Financial instruments: Recognition and initial measurement 3663
is called the ‘settlement date’. [IFRS 9.B3.1.5, B3.1.6]. One effect of this mechanism is
that, while legal title to the assets that are the subject of the transaction passes only
on or after settlement date, the buyer is effectively exposed to the risks and rewards
of ownership of the assets from trade date.
Absent any special provisions, the accounting analysis for regular way transactions under
IFRS 9 would therefore be that, between trade date and settlement date, an entity has a
forward contract to purchase an asset (see 2.1.3 above) which, in common with all derivatives,
should be recorded at fair value, with all changes in fair value recognised in profit or loss
(see Chapter 46 at 2.4), unless the special rules for hedge accounting apply (see Chapter 49).
This would not only be somewhat onerous but would also have the effect that changes in a
financial asset’s fair value between trade date and settlement date would be recognised in
profit or loss, even though the asset itself is not measured at fair value through profit or loss.
To avoid this, IFRS 9 permits assets subject to regular way transactions to be recognised,
or derecognised, either as at the trade date (‘trade date accounting’) or as at the
settlement date (‘settlement date accounting’). [IFRS 9.B3.1.2, B3.1.3, B3.1.5, B3.1.6]. This
accounting policy choice can be made separately for each of the main categories of
financial asset identified by IFRS 9, i.e. debt instruments measured at amortised cost, at
fair value through other comprehensive income (FVOCI), financial assets mandatorily
measured at fair value through profit or loss, those designated as measured at fair value
through profit or loss and equity investments designated as measured at FVOCI (see
Chapter 44). Once chosen, the accounting policy needs to be applied consistently and
symmetrically (i.e. to acquisitions and disposals) to each category. [IFRS 9.B3.1.3].
IFRS 9 provides additional guidance for determining whether a transaction meets the
definition of ‘regular way’ which is further discussed below.
2.2.1.A
No established market
The definition of ‘regular way’ transactions refers to terms that require delivery of the
asset within the time frame established generally by regulation or convention in the
marketplace concerned. Marketplace in this context is not limited to a formal stock
exchange or organised over-the-counter market. Rather, it means the environment in
which the financial asset is customarily exchanged. An acceptable time frame would be
the period reasonably and customarily required for the parties to complete the
transaction and prepare and execute closing documents. For example, a market for
private issue financial instruments can be a marketplace. [IFRS 9.B.28].
2.2.1.B
Contracts not settled according to marketplace convention: derivatives
The contract must be accounted for as a derivative when it is not settled in the way
established by regulation or convention in the marketplace concerned.
Example 45.1: Regular way transactions – Forward contract
Entity A enters into a forward contract to purchase 1 million of B’s ordinary shares in two months for £10 per
share. The contract is with an individual and is not an exchange-traded contract. The contract requires A to take
physical delivery of the shares and pay the counterparty £10 million in cash. B’s shares trade in an active public
market at an average of 100,000 shares a day. Regular way delivery is three days. In these circumstances, the
forward contract cannot be regarded as a regular way contract and must be accounted for as a derivative because
it is not settled in the way established by regulation or convention in the marketplace concerned. [IFRS 9.B.29].
3664 Chapter 45
2.2.1.C
Multiple active markets: settlement provisions
If an entity’s financial instruments trade in more than one active market, and the
settlement provisions differ in the various active markets, the provisions that apply are
those in the market in which the purchase actually takes place.
For instance, an entity purchasing shares of a public company listed on a US stock
exchange through a broker, where the settlement date of the contract is six business
days later, could not apply the regular way trade exemption since trades for equity
shares on US exchanges customarily settle in three business days. However, if the entity
did the same transaction on an exchange outside the US that has a customary settlement
period of six business days, the contract would meet the exemption for a regular way
trade. [IFRS 9IG.B.30].
2.2.1.D
Exercise of a derivative
The settlement of an option is governed by regulation or convention in the marketplace
for options and, therefore, upon exercise of the option it is no longer accounted for as
a derivative when the exercise is settled according to the provisions of the market place.
