FINANCIAL REPORTING
IFRS 9 Financial Instruments
A financial instrument represents any contract that gives rise to both a financial asset (holder) and
a financial liability or equity(issuer)
Reporting standards
• IAS 32 – Financial instruments: presentation
• IFRS 7 – Financial instruments: Disclosures
• IFRS 9– Financial instruments: Measurement
Financial Instrument:
1. Financial Asset
2. Financial liability
3. Equity
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
Financial Liability
Any liability that has any of the contractual obligations to deliver:
• Cash
• Financial asset to another entity
• Exchange financial instruments under favourable conditions
Equity:
Residual interest in the asset of an entity after deducting all its liabilities
Recognition: when there is contractual economic flow
Derecognition: if that contractual flow expires or risk and reward transfers.
Accounting for Financial Liability:
Financial liability can be classified into two:
Derivatives and Liabilities held for Borrowings and Loan notes
trading
• Initial measurement: at issue price(fair • Initial measurement: at issue price(fair
value); transaction costs are expensed to value); transaction costs is deducted
SOPL from fair vale
• Subsequent measurement: FVTPL, FV • Subsequent measurement: Amortised
@ DOR cost; using the effective interest method.
Effective interest is taken to SOPL
Accounting for Financial Asset
1. Equity Investments: Any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities
AISWARYA BOSE 1
FINANCIAL REPORTING
FVTPL- By default FVTOCI- Irrevocable choice
• Investment is intended for long-term
• Initial measurement – at Fair value; • Initial measurement– at Fair value;
Transaction costs are expensed Transaction costs are capitalised
• Subsequent measurement- at Fair • Subsequent measurement- at Fair value
value; loss or gain in SOPL (at DOR); loss/gain in OCI and it cannot
be reclassified to SOPL
2. DEBT INVESTMENTS
The default category is again fair value through profit or loss (FVPL). The other two
categories depending on the instrument passing two tests:
1) Business model test: this test is passed if the asset is held to collect cash flows
rather than an early sale
2) Contractual cashflow test: this test is passed if the cash flows that arise from
the financial asset represent interest payment and repayment of principal amount
alone.
Amortised cost FVTPL FVTOCI
• Debt instruments that • Debt instruments that • Equity non-trading
pass both tests fail tests instruments (selling
• IM: issue price + • Accounting treatment: financial assets)
transaction cost Same as equity • Accounting treatment:
• SM: amortised cost instruments Same as equity
using effective interest instruments
method (finance
income)
IAS 32 - Compound instruments
- Has characteristics of both equity and liabilities
Convertible bonds, convertible preference shares
Initial measurement: Compound instrument must be split into a liability component and an
equity component:
• The liability component is calculated as the present value of the repayments, discounted at a
market rate of interest
• The equity component is calculated as the difference between the cash proceeds (face value)
and the value of the liability component (balancing figure).
Subsequent measurement:
• Equity not remeasured
• The liability component is calculated using amortised cost method.
AISWARYA BOSE 2
FINANCIAL REPORTING
Factoring of receivables
with recourse without recourse.
• significant benefits and risk are retained • significant benefits and risk are
• The amount received from factor is transferred.
considered as financial liability and the • factoring company bears the liability for
receivables are shown in balance sheet. any bad debt
• receivables are derecognised from the
SOFP of company.
Credit risk
IFRS 9 requires that the gain or loss as a result of credit risk is recognised n OCI.
Disclosure:
• CV of financial instrument should be recorded either on SOFP or within the notes.
• An entity must also disclose items of income, expense, gains and losses in SOPL, OCI or in
notes
• The nature and extent of risks faced by the entity.
AISWARYA BOSE 3