit rating, EBITDA or gearing ratio. Such a feature
will not fail the ‘solely payments of principal and interest’ test provided the
adjustment is considered to reasonably approximate the credit risk of an instrument
with that level of EBITDA, gearing or credit rating. That is, if such a covenant
compensates the lender with higher interest when the borrower's credit risk increases
then this is consistent with interest being defined as the consideration for the credit
risk and the time value of money. However, if the covenant results in more than just
compensation for credit or provides for some level of interest based on the entity's
profitability that will not meet the test.
Example 2 – Average rates
An entity has a loan agreement where interest is based on an average LIBOR rate
over a period. That is, the loan has no defined maturity, but rolls every two years with
reference to the two year LIBOR rate. The interest rate is reset every two years to
equal the average two year LIBOR rate over the last two years. The economic
rationale is to allow borrowers to benefit from a floating rate, but with an averaging
mechanism to protect them from short-term volatility. Such a feature will not fail the
‘solely payments of principal and interest’ test provided the average rate represents
compensation for only the time value of money and credit risk.
Classification and measurement - Non-recourse
A non-recourse provision is an agreement that, should the debtor default on a
secured obligation, the creditor can look only to the securing assets (whether
financial or non-financial) to recover its claim. Should the debtor fail to pay and the
specific assets fail to satisfy the full claim, the creditor has no legal recourse against
the debtor's other assets. The fact that a financial asset is non-recourse does not
necessarily preclude the financial asset from meeting the condition to be classified
at amortized cost.
If a non-recourse provision exists, the creditor is required to assess (to ‘look through
to’) the particular underlying assets or cash flows to determine whether the financial
asset's contractual cash flows are solely payments of principal and interest. If the
instrument's terms give rise to any other cash flows or limit the cash flows in a manner
inconsistent with ‘solely payments of principal and interest’, the instrument will be
measured in its entirety at fair value through profit or loss.
There is limited guidance as to how the existence of a non-recourse feature may
impact the classification of non-recourse loans at amortized cost. Judgment will,
therefore, be needed to assess these types of lending relationships.
Classification and measurement - Equity instruments
Investments in equity instruments are always measured at fair value. Equity
instruments that are held for trading are required to be classified as at fair value
through profit or loss. For all other equities, management has the ability to make an
irrevocable election on initial recognition, on an instrument-by-instrument basis, to
present changes in fair value in other comprehensive income (OCI) rather than
profit or loss. If this election is made, all fair value changes, excluding dividends that
are a return on investment, will be reported in OCI. There is no recycling of amounts
from OCI to profit and loss – for example, on sale of an equity investment – nor are
there any impairment requirements. However, the entity may transfer the cumulative
gain or loss within equity.
 Example 1 – Investment in perpetual note
An entity (the holder) invests in a subordinated perpetual note, redeemable at the
issuer's option, with a fixed coupon that can be deferred indefinitely if the issuer does
not pay a dividend on its ordinary shares. The issuer classifies this instrument as equity
under IAS 32. The holder has the option to classify this investment at fair value
through OCI under IFRS 9, as it is an equity instrument as defined in IAS 32.
Example 2 – Investment in a puttable share
An entity (the holder) invests in a fund that has puttable shares in issue – that is, the
holder has the right to put the shares back to the fund in exchange for its pro
rata share of the net assets. The puttable shares may meet the requirements to be
classified as equity from the fund’s perspective, but this in an exception, as they do
not meet the definition of equity in IAS 32. However, the holder does not have the
ability to classify this investment as fair value through OCI, as paragraph 96C of IAS
32 states that puttable should not be considered an equity instrument under other
guidance. Investments in puttable shares are, therefore, required to be classified as
fair value through profit or loss, as they cannot be regarded as equity instruments for
IFRS 9.
Example 3 – Dividend return on investment
An entity invests in shares at a cost of C12 and designates these at fair value through
OCI. The fair value then increases to C22, giving rise to an unrealized gain of C10 in
OCI. The issuer then pays a special dividend of C10. This dividend is recorded in
profit or loss in accordance with IAS 18, ‘Revenue’; as such a dividend does not
represent a recovery of part of the cost of the investment.
Equity Instruments at Cost
The standard removes the requirement in IAS 39 to measure unquoted equity
investments at cost when the fair value cannot be determined reliably. However,
IFRS 9 includes indicators of when cost might not be representative of fair value.
These are:
 A significant change in the investee's performance compared with budgets,
plans or milestones.
 Changes in expectation that the investee’s technical product milestones will
be achieved.
 A significant change in the market for the investee’s equity or its products or
potential products.
 A significant change in the global economy or the economic environment in
which the investee operates.
 A significant change in the performance of comparable entities or in the
valuations implied by the overall market.
 Internal matters of the investee such as fraud, commercial disputes, litigation,
or changes in management or strategy.
 Evidence from external transactions in the investee’s equity, either by the
investee (such as a fresh issue of equity) or by transfers of equity instruments
between third parties.
Given the indicators above, it is not expected that cost will be representative of fair
value for an extended period of time.
Classification and measurement - Embedded derivatives
The accounting for embedded derivatives in host contracts that are financial assets is
simplified by removing the requirement to consider whether or not they are closely
related and should, therefore, be separated. The classification approach in the new
standard applies to all financial assets, including those with embedded derivatives.

