IFRS 9 Financial Instruments: Measurement

Subsequent measurement of financial assets and financial liabilities depends on their classification. The table below summarises the subsequent measurement for each category and more discussion follows:

Classification and measurement of financial assets under IFRS 9
Classification and measurement of financial assets under IFRS 9

Note that fair value measurements are covered in IFRS 13.

Initial measurement is covered on a separate page.

Assets measured at amortised cost are accounted for using the effective interest method with interest income recognised in P/L. These assets are also subject to impairment losses recognised in P/L (IFRS 9.5.2.2) and foreign currency translation with gains/losses recognised in P/L as well (IFRS 9.B5.7.2).

Amortised cost and effective interest method are discussed on a separate page with excel examples given there.

As debt instruments are monetary items, general IAS 21 provisions apply. Firstly, the amortised cost is determined in the foreign currency in which the item is denominated. Then, the foreign currency amount is translated into the functional currency and any foreign gains/losses are recognised in P/L (IFRS 9.B5.7.2; IFRS 9 IG.E.3.4).

Hedge accounting is discussed on a separate page.

Impairment of financial assets is discussed on a separate page.

As mentioned earlier, FVOCI category can be used for debt investments only. For these instruments (IFRS 9.5.7.10-11):

  • interest calculated using the effective interest method is recognised in P/L
  • impairment gains/losses are recognised in P/L
  • foreign exchange gains/losses (calculated based on the amortised cost) are recognised in P/L
  • fair value remeasurements, excluding impacts as above, are recognised in OCI

Interest and impairment are calculated and accounted for in exact the same way as for assets measured at amortised cost described above. Therefore the P/L impact for both categories is the same, but assets in the FVOCI with recycling category are additionally remeasured to fair value with fair value changes (excluding impacts of earned interest, impairment and foreign exchange) recognised in OCI (IFRS 9.5.7.10).

On derecognition, cumulative gains/losses recognised in OCI are reclassified to P/L as a reclassification adjustment (derecognition is discussed in a separate section below).

As debt instruments are monetary items, general IAS 21 provisions apply. Firstly, the amortised cost is determined in the foreign currency in which the item is denominated. Then, the foreign currency amount is translated into the functional currency and any foreign gains/losses are recognised in P/L even for instruments in the FVOCI category (IFRS 9.B5.7.2; IFRS 9 IG.E.3.4).

See also the illustrative example on separation of currency component for financial assets measured at FVOCI with recycling contained in paragraph IFRS 9 IG.E.3.2.

General impairment requirements are discussed on a separate page with additional aspects specific to assets at FVOCI with recycling.

As mentioned earlier, this category can be applied to equity investments only. Fair value remeasurements are recognised in OCI are not recycled to P/L subsequently (IFRS 9.5.7.5; B5.7.1).

Dividends on equity investments designated at FVOCI are still recognised in P/L (IFRS 9.5.7.6) unless the dividend clearly represents a recovery of part of the cost of the investment (IFRS9.B5.7.1). IFRS 9 contains no further guidance on determining whether a dividend clearly represents a recovery of part of the cost of the investment.

Equity investments are non-monetary items, therefore fair value gains/losses include also foreign exchange impacts and are recognised in OCI altogether (IFRS 9.B5.7.3; IFRS 9 IG.E.3.4).

Assets measured at FVOCI no recycling are not subject to impairment requirements of IFRS 9 (IFRS 9.5.5.1).

Although IFRS 9 requires all equity instruments to be measured at fair value, it acknowledges that, in limited circumstances, cost may be an appropriate estimate of fair value for unquoted equity instruments. See the discussion in paragraphs IFRS 9.B5.2.3-B5.2.6.

Liabilities measured at amortised cost are accounted for using the effective interest method with interest expense recognised in P/L. The effective interest method is covered on a separate page.

See the paragraph on foreign exchange gains/losses arising on assets measured at amortised cost.

As the category name implies, financial assets/ liabilities measured at fair value through profit or loss are measured, subsequent to recognition, at fair value with gains/losses arising on remeasurements recognised in P/L (IFRS 9.5.7.1). An exception relates to changes in fair value of financial liabilities designated at FVTPL which is attributable to own credit risk, which is discussed below.

