1. IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]
- Financial assets at fair value through profit or loss
- Available-for-sale financial assets
- Loans and receivables
- Held-to-maturity investments
This classification make such financial assets easy to record and measure )
Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements.
Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements.
1.1 Financial assets at fair value through profit or loss (FVTPL). This category has two subcategories:
- Designated. The first includes any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss. (*)
- Held for trading (Trading securities). The second category includes financial assets that are held for trading. All derivatives (except those designated hedging instruments) and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-term profit taking are held for trading. [IAS 39.9]
(*) The BOD intentionally determines to design financial assets at FVTPL => It is easy to record and evaluate => Therefore, IAS requires the company has a clear and consistent policy about it.
1.2 Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as as (NOT AS 3 OTHERS)
1.2 Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as as (NOT AS 3 OTHERS)
(a) loans and receivables,
(b) held-to-maturity investments or
(c) financial assets at fair value through profit or loss. [IAS 39.9]
AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets are recognised directly in equity, through the statement of changes in equity, except for interest on AFS assets (which is recognised in income on an effective yield basis), impairment losses and (for interest-bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was recognised in equity is recognised in profit or loss when an available-for-sale financial asset is derecognised. [IAS 39.55(b)] (Avaluate: Accumulate on BS and Sold: BS -> PL)
1.3 Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than held for trading or designated on initial recognition as assets at fair value through profit or loss or as available-for-sale. Loans and receivables for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, should be classified as available-for-sale.[IAS 39.9] Loans and receivables are measured at amortised cost. [IAS 39.46(a)]
1.4 Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments that an entity intends and is able to hold to maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or loss or as available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a held-to-maturity investment other than in insignificant amounts or as a consequence of a non-recurring, isolated event beyond its control that could not be reasonably anticipated, all of its other held-to-maturity investments must be reclassified as available-for-sale for the current and next two financial reporting years. [IAS 39.9] Held-to-maturity investments are measured at amortised cost. [IAS 39.46(b)]
2. IFRS 9 (Simpler than IAS 39) - Under progess - Finish Recognition and Measurement -Mandatory apply from 1.1.2015 (Early adoption - option)- Impairment & Hedging account still regulated by IAS 39
IFRS classify financial assets under 2 categories:
IFRS classify financial assets under 2 categories:
+ Measured at amortised cost
+ Measured at fair value
2.1 Debt instruments
A debt instrument that meets the following two conditions can be measured at amortised cost (net of any write down for impairment) [IFRS 9, paragraph 4.1.2]:
o Business model test: The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes).
o 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 outstanding.
All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS 9, paragraph 4.1.4]
Fair value option
Even if an instrument meets the two amortised cost tests, IFRS 9 contains an option to designate a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. [IFRS 9, paragraph 4.1.5]
IAS 39's AFS and HTM categories are eliminated
The available-for-sale and held-to-maturity categories currently in IAS 39 are not included in IFRS 9.
2.2 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 recognised in profit or loss, except for those equity investments for which the entity has elected to report value changes in 'other comprehensive income'. There is no 'cost exception' for unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at fair value through other comprehensive income (FVTOCI) with only dividend income recognised in profit or loss. [IFRS 9, paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value.
By IAS+
By IAS+
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