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Many embedded derivatives introduce variability to cash flows. This is not consistent
with the notion that the instrument’s contractual cash flows solely represent the
payment of principal and interest. If an embedded derivative was not considered
closely related under the existing requirements, this does not automatically mean the
instrument will not qualify for amortized cost treatment under the new standard.
However, most hybrid contracts with financial asset hosts will be measured at fair
value in their entirety.
The accounting for embedded derivatives in non-financial host contracts and
financial liabilities currently remains unchanged.
CLASSIFICATION OF FINANCIAL LIABILITIES
An entity shall classify all financial liabilities as subsequently measured at amortized
cost, except for:
(a) financial liabilities at fair value through profit or loss. Such liabilities, including
derivatives that are liabilities, shall be subsequently measured at fair value.
(b) financial liabilities that arise when a transfer of a financial asset does not
qualify for de-recognition or when the continuing involvement approach
applies.
(c) financial guarantee contracts. After initial recognition, an issuer of such a
contract shall subsequently measure it at the higher of:
 the amount of the loss allowance; and
 the amount initially recognized less, when appropriate, the cumulative
amount of income recognized in accordance with the principles of IFRS
15.
(d) commitments to provide a loan at a below-market interest rate. An issuer of
such a commitment shall subsequently measure it at the higher of:
 the amount of the loss allowance; and
 the amount initially recognized less, when appropriate, the cumulative
amount of income recognized in accordance with the principles of IFRS
15.
(e) contingent consideration recognized by an acquirer in a business
combination to which IFRS 3 applies. Such contingent consideration shall
subsequently be measured at fair value with changes recognized in profit or
loss.
Option to designate a financial liability at fair value through profit or loss
An entity may, at initial recognition, irrevocably designate a financial liability as
measured at fair value through profit or loss when doing so results in more relevant
information, because either:
(a) it 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 recognizing the
gains and losses on them on different bases; or
(b) a group of financial liabilities or financial assets and financial liabilities is
managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy,
and information about the group is provided internally on that basis to the
entity’s key management personnel (as defined in IAS 24 Related Party
Disclosures), for example, the entity’s board of directors and chief executive
officer.
Re-classification
If an entity reclassifies financial assets, it shall apply the reclassification prospectively
from the reclassification date. The entity shall not restate any previously recognized
gains, losses (including impairment gains or losses) or interest.
When, and only when, an entity changes its business model for managing financial
assets it shall reclassify all affected financial assets as under: -
From Amortized cost to at fair value through profit or loss account
The fair value is measured at the reclassification date. Any gain or loss arising from a
difference between the previous amortized cost of the financial asset and fair value
is recognized in profit or loss.
From at fair value through profit or loss account to Amortized cost
The fair value at the reclassification date becomes its new gross carrying amount.
From Amortized cost to at fair value through other comprehensive income
The fair value is measured at the reclassification date. Any gain or loss arising from a
difference between the previous amortized cost of the financial asset and fair value
is recognized in other comprehensive income. The effective interest rate and the
measurement of expected credit losses are not adjusted as a result of the
reclassification.
From at fair value through other comprehensive income to Amortized cost
The financial asset is reclassified at its fair value at the reclassification date. However,
the cumulative gain or loss previously recognized in other comprehensive income is
removed from equity and adjusted against the fair value of the financial asset at the
reclassification date. As a result, the financial asset is measured at the
reclassification date as if it had always been measured at amortized cost. This
adjustment affects other comprehensive income but does not affect profit or loss
and therefore is not a reclassification adjustment
The effective interest rate and the measurement of expected credit losses are not
adjusted as a result of the reclassification.
From at fair value through profit or loss account to at fair value through other
comprehensive income
The financial asset continues to be measured at fair value. The effective interest rate
to be determined on re-classification date for recognition of interest income.
From at fair value through other comprehensive income to at fair value through profit
or loss account
The financial asset continues to be measured at fair value. The cumulative gain or
loss previously recognized in other comprehensive income is reclassified from equity
to profit or loss as a reclassification adjustment at the reclassification date.
An entity shall not reclassify any financial liability.
IMPAIRMENT OF FINANCIAL ASSETS
Recognition of expected credit losses
An entity shall recognize allowance for expected credit losses on a financial asset
classified at amortized cost or at fair value through other comprehensive income, a
lease receivable, contract asset or loan commitment and financial guarantee
contract.
Life time expected credit loss
At each reporting date, an entity shall measure the loss allowance for a financial
instrument at an amount equal to the lifetime expected credit losses if the credit risk
on that financial instrument has increased significantly since initial recognition.

