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IFRS 9 Reclassification of financial instruments

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IFRS 9 Reclassification of financial instruments

For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only if the entity’s business model objective for its financial assets changes so its previous model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business model. An entity does not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification: IFRS 9 Reclassification of financial instruments

  • for equity investments measured at FVTOCI, or
  • where the fair value option has been exercised in any
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Classification for investments in bonds

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Classification for investments in bondsClassification for investments in bonds – Under IFRS 9, bonds should be classified and measured based on an entity’s business model for managing the bonds and their contractual cash flow characteristics (SPPI Test) (see table below).

The business model refers to how an entity manages bonds in order to generate cash flows—either by collecting contractual cash flows, selling the bonds or both. An entity is also required to determine whether the bond’s contractual cash flows are “Solely Payments of Principal and Interest” (SPPI) on the principal amount outstanding.

The entity must assess its business model by looking at several factors, including the expected frequency, volume and timing of asset sales, the measurement of … Read more

Instruments with certain par prepayment features

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Instruments with certain par prepayment features debt instruments with prepayment features that give rise to compensation being paid to the party triggering the possibility to be measured at amortised cost or fair value through other Instruments with certain par prepayment featurescomprehensive income (FVOCI) in certain circumstances. Instruments with certain par prepayment features

If a financial asset would otherwise meet the SPPI test, but fails to do so only as a result of a contractual term that permits or requires prepayment before maturity, or permits or requires the holder to put the instrument back to the issuer, then the asset can be measured at amortised cost or FVOCI if:

  • the relevant business model test is satisfied; Instruments with certain par prepayment features
  • the
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Financial liabilities not at amortised costs

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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

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Commitments in financial statements

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Commitments in financial statements are items that are not reported as liabilities as of the balance sheet date. Some of these items are reported in the notes to the financial statements. Examples include non-cancelable (as at balance sheet date) binding contracts to rent space in the future or to purchase items at specified prices. Commitments in financial statementsCommitments in financial statements

A financial commitment is a commitment to an expense at a future date. Commitments in financial statements

A capital commitment is the projected capital expenditure a company commits to spend on non-current assets over a period of time. Commitments in financial statements

Financial or capital commitment revolves around the designation of funds for a particular purpose including any future … Read more

Loan receivable classification and measurement

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Loan receivable classification and measurement – Once it has been determined that a loan receivable is within the scope of IFRS 9, it must be classified into one of three categories:

  1. Amortised cost; Loan receivable classification and measurement
  2. Fair Value through Profit or Loss (FVPL); or Loan receivable classification and measurement
  3. Fair Value through Other Comprehensive Income (FVOCI).

The classification decision is based on (i) the business model within which the loan is held and (ii) whether its contractual cash flows meet the ‘solely payments of principal and interest’ (SPPI) test, as illustrated below:

Business model > Hold to collectHold to collect and sellOther
Cash Flow CharacteristicSPPIAmortised costsFVOCIFVPL
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IFRS 9 Profit participating loan

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IFRS 9 Profit participating loan – Parent A advances €1m to Subsidiary B on 1 January 2018 with the following terms:

  • 5% interest;
  • 30% of the annual appreciation in the property value;
  • €1m repayable in 5 years – December 2022.

Classification

IFRS 9 Profit participating loanAs the loan is in a ‘hold to collect’ business model, the key classification question is whether the loan meets the Solely Payments of Principal and Interest test (the SPPI test).

Despite the fact that the loan has contractual payments of principal and interest, the additional contingent payment linked to the appreciation in the property value must be considered in order to determine whether the loan meets the SPPI test. This because Read more

Accounting policies for financial instruments

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Accounting policies for financial instruments – a quite complete overview of all kinds of accounting issues for financial instruments such as measurement categories, initial recognition, amortised costs and effective interest rate, financial assets, impairment, derecognition, financial liabilities, derecognition, and derivatives. Enjoy it!

Summary of significant financial instruments accounting policies

1 Financial assets and liabilities

1.1 Summary of measurement categories

The insurer classifies its financial assets into the following categories:

Business model and cash flow characteristics

Type of financial instruments

Classification

Hold to collect business model and solely payments of principal and interest

Cash and cash equivalents

Amortised cost (AC)

Hold to collect and sell business model and solely payments of principal and interest

Government bonds

Fair value

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Introduction IFRS 17 Insurance contracts

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More than 20 years in development, IFRS 17 represents a complete overhaul of accounting for insurance contracts. The new standard applies a current value approach to measuring insurance contracts and recognises profit as insurers provide services and are released from risk. The profit or loss earned from underwriting activities are reported separately from financing activities. Detailed note disclosures explain how items like new business issued, experience in the year, cash receipts and payments, and changes in assumptions affected the performance and the carrying amount of insurance contracts.

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts held and investment contracts with discretionary participation features an entity issues.

Overview IFRS 17 Insurance contracts

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IFRS 9 Financial asset classification

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IFRS 9 Financial asset classification provides an overview of the financial asset classification requirements under IFRS 9 and the differences with IAS 39, as per below table:

CategoriesConditions to be MetImpact
Amortized CostThe financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows (“business model test”).

The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (“SPPI contractual cash flow characteristics test”). (IFRS 9.4.1.2)

Investments classified as held to maturity under IAS 39 and measured at amortized cost
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