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IFRS > Flashcards IFRS 9 > Flashcards

Flashcards IFRS 9

1
Q

Scope exclusions of IFRS 9 ?

A

1) IFRS 2 share based payments
2) IFRS 3 business combinations - incl qualifying related forward contracts
3) IFRS 10/IAS28/IAS27
4) IFRS 15
5) IFRS 16 leases - except impairment + derecognition
6) IFRS 17 - insurance contracts
7) IAS 19 benefit plans
8) IFRS 32 equity instr

9) IFRS 37 - reimbursement assets
10) Loan commitments unless they can be settled net in cash =fin instr - impairment provisions apply
11) Instruments to buy non-financial asset
if physical delivery is expected
that is not for sale shortly upon delivery (trading)
Included, however:
Written option for non-financial items that can be settled in cash or equiv or are readily convertible to cash

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2
Q

IFRS 9 - when are fin assets recognised ?

A

1) On committment date when entity becomes party to contract
- Derivatives
- Unconditional rights/obligations
2) Regular way transaction :
- trade date OR
- settlement date
3) Firm committments to purchase/sell
- Outside scope of IFRS 9 :
when one of the parties has performed under the agreement
- Within scope of IFRS 9 (=derivative) :
upon committment date

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3
Q

IFRS 9 - Regular way transactions: definition ? what are the options ?

A

A purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
Options :
1 - Trade date accounting
2 - Settlement date accounting

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4
Q

IFRS 9 - Settlement date accounting treatment:
for a PURCHASE
traded before and settled after reporting period end
at Amort cost, FVTOCI, FVTPL ?

A

1 Trade date : no entries
2 Period end :
a-FVTPL/FVTOCI :
receivable asset or liab TO PL or OCI for FV change
since trade date.
b-Amort cost : No entry
3 Settlement date : asset TO receivable + cash

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5
Q

IFRS 9 - Settlement date accounting treatment:
for a SALE
traded before and settled after reporting period end
at Amort cost, FVTOCI, FVTPL ?

A

1 Trade date :
a-FVTPL/FVTOCI :
adjustment of carrying amount to FV
b-Amort cost : no entry
2 Period end : no FV adjustments no entries
3 Settlement date : derecognition of asset against cash

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6
Q

IFRS 9 - criteria for asset de-recognition ?

A

1 - Level -consolidated or separate FS
2 - PART or ALL of the asset
3 - NO RETAINED CASHFLOWS > DeRecognise in full
- No right to receive further cash flows from asset OR
- Obligation to transfer cashflows to third party AND
a) No obl to remit any uncollected amounts
b) No selling, pledging of asset
c) Remittance w/o material delay
d) Remit ev short term interest
4 - PARTIALLY RETAINED CASHFLOWS
- Risks + Reward substantially :
a) Transferred ? DeRecognise
b) Retained ? NO DeRecognition
c) Control fully transferred ?
a) Yes =>DeRecognition
b) No =>Partial DeRecognition
(continuing involvement)

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7
Q

IFRS 9 - criteria for transfer of control for derecognition?

A

Control was transferred only when transferee purchaser has
- unilateral + practical ability
- to sell asset in its entirety
- w/o restrictions
Practical ability eg=there is an active market for the item and can be repurchased if return is required
In all other cases, control is RETAINED

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8
Q

IFRS 9 - criteria for transfer of risk & rewards of ownership ?

A

Transfer of significant variability in amount + timing of cash flows

Examples substantially transferred :

1) unconditional sale
2) sale w/repurchase at FV at time of purchase
3) sale w/put/call option deeply out of money

Examples substantially retained :

1) sale w/repurchase at FV at fixed price
2) security lending agreement
3) sale w/total return swap transferring back the risks&rewards
4) sale w/deep into the money put/call option
5) sale of shortterm AR w/credit risk guarantee likely to occur

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9
Q

IFRS 9 - Accounting treatement

  • for derecognition
  • no dercognition
  • continued involvement
A

1 Asset qualifies for DeRecognition :
- dereognise asset in entirety
- record NEW asset for cashflows retained
2- No DeRecognition :
a- continue recognising asset in entirety
b- no offset of assets + liabs or income + expenses
c- record liability for amounts received:
(i) Written Put/purchased call option :
Amort cost :
liab = cash received
amortised to exercise price
FV-call option :
asset FV/option strike price
less option time value
if option money =
in/at : liab = exercise price
out : liab = asset FV
FV-written put :
option strike price
plus option time value
Asset FV limited to option strike price !
3- Continued Involvement :
- Partial DeRecognition of Asset
- Guarantee :
asset/liab for guaranteed amt
+ liab for FV of guarantee recognised over time