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12 Months expected credit loss
If, at the reporting date, the credit risk on a financial instrument has not increased
significantly since initial recognition, an entity shall measure the loss allowance for
that financial instrument at an amount equal to 12-month expected credit losses.
Modified financial assets
If the contractual cash flows on a financial asset have been renegotiated or
modified and the financial asset was not de-recognized, an entity shall assess
whether there has been a significant increase in the credit risk of the financial
instrument by comparing:
(a) the risk of a default occurring at the reporting date (based on the modified
contractual terms); and
(b) the risk of a default occurring at initial recognition (based on the original,
unmodified contractual terms).
Purchased or originated credit-impaired financial assets
At the reporting date, an entity shall only recognize the cumulative changes in
lifetime expected credit losses since initial recognition as a loss allowance for
purchased or originated credit-impaired financial assets.
Recognition of impairment loss
At each reporting date, an entity shall recognize in profit or loss the amount of the
change in lifetime expected credit losses as an impairment gain or loss. An entity
shall recognize favorable changes in lifetime expected credit losses as an
impairment gain, even if the lifetime expected credit losses are less than the amount
of expected credit losses that were included in the estimated cash flows on initial
recognition.
Simplified approach for trade receivables, contract assets and lease receivables
An entity shall always measure the loss allowance at an amount equal to lifetime
expected credit losses for:
(a) trade receivables or contract assets that result from transactions that are
within the scope of IFRS 15, and that:
(i) do not contain a significant financing component in accordance with
IFRS 15 (or when the entity applies the practical expedient under IFRS
15; or
(ii) contain a significant financing component in accordance with IFRS 15,
if the entity chooses as its accounting policy to measure the loss
allowance at an amount equal to lifetime expected credit losses. That
accounting policy shall be applied to all such trade receivables or
contract assets but may be applied separately to trade receivables
and contract assets.
(b) lease receivables that result from transactions that are within the scope of
IFRS 16, if the entity chooses as its accounting policy to measure the loss
allowance at an amount equal to lifetime expected credit losses. That
accounting policy shall be applied to all lease receivables but may be
applied separately to finance and operating lease receivables.
An entity may select its accounting policy for trade receivables, lease receivables
and contract assets independently of each other.
Measurement of expected credit losses
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; and
(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.
When measuring expected credit losses, an entity need not necessarily identify
every possible scenario. However, it shall consider the risk or probability that a credit
loss occurs by reflecting the possibility that a credit loss occurs and the possibility that
no credit loss occurs, even if the possibility of a credit loss occurring is very low.
The maximum period to consider when measuring expected credit losses is the
maximum contractual period (including extension options) over which the entity is
exposed to credit risk and not a longer period, even if that longer period is consistent
with business practice.
However, some financial instruments include both a loan and an undrawn
commitment component and the entity’s contractual ability to demand repayment
and cancel the undrawn commitment does not limit the entity’s exposure to credit
losses to the contractual notice period. For such financial instruments, and only those
financial instruments, the entity shall measure expected credit losses over the period
that the entity is exposed to credit risk and expected credit losses would not be
mitigated by credit risk management actions, even if that period extends beyond
the maximum contractual period.
RECOGNITION OF GAIN LOSS ON DERECOGNITION
Entire financial asset
 The gain or loss is charged to profit and loss account on de-recognition of the
difference
a) The carrying amount and
b) Consideration received plus any new asset less any new liability assumed
 The entity transfer the financial asset but retains a servicing contract, which
may result in servicing asset or servicing liability
 The entity transfer the financial asset which results in new financial asset or
financial liability or servicing liability, all resulting assets/liabilities are
recognized at fair value
Entire part of financial asset
 The previous carrying value of the parts is allocated between part continue to
be recognized and de-recognized on relative fair value at date of transfer
 The gain or loss is charged to profit and loss account of the difference of: -
a) The carrying value of part de-recognized and;
b) The consideration received
 When the fair value is not determinable for separate parts then carrying value
of recognized part is fair value of total asset less consideration received for
de-recognized asset.
Transfers that do not qualify for de-recognition
If a transfer does not result in de-recognition because the entity has retained
substantially all the risks and rewards of ownership of the transferred asset, the
entity shall continue to recognize the transferred asset in its entirety and shall
recognize a financial liability for the consideration received. In subsequent
periods, the entity shall recognize any income on the transferred asset and
any expense incurred on the financial liability.
Continuing Involvement in transferred asset
Substantial risks / rewards neither transferred nor retained but entity control the asset.
 The related asset and liability is recognized to the extent: -
Involvement in the form of guarantee, the asset will be recognized at lower of
carrying value of asset and maximum consideration to be payable

