3. Classification of financial assets under IFRS
9
(A) At amortised cost:
An asset (other than equity instrument) that meets the below
mentioned conditions:
The asset is held within a business model whose objective is to hold
assets in order to collect contractual cash flows;
The contractual cash terms of the financial asset give rise to cash
flows on specific dates that are solely payments of principal and
interest on the principal amount outstanding;
The entity has not invoked the fair value option for measurement of
financial asset to reduce an accounting or measurement mismatch
(B) At fair value
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4. Business Model
An entity’s business model approach is determined on a
higher level, rather than an asset-by-asset basis.
Further, the entity may have different assets (portfolio of
assets) for business purposes.
Accordingly, it may not be right to identify the business
model on an entity’s level either. The entity may
comprise of a portfolio of assets which is collected on
the basis of contractual cash flows, and of a portfolio of
assets in which it trades.
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5. Examples
K Ltd, a banking company, issues loans to various customers in
retail business. A customer, having taken a 20 years loan, decides to
pay off the loan in 5 years’ time. K Ltd cannot refuse the pre-
payment, and would receive the money due from the customer.
K Ltd gives loan to various clients in the retail sector. If someone
does not pay the instalment, K Ltd would follow different measures
to recover money. It may further mean to recover money by selling
off the collateral.
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6. Amortised cost
K Ltd invests $100,000 into debt instrument of T Ltd.
The cost of advisory / valuation comes at $5,000. K
Ltd’s business model is to collect contractual cash flows
in form of recovery of interest and principal payments.
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7. At fair value
IFRS 9 provides that changes in the value of a financial
asset measured at fair value, but not held for trading
purposes, may be done through Other Comprehensive
Income. However, this choice has to be made by the entity
at the time of initial recognition of the asset. This decision
is irrevocable, and cannot be changed later.
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8. Examples
K Ltd invests in 3 years’ redeemable preference shares of T Ltd. K Ltd
holds these shares until maturity and recovers the cash flows through
dividend and principal repayment.
K Ltd invests in bonds of T Ltd. The intention is to hold these bonds for a
longer term. However, K Ltd decided to value the investment at fair value
routed through profit and loss.
K Ltd has receivables of $5 million from T Ltd. The business model of K
Ltd is to sell off the receivables portfolio to 3rd party and recover money the
moment sales are made.
K Ltd has invested in debentures of T Ltd. K Ltd has an intention to hold
these debentures until maturity. However, if K Ltd identifies a substantial
gain, it may sell off the debentures to realise the gain.
A perpetual debt (with no maturity) is considered at amortised cost.
A debt instrument convertible into equity shares of the entity is considered
at fair value, rather than at amortised cost. The recovery is not necessarily
coming through contractual cash flows in form of principal and interest.
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9. At fair value
K Ltd invests $100,000 into shares of T Ltd (not for
trading purposes). The cost of advisory / valuation
comes at $5,000.
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10. Classification of Financial Liabilities
Classification of Financial liabilities
Under the principles of IAS 39, a financial asset may be classified under
two categories:
At amortised cost:
An entity shall classify all financial liabilities as subsequently measured at
amortised cost using the effective rate of interest method, unless the
financial liability is measured at fair value through profit or loss.
At fair value through profit or loss:
The classification into fair value through profit or loss is applicable if:
The classification reduces the accounting mismatch; or
The liability is managed and its performance is evaluated on a fair value
basis as per the documented investment strategy or risk management.
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11. Measurement of liability at fair
value
K Ltd issues $100,000 debt instrument. The cost of
advisory / valuation comes at $5,000. K Ltd’s trades in this
liability.
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12. Costs directly related to issuance of equity
and debt
Transaction costs are the incremental costs directly attributable to
the acquisition, issue or disposal of a financial asset or liability.
These include:
◦ Legal fee (Stock exchange listing fee);
◦ Advisory fees;
◦ Printing and stamp charges;
Transaction costs directly attributable to equity issuance, that
otherwise would have been avoided, are deducted from equity.
Similarly, transaction costs directly attributable to debt issuance,
that otherwise would have been avoided, are deducted from debt to
arrive at its initial value.
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13. Directly attributable costs
K Ltd has issued 1 million shares of $1 each. The total
proceeds of issuance of shares are $1.2 million. Total
costs of printing of these shares and advisory costs are
$100,000.
K Ltd plans to issue 1 million shares of $1 each.
However, of these shares, 200,000 shares have not been
issued. Total cost of printing of 1 million shares in
physical form is $100,000.
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14. Classification
Financial
Instruments
Financial
Assets Financial
liabilities
At amortised
cost
FV through FV through At amortised
Other At fair value
Income through income cost
statement Comprehensive
Income statement
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15. Initial measurement of financial
assets and liabilities
For financial assets:
A financial asset is measured at its fair value (for a
financial asset recognised / classified at fair value);
A financial asset is measured at its fair value plus
attributable transaction costs (for a financial asset
recognised / classified at amortised cost)
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16. Amortised cost concept
On 1st January 2011, K Ltd invested in bonds of T Ltd
worth $500,000. It pays transaction costs (directly
attributable to acquisition of the bonds) of $20,000 to
invest into these bonds. At the end of each year, K Ltd
received interest @ 6% on the principal amount of
$500,000. The effective interest rate is 9.15%. At the end
of 4 years, K Ltd receives $600,000 as redemption
amount.
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17. Compound Instruments
Comprise of both equity and liability
Liability portion has to be separately calculated
Equity is the residual balance (remaining amount)
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