Financial Instruments: IFRS-9 — Classification and Measurement (Portfolio 5185)

Bloomberg BNA Tax and Accounting Portfolio 5185, Financial Instruments: IFRS 9—Classification and Measurement, explores how an entity classifies and measures nonderivative financial instruments under International Financial Reporting Standards (IFRSs), with a focus on the requirements of IFRS 9, Financial Instruments (as of July 2014). To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

 

Description

Bloomberg BNA Tax and Accounting Portfolio 5185, Financial Instruments: IFRS 9—Classification and Measurement, explores how an entity classifies and measures nonderivative financial instruments under International Financial Reporting Standards (IFRSs), with a focus on the requirements of IFRS 9, Financial Instruments (as of July 2014).

This Portfolio does all of the following:



• Paraphrases the existing authoritative international guidance as set out in IFRS 9;
• Offers insight into the rationale for, and practical consequences of, the authoritative guidance;
• Provides context for and observations about illustrative examples set out in the authoritative guidance; and
• At a high-level, notes how authoritative generally accepted accounting principles in the United States (as set out in the Financial Accounting Standards Board (FASB) Accounting Standards Codification) compare and contrast with the authoritative international guidance.


The insights are drawn from analysis of the authoritative guidance, and also from the supporting project materials of the International Accounting Standards Board—for example, the basis for board's conclusions and related dissents, exposure drafts, comment letters, and other project documentation.

Notice: This Bloomberg BNA Portfolio is intended to provide authoritative information regarding the subject matter covered, but is not intended to provide legal or accounting advice or any other professional service. The information is not relevant for any particular client or use and may not reflect all relevant laws applicable to any particular factual situation. Although diligent effort has been made to ensure accuracy of the information, the authors and publisher assume no responsibility for any reader's reliance on the information or opinions expressed herein, and encourage the reader to verify all items by reviewing the original sources. To ensure compliance with IRS requirements, any discussion of U.S. federal tax matters contained in the publication is not intended or written to be used, and can't be used, for the purpose of (i) avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) promoting, marketing or recommending to another party any arrangement or other transaction addressed herein.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5185, Green, Financial Instruments: IFRS 9—Classification and Measurement (Accounting Policy and Practice Series). Within the Accounting Policy and Practice Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

Authors

James F. Green, CPA-IL

Jim is an Illinois CPA who helps people understand generally accepted accounting principles and related subjects. Jim has applied, helped set, and offered insights into GAAP and other professional requirements for 30 years—

• Analyzing accounting and other principles for clients in industry and public practice;
• Helping the Financial Accounting Foundation create the FASB Accounting Standards Codification® through his analysis, authoring, and editing;
 • Developing and communicating accounting technical positions—including positions on financial instruments, derivatives, hedging, securitizations, and foreign currency translation—as a partner in Arthur Andersen's Professional Standards Group;
• Writing guidance on accounting, auditing, and regulatory matters as staff of several financial services committees of the American Institute of Certified Public Accountants;
• Representing the AICPA on accounting and auditing issues before the United States Congress and federal regulatory agencies; and,
• Auditing financial statements as a manager at KPMG.


Jim has a BBA in accounting from the College of William and Mary in Virginia. Jim speaks English and Spanish and devotes his volunteer time to literacy and hunger issues.

