IFRS – 09 (Financial Instruments)
Lecture March 23, 2021
Applicable Standards on Financial Instruments
1- IAS – 32 (Classification and Presentation)
2- IFRS – 07 (Disclosure)
3- IFRS – 09 (Measurement and recognition)
Financial Instruments (Definition)
Financial Assets Equity Instruments Financial Liabilities
1- Cash; Contract that gives right to net 1- X;
2- Equity instrument of assets 2- X;
another entity; 3- Contractual obligation to
3- Contractual right to deliver cash or financial
receive cash or financial assets;
assets; 4- Contractual obligation to
4- Contractual right to exchange financial
exchange financial instrument on unfavorable
instrument on favorable term; or
term; or 5- Contractual obligation to
5- Contractual right to deliver variable number of
receive variable number of own equity instruments.
own equity instruments.
Interest, Dividend, Gains and Losses arise
From Liability Charge to expense through profit or loss
From Equity Charge to SOCE
OFFSET:
Financial assets and liabilities can be offset only if:
1- There is legally enforceable right to set off
2- a) There is an intention to settle in net; or
b) Realization of assets and settlement of liability occur simultaneously
IFRS – 09 (Financial Instruments)
Lecture March 23, 2021
RECOGNITION AND MEASUREMENTS
Accounting mismatch: It occurs when measurement basis of any assets/ liability held does not
match with its utilization.
“Mr. A invests in assets that are measured at fair value through profit or loss. These asset purchases
are funded by issuing bonds. If the bonds were not re-measured to fair value, an accounting
mismatch would arise.”
Amortized Cost Transaction Cost: FV through Profit or loss
Incremental cost
All other cases directly attributable Liability held for trading
to acquisition, issue
or disposal of financial instruments. i.e. Fee, commission, taxes, etc.
Initial Recognition
Assets & Liabilities Both
FV + Transaction cost (liabilities) FV (Transaction cost shall be
FV – Transaction cost (Assets) expensed out)
All other cases 1- Assets / liabilities held for trading
2- Accounting mismatch
FV means fair value of instrument.
If any amount other than FV is paid as consideration to acquire financial assets or liabilities then that
amount may be used for initial recognition with impact of transaction cost. However immediately
these shall be recognized at FV according to their subsequent measurement criteria.
Subsequent Measurement:
Financial Liabilities
FV through PnL FV through OCI
Held for trading All other provided irreversible option
exercised
IFRS – 09 (Financial Instruments)
Lecture March 23, 2021
Note:
To avoid any accounting mismatch a liability held for trading may also be measured at FV through
OCI
Amortized Cost: Present value of future expected cash flows at effective interest rate (IRR).
Financial Assets
Equity Investment Debt Investment
FV through PnL FV through OCI FV through PnL Amortized cost FV through OCI
All other cases Not held for All other Business model is Business model is
trading to earn interest to earn interest
(Irrevocable only (Cash inflow and have trade
option expected only whenever
exercised)* from interest or favorable**
principal
repayment) **
(*) Reclassification not possible
(**) Reclassification possible only when there is change in business model (Retrospectively)
Equity Instruments
Amortized Cost FV through Profit or loss
All other cases Liability held for trading
IFRS – 09 (Financial Instruments)
Lecture March 23, 2021
Amortized Cost means FV + Transaction cost then interest at effective rate
FVOCI means FV + Transaction cost + interest at effective rate then FV change impact
(impact of interest rate shall be charged to PnL)
FVPnL means FV then FV change impact to PnL
Time of Recognition
Liabilities When obligation arises including contingent obligation
Equity When acquired (Risk and reward transferred)
Assets When became party to contractual provisions
i.e. when one party has fulfilled its part of obligation which makes the other party
responsible to perform his part.
Asset will never be recognized only on becoming part of contract (entering into
contract)
Sales/ purchase orders shall not be recognized as asset (receivable) until goods are
delivered.
De-recognition of Financial Instruments
Liabilities when obligation discharged, expired or cancelled
Assets 1- when contractual right expires (Time lapsed etc.)
2- substantially all risk and rewards transferred
Simple transfer of ownership without transfer of risk and reward does not result in de-recognition.
i.e. sale with repurchase agreement shall not be accounted as de-recognition of financial assets.
Accounting Treatment on De-recognition:
1- Gain / Loss on transaction (Proceed – Carrying value) shall be accounted in profit or loss.
2- Cumulative gain/ loss previously charged to OCI shall be recycled to profit or loss except
for the case of disposal of investment in equity securities.
Note:
The classification of a financial instrument as either a liability or as equity will have major impact on
the financial statements.
IFRS – 09 (Financial Instruments)
Lecture March 23, 2021
a) If an entity issue an instrument and classify it as liability, then gearing will rise and entity will
appear more risky to potential investors. The service cost of finance shall be charged to profit
or loss reducing profit
b) If an entity issues an instrument and classify it as equity then gearing will fall. The service cost
of finance will be charged too retained earning directly and so will not impact profit.
