period, which gives a notional present value of €152,367 (€12,000 × (1 – 1.0775–9) / 0.0775 + €150,000 ×
1.0775–9), on the assumption that there has been no change in the instrument-specific component.
Step (c)
The market price of the liability at the end of the period (which will reflect the real instrument-specific
component at the end of the period within the 7.6% yield) is €153,811, therefore J should disclose €1,444
(€153,811 – €152,367) as the increase in fair value of the bond that is not attributable to changes in market
conditions that give rise to market risk.
This method assumes that changes in fair value other than those arising from changes
in the instrument’s credit risk or from changes in the ‘observed (benchmark) interest
rate’ are not significant. It would not be appropriate to use this method if changes in fair
value arising from other factors are significant. In such cases, an alternative method
should be used that more faithfully measures the effects of changes in the liability’s
credit risk. For example, if the instrument in the example contained an embedded
derivative, the change in fair value of the embedded derivative should be excluded in
determining the amount to be presented in other comprehensive income.
[IFRS 9.B5.7.19, B5.7.16(b)].
The above method will also produce an amount which includes any changes in the
liquidity spread charged by market participants, since such changes are not considered
to be attributable to changes in market conditions that give rise to market risk. This
method is applied in practice as the effect of a liquidity spread cannot normally be
isolated from that of the credit spread.
As with all estimates of fair value, the measurement method used for determining the
portion of the change in the liability’s fair value that is attributable to changes in its credit
risk should make maximum use of observable market inputs. [IFRS 9.B5.7.20].
2.4.2
Liabilities at fair value through profit or loss: assessing whether an
accounting mismatch is created or enlarged
If a financial liability is designated as at fair value through profit or loss, it must be
determined whether presenting the effects of changes in the liability’s credit risk in
other comprehensive income would create or enlarge an accounting mismatch in profit
or loss. An accounting mismatch would be created or enlarged if this treatment would
result in a greater mismatch in profit or loss than if those amounts were presented in
profit or loss. [IFRS 9.B5.7.5].
In making that determination, an assessment should be made as to whether the effects
of changes in the liability’s credit risk are expected to be offset in profit or loss by a
change in the fair value of another financial instrument measured at fair value through
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profit or loss. Such an expectation should be based on an economic relationship
between the characteristics of the liability and the characteristics of the other financial
instrument. [IFRS 9.B5.7.6].
The determination should be made at initial recognition and is not reassessed. For
practical purposes, all of the assets and liabilities giving rise to an accounting mismatch
need not be entered into at exactly the same time – a reasonable delay is permitted
provided that any remaining transactions are expected to occur. An entity’s
methodology for making this determination should be applied consistently for similar
types of transactions. IFRS 7 requires an entity to provide qualitative disclosures in the
notes to the financial statements about its methodology for making that determination
– see Chapter 50 at 4.4.2. [IFRS 9.B5.7.7].
If an accounting mismatch would be created or enlarged, the entity is required to
present all changes in fair value (including the effects of changes in the credit risk of the
liability) in profit or loss. If such a mismatch would not be created or enlarged, the entity
is required to present the effects of changes in the liability’s credit risk in other
comprehensive income. [IFRS 9.B5.7.5].
The following example describes a situation in which an accounting mismatch would
be created in profit or loss if the effects of changes in the credit risk of the liability were
presented in other comprehensive income. [IFRS 9.B5.7.10].
Example 46.2: Liabilities at fair value through profit or loss: accounting
mismatch in profit or loss
A mortgage bank provides loans to customers and funds those loans by selling bonds with matching
characteristics (e.g. amount outstanding, repayment profile, term and currency) in the market. The contractual
terms of the loans permit the mortgage customer to prepay its loan (i.e. satisfy its obligation to the bank) by
buying the corresponding bond at fair value in the market and delivering that bond to the mortgage bank.
As a result of that contractual prepayment right, if the credit quality of the bond worsens (and, thus, the fair
value of the mortgage bank’s liability decreases), the fair value of the mortgage bank’s loan asset also
decreases. The change in the fair value of the asset reflects the mortgage customer’s contractual right to
prepay the mortgage loan by buying the underlying bond at fair value (which, in this example, has decreased)
and delivering the bond to the mortgage bank. Therefore, the effects of changes in the credit risk of the
liability (the bond) will be offset in profit or loss by a corresponding change in the fair value of a financial
asset (the loan).
