IFRS 9 recognises three different accounting policies for financial instruments. These principles determine the value of the financial instruments on the balance sheet.
- Amortised cost
- Fair value through other comprehensive income
- Fair value through profit or loss.
The initial measurement is based on amortised costs, this is the amount for which an asset or liability is initially recognised in the balance sheet less principal repayments, plus or minus the cumulative amortisation of the difference between that initial amount and the redemption amount calculated by using the effective interest method and less any write-downs (directly or through the use of a provision) arising from impairment or un-collectibility.
The second measurement basis is the fair value through other comprehensive income. IASB defines fair value in IFRS 13 as:’The price that would be received on sale of an asset or paid upon transfer of a liability in a regular transaction between market participants on the measurement date’. The changes in fair value are recognised in other comprehensive income.
The last measurement basis is the fair value through profit or loss. The definition of fair value in IFRS 13 is also effective within this measurement basis.
The classification of financial instruments affects the valuation of financial instruments for reporting purposes. Based on the requirements of IFRS 9, a framework can be created to link the classification of financial instruments to the corresponding measurement basis.
Under IFRS 9, all financial instruments are first divided into three categories, namely debt instruments, derivatives and equity instruments.
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The IFRS 9 Framework for financial assets
The IFRS 9 Framework for financial assets
The second measurement basis is the fair value through other comprehensive income. IASB defines fair value in IFRS 13 as:’The price that would be received on sale of an asset or paid upon transfer of a liability in a regular transaction between market participants on the measurement date’. The changes in fair value are recognised in other comprehensive income.