Question

One of the issues covered by IFRS 9 Financial Instruments (revised July 2014) is the classification and measurement of financial assets. The three possible measurement bases identified by the standard are: • Amortised cost. • Fair value through other comprehensive income. • Fair value through profit or loss. Required: Explain how IFRS 9 requires entities to select the appropriate measurement basis for a financial asset. You should include any options available to entities regarding classification in your explanation. Note: You are NOT required to define financial asset. IFRS 9 principle is required to answer this

Answer 1

Answer:

Following are alternatives available for entities to choose :

Where assets are estimated at reasonable worth or fair value, profits and losses are either perceived completely in profit or loss or perceived in other comprehensive income.

For debt instruments the Fair value through other comprehensive income classification is compulsory for specific assets except if the reasonable worth choice is chosen. While for equity investment the Fair value through other comprehensive income classification is a political race Furthermore the prerequisites for reclassifying gains or misfortunes perceived on other comprehensive incoome are distinctive for debt instruments and equity investments.

Measurement basis:

Debt instruments :

An debt instrument that meet after two conditions must be estimated at amortized cost except if the asset is assigned as Fair value through profit or loss(FVTPOL)Under the reasonable worth choice or fair value option.

Plan of action test The goal of the entities model is to hold the financial asset for gather the contractual cash flows.

Cash flow characteristics test:

The legally binding terms of the financial asset give ascend on determined dates to incomes or cash flows that are exclusively payments of head and interest on the principal sum outstanding.

Evaluating the cash flow qualities additionally remembers an analysis of changes for the planning or in the measure of payments It is important to survey whether the incomes or cash flows when the change represent to just reimbursements of the nominal amount and an interest dependent on them.

The privilege of end may for instance be as per the cash flow condition if, on account of end or termination, the main outstanding payments comprise of head and interest on the principal sum and a proper remuneration payments where relevant. In October 2017,the IASB explained that the

Compensation payments can likewise have a negative sign

All other debt instruments must be estimated at reasonable worth or  Fair value through profit or loss .

Equity instruments:

All equity instruments in extent of IFRS 9 are to be estimated at reasonable worth in the statement of financial situation, with esteem changes perceived in profit or misfortune, aside from those equity investments for which the entity has chosen for present worth changes in other comprehensive income There is no cost exemption for unquoted values or equities.

Reasonable worth alternative or Fair value option :

IFRS 9 contains an alternative to assign a financial liability as estimated at Fair value through profit or loss doing so eliminates or fundamentally decreases an estimation or acknowledgment irregularity that would some way or another emerge from estimating assets or liabilities or perceiving the gains and misfortunes on them on various bases, or the liability is part or a gathering of Financial assets or liabilities and fiscal liabilities that is overseen and it's presentation is assessed on a reasonable worth basis, as per a reported risk management or investment method, and data about the gathering is given inside on that premise to entities key administrative staff .