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10
Q

IFRS 9 - criteria for De-recognition of financial liabilities

A

1- when extinguished, i.e. cancelled, expired, discharged
2-exchange with lender of debt instruments with substantially different terms
3- substantial modification of a contract :
a- if PV under modified terms @prior disct rate is 10% or more
b- risk exposure is significantly different
(eg fixed/variable interest rate changed to leveraged interest rate)

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11
Q

IFRS 9 - Criteria Held for trading of Financial Liabilities

A

1 - repurchasing in near-term
2 - part of portfolio w/short-term profit taking
3 - derivatives

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12
Q

IFRS 9 - Contractual cash flow test - what are the criteria ?

A

1-Test conducted individual level
2-Provides only principle + interest
3-Interest is only for
(i) time value,
(ii) profit,
(iii) admin,
(iv) credit + liquidity risk,
eg
-fixed rate,
-floating rate that changes in line with selected rate renewal frequency,
-linked to index related to related inflation/market.Fails test

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13
Q

IFRS 9 - Business Model test - what are the criteria ?

A

1-Test conducted at Portfolio level
2-Managed w/objective to hold to maturity + collect contractual cashflows only
3-How key mgmt manages business NOT intentions
4-Criteria :
a) held to maturity or
b) sales infrequent (even w/sign value) or
c) sales of insignificant aggregate value or

d) sales close to maturity + diff w/maturity amount is insignificant

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14
Q

IFRS 9 - What Financial assets are measured at amortised cost ?

A

1-Contractual cash flow test
2-Business model test contr cash flow only
3-FVTPL Option not selected

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15
Q

IFRS 9 - What Financial assets are measured at FVTPL mandatorily ?

A

1-FI held for trading
2-Contractual cash flow test NOT met and
FVTOCI option for equity instr not selected

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16
Q

IFRS 9 - What financial asset are measured at FVTOCI ?

A

1) Cashflow test met + Business model test :
contr cashflow + sales + FVTPL option NOT designated
2) Equities not held for trading
+ FVTOCI option designated

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17
Q

IFRS 9 - How are financial asset measured at initial recognition ?

A

1-Trade receivables w/o sign financing : at transaction value
2-All other :
FV + incr. transaction cost (FVTOCI or Amort Cost)
Normally transaction price = FV,
Exceptions :
- if not traded at FV (unit of acct, interco, forced, etc)
- includes comp for something else than Fin Instr
(eg loan w/no interest - FV = discounted value)
3-Acctg treatment of diff w/FV :
FV level 1 or 2 w/only observable inputs => PL
FV level 3 => FV is adjusted

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18
Q

IFRS 9 - When are financial liability measured at FVTPL ?

A

At initial recognition
Irrevocable/No subs assessment
1) held for trading
2) designated at FVTPL provided :
(i) avoidance of accounting mismatch
(ii) group of F assets/liabs as a group
(iii) with embedded derivatives
3) liabs from continuing involvement from trsfrd assets
4) fin guarantee contracts
5) commitments to provide loan below market rates
6) derivatives

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19
Q

IFRS 9 - accounting treatement of transaction (acquisition) cost ?

A

1) FVTPL -> expensed
2) FVTOCI -> added to FV at initial recognition
- > ignored at subsequent FV measurement to OCI
3) Amort cost -> added to FV at initial recognition

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20
Q

IFRS 9 - Technique to determine change in FV due to own credit risk in Fin Liabs ?

A

Own credit risk = Difference of
1) FV of instrument AND
2) PV of
a) instrument’s remaining cashflow
b) discount rate :
current benchmark rate
+ original instrument specific rate
3) Instrument specific rate =
Internal rate
less benchmark (eg libor) interest rate

at initial recognition date
=>instrument specific rate
4) Assumes that changes due to other than credit risk + benchmark are insignificant

21
Q

IFRS 9 - What + when are acquisition cost added to financial asset value ?

A

1) only incremental acquisition cost
(that would not have been incurred if specific transaction did not take place)
2) only when measured at
(I) amortised cost or
(II) FVTOCI

22
Q

IFRS 9 - Acctg treatment of FVTPL for
FV change,
FX,
Impairment,
interest/dividends) ?