Changes in fair value of a financial liability designated at FVTPL attributable to changes in the credit risk of that liability are recognised in OCI and are not subsequently transferred to P/L (IFRS 9.5.7.7(a); B5.7.9). If recognition of own credit risk in OCI impact would ‘would create or enlarge an accounting mismatch in P/L’, all fair value gains/losses are recognised in P/L (IFRS 9.5.7.8). More information on accounting mismatch applicable to these requirements can be found in paragraphs IFRS 9.B5.7.5 -B5.7.7 and B5.7.10–B5.7.12 with an illustrative example in paragraph IFRS 9.B5.7.10.

Credit risk is defined by IFRS 7 as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation (IFRS 7.Appendix A). The requirement in paragraph IFRS 9.5.7.7(a) relates to the risk that the issuer will fail to perform on that particular liability. Paragraphs IFRS 9.B5.7.13-20 contain a very good discussion on what is meant on credit risk of a liability, how it is impacted by a collateral, how it differs from asset-specific performance risk and how to determine the effects of changes in credit risk. Requirements on how to determine the effects of changes in credit risk are illustrated in illustrative example contained in paragraphs IFRS 9.IE1-IE5.

Changes in fair value of loan commitments and financial guarantee contracts designated at FVTPL are recognised in P/L in full even for impacts resulting from changes in own credit risk (IFRS 9.5.7.9).

Assets measured at FVTPL are not subject to impairment requirements of IFRS 9 (IFRS 9.5.5.1).

Financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument (IFRS 9.Appendix A). See also distinguishing financial guarantees from other guarantees.

Financial guarantee contracts are subsequently measured by the issuer at the higher of (IFRS 9.4.2.1(c)):

  • the amount of loss allowance according to the impairment requirements of IFRS 9 and
  • the amount initially recognised less, when appropriate, the cumulative amount of income recognised under IFRS 15

The above requirements do not apply if the financial guarantee is designated at FVTPL.

Commitments to provide a loan at a below-market interest rate are subsequently measured by the issuer at the higher of (IFRS 9.4.2.1(d)):

  • the amount of loss allowance according to the impairment requirements of IFRS 9 and
  • the amount initially recognised less, when appropriate, the cumulative amount of income recognised under IFRS 15

The above requirements do not apply if the commitment is designated at FVTPL.

In some circumstances, the renegotiation or modification of the contractual cash flows of a financial asset can lead to derecognition of the existing financial asset in accordance with IFRS 9. When the modification of a financial asset results in derecognition of the existing financial asset and the subsequent recognition of the modified financial asset, the modified asset is considered a ‘new’ financial asset for the purposes of IFRS 9. Accordingly the date of the modification should be treated as the date of initial recognition of that financial asset when applying the impairment requirements to the modified financial asset. This typically means measuring the loss allowance at an amount equal to 12-month ECL until the requirements for the recognition of lifetime ECL are met. However, in some unusual circumstances following a modification that results in derecognition of the original financial asset, there may be evidence that the modified financial asset is credit-impaired at initial recognition, and thus, the financial asset should be recognised as an originated credit-impaired financial asset. This might occur, for example, in a situation in which there was a substantial modification of a distressed asset that resulted in derecognition of the original financial asset. In such a case, it may be possible for the modification to result in a new financial asset which is credit-impaired at initial recognition (IFRS 9.B5.5.25-26).

Renegotiation or modification of a financial asset may not lead to this asset being derecognised. If this is the case, a one-off modification gain/loss should be recognised in P/L calculated as the difference between gross carrying amount before and after the modification. The gross carrying amount after the modification is calculated as the present value of the estimated future cash payments or receipts through the expected life of the renegotiated or modified financial asset that are discounted at the financial asset’s original EIR (IFRS 9.5.4.3, Appendix A).

See Example 11 accompanying IFRS 9.

See other pages relating to IFRS 9:

IFRS 9 Financial Instruments: Scope and Initial Recognition

IFRS 9 Financial Instruments: Classification of Financial Assets and Financial Liabilities

IFRS 9 Financial Instruments: Derivatives and Embedded Derivatives: Definitions and Characteristics

IFRS 9 Financial Instruments: Amortised Cost and Effective Interest Rate

IFRS 9 Financial Instruments: Impairment

IFRS 9 Financial Instruments: Derecognition of Financial Assets and Financial Liabilities

IFRS 9 Financial Instruments: Hedge Accounting

 


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Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). The information provided on this website does not constitute professional advice and should not be used as a substitute for consultation with a certified accountant.