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