A

All => to P&L, except :
FV changes for Fin liabs due to credit/liquidity risk => to OCI

23
Q

IFRS 9 - Acctg treatment of FVTOCI for
FV change,
FX,
Impairment,
interest/dividends) ?

A

1) Debt instruments :
FV change -> to OCI (recycled)
Interests -> to PL
FX -> to PL
Impairment loss -> to PL
2) Equity instruments :
FV change -> to OCI*
FX -> to OCI*
Impairment loss -> to OCI*
Dividends -> to PL

*No OCI recycling

24
Q

IFRS 9 - Acctg treatment of Amortise cost for
FV change,
FX,
Impairment,
interest/dividends) ?

A

FV change -> not recognised
FX -> to PL
Impairment loss -> to PL
Interest -> to PL (effective interest method)
Dividends -> N/A

25
Q

IFRS 9 - Accounting treatment of forward contracts?

A

1-Derivative :
if mgmt intends to take settlement in cash
2-Purchase commitment :
if mgmt intend settlement by delivery
+ no practice of reselling within short period
+ used in entity’s production process

26
Q

IFRS 9 - When must embedded derivatives be separated ?

A

1) not a fin asset
2) not measured at FVTPL
3) derivative notclosely related to host
4) separated derivative meets definition of a derivative

27
Q

IFRS 9 - Criteria closely related embedded derivative ?

A

Risk & characteristics are not closely related
1) equity/commodity index applied to debt instrument interest
2) Holder does not recover substantially all of investment
3) Initial rate of return could be at least doubled
4) Rate is over/under cap/floor derivative or
in add to cap/floor is leveraged
5) currency not either functional cury of one of the parties
or trade cury around the world
or commonly used in market where trans takes place
6) inflation index leveraged or not in approp market (IFRIC 9)

28
Q

IFRS 9 - Definition of a derivative ?

A

1 - value varies on an underlying variable
2 - settled in future
3 - no or smaller initial investment that has the same response to changes
4 - settlement in cash or equivalent

29
Q

IFRS 9 - Initial measurement of separated embedded derivatives ?

A

1) Non-option derivatives : value at inception=zero
2) Derivatives : residual value, i.e. value of instr less value of host contract

30
Q

IFRS 9 - How to deal with multiple embedded derivatives ?

A

Treated as a single compound derivative
Exception :
- equity derivative must be separated
- readily separable related to dissimilar risks

31
Q

IFRS 9 - When can measurement of Fin Assets be changed ?

A

1) Upon change of business model only
2) NO reason for reclass, eg : Item designated newly or no longer qualified as hedge instr in cashflow hedge

32
Q

IFRS 9 - Measurement reclassifications asset: Amortised cost -> FVTPL?

A

1-New carrying amt equals FV at reclass date;
2-FV Changes => PL
3- Derecognition of loss allow to PL

33
Q

IFRS 9 - Measurement reclassifications asset: Amortised cost -> FVTOCI?

A

1-New carrying amt equals FV at reclass;
2-FV Changes to OCI
3-No change to interest / loss allowance

34
Q

IFRS 9 - Measurement reclassifications asset: FVTPL -> FVTOCI/Amort Cost?

A 
1-new carrying amt equals FV at reclass; 
2-reclass date 
 =\> effect interest determined
 =\> inception date for classifying impairment stages
35
Q

IFRS 9 - Measurement reclassifications asset: FVTOCI -> FVTPL?

A

1- same FV carrying amount
2- OCI reclas adj from equity to PL (reclass adj IAS 1)
3- Derecognition of loss allow to PL

36
Q

IFRS 9 - When can measurement of Fin Liabilities be changed ?

A

1) CanNOT be changed
2) Measurement options
- available at initial recogn only
- are irrevocable

37
Q

IFRS 9 - documentation for hedge requirement ?

A

1) hedge strategy (entity level)
2) hedge objective (individual hedge level)
a) risk hedged
b) hedged item
c) hedge instrument(s)
d) expected effectiveness
e) type of hedge
d) quantitative assessment

38
Q

IFRS 9 - Type + acctg treatment of hedges ?

