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.

Answer 1

Following are options available for entities to select

Where assets are measured at fair value, gains and losses are either recognized entirely in profit or loss or recognized in other comprehensive income

For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is selected. Whilst for equity investment the FVTOCI classification is an election Furthermore the requirements for reclassifying gains or losses recognized on other comprehensive income are different for debt instruments and equity investments.

Measurement basis

Debt instruments

A debt instrument that meet following two conditions bmust be measured at amortised cost unless the asset is designated as fair value through profit or loss

Under the fair value option

Business model test The objective of the entities model is to hold the financial asset to collect the contractual cash flows

Cash flow characteristics test

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.

Assessing the cash flow characteristics also includes an analysis of changes in the timing or in the amount of payments It is necessary to assess whether the cash flows before and after the change represent only repayments of the nominal amount and an interest rate based on them.

The right of termination may for example be in accordance with the cash flow condition if, in the case of termination, the only outstanding payments consist of principal and interest on the principal amount and an appropriate compensation payments where applicable. In October 2017,the IASB clarified that the

Compensation payments can also have a negative sign

A debt instruments that meets the following two conditions must be measured at FVTOCI unless the asset is designated at FVTPL under the fair value option

Business model test The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets

Cash flow characteristics test

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.

All other debt instruments must be measured at fair value through profit or loss

Equity instruments

All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognized in profit or loss, except for those equity investments for which the entity has elected to present value changes in other comprehensive income There is no cost exception for unquoted equities

Fair value option

IFRS 9 contains an option to designate a financial liability as measured at FVTPL

doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases, or

the liability is part or a group of Financial liabilities or financial assets and financial liabilities that is managed and it's performance is evaluated on a fair value badis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to entitys key managerial personnel

FVTPL(fair value through profit and loss)

FVTOCI (fair value through other comprehensive income, )