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 Involvement in the form of written/purchased call option the amount of asset
transferred which the entity may purchase
Involvement in the form of written put option then at lower of fair value of
asset transferred and option exercise price
 The liability will be recognized according to applicable provisions of IFRS9.
However, the associated liability is measured in such a way that the net
carrying value of asset transferred and liability is the: -
Amortized cost of the rights/obligations retained by the entity (asset is
measured at amortized cost.
Fair value of the rights and obligations retained (asset transferred is measured
at FV)

De-recognition principle can be applied to part when: -

a) Part comprise identifiable cash flows
b) Full proportionate share of cash flows of asset
c) Proportionate share of identifiable cash flows

The entity treats the transfer of asset when: -

a) No obligation to pay until it
received from the asset
b) The entity cannot sell or pledge the
asset
c) The cash flows collected are
immediately remitted to Buyer

The transfer of risks and

rewards are determined by the
exposure of an entity to
variability in cash flows before
and after transfer

Control is
determined by
the practical
ability of the
transferee to sell
asset in entirety
to a third party
DE-RECOGNITION OF A FINANCIAL LIABILITY
A financial liability should be removed from the balance sheet when, and only
when, it is extinguished, that is, when the obligation specified in the contract is either
discharged, cancelled, or expired.
Where there has been an exchange between an existing borrower and lender of
debt instruments with substantially different terms, or there has been a substantial
modification of the terms of an existing financial liability, this transaction is
accounted for as extinguishments of the original financial liability and the
recognition of a new financial liability.
A gain or loss from extinguishments of the original financial liability is recognized in
the income statement.
GAINS AND LOSSES
A gain or loss on a financial asset or financial liability that is measured at fair value
shall be recognized in profit or loss unless:
(a) it is part of a hedging relationship;
(b) it is an investment in an equity instrument and the entity has elected to
present gains and losses on that investment in other comprehensive income;
(c) it is a financial liability designated as at fair value through profit or loss and the
entity is required to present the effects of changes in the liability’s credit risk in
other comprehensive income; or
(d) it is a financial asset measured at fair value through other comprehensive
income and the entity is required to recognize some changes in fair value in
other comprehensive income.
DIVIDENDS
A Dividends are recognized in profit or loss only when:
(a) the entity’s right to receive payment of the dividend is established;
(b) it is probable that the economic benefits associated with the dividend will
flow to the entity; and
(c) the amount of the dividend can be measured reliably.
INTEREST INCOME/GAIN AND LOSS
A gain or loss on a financial asset that is measured at amortized cost and is not part
of a hedging relationship and, if applicable, for the fair value hedge accounting for
a portfolio hedge of interest rate risk) shall be recognized in profit or loss when the
financial asset is derecognized, reclassified, through the amortization process or in
order to recognize impairment gains or losses. A gain or loss on a financial liability
that is measured at amortized cost and is not part of a hedging relationship for the
fair value hedge accounting for a portfolio hedge of interest rate risk) shall be
recognized in profit or loss when the financial liability is derecognized and through
the amortization process.
Investments in equity instruments
At initial recognition, an entity may make an irrevocable election to present in other
comprehensive income subsequent changes in the fair value of an investment in an
equity instrument within the scope of this Standard that is neither held for trading nor
contingent consideration recognized by an acquirer in a business combination to
which IFRS 3 applies.
FINANCIAL LIABILITY DESIGNATED AT FV THROUGH PROFIT OR LOSS ACCOUNT
An entity shall present a gain or loss on a financial liability that is designated as at fair
value through profit or loss as follows:

