IFRS 9 - Financial Instruments

-?????????Financial instrument is any contract that gives rise to financial asset for one entity and financial liability to another entity.

-?????????Financial instruments – derivatives, swaps, futures, options

-?????????Derivatives are those

o??financial instrument that derives value from the underlying asset

o??has no initial investment

o??settled at a future date

-?????????Compounded instruments: consists of both equity and financial liability.

-?????????Computation of compounded instruments:

Present value of principle component????????XXXXXXXXX

Present value of Interest component?????????XXXXXXXXX (Cum. Disc factor)

???????????????????????????????????????????????????????????????????????______________

????????????????????????????????????????????????????????????????XXXXXXXXXX

Equity component?????????????????????????????????????? XXXXXXXXXX

???????????????????????????????????????????????????????????????????????_____________

Proceeds from issue ???????????????????????????????????XXXXXXXXX

??????????????????????????????????????????????????????????????????????____________

Recognition of financial instruments:

Financial asset:

Initial measurement

-?????????Measured at Fair value

Subsequent measurement

-?????????Measured in three ways

1. Fair value through other comprehensive income (OCI)

2. Fair value through Profit and loss (P&L)

3. Amortised cost

?- The classification takes into consideration the below:

??????????????- The business model to hold the financial asset or sell the financial asset

?- the contractual cash flow characteristics of the financial asset

Amortised cost

-?????????The entity holds the financial asset to collect contractual cash flows

-?????????The contractual terms give rise to cash flows solely for the purpose of principle and interest repayments (SPPI test)

Fair value through OCI

-?????????The entity holds the financial asset to collect contractual cash flows and sell the financial asset

-?????????The contractual terms give rise to cash flows solely for the purpose of principle and interest repayments (SPPI test)

Fair value through P&L

-?????????Those financial assets that can neither be measured at amortised cost nor FV through OCI are measured through FV through P&L

Further, any entity may, at initial recognition, make an irrevocable election to measure a particular investment in equity instrument, which is otherwise measurable at FV through OCI, be measured at FV though P&L. This method can be applied only for Equity instruments, not held for the purpose of trading.

Notwithstanding any of the above provisions, a financial asset can be measured at FV through P&L as initial recognition as an irrevocable election, which is otherwise measurable as FV through OCI, which may reduce or eliminate the measurement or recognition inconsistency, which might have arisen if the same was measured at FV through OCI (Accounting mismatch)

Impairment:

-?????????Charged off to P&L

-?????????12 month’s credit loss – No significant increase in credit risk since initial recognition

-?????????Life time credit loss – Significant increase in credit risk since initial recognition

Trade receivables:

-?????????Recognised at amortised cost

-?????????Impairment made based on provision matrix – based on the period for which the receivable is due for payments

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