If the effects of changes in the liability’s credit risk were presented in other comprehensive income there would
be an accounting mismatch in profit or loss. Therefore, the mortgage bank is required to present all changes in
fair value of the liability (including the effects of changes in the liability’s credit risk) in profit or loss.
In the example above, there is a contractual linkage between the effects of changes in
the credit risk of the liability and changes in the fair value of the financial asset (i.e. as a
result of the mortgage customer’s contractual right to prepay the loan by buying the
bond at fair value and delivering the bond to the mortgage bank). The standard states
that an accounting mismatch may also occur in the absence of a contractual linkage, but
does not provide any examples of when this might be the case. [IFRS 9.B5.7.11].
However, the standard makes clear that a mismatch that arises solely as a result of the
measurement method does not affect the determination of whether presenting the
effects of changes in the liability’s credit risk in other comprehensive income would
create or enlarge an accounting mismatch in profit or loss. For instance, an entity may
Financial instruments: Subsequent measurement 3693
not isolate changes in a liability’s credit risk from changes in liquidity risk. If the entity
presents the combined effect of both factors in other comprehensive income, a
mismatch may occur because changes in liquidity risk may be included in the fair value
measurement of the entity’s financial assets and the entire fair value change of those
assets is presented in profit or loss. However, such a mismatch is caused by
measurement imprecision, not an offsetting relationship, and, therefore, does not affect
the determination of an accounting mismatch. [IFRS 9.B5.7.12].
The following example illustrates another situation in which an accounting mismatch is
not due to an economic relationship (in the sense intended by the IASB) between the
movement in the fair value of the financial assets and the movement in the fair value of
the financial liabilities related to the liabilities’ own credit risk.
Example 46.3: Liabilities at fair value through profit or loss: no accounting
mismatch in profit or loss
A bank issues structured products (consisting of a host debt contract and one or more embedded derivatives)
in the market. These financial liabilities are designated as at fair value through profit or loss because they are
managed on a fair value basis.
The bank invests the funds received in highly rated bonds, which are also designated as at fair value through
profit or loss, and derivatives whose terms mirror those of the embedded derivatives in the structured products.
In periods when market credit spreads are volatile, it is expected that the effect of changes in credit spreads
on the fair value of the structured products will be mainly compensated for by the effect of an offsetting credit
spread movements on the bonds. This is because the credit quality of the bank is similar to the credit quality
of the highly rated bonds in which the bank has invested.
Unlike Example 46.2 above, there is no direct link between the bank’s own credit risk of the structured
financial liabilities and the credit risk of the financial assets. The credit quality of the financial assets may be
similar to that of the financial liabilities and these may move in a correlated manner as they are affected by
similar movements in the general price of credit and other market risks, but the fair value of the financial
assets will not move directly in response to changes in the bank’s own credit risk.
Therefore, the requirements for an economic relationship are not met and all fair value changes attributable
to changes in the credit risk of the financial liabilities should be taken to other comprehensive income.
2.5
Investments in equity investments designated at fair value
through other comprehensive income
After initial recognition, investments in equity instruments not held for trading that are
designated as measured at fair value through other comprehensive income (see
Chapter 44 at 2.2) should be measured at fair value, with no deduction for sale or
disposal costs. With the exception of dividends received, the associated gains and losses
(including any related foreign exchange component) should be recognised in other
comprehensive income. Amounts presented in other comprehensive income should not
be subsequently transferred to profit or loss, although the cumulative gain or loss may
be transferred within equity. [IFRS 9.5.2.1, 5.7.5, B5.7.1, B5.7.3].
Dividends from such investments should be recognised in profit or loss when the right
to receive payment is probable and can be measured reliably unless the dividend clearly
represents a recovery of part of the cost of the investment. [IFRS 9.5.7.1A, 5.7.6, B5.7.1].
Determining when a dividend does or does not clearly represent a recovery of cost
could prove somewhat judgmental in practice, especially as the standard contains no
further explanatory guidance.
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2.6
Unquoted equity instruments and related derivatives
In contrast to the position under IAS 39 – Financial Instruments: Recognition and
Measurement, the previous standard for accounting for financial instruments, IFRS 9
requires all investments in equity instruments and contracts on those instruments to be
measured at fair value (see Chapter 14). However, it is recognised that in limited
circumstances, cost may be an appropriate estimate of fair value. That may be the case
if insufficient more recent information is available to determine fair value, or if there is
a wide range of possible fair value measurements and cost represents the best estimate
of fair value within that range. [IFRS 9.B5.2.3].
