8- Part 2

IFRS 9 Embedded derivatives

Characteristics

May or may not have financial instruments in themselves

Treatment

Ordinarily, derivatives not use for hedging

Treated as held for trading and measured at FVTPL

However, with limited exceptions, it is required that embedded derivatives that would meet the def of a separate derivatives instrument

To be separated from the host contract and therefore be measured at FVTPL like other derivatives

Host contract that is bond

Accounted for as normal amortised cost

Embedded derivatives that is option on equities

Treat as derivatives that is remeasured to FV with changes recognised to P/L

Embedded derivatives are not required to be separated from the host if

The economic characteristics and risks of the embedded derivatives are closely related to those of the host contract

The hybrid instrument is measured at FVTPL

The host contract is a financial asset within the scope of IFRS 9

The embedded derivatives significantly modifies the cash flows of the contract

Impairment of financial asset

It is a forward looking impairment model

Future expected credit losses are recognised (different from the impairment under IAS 36 that is impairment loss are recognised when objective evidence of impairment exists)

Scope

Only applied to certain financial asset

Financial asset measured at amortised cost (business model- objective- to collect CCC of principal and interest)

Investment in debt instrument measured at FVTOCI, business model; objective is to collect CCC of principal and interest and to sell financial asset

It is not applied to financial asset measured at FVTPL

This is because subsequent measurement at FV will already take into account any impairment

Recognition of credit losses

On initial recognition and each subsequent reporting date

A loss allowance for expected credit losses must be recognised

At initial recognition

A loss allowance = to 12 months expected credit losses must be recognised

12 months credit losses

The portion of lifetime expected credit losses that result from default events on a financial instrument that are possibly within the 12 months after the reporting date

They are calculated by multiplying the probability of default in the next 12 months by the PV of the lifetime expected credit losses that would result from the default

Lifetime expected credit losses

The expected credit losses that result from all possible default events over the expected life of the financial instrument

At subsequent reporting date

The loss allowance required depends on whether there has been a significant increase in credit risk of that financial instrument since initial recognition

3 Situations

No significant increase in credit risk since initial recognition

Significant increase in credit risk since initial recognition

Objective evidence of impairment at the reporting date

Recognised 12 months expected credit losses

Effective interest calculated on gross CA of financial asset

Recognised lifetime expected credit losses

Effective interest calculated on gross amount of CA of financial asset

Recognised lifetime expected credit losses

Effective interest calculated on net CA of financial asset

To determine whether credit risk has increased significantly, management should assess whether there has been a significant increase in the risk of fault

There is a rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due

Stakeholder's perspective

Management needs to exercise their professional judgment

For example, assessing whether there has been a significant increase in the credit risk of financial asset since initial recognition requires management to consider forward looking and past due information in making a considered opinion

Entity needs to disclose in depth, of how entity has applied the impairment model, what are the results of applying the model are and the reasons for any changes in expected losses

Presentation

Investment in debt instrument measured at amortised cost

Investment in debt instrument measured at FVTOCI

Treatment of credit losses

Recognised in P/L

Credit losses held in a separate allowance account offset against the CA of the asset

Financial asset - Allowance for credit losses = CA (net allowance for credit losses)

Treatment of credit losses

Portion of the fall in FV relating to credit losses recognised in the P/L

Remainder recognised in OCI

No allowance account necessary because already carried at FV (which is automatically reduced for any fall in value, including credit losses)

Measurement

The measurement of expected credit losses should reflect

An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes

The time VFM

Reasonable and supportable information that is available without undue cost and effort at the reporting date about past events, current conditions and forecasts of future economic conditions

Impairment loss reversal

If an entity has measured the loss allowance at an amount = to lifetime expected credit losses in the previous reporting date, but determines that the conditions are no longer met, it should revert to measuring the loss allowance at an amount= to 12 months credit losses

The gain is recognised in the P/L

Trade receivables, contract assets and lease receivables

A simplified approach is permitted

For trade receivables and contract assets that do not have a significant IFRS 15 financing element, the loss allowance is measured at the lifetime expected credit losses. from initial recognition

