Financial liabilities not at amortised costs

IFRS 9 retains almost all of the existing requirements from IAS 39 on the classification of financial liabilities – including those relating to embedded derivatives – because the Board believes that the benefits of changing practice would not outweigh the costs of the disruption caused by such a change. [IFRS 9 BCE 12] Financial liabilities not at amortised costs

Therefore under IFRS 9, financial liabilities after initial recognition are subsequently classified as measured at amortised cost, except for the following instruments. [IFRS 9 4.2.1IFRS 9 4.2.2]

Financial liabilities not at amortised costs

Measurement requirements

Financial liabilities that are held for trading – including derivatives

FVTPL

Financial liabilities that are designated as at FVTPL on initial recognition

FVTPL

Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies

Measured under specific guidance carried forward from IAS 39, see below

Financial guarantee contracts 

see below

Commitments to provide a loan at a below-market interest rate

see below

Contingent consideration recognised by an acquirer in a business combination

FVTPL

Measured under specific guidance carried forward from IAS 39 Financial liabilities not at amortised costs

Transfers that do not qualify for derecognition [IFRS 9 3.2.15]

When an entity transferred an asset, but has retained substantially all the risks and rewards, the asset is not derecognised. Instead, any proceeds received are recognised as a financial liability. In subsequent periods, an entity recognises income on the transferred asset and expense incurred on the financial liability as if they were separate financial instruments.

Note that this is not the same as continuing involvement in transferred assets covered below.

Continuing involvement in transferred assets – associated liabilities measurement [IFRS 9 3.2 17]

When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recognises an associated liability. Despite the other measurement requirements in IFRS 9, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is:

  1. the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost, or
  2. equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair value.

Financial guarantee contracts [IFRS 9 4.2.1 (c)] Financial liabilities not at amortised costs

IFRS 9 requires liabilities that result from financial guarantee contracts in its scope to be measured, after initial recognition, at the higher of:

This ‘higher of’ approach is similar to that in IAS 39, except that under IAS 39 the provision for credit losses is calculated by applying IAS 37.

Commitments to provide a loan at a below-market interest rate [IFRS 9 4.2.1 (d)] Financial liabilities not at amortised costs

Similar to the accounting for financial guarantee contracts, IFRS 9 retains a similar approach of measuring liabilities that result from commitments to provide a loan at a below-market interest rate after initial recognition at the higher of:

  • the amount of the provision for expected credit losses; and Financial liabilities not at amortised costs
  • the amount initially recognised, less the cumulative amount of income recognised in accordance with the principles of IFRS 15 (See below ‘Applying IFRS 15 principles to a financial guarantee contract).

Example

In practice, the accounting for loan commitments that are not measured at FVTPL may be different depending on whether the loan commitment is to provide a loan at or below a market interest rate. The following example illustrates this difference.

Below-market rate loan commitment

Company D issues a commitment to provide a loan at a below-market interest rate whose fair value on initial recognition is 10. D measures expected credit losses for the commitment at an amount equal to 12-month expected credit losses and estimates these to be 2.

On initial recognition, D records the loan commitment at its fair value of 10, which is the higher of:

  • the provision for expected credit losses of 2; and
  • the amount initially recognised (fair value of 10) less the cumulative amount of income recognised under IFRS 15 (zero, as the loan commitment has just been recognised).

No expected credit losses are recognised, because the fair value of the loan commitment is higher than the 12-month expected credit losses.

At-market rate loan commitment

Assume instead that D issued a loan commitment with an at-market interest rate for its fair value of 5, with the remaining facts unchanged. D would then record the fee received of 5 as a liability and, in addition, would recognise a provision for expected credit losses of 2. This is because the specific measurement requirements for loan commitments issued with a below-market interest rate do not apply to other loan commitments issued.

Summary

This means that whether a provision for expected credit losses is recognised on a loan commitment may depend on whether the commitment is to provide a loan at or below a market interest rate.

Applying IFRS 15 principles to a financial guarantee contract

IFRS 9 requires an entity to assess the cumulative amount of income recognised on a financial guarantee contract in accordance with the principles of IFRS 15. The general principle in IFRS 15 is that an entity recognises revenue to depict the transfer of goods and services to the customer, at an amount that reflects the consideration that it expects to be entitled to receive from the customer.

However, IFRS 15 contains no specific guidance on how to apply this principle, or the more detailed requirements of IFRS 15, to financial guarantee contracts.

In the case of a financial guarantee contract, key practical questions are likely to include identifying the nature of the entity’s obligation under the contract and assessing when that obligation is satisfied.

There are two main possibilities under IFRS 15: an obligation may be satisfied over time (e.g. over the term of the contract) or at a point in time (e.g. on completion of the contract). If an obligation is satisfied over time, an entity identifies an appropriate method of measuring progress to complete satisfaction of the obligation.

 

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