Financial Assets IFRS 9 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 1 To be covered 1.Definition of Financial Assets 2.Measurement of financial assets 3.Classification of financial assets 4.Accounting treatment of investment in equity of other entities 5.Accounting treatment of investment in debt of other entities 6.Offseting and derecognition of Fin instruments 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 2 Loading Definition of financial assets According to IFRS 9 an entity shall recognise a financial asset..when, and only when, the entity becomes party to the contractual provisions of the instrument. Initial measurement of financial assets is at fair value: this being the purchase consideration paid to acquire the financial asset, plus transaction costs. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 3 Measurement of financial assets At initial recognition, all financial assets are measured at fair value. This is the purchase consideration paid to acquire the financial asset plus transaction costs. Transaction costs, however, are not included if the instrument is classified as at FV through Profit or Loss 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 4 Loading Classification of Financial Assets Equity Instruments Are valued at Fair value only when they are designated as FV through PL At the year end, they are revalued to fair value and.. Any gains or losses are taken to PL where the initial transaction costs are charged Equity Instruments contid If the investment is intended as a long term investment.. Then the equity instruments are designated a FV through Other Comprehensive Income In this case transaction costs are capitalised, included in the initial measurement. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 5 Equity investments..contd At the year end, the financial instruments are revalued to fair value, and any gains or losses.. Are taken to an investment reserve, and also reported on the face of the SoPL in Other Comprehensive Income. The investment reserve can be, as an exception, a debit balance or a credit balance. When a FVOCI investment is sold, the reserve is transferred to Retained Earnings or remain.. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 6 Debt instruments Investment in debt of other entities, like equity instruments, are also classified as FVPL.. Unless they pass the following two test, in which case they will be classified as: Either Amotised Cost Or Fair Value through Other Comprehensive Income (FVOCI). What are the two tests? 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 7 The Tests Business model test: considers the entitys purpose in holding the investment. Contractual cash flow characteristics test: considers the composition of the cash that will be received as a result of holding the investment. The first test establishes whether the FI will be held to maturity or not, and the second test.. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 8 The tests contd The second test determines whether the cash flows are solely of principal and interest. To be classified as a FI at Amortised Cost: Both test must be passed: the instrument will be held to maturity, and the cash flow is that solely of principal and interest To be classified as a FI at FV though OC: Both tests must be passed but must include.. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 9 The tests continued.. To be classified as a FI at FV though OC: Both tests must be passed, but must include the reality that the entity may sell the asset before maturity if .. If the possibility of buying another financial asset with a higher return arises. Recognition of financial assets is discussed in the following slide.. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 10 Loading Recognition of Financial Assets The year end value is calculated as follows: Balance Interest Payment Balance b/f income Received c/f X X (X) X The assets is recognised at fair value plus transaction costs The effective rate is used to calculate the interest received (as for Amortised cost) 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 11 Recognition of Financial Assets Gains or losses arising on revaluation to fair value at the year end are taken to Other Comprehensive Income (investment reserve) When the FI is finally disposed of (before maturity) the balance on the investment reserve is transferred to profit or loss (reclassified) Would a convertible bond pass the tests? 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 12 Offsetting and Derecognition of.. Offsetting is permitted only when: The entity has a legally enforceable right to offset the amounts and.. Intends either to settle on a net basis or to realise the asset and the liability simultaneously Offsetting therefore rarely occur, as contracts scarcely coincide. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 13 Derecognistion of FI In the words of IFRS 9.. A financial assets should be derecognised when, and only when, the contractual rights to the cash flows from the asset expire. A financial liability should be derecognised when, and only when, the obligation specified in the contract is discharged or cancelled or expires. 05-Apr-19 Kaplan Publishing, (2018) FR Study Text 14 Summary Investments in equity of other entities are also referred to as Equity instruments, and Investments in debt of other entities are also referred to as debt instruments Remember that the term accounting treatment refers to measurement and recognition.. Which must be specific as to what amounts go to P/L, investment reserve, and reported on the Statement of Financial Position.