6.4.3 Regulated
interest rates .................................................................... 3624
6.4.4
Other contractual features that change the timing or
amount of contractual cash flows .................................................. 3624
6.4.4.A
Prepayment – negative compensation ..................... 3625
6.4.4.B Prepayment
–
assets originated at a premium
or discount .......................................................................3627
6.4.5
Contractual features that normally do not represent
payments of principal and interest ................................................. 3630
6.4.6 Loan
commitments
............................................................................ 3633
6.5
Non-recourse assets .......................................................................................... 3634
6.6 Contractually
linked instruments ................................................................... 3636
6.6.1
Assessing the characteristics of the underlying pool .................. 3640
6.6.2
Assessing the exposure to credit risk in the tranche held .......... 3641
7 DESIGNATION AT FAIR VALUE THROUGH PROFIT OR LOSS .................... 3643
7.1
Designation eliminates or significantly reduces a measurement or
recognition inconsistency (accounting mismatch) that would
otherwise arise ................................................................................................... 3644
7.2
A group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis ........................................................................................................... 3645
7.3
Hybrid contracts with a host that is not a financial asset within the
scope of IFRS 9 .................................................................................................. 3646
8 DESIGNATION OF NON-DERIVATIVE EQUITY INVESTMENTS AT
FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME ..................... 3647
9 RECLASSIFICATION OF FINANCIAL ASSETS .............................................. 3649
10 EFFECTIVE DATE AND TRANSITION .......................................................... 3651
10.1 Effective date ....................................................................................................... 3651
10.2 Transition
provisions
.........................................................................................
3651
10.2.1
Date of initial application .................................................................. 3651
10.2.2 Applying
the
‘business model’ assessment .................................... 3651
10.2.3 Applying the contractual cash flow characteristics test ............ 3652
Financial
instruments:
Classification
3593
10.2.4 Making and revoking designations ................................................. 3653
10.2.5 Restatement
of
comparatives
..........................................................
3654
10.2.6 Financial instruments derecognised prior to the date of
initial application ............................................................................... 3654
10.2.7 Transition
adjustments
and measurement of financial
assets and liabilities ........................................................................... 3655
10.2.7.A
Hybrid financial assets ................................................. 3655
10.2.7.B
Financial assets and liabilities measured at
amortised cost ............................................................... 3655
10.2.7.C
Unquoted equity investments .................................... 3656
List of examples
Example 44.1:
The level at which the business model assessment should
be applied ............................................................................................ 3608
Example 44.2:
Splitting portfolios ............................................................................. 3609
Example 44.3:
Credit risk management activities .................................................. 3609
Example 44.4:
Sales to manage concentration risk ................................................ 3610
Example 44.5:
Credit-impaired financial assets in a hold to collect
business model .................................................................................... 3610
Example 44.6:
Hedging activities in a hold to collect business model ............... 3610
Example 44.7:
Securitisation ....................................................................................... 3610
Example 44.8:
Liquidity portfolio for stress case scenarios.................................. 3610
Example 44.9:
Anticipated capital expenditure ...................................................... 3611
Example 44.10:
Liquidity portfolio for everyday liquidity needs .......................... 3611
Example 44.11:
Opportunistic portfolio management ............................................. 3611
Example 44.12:
Replication portfolios ........................................................................ 3612
Example 44.13:
Loans that are to be sub-participated ............................................ 3612
Example 44.14:
Portfolio managed on a fair value basis ......................................... 3613
Example 44.15:
Unleveraged inflation linked bond .................................................. 3619
Example 44.16:
Examples of a modified time value of money component ....... 3622
Example 44.17:
Interest rate period selected at the discretion of the
borrower .............................................................................................. 3623
Example 44.18:
Five-year constant maturity bond ................................................. 3623
Example 44.19:
Regulated interest rates –‘Livret A’ ............................................... 3624
Example 44.20:
Prepayable corporate loan recognised at a premium to par..... 3629
Example 44.21:
Debt covenants .................................................................................. 3630
Example 44.22:
Auction Rate Securities (ARSs) ....................................................... 3630
Example 44.23:
Dual currency instruments ............................................................... 3631
Example 44.24:
Convertible debt ................................................................................. 3631
Example 44.25:
Inverse floater ..................................................................................... 3631
3594 Chapter 44
Example 44.2
6:
Perpetual instruments with potentially deferrable
coupons ............................................................................................... 3632
Example 44.27:
Write-down or conversion imposed by regulator ...................... 3632
Example 44.28:
Multiple of a benchmark interest rate ........................................... 3633
Example 44.29:
Fixed rate bond prepayable by the issuer at fair value .............. 3633
Example 44.30:
Investment in open-ended money market or debt funds ......... 3633
Example 44.31:
Non-recourse loans ........................................................................... 3635
Example 44.32:
Assessing the exposure to credit risk in the tranche held ......... 3642
Example 44.33:
Callable, perpetual ‘Tier 1’ debt instrument ................................. 3648
Example 44.34:
Change in the way a portfolio is managed ................................... 3650
Example 44.35:
Loans previously reclassified from trading under IAS 39 .......... 3651
Example 44.36:
Loans held within a business intended for disposal ................... 3652
3595
Chapter 44
Financial instruments:
Classification
1 INTRODUCTION
On 24 July 2014, the International Accounting Standards Board (the IASB or the Board)
published the consolidated version of IFRS 9 – Financial Instruments (IFRS 9 or the
standard) including the revised classification requirements for financial assets.
Classification determines how financial instruments are accounted for in the financial
statements and, in particular, how they are measured on an ongoing basis.
