IFRS 9: Financial

Instruments:
Recognition and
Classification
 •A financial instrument is any contract that
gives rise to both:
• A financial asset of one entity; and
• Either a financial liability or an equity
Financial instrument of another entity.

Assets, •For example, a receivable of one entity (a

financial asset) will represent a
liabilities, •payable (a financial liability) of another entity.

and Equity •An equity instrument is a financial asset for

Instruments an investor holding the
•instrument and is equity of the issuer of the
instrument.
Financial assets
Financial asset is any asset that is:

CONTRACTUAL
RIGHT TO
CONTRACTUAL EXCHANGE
RIGHT TO RECEIVE FINANCIAL AN EQUITY
CASH CASH OR INSTRUMENTS INSTRUMENT OF
ANOTHER UNDER ANOTHER ENTITY
FINANCIAL ASSET POTENTIALLY
FAVOURABLE
CONDITIONS

Purchased call
Bank Receivables Ordinary
options, put
accounts or Bonds held Shares
options
 Financial Liability
• A financial liability is any liability that:

A CONTRACTUAL OBLIGATION TO DELIVER CASH OR ANOTHER Trade

FINANCIAL ASSET TO ANOTHER ENTITY payables

A CONTRACTUAL OBLIGATION TO EXCHANGE FINANCIAL ASSETS OR A written call

FINANCIAL LIABILITIES WITH ANOTHER ENTITY UNDER CONDITIONS option or put
THAT ARE POTENTIALLY UNFAVORABLE TO THE ENTITY option
Equity Instruments
• An equity instrument is a contract that
evidences a residual interest in the
assets of an entity after deducting all of
its liabilities.

• For instance, common stock certificate

 Shares:

1. In your own company

Observation These are Not financial instruments

1 2. In a company you have invested in

These are financial instruments
Observation 3
Want to buy Yes, but I will pay
some flowers for the cash
2 ounces of equivalent of the
gold? gold next month

It is financial instrument

Dr Financial Asset 100$

Cr Sales 100$

Dr Financial Asset 10$

Cr I/S 10$
 An entity shall recognize a financial
asset or a financial liability in its
Recognition statement of financial position when,
and only when, the entity becomes
party to the contractual provisions of
the instrument

Initially financial liabilities and

financial assets are recognized at its
fair value.
Derecognition of
financial assets
An entity shall derecognize (remove from the
SFP) a financial asset when, and only when:

(a) the contractual rights to the cash flows

from the financial asset expire, or

(b) it transfers the financial asset, and the

transfer qualifies for derecognition
Transfer of financial asset

An entity transfers a financial asset if, and only if, it

either:
• (a) transfers the contractual rights to receive the
cash flows of the financial asset, or

• (b) retains the contractual rights to receive the

cash flows of the financial asset but assumes a
contractual obligation to pay the cash flows to
one or more recipients in an arrangement
Whether the transfer qualifies for
derecognition
When an entity transfers a financial asset, it shall evaluate the extent to which
it retains the risks and rewards of ownership of the financial asset

(a) all the risks and rewards of ownership transferred - the entity shall
derecognize the financial asset and recognize separately as assets or liabilities
any rights and obligations created or retained in the transfer.

(b) if the entity retains substantially all the risks and rewards of ownership of
the financial asset, the entity shall continue to recognize the financial asset.
 It is more difficult to remove an
asset from an entity’s SFP than it is
to recognize that asset
Derecognition:
Stickiness
concept Derecognition cannot be achieved
by merely transferring the legal
title to a financial asset to another
entity. Risks and rewards, control
of rights should be assessed
 • Outright sale – a sale with no option or
obligation to repurchase.
Derecognition
Example: • Sale to an unrelated third party in
Outright sale transaction at fair value, such an outright
sale will qualify for derecognition
• If an asset is sold but must be repurchased at
fixed price at some time in the future.
Derecognition Example:
• Transferee retained substantially all of the risks Sale with fixed repurchase
and rewards of ownership price
• Derecognition failed
 IASB created a decision tree that
Derecognition: explains in which order tests should
be applied to determine whether a
Decision tree transfer of financial asset qualifies
for derecognition.
Step 1: Derecognition
decision tree
• The first step is to define at which level the
derecognition decision tree is to be applied:

(a) The separate financial statement level or

(b) The consolidated financial statement level

The reporting group must first consolidate all

subsidiaries in accordance with IFRS 10 Consolidated
Financial Statements.
Step 2: Derecognition
decision tree
• Determine whether the derecognition principles are applied
to all or part of an asset.