Such guidance was provided to alleviate some of the concerns expressed by
constituents and also, to replace the IAS 39 cost exception that was not brought forward
to IFRS 9. IAS 39 contained an exception from fair value measurement for investments
in equity instruments (and some derivatives linked to those investments) that do not
have a quoted price in an active market and whose fair value cannot be reliably
measured. Those equity investments were required to be measured at cost less
impairment, if any. [IFRS 9.BC5.13, BC5.16, BC5.18].
Indicators that cost might not be representative of fair value include: [IFRS 9.B5.2.4]
(a) a significant change in the performance of the investee compared with budgets,
plans or milestones;
(b) changes in expectation that the investee’s technical product milestones will
be achieved;
(c) a significant change in the market for the investee’s equity or its products or
potential products;
(d) a significant change in the global economy or the economic environment in which
the investee operates;
(e) a significant change in the performance of comparable entities, or in the valuations
implied by the overall market;
(f) internal matters of the investee such as fraud, commercial disputes, litigation,
changes in management or strategy; and
(g) evidence from external transactions in the investee’s equity, either by the investee (such
as a fresh issue of equity), or by transfers of equity instruments between third parties.
This list is not intended to be exhaustive. All information about the performance and
operations of the investee that becomes available after the date of initial recognition
should be used and to the extent that any such relevant factors exist, they may indicate
that cost might not be representative of fair value. In such cases, fair value should be
estimated. [IFRS 9.B5.2.5].
For the avoidance of doubt, IFRS 9 emphasises that cost is never the best estimate of
fair value for investments in quoted equity instruments (or contracts on quoted equity
instruments). [IFRS 9.B5.2.6].
Financial instruments: Subsequent measurement 3695
2.7
Reclassifications of financial assets
In certain situations financial assets classified as measured at fair value through profit or
loss should be reclassified as measured at amortised cost and vice versa. The situations
in which a reclassification might arise are considered in more detail in Chapter 44 at 9.
The reclassification should be applied prospectively from the reclassification date
which is defined as ‘the first day of the first reporting period following the change
in business model that results in an entity reclassifying financial assets’.
[IFRS 9.5.6.1, Appendix A].
Accordingly, any previously recognised gains, losses (including impairment gains and
losses) or interest should not be restated. [IFRS 9.5.6.1]. For example, when a financial asset
is reclassified so that it is measured at fair value, its fair value is determined at the
reclassification date. Any gain or loss arising from a difference between the previous
carrying amount and fair value should be recognised in profit or l
oss of the current
period without restating prior periods. [IFRS 9.5.6.2]. Accordingly, when a financial asset is
reclassified so that it is measured at amortised cost, its fair value at the reclassification
date becomes its new gross carrying amount. [IFRS 9.5.6.3].
2.8
Financial guarantees and commitments to provide a loan at a
below-market interest rate
Financial guarantees issued and commitments made to provide a loan at a below-market
interest rate should be measured on initial recognition at their (negative) fair value and
subsequently at the higher of:
• the amount of the loss allowance determined in accordance with the impairment
requirements of IFRS 9 (see Chapter 47); and
• the amount initially recognised less, where appropriate, cumulative amortisation
recognised in accordance with IFRS 15 – Revenue from Contracts with Customers
(see Chapter 28).
This assumes that the instrument is not classified at fair value through profit or loss (in
which case the requirements considered at 2.4 above apply) and, in the case of a
financial guarantee contract, does not arise from a failed derecognition transaction
(see 2.9.3 below). [IFRS 9.4.2.1(a), 9.4.2.1(c), 4.2.1(d)].
Normal loan commitments issued at market interest rates are excluded from the scope
of IFRS 9 except for impairment and derecognition. [IFRS 9.2.1(g), 2.3]. Unlike loan
commitments provided at below-market interest rates, normal loan commitments are
not subject to the ‘higher of’ test for subsequent measurement (see Chapter 47 at 11).
[IFRS 9.2.3(c), 4.2.1(d)].
For financial guarantees, there have been discussions by the ITG on whether future
premiums to be received affect the measurement of the expected credit loss (ECL)
allowance and this is discussed further at Chapter 47 at 1.5 and 11.
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2.9
Exceptions to the general principles
2.9.1 Hedging
relationships
Financial assets and financial liabilities that are designated as hedged items are subject
to measurement under the hedge accounting requirements of IFRS 9, or IAS 39 if the
entity chooses as its accounting policy to continue to apply the hedge accounting
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