Table of Contents

Detailed Analysis
I. Overview
Introductory Material
A. The Primary Accounting Issues
B. The Financial Instruments Portfolios
1. Derivatives and Hedging
2. Impairment of Nonderivative Financial Assets
3. Derecognition of Financial Instruments
4. Presentation and Disclosure of Nonderivative Financial Instruments
C. Overview of the Classification and Measurement Model
1. Nonderivative Financial Assets
a. Investments in Nonderivative Equity Instruments
b. Investments in Nonderivative Debt Instruments
2. Nonderivative Financial Liabilities
II. Scope of the Classification and Measurement Guidance
Introductory Material
A. Financial Instruments
1. Nonderivative Financial Assets
2. Nonderivative Financial Liabilities
B. Entity Scope of the Guidance
1. IFRS for Small- and Medium-Sized Entities
2. Contrasting Entity Scope in U.S. GAAP
C. Item Scope of the Guidance
1. Interests in Investees
a. Interests in Investees That Are Controlled Collectively
b. Entities That Are Investment Entities
c. Potential Voting Rights in Investees
d. Interests in Investees Exempted from the Equity Method
e. Loss of Control of (or Influence Over) An Investee
2. Written Financial Guarantees
3. Financial Instruments That Have Discretionary Participation Features
4. Issued Loan Commitments
a. Past Practice of Selling Loans Shortly After Origination
b. Commitments to Issue Loans at Below-Market Interest Rates
c. Loan Commitments an Entity Elects to Recognize Under IFRS 9
5. Nonderivative Financial Instruments Associated With Customer Contracts
D. Unit of Account
1. Hybrid Contracts
2. Nonderivative Financial Instruments Viewed Together as a Derivative
3. Registration Payment Arrangements
III. Initial Recognition of Nonderivative Financial Instruments
Introductory Material
A. Classification of Nonderivative Financial Assets
1. Unit of Account for Classifying Nonderivative Financial Assets
2. Contingent Consideration
3. Investments in Nonderivative Equity Instruments
a. Cash Flow Characteristics of Nonderivative Equity Instruments
b. Items Held for Trading
4. Investments in Nonderivative Debt Instruments
a. Contractual Cash Flows Requirement
(1) The Time Value of Money
(A) Interest-Rate Resets
(B) Prepayment Features
(C) Negative Interest Rates
(D) Regulated Interest Rates
(2) Other Contractual Terms That Can Change Cash Flows
(3) Cash Flows Denominated in a Foreign Currency
(4) Contractually Linked Instruments
(A) Background
(B) Conditions for Contractually Linked Cash Flows
(i) First Condition
(ii) Third Condition
(iii) Fourth Condition
b. Business Models
(1) Held for Trading
(2) Groups Managed Based on Fair Value
(3) Credibility of Hold-Only Business Models
(4) Credibility of Hold-and-Sell Business Models
5. Regular-Way Purchases of Nonderivative Financial Assets
a. Trade-Date Accounting
b. Settlement-Date Accounting
B. Classification of Nonderivative Financial Liabilities
1. Liabilities for Consideration in Financial Asset Transfers
2. Liabilities for Continuing Involvement in Financial Asset Transfers
3. Nonderivative Financial Liabilities Held for Trading
4. Contingent Consideration
5. Groups Managed Based on Fair Value
C. Accounting Mismatches
1. Definition of Accounting Mismatch
2. Sources of Accounting Mismatches
3. Accounting Mismatch Criteria
a. Credit Risk, Creditworthiness, and Performance Risk
D. Nonderivative Financial Instruments as Hedging Instruments
IV. Initial Measurement of Nonderivative Financial Instruments
Introductory Material
A. Fair Value Versus Transaction Price
B. Transaction Costs
C. Trade Receivables
V. Subsequent Accounting for Nonderivative Financial Instruments
Introductory Material
A. Subsequent Accounting for Nonderivative Financial Assets
1. Nonderivative Financial Assets Classified as Fair Value Through Profit or Loss
a. Estimating Fair Values of Equity Instruments
2. Nonderivative Financial Assets Classified as Fair Value Through Other Comprehensive Income
3. Foreign Exchange Gains and Losses
4. Nonderivative Financial Assets at Amortized Cost
a. Effective Interest Method
(1) Interest Rates
(2) Integral Fees
b. Modifications
c. Write-Offs
d. Perpetual Debt Instruments
5. Reclassifications of Nonderivative Financial Assets
a. Changes That Warrant Reclassification
b. Reclassification Accounting
B. Subsequent Measurement of Nonderivative Financial Liabilities
1. Nonderivative Financial Liabilities Classified as Fair Value Through Profit or Loss
a. Measuring Credit-Risk-Related Changes in Fair Value
(1) Measurement Using Other Market Risk Changes
(2) Measurement Shortcut
2. Nonderivative Financial Liabilities Classified As Amortized Cost
3. Written Financial Guarantees
4. Issued Loan Commitments
5. Liabilities for Consideration in Financial Asset Transfers
6. Liabilities for Continuing Involvement in Financial Asset Transfers
VI. Disclosures About Nonderivative Financial Instruments
Introductory Material
A. Carrying Amounts
B. Financial Instruments Classified as Fair Value Through Profit or Loss
1. Credit-Risk-Related Changes Recognized in Other Comprehensive Income
2. Credit-Risk-Related Changes Recognized in Profit or Loss
C. Investments in Nonderivative Equity Instruments Classified as Fair Value Through Other Comprehensive Income
D. Reclassifications of Financial Assets
VII. Adoption of the Classification and Measurement Guidance
Introductory Material
A. Incremental Adoption by Entity that Already Applies International Financial Reporting Standards
1. Classification of Nonderivative Financial Assets at the Initial-Application Date
a. Contractual Cash Flows Requirement: Time Value of Money
(1) Alignment of Interest-Rate Resets
(2) Prepayment Features
b. Business Models
c. Accounting Mismatches
2. Classification of Nontraded, Nonderivative Financial Liabilities at the Initial-Application date
a. Recognizing Credit-Risk-Related Changes
3. Effective Interest Method
4. Fair Value of Equity Instruments
5. Restatement of Prior Periods
6. Interim Periods
7. Early Adoption
8. Disclosures About Initial Application
B. First-Time Adoption of International Financial Reporting Standards

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Trade-Date Accounting Examples
Worksheet 2 Settlement-Date Accounting Examples
Worksheet 3 Disclosure Checklist