• For instance, bank that is originated mortgages. If Bank sells a

mortgage, it could choose one of the following
- Selling entire asset
- Sell specific cash flows (interest, or repayment of principal)
- Sell full proportionate share (25% of all cash received)
- Sell full proportionate share of specific cash flows (25% of
interest)
Step 3: Derecognition
decision tree
• Whether the rights to the cash flow on the asset
expired
For instance, in mortgage if customer had fully paid
mortgage, right to receive cash is expired, so
derecognition is appropriate
Step 4 and 5: Derecognition
decision tree
• If cash flows have not expired, entity needs to determine if it has
transferred its rights to receive cash flows

• If company retains substantially all risks and rewards, continue to

recognize asset

• If company retains control of the asset, continue to recognize asset

Put and call option
• Put option - Put options give holders of the option the right, but not
the obligation, to sell a specified amount of an underlying security
at a specified price within a specified time frame

• Call option – A call option gives you the right, but not the
requirement, to purchase a stock at a specific price (known as the
strike price) by a specific date, at the option's expiration.
Examples of when an entity retained risks
and rewards
• A sale and repurchase transaction whereby the repurchase price
is fixed

• A sale of a financial asset together with a total return swap that

transfers the market risk back to the entity; and

• A sale of short-term receivables in which the entity guarantees

to compensate the transferee for credit losses that are likely to
arise.
Example – Failed derecognition
• Airline Ltd needed to raise some cash in the short term.
It agreed to sell a government bond in its BS to banking counterparty
At the same time, it agreed to buy back at fixed price in the future

• The asset had a market value of 100 CU, and bank paid 100 CU. Airline
Ltd had to buy the asset for 103 CU in 3 months.
Journal entries
• The company failed to meet the derecognition criteria in IFRS 9 for
the sale of receivables. Because it retains substantially all risks and
rewards of ownership of the asset. The entry is:

Dr Cash
Cr Liability: Obligation to pay
Derecognition: Financial
liabilities
An entity shall remove a financial liability (or part
of financial liability) from its SFP when, and only
when, it is extinguished, i.e. when the obligation in
the contract)

• Discharged
• Cancelled
• Expires
Discharged

An obligation is
Other financial
discharged if an Cash
assets
entity delivers:

Which the
counterparty
Other goods
accepts as suitable
compensation.
Cancelled
An obligation is cancelled only through a process of law whereby
the entity is legally released from its primary obligation to pay the
creditor.

Expires
An obligation expires due to the passage of time
The accounting for extinguishment
When the liability is extinguished, recognize in profit or loss, the
difference between its carrying amount and the fair value
consideration paid including any non-cash assets transferred.

The fair value of debt is 100 CU but its carrying amount is 105 CU:

Dr Liability 105
Cr Investment 100
Cr P&L 5
Classification:
Business Model
test
Business Model test
How business controls its financial assets
1) SPPI test (Solely payments of principal and interest)
Are there any other payments?
Is the interest rate tied to anything else? For example, it
does not pass the SPPI test if it is linked to oil prices, gold
prices, devaluation, profit from project.
Hold to collect and Hold to sell?

The ‘hold to collect’ business model test does not require that financial
assets are always held until their maturity - the test will likely still be
met if there are only infrequent sales, and those sales occur for reasons
such as to realise cash to deal with an unforeseen need for liquidity, or
concerns about the collectability of the contractual cash flows.

Hold to sell – for instance, the company has 1 bln USD excess cash.
It needs this money to invest to ppe in short amount of time. Bank
can buy bonds, because bonds are illiquid with low risk. You will
hold asset and sell when cash is needed.
Amortized cost
• Trade receivable, bonds held at maturity, simple loan etc.

• Initially recognized in fair value

• All commissions, payments, fees will be collected to the one table and
IRR formula will be used. It shows effective interest rate.

• Effective interest rate will be added, and payments will be deducted. It

will show amortized cost.
Examples: Not Amortized
cost
A Convertible bond – Convertible option exist, so it must go
somewhere FVTPL
Thank you