For other trade receivables, and contract assets and lease receivables, the entity can choose to apply the 3 stage approach or to recognise for lifetime expected credit losses from initial recognition

Purchased or originated credit-impaired financial assets

A financial asset may already be credit-impaired when it is purchased. In this case, it is originally recognised as a single figure with no separate allowance for credit losses

However, any subsequent changes in lifetime expected credit losses are recognised as a separate allowance

Hedging accounting

Objectives

In order to reduce business risk

Where an item in the SOFP or future cash flow is subject to potential fluctuations in value that could be detrimental to the business

Where the item hedged makes a financial loss, the hedging instrument would make a gain and vice versa, reducing overall risks

Criteria where the hedge accounting will be mandatory to be applied

Types of hedges

Disclosure

Objectives

Shareholder perspective

Key disclosures

Significance of financial instruments for financial position and performance

Nature and extent of risks arising from financial instrument

The hedging relationship consists only of eligible hedging instruments and eligible hedged items

It was designated at its inception as a hedge with full documentation of how this hedge fits into the company's strategy

The hedging relationship meets all of the following hedge effectiveness requirements

There is an economic relationship between the hedged items and the hedging instrument that is the hedging instrument and the hedged item have values that generally move in the opposite direction because of the same risk, which is the hedged risk

The effect of credit risk does not dominate the value changes that result from that economic relationship, that is the gain or loss from credit risk does not frustrate the effect of changes in the underlying on the value of the hedging instrument or the hedged item, even if those changes were significant

The hedged ratio of the hedging relationship (quantity of hedged instrument vs quantity of hedged item) is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of the hedged item.

Hedge accounting is effectively optional in that an entity can choose whether to set up the hedge documentation at inception or not

An entity discontinues hedge accounting when the hedging relationship ceases to meet the qualifying criteria, which also arises when the hedging instrument expires or is sold, transferred or exercised

FV Hedge

Cash flow hedge

Hedge the change in value of a recognised asset or liability (or unrecognised firm commitment) that could affect profit or loss

All gains or losses on both the hedged item and hedging instrument are recognised as follows

Immediately in P/L (except for hedges of investment in equity instruments held at FVTOCI)

Immediately in OCI if the hedged item is an investment in an equity instrument held at FVTOCI. This ensures that hedges of investment of equity instruments held at FVTOCI can be accounted for as hedges.

In both cases, the gain or loss on the hedged item adjusts the CA of the hedged item

This hedges the risk of change in value of future cash flows from a recognised asset or liability (or highly probable forecast transaction) that could affect profit or loss

Accounted for as follows

The portion of the gain or loss on the hedging instrument that is effective (that is up to the value of the loss or gain on cash flows hedged) is recognised in OCI (items that may be reclassified subsequently to P/L) and the cash flow hedge reserve

Any excess is recognised immediately in the P/L

The amount that has been accumulated in the cash flow hedge reserve is then accounted for as follows

If a hedged forecast transaction subsequently results in the recognition of a non-financial asset or liability, the amount shall be removed from cash flow reserve and be included directly in the initial cost or CA of the asset or liability

For all other cash flow hedges, the amount shall be reclassified from OCI to P/L in the same period that the hedged expected future cash flows affect P/L

Provide disclosures that enable users of FS to evaluate

The significance of financial instruments for the entity's financial position and performance

The nature and extent of risks arising from financial instrument to which the entity is exposed. and how the entity manages those risks

The disclosure are extensive but important because many financial instruments are inherently risky. The disclosures provide investors and other stakeholders with additional information that may affect their assessment of entity's SOFP, SOPL and its ability to generate future cash flows

Disclosures are required to enable uses to see the judgements and accounting choices management has made in applying IFRS 9 and IAS 32 and how those affected the financial statements

Qualitative

Quantitative

Exposure to risk

Policies for risk management

Credit risk

Liquidity risk

Market risk

Breakdown of CA by class of FI

Details of financial asset reclassified

Pls read the rest in the workbook