In such case, the settlement of an option by delivery of the shares is a regular way
transaction.
Example 45.2: Regular way transactions – Share purchase by call option
Entity A purchases a call option in a public market permitting it to purchase 100 shares of Entity X at any
time over the next three months at a price of £100 per share. If Entity A exercises its option, it has 14 days to
settle the transaction according to regulation or convention in the options market. X shares are traded in an
active public market that requires three-day settlement.
In this case, the purchase of shares by exercising the option is a regular way purchase of shares because
settlement by delivery of the shares within 14 days is a regular way transaction. [IFRS 9.B.31]. This is the case
even though if the shares had been acquired directly in the market the market convention for settlement would
have been three days.
2.2.2 Financial
liabilities
The above requirements apply only to transactions in financial assets. IFRS 9 does not
contain any specific requirements about trade date accounting and settlement date
accounting for transactions in financial instruments that are classified as financial
liabilities. Therefore, the general recognition and derecognition requirements for
financial liabilities in IFRS 9 normally apply. [IFRS 9.B.32]. Consequently, financial
liabilities are normally recognised on the date the entity ‘becomes a party to the
contractual provisions of the instrument’ (see 2.1 above) and are derecognised only
when they are extinguished, i.e. when the obligation specified in the contract is
discharged, cancelled or expires (see Chapter 48 at 6).
In January 2007, the IFRS Interpretations Committee addressed the accounting for short
sales of securities when the transaction terms require delivery of the securities within
the time frame established generally by regulation or convention in the marketplace
concerned. Constituents explained that in practice, many entities apply trade date
accounting to such transactions. Specifically, industry practice recognised the short
sales as financial liabilities at fair value with changes in fair value recognised in profit or
loss. Profit or loss would be the same as if short sales were a
ccounted for as derivatives,
Financial instruments: Recognition and initial measurement 3665
but the securities would be presented differently on the statement of financial position.
Those constituents argued that a short sale is created by a transaction in a financial asset
and hence the implementation guidance noted in the previous paragraph is not relevant.
The Committee acknowledged that requiring entities to account for short positions as
derivatives may create considerable practical problems for their accounting systems and
controls with little, if any, improvement to the quality of financial information
presented. For these reasons, and because there was little diversity in practice, the
Committee decided not to take the issue onto its agenda and thus industry practice
remains prevalent.2
2.2.3
Trade date accounting
As noted above, the trade date is the date on which an entity commits itself to purchase
or sell an asset. Trade date accounting requires:
(a) in respect of an asset to be bought: recognition on the trade date of the asset and
the liability to pay for it, which means that during the period between trade date
and settlement date, the entity accounts for the asset as if it already owned it; and
(b) in respect of an asset to be sold: derecognition on the trade date of the asset,
together with recognition of any gain or loss on disposal and the recognition of a
receivable from the buyer for payment.
IFRS 9 notes that, generally, interest does not start to accrue on the asset and
corresponding liability until the settlement date when title passes. [IFRS 9.B3.1.5].
2.2.4
Settlement date accounting
As noted above, the settlement date is the date that an asset is delivered to or by an
entity. Settlement date accounting requires:
(a) in respect of an asset to be bought: the recognition of the asset on the settlement
date (i.e. the date it is received by the entity). Any change in the fair value of the
asset to be received during the period between the trade date and the settlement
date is accounted for in the same way as the acquired asset. In other words:
[IFRS 9.5.7.4, IFRS 9.B3.1.6]
• for assets carried at cost or amortised cost, the change in fair value is not
recognised (other than impairment losses);
• for assets classified as financial assets at fair value through profit or loss, the
change in fair value is recognised in profit or loss; and
• for financial assets measured at FVOCI, the change in fair value is recognised
in other comprehensive income.
(b) in respect of an asset to be sold: derecognition of the asset, recognition of any gain
or loss on disposal and the recognition of a receivable from the buyer for payment
on the settlement date (i.e. the date it is delivered by the entity). [IFRS 9.B3.1.6]. A
change in the fair value of the asset between trade date and settlement date is not
recorded in the financial statements because the seller’s right to changes in the fair
value ceases on the trade date. [IFRS 9.D.2.2].