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(a) The amount of change in the fair value of the financial liability that is
attributable to changes in the credit risk of that liability shall be presented in
other comprehensive income, and
(b) the remaining amount of change in the fair value of the liability shall be
presented in profit or loss unless the treatment of the effects of changes in the
liability’s credit risk described in (a) would create or enlarge an accounting
mismatch in profit or loss.
If it would create or enlarge an accounting mismatch in profit or loss, an entity shall
present all gains or losses on that liability (including the effects of changes in the
credit risk of that liability) in profit or loss.
An entity shall present in profit or loss all gains and losses on loan commitments and
financial guarantee contracts that are designated as at fair value through profit or
loss.
Assets measured at fair value through other comprehensive income
A gain or loss on a financial asset measured at fair value through other
comprehensive income shall be recognized in other comprehensive income, except
for impairment gains or losses and foreign exchange gains and losses, until the
financial asset is derecognized or reclassified. When the financial asset is
derecognized the cumulative gain or loss previously recognized in other
comprehensive income is reclassified from equity to profit or loss as a reclassification
adjustment. If the financial asset is reclassified out of the fair value through other
comprehensive income measurement category, the entity shall account for the
cumulative gain or loss that was previously recognized in other comprehensive
income. Interest calculated using the effective interest method is recognized in profit
or loss.
If a financial asset is measured at fair value through other comprehensive income,
the amounts that are recognized in profit or loss are the same as the amounts that
would have been recognized in profit or loss if the financial asset had been
measured at amortized cost.

HEDGE ACCOUNTING
Hedge accounting recognizes symmetrically the offsetting effects on net profit or
loss of changes in the fair values of the hedging instrument and the related item
being hedged.
IAS 39/IFRS 9 permits hedge accounting under certain circumstances provided that
the hedging relationship is:
Formally designated and documented, including the entity's risk management
objective and strategy for undertaking the hedge, identification of the hedging
instrument, the hedged item, the nature of the risk being hedged, and how the
entity will assess the hedging instrument's effectiveness; and
Expected to be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk as designated and documented, and
effectiveness can be reliably measured.
Hedging Instruments
A derivative measured at fair value through profit or loss may be designated as a
hedging instrument, except for some written options.
A non-derivative financial asset or a non-derivative financial liability measured at fair
value through profit or loss may be designated as a hedging instrument unless it is a
financial liability designated as at fair value through profit or loss for which the
amount of its change in fair value that is attributable to changes in the credit risk of
that liability is presented in other comprehensive income. For a hedge of foreign
currency risk, the foreign currency risk component of a non-derivative financial asset
or a non-derivative financial liability may be designated as a hedging instrument
provided that it is not an investment in an equity instrument for which an entity has
elected to present changes in fair value in other comprehensive income.
A proportion of the hedging instrument may be designated as the hedging
instrument. Generally, specific cash flows inherent in a derivative cannot be
designated in a hedge relationship while other cash flows are excluded. However,
the intrinsic value and the time value of an option contract may be separated, with
only the intrinsic value being designated. Similarly, the interest element and the spot
price of a forward can also be separated, with the spot price being the designated
risk. Qualifying Criteria

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Hedged Items
A hedged item can be:
a single recognized asset or liability, firm commitment, highly probable
transaction, or a net investment in a foreign operation;

a group of assets, liabilities, firm commitments, highly probable forecast

transactions, or net investments in foreign operations with similar risk
characteristics;

a held-to-maturity investment for foreign currency or credit risk (but not for
interest risk or prepayment risk);
a portion of the cash flows or fair value of a financial asset or financial liability;
or

a non-financial item for foreign currency risk only or the risk of changes in fair
value of the entire item.

in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the
portfolio of financial assets or financial liabilities that share the risk being
hedged.