The more principle-based approach of IFRS 9 will require careful use of judgment in
its application. Some fact patterns have no simple and distinct outcome and we highlight
in this chapter the factors that need to be considered in arriving at a conclusion.
2
CLASSIFYING FINANCIAL ASSETS: AN OVERVIEW
IFRS 9 has the following measurement categories for financial assets:
• Debt instruments at amortised cost;
• Debt instruments at fair value through other comprehensive income with
cumulative gains and losses reclassified to profit or loss upon derecognition;
• Debt instruments, derivatives and equity instruments at fair value through profit
or loss;
• Equity instruments designated as measured at fair value through other
comprehensive income with gains and losses remaining in other comprehensive
income, i.e. without recycling to profit or loss upon derecognition.
Apart from some options which are described in more detail at 7 and 8 below, the
classification is based on both the entity’s business model for managing the financial
assets and the contractual cash flow characteristics of the financial assets. [IFRS 9.4.1.1].
The synopsis below illustrates the thought process on which the classification of
financial assets is based:
3596 Chapter 44
Debt (including hybrid contracts)
Derivatives
Equity
Contractual cash flow characteristics test
(at instrument level)
Pass
Fail
‘Business Model’ (BM) assessment
(at an aggregate level)
Held for
trading?
No
1
2
3
BM
Yes
with objective
Hold-to-collect
that results in
contractual
collecting
Neither (1)
cash flows
contractual cash
nor (2)
flows and sel ing
financial assets
No
FVOCI option
Conditional fair value
elected?
option (FVO) elected?
Yes
Yes
No
No
Amortised
FVOCI
FVOCI
cost
FVTPL
(with recycling)
(no recycling)
The following matrix summarises the outcome of the thought process depicted in the
synopsis above:
Contractual cash flow
characteristics test
Pass Fail
Held within a business model whose objective is to hold
Amortised
FVTPL1
financial assets in order to collect contractual cash flows
cost
siness
model
Bu
Held within a business model whose objective is achieved by
FVOCI2
FVTPL3
both collecting contractual cash flows and selling financial assets
(debt)
Financial assets which are neither held at amortised cost nor at
FVTPL FVTPL
fair value through other comprehensive income
Conditional fair value option is elected
FVTPL
n/a
Option elected to present changes in fair value of an equity
FVOCI4
Options
instrument not held for trading in OCI
(equity)
1
Fair value through profit or loss
2
Fair value through other comprehensive income
3
Financial assets which fail the contractual cash flow characteristics test are measured at fair value through profit or loss 4
Only debt instruments can pass the contractual cash flow characteristics test. The fair value through other
comprehensive income option without recycling to OCI only applies to equity instruments
Financial
instruments:
Classification
3597
Measurement is covered in Chapter 46, particularly at 2.1 (debt financial assets
measured at amortised cost), 2.3 (debt financial assets measured at fair value through
other comprehensive income), 2.4 (financial assets measured at fair value through profit
or loss) and 2.5 (investments in equity instruments designated at fair value through other
comprehensive income). This includes the effective interest method and expected
credit loss impairment model for financial assets measured at amortised cost and fair
value through other comprehensive income. Fair value is determined in accordance
with IFRS 13 – Fair Value Measurement – see Chapter 14.
2.1 Debt
instruments
A debt instrument is normally measured at amortised cost if both of the following
conditions are met: [IFRS 9.4.1.2]
(a) the asset is held within a business model whose objective is to hold assets in order
to collect contractual cash flows; and
(b) 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.
A debt instrument is normally measured at fair value through other comprehensive
income if both of the following conditions are met: [IFRS 9.4.1.2A]
(a) the asset is held within a business model in which assets are managed to achieve a
particular objective by both collecting contractual cash flows and sellin
g financial
assets; and
(b) 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.
The application of these conditions (the ‘business model’ assessment and ‘contractual
cash flow characteristics’ test) is covered in more detail at 5 and 6 below, respectively.
The above requirements should be applied to an entire financial asset, even if it contains
an embedded derivative. [IFRS 9.4.3.2].
The application of these requirements to debt instruments means that, apart from the
exceptions described in 6.4 below, only relatively simple ‘plain vanilla’ debt instruments
qualify to be measured at amortised cost or at fair value through other comprehensive
income. Debt instruments that are neither measured at amortised cost nor at fair value
though other comprehensive income are measured at fair value through profit or loss.
[IFRS 9.4.1.4]. As will be shown at 5.4 below, this includes instruments that are held for
trading (see 4 below).
Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair
value through other comprehensive income, as described above, an entity may irrevocably
designate a debt instrument as measured at fair value through profit or loss at initial
recognition. This is allowed if doing so eliminates or significantly reduces a measurement
or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’). Such
mismatches would otherwise arise from measuring assets or liabilities or recognising the
gains and losses on them on different bases. [IFRS 9.4.1.5]. This is covered further at 7 below.
3598 Chapter 44
In its Basis for Conclusions, the IASB noted that the fair value through other
comprehensive income measurement category is intended for debt instruments for
which both amortised cost information and fair value information are relevant and
useful. This will be the case if their performance is affected by both the collection of
contractual cash flows and the realisation of fair values through sales. [IFRS 9.BC4.150].
The fair value through other comprehensive income measurement category may also
help some insurers achieve consistency of measurement for assets held to back
insurance liabilities under IFRS 17 – Insurance Contracts – insurance contracts model.
It should also help to address concerns raised by preparers who expect to sell financial
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 710