A

1) Fair value hedge
- effective portion adjusts hedged item’s value
- ineffective portion to PL
2) Cash flow hedge
- effective portion to OCI

  • recycled when hedged item affects PL
  • ineffective portion to PL
    3) Net investment in foreign operation hedge
  • foreign currency hedge - to OCI

-recycled upon sale of investment

39
Q

IFRS 9 - What happens if hedge is not 100% effective ?

A

1) Over-effective portion to PL
2) Under-effective portion > no diff treatment
3) ReBalancing if forward looking effectiveness is not close to 100%,
i. e. adjust quantities of hedged item OR hedge instrument

40
Q

IFRS 9 - Difference FV hedge / Cashflow hedge ?

A

FV hedge “fixed items” :
- Fixed rate items’ risks - Interest, credit, termination option
(eg fixed interest bond swaped for a variable rate)
Unrecognized firm commitments
Cashflow hedge “variable items“
- Variable rate items’ risks - Interest, credit, termination option
(eg variable interest bond swaped for a fixed rate)
Highly probable forecast trans
Foreign currency risk :
can be treated as either cashflow or FV hedge

41
Q

IFRS 9 - Impairment what approach is applied when ?

A

1 - Simplified approach :
Trade receivables*,
Contract asset*,
Lease receivables*
*w/o sign financing component or if entity selects to apply life time expected credit loss
2 - General approach - all other

42
Q

IFRS 9 - Stages of the general approach impairment loss allowance ?

A

Stage 1 :
- 12 months expected credit loss
- low risk assets- collective assessment
Stage 2 :
- life time expected credit loss
- risk increased sign since initial recognition
- assumed if overdue for more than 30 days
Stage 3 :
- life time expected credit loss
- impaired fin asset evidenced by event- assumed if overdue more than 90 days

43
Q

IFRS 9 - How are expected credit losses calculated ?

A

A-General approach :
Stage 1)
12 months expected credit loss :
Expected Life time credit loss
Weighted w/probability of occurence within 12 months
Discounted to expected timing
Stage 2)
Life time expected credit loss :
Carrying amount less
PV of expected cash flows
Weighted with probability of occurance
For various periods

Effective int rate NOT adjusted

Stage 3)
Same as 2

Effective int rate adjusted
B- Simplified approach :
Nominal (non-discounted) amounts
split by aging
weighted by loss probability percentage

44
Q

IFRS 9 - For assets/liabilities measured at amortised cost/FVTOCI, when is the effective interest rate updated ?

A

1 - Stage 3 credit impaired assets
(in accordance with the expected cashflows)
2 - Variable rate debt instruments,
(upon change of the variable rate)
3- Upon modification/renegotiation that result in de-recognition of the financial liability
If NOT, new carrying amt = new cashflows @ original effective interest
Difference => PL
4) Fair value hedge items at amortised cost when no further FV adjustments

45
Q

IFRS 9 - Impairment loss : what discount rates should be used ?

A

1) Lease receivable :
discount rate used for lease receivable
2) Loan commitment/guarantee :
Estimate of rate that would be used when recognising the asset or
iI not possible : market rate for time value + risks not included in cashflows
3) Other :
Effective interest rate at initial recognition,
Approximation thereof,
Current rate for variable rate instruments

46
Q

IFRS 9 - Which assets are subject to IFRS 9 impairment measurement ?

A

1-Financial assets NOT measured at FVTPL
2-loan commitments
3-financial guarantees
4-lease receivables (IFRS 16)
5-contract assets (IFRS 15)

47
Q

IFRS 9 - How can “low credit” for stage 1 expedient be determined ?

A

1) External rating agencies (like AAA rating)
2) Internal rating indications

48
Q

IFRS 9 - What are indicators of stage 3 credit impairments ?

A

1) Bankrupt
2) Disappearance of active market due to fin difficulties
3) Concessions from other lenders
4) Breach of contract
5) Financial difficulties

49
Q

IFRS 9 - accounting treatment of collaterals ?

A

1) if transferee has the right to sell or repledge the collateral
TRANSFEROR should reclass asset (eg loaned asset, pledged equity instr, repurchase receivable)
2) sale of collateral by transferee w/o default of transferor :
transferee recognizes proceeds + liab to retrun collateral
3) On default + loss of right to collateral of transferor :
Transferor - derecognise / transferee - recognise asset/sales proceeds
4) except for 3 above transferee/transferror shall NOT recognise/derecognise collateral

IFRS (13 decks)

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