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following
criteria are met:
a) The hedging relationship only exists for eligible hedged items and hedging
instruments.

b) At the inception of the hedging relationship there is a formal designation.

c) The hedging relationship meets all of the following hedge effectiveness

requirements: -
ii) There is an economic relationship between hedged item and
hedging instrument.
iii) The effect of credit risk does not dominate the value changes that
result from that economic relationship.
iv) The hedge ratio of the hedging relationship is the same as that
resulting from the quantity of the hedged item that the entity actually
hedges and the quantity of the hedging instrument that the entity
actually uses to hedge that quantity of hedged item.
Subsequent assessment of effectiveness, rebalancing
and discontinuation

CATEGORIES OF HEDGES
A fair value hedge is a hedge of the exposure to changes in fair value of a
recognized asset or liability or a previously unrecognized firm commitment to buy or
sell an asset at a fixed price or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect profit or loss.
The gain or loss from the change in fair value of the hedging instrument is recognized
immediately in profit or loss except if the investment in equity classified at fair value
through OCI, the fair value gain/(loss) is recognized in OCI.

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At the same time the carrying amount of the hedged item is adjusted for the
corresponding gain or loss with respect to the hedged risk, which is also recognized
immediately in net profit or loss except items designated at fair value through OCI.
The fair value gain / (loss) on hedging instrument relating to firm commitment as
hedged item is recognized in profit or loss account.
A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is
attributable to a particular risk associated with a recognized asset or liability (such as
all or some future interest payments on variable rate debt) or a highly probable
forecast transaction and (ii) could affect profit or loss.
As long as a cash flow hedge meets the qualifying criteria, the hedging relationship
shall be accounted for as follows:
(a) the separate component of equity associated with the hedged item
(cash flow hedge reserve) is adjusted to the lower of the following (in
absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from
inception of the hedge; and
(ii) the cumulative change in fair value (present value) of the
hedged item (ie the present value of the cumulative change in the
hedged expected future cash flows) from inception of the hedge.
(b) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (ie the portion that is offset by the
change in the cash flow hedge reserve calculated in accordance with (a))
shall be recognized in other comprehensive income.
(c) any remaining gain or loss on the hedging instrument (or any gain or
loss required to balance the change in the cash flow hedge reserve
calculated in accordance with (a)) is hedge ineffectiveness that shall be
recognized in profit or loss.
(d) the amount that has been accumulated in the cash flow hedge
reserve in accordance with (a) shall be accounted for as follows:
(i) if a hedged forecast transaction subsequently results in the
recognition of a non-financial asset or non-financial liability, or a
hedged forecast transaction for a non-financial asset or a non-
financial liability becomes a firm commitment for which fair value
hedge accounting is applied, the entity shall remove that amount
from the cash flow hedge reserve and include it directly in the initial
cost or other carrying amount of the asset or the liability. This is not a
reclassification adjustment (see IAS 1 Presentation of Financial
Statements) and hence it does not affect other comprehensive
income.
(ii) for cash flow hedges other than those covered by (i), that
amount shall be reclassified from the cash flow hedge reserve to profit
or loss as a reclassification adjustment (see IAS 1) in the same period or
periods during which the hedged expected future cash flows affect
profit or loss (for example, in the periods that interest income or interest
expense is recognized or when a forecast sale occurs).
(iii) however, if that amount is a loss and an entity expects that all or
a portion of that loss will not be recovered in one or more future
periods, it shall immediately reclassify the amount that is not expected
to be recovered into profit or loss as a reclassification adjustment (see
IAS 1).
Discontinuation of Hedge Accounting
Hedge accounting must be discontinued prospectively if:
the hedging instrument expires or is sold, terminated, or exercised;
the hedge no longer meets the hedge accounting criteria - for example it is
no longer effective;
for cash flow hedges the forecast transaction is no longer expected to occur;
or
the entity revokes the hedge designation.
If hedge accounting ceases for a cash flow hedge relationship because the
forecast transaction is no longer expected to occur, gains and losses deferred in
equity must be taken to the income statement immediately. If the transaction is still
expected to occur and the hedge relationship ceases, the amounts accumulated
in equity will be retained in equity until the hedged item affects profit or loss.
If a hedged financial instrument that is measured at amortized cost has been
adjusted for the gain or loss attributable to the hedged risk in a fair value hedge, this
adjustment is amortized to profit or loss based on a recalculated effective interest
rate on this date such that the adjustment is fully amortized by the maturity of the
instrument. Amortization may begin as soon as an adjustment exists and must begin
no later than when the hedged item ceases to be adjusted for changes in its fair
value attributable to the risks being hedged.

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