IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities. All entities and all financial instruments are in the scope of IFRS 9 with certain exceptions listed in paragraph IFRS 9.2.1.
However, it is IAS 32 that covers:
- definition of a financial instrument,
- classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments,
- offsetting financial assets and financial liabilities
Financial guarantees vs other guarantees
A financial guarantee is defined by IFRS 9 as ‘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 …’. Such financial guarantees are in the scope of IFRS 9 and are accounted for as described here. Not all contracts legally described as ‘guarantees’ are financial guarantees as defined by IFRS 9. In fact, the definition quoted above is rather narrow and includes only a payment when a debtor defaults on its due payment. See paragraph IAS 32.AG8 for further reading.
Other ‘guarantees’ are still financial instruments as they are contractual. They may be treated under IFRS as derivatives and accounted for under IFRS 9 or as insurance contracts accounted for under IFRS 4/IFRS 17.
An insurance contract is defined in IFRS 4/17 as ‘a contract under which the issuer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.’ Insurance risk is any risk other than financial risk (again, IFRS 17 Appendix A). See paragraphs IFRS 17.B7-B16 for discussion on the distinction between insurance risk and other risks.
Therefore, if the specified uncertain future event is specific to the holder of the guarantee and will compensate it for a loss it would have suffered – such a guarantee is an insurance contract. Otherwise, such (non-financial) guarantee is treated as a derivative accounted for under IFRS 9.
Accounting for contractual guarantees under IAS 37 is incorrect as financial instruments are out of scope of IAS 37.
General rule for initial recognition of financial instruments
As a general rule, an entity recognises a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument (IFRS 184.108.40.206).
Receivables and payables
Unconditional receivables and payables are recognised as assets or liabilities when the entity (IFRS 9.B3.1.2(a)):
- becomes a party to the contract and
- has a legal right to receive or a legal obligation to pay cash
Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not generally recognise an asset (and the entity that places the order does not recognise a liability) at the time of the commitment but, instead, delays recognition until the ordered goods or services have been shipped, delivered or rendered (IFRS 9.B3.1.2(b)).
If a firm commitment is a derivative instrument within the scope of IFRS 9, separate provisions apply (IFRS 9.B3.1.2(b)-(d)).
Cash collaterals are recognised by the receiving entity as cash and a corresponding liability. The transferor derecognises cash and recognises a receivable (IFRS 9.D.1.1).
Regular way purchase or sale of financial assets (trade date and settlement date)
Regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned (IFRS 9.Appendix A). This mechanism is present in nearly all major stock exchanges, where transactions are settled a few days after they are entered into. However, the policy choice discussed here applies also to private issue financial instruments (IFRS 9 IG.B.28).
IFRS 9 provides a policy choice for such transactions: they can be recognised and derecognised using trade date accounting or settlement date accounting (IFRS 220.127.116.11).
The trade date is the date that an entity commits itself to purchase or sell an asset. Trade date accounting refers to (a) the recognition of an asset to be received and the liability to pay for it on the trade date, and (b) derecognition of an asset that is sold, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment on the trade date. Generally, interest does not start to accrue on the asset and corresponding liability until the settlement date when title passes (IFRS 9.B3.1.5).
The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that it is delivered by the entity. When settlement date accounting is applied an entity accounts for any change in the fair value of the asset to be received during the period between the trade date and the settlement date in the same way as it accounts for the acquired asset (IFRS 9.B3.1.6).
Paragraphs IFRS 9 IG.D.2.1-3 contain examples illustrating application of trade date and settlement date accounting. As it can be seen, both methods give the same impact on P/L or OCI, the difference relates to the timing of recognition of the underlying financial asset only.
The same method should be applied for all purchases and sales of financial assets that are classified in the same way under IFRS 9 (IFRS 9.B3.1.3).
Irrespective of the approach adopted, the trade date should be considered the date of initial recognition for the purposes of applying the impairment requirements (IFRS 18.104.22.168).
Loan commitments are firm commitments to provide credit under pre-specified terms and conditions and are generally not recognised as they are outside the scope of IFRS 9, with the exception of certain loan commitments as specified in paragraph IFRS 9.2.3. However, the issuer applies impairment requirements of IFRS 9 to loan commitments (IFRS 9.2.1(g)).
More about IFRS 9
See other pages relating to IFRS 9:
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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.