3666 Chapter 45
2.2.5 Illustrative
examples
Examples 45.3 and 45.4 below (which are based on those in the implementation
guidance appended to IFRS 9) illustrate the application of trade date and settlement date
accounting to the various categories of financial asset identified by IFRS 9.
[IFRS 9.D.2.1, D.2.2]. For simplicity purposes, these examples do not address the accounting
entries related to impairment charges. The accounting treatment for these categories of
assets is discussed in more detail in Chapter 46 through to Chapter 50.
Example 45.3: Trade date and settlement date accounting – regular way
purchase
On 29 December 2019 (trade date), an entity commits itself to purchase a financial asset for €1,000, which is
its fair value on trade date. On 31 December 2019 (financial year-end) and on 4 January 2020 (settlement
date) the fair value of the asset is €1,002 and €1,003, respectively. The accounting entries to be recorded for
the transaction will depend on how it is classified and whether trade date or settlement date accounting is
used, as shown in the tables below:
A
Financial asset accounted for at amortised cost
Trade date accounting
Settlement date accounting
€
€
€ €
29 December 2019
Financial
asset 1,000
Liability to counterparty 1,000
To record purchase of asset and liability No accounting entries
thereof
31 December 2019
No accounting entries
No accounting entries
4 January 2020
Liability
to
1,000
Financial asset
1,000
counterparty
Cash
1,000
Cash
1,000
To record settlement of liability
To record purchase of asset
B
Financial asset accounted for at fair value through profit or loss
Trade date accounting
Settlement date accounting
€
€
€ €
29 December 2019
Financial
asset 1,000
Liability to
counterparty 1,000
To record purchase of asset and
liability thereof
No accounting entries
Financial instruments: Recognition and initial measurement 3667
€
€
€ €
31 December 2019
Financial
Asset 2
Receivable
2
Income
statement 2
Income
statement
2
To record change in fair value of asset
To record change in fair value of contract
4 January 2020
Liability to
counterparty 1,000
Financial
asset
1,003
Cash
1,000
Cash
1,000
Financial
asset 1
Receivable
2
Income
statement 1
Income
statement
1
To record settlement of liability and To record purchase of asset, change in fair
change in fair value of asset
value and settlement of contract
C Financial
asset measured at FVOCI *
Trade date accounting
Settlement date accounting
€
€
€ €
29 December 2019
Financial
asset 1,000
Liability
to
1,000
counterparty
To record purchase of asset and liability No accounting entries
thereof
31 December 2019
Financial
Asset 2
Receivable
2
OCI
2
OCI
2
To record change in fair value of asset
To record change in fair value of contract
&n
bsp; 4 January 2020
Liability
to
1,000
Financial asset
1,003
counterparty
Cash
1,000
Cash
1,000
Financial
asset 1
Receivable
2
OCI
1
OCI
1
To record settlement of liability and To record purchase of asset, change in fair
change in fair value of asset
value and settlement of contract
*
The same analysis applies whether the financial assets measured at FVOCI are debt instruments or equity instruments.
As illustrated above, for a regular way purchase, the key difference between trade date
and settlement date accounting is the timing of recognition of a financial asset. Regardless
of the method used, the impact on profit or loss, OCI and net assets is the same.
Example 45.4: Trade date and settlement date accounting – regular way sale
On 29 December 2019 (trade date) an entity enters into a contract to sell a financial asset for its then current
fair value of €1,010. The asset was acquired one year earlier for €1,000 and its amortised cost is €1,000. On
31 December 2019 (financial year-end), the fair value of the asset is €1,012. On 4 January 2020 (settlement
date), the fair value is €1,013. The accounting entries to be recorded for this transaction will depend on how
the asset is classified and whether trade date or settlement date accounting is used as shown in the tables
below (any interest that might have accrued on the asset is disregarded).
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 725