Dual Currency Investments and IFRS 9

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IFRS Newbie
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Joined: 15 Dec 2021, 05:53

Dual Currency Investments and IFRS 9

Post by IFRS Newbie »

First - thank you - wow this site is filled with brilliant information :)

I am trying to review and apply IFRS 9 and IAS 32 guidance to a Dual Currency Investment and at first I thought it would be a little more straightforward. As I dig in the guidance, it is certainly not!

Contract is such that you deposit $1,000 notional in currency A and receive a favorable interest rate paid in currency A. A strike rate (currency B:A) is set at the commencement and the bank will return the deposit on a specified date in either currency A if the spot rate is below the strike rate OR if the spot is at or above the strike rate the deposit is returned in currency B at the strike rate.

Initially I thought there would be two components: a deposit that would be recorded as a short term investment with interest income recorded to P&L and FX contract that is a derivative and on a measurement date the FX gain/loss would be recorded to P&L and a contract asset/liability recorded to balance sheet. On settlement the asset/lability would be removed with cash inflow from return of principal and any difference being recorded to FX gain/loss

As I am trying to apply guidance it is not lining up with what I initially thought above. I am getting stuck on the fact derivative criteria requires no initial investment and with this contract you deposit a set notional amount and then I am iterating on if I can even split the investment into two pieces but I don't see any other way! Has anyone encountered this type of arrangement before and have any helpful tips or how the guidance can be applied.

I think either way derivative or not the gains or losses will be going through the P&L, so a secondary question is does calling it a derivative matter?

Thank you
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Marek Muc
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Re: Dual Currency Investments and IFRS 9

Post by Marek Muc »

It does matter because embedded derivatives are *not* separated for accounting purposes if the non-derivative host is a financial asset within the scope of IFRS 9 (IFRS 9.4.3.2). So you need to look at your investment as one financial asset and it'll most likely fail the SPPI test so that you'll end up in the fair value through P&L category
IFRS Newbie
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Re: Dual Currency Investments and IFRS 9

Post by IFRS Newbie »

Ah! so it still ends in FVPTL.

Following, if it is considered one financial asset my initial assessment was the investment of 1,000 for the deposit + 0 for the FX option for would be recorded to the balance sheet as a single asset on contract signing. Then at measurement date the fair value of the embedded derivate component (FX option) will have changed from 0 on signing to a figure and this would be recorded to the p&l with the offset to the asset that was set up - does that make sense?

on the initial recognition of the 1,000 deposit component, I had thought the fair value would be the value of consideration but after reading IFRS 9.B5.1.1 I am left wondering since the interest to be received on the initial 1,000 deposit is higher than market, if the initial consideration is not actually fair value? and it needs to be the deposit of 1,000 plus a PV spread on the difference in interest per contract and interest in market?

any thoughts helpful! alone in my head! haha.
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Marek Muc
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Re: Dual Currency Investments and IFRS 9

Post by Marek Muc »

IFRS Newbie wrote: 15 Dec 2021, 22:38 Ah! so it still ends in FVPTL.
Yeah but the whole instrument ends as FVTPL, I gathered you planned to account for the plain deposit part at amortised cost.

I would go with the initial recognition at 1000 as per IFRS 9.B5.1.2A.

Then it's all fair value, but not just the fx part. The plain deposit part will also have FV swings eg due to changes in market interest rates, credit spreads etc
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