European banks to find an appropriate technical solution to allow the removal of the
carve-out as rapidly as possible.4 However, there have been only limited signs of
progress on this issue and IFRS 9 does not remove the reasons for the carve-out (see 1.4
above). Consequently the carve-out continues to be available for entities that prepare
their financial statements in accordance with IFRS as endorsed for use in the EU and
continue to apply the macro fair value hedge accounting requirements of IAS 39.
Originally IFRS 9 was scheduled for fast-track endorsement so that banks could apply
the first version in their 2009 financial statements. However, these plans were
3408 Chapter 40
withdrawn and the process postponed until completion of the third phase of the
standard in July 2014. That version of the standard was endorsed for use in the EU in
November 2016, the amendments to IFRS 4 delaying the application of IFRS 9 for
certain insurers were endorsed in November 2017, albeit with a wider scope (see
Chapter 51 at 10.1.6), and the October 2017 amendments to IFRS 9 were endorsed in
March 2018.
References
1
IAS
32, Application Guidance, para.
before
and Guidance on Implementing, para. before
para. AG1, IFRS 7, Financial Instruments:
main heading Section A.
Disclosure, Appendix B, Application guidance, 3
Press
Release
IP/04/1385,
Accounting standards:
para.
after main heading, IFRS
9, Financial
Commission endorses IAS
39, European
Instruments, Appendix B, Application guidance,
Commission, 19 November 2004.
para. after main heading.
4
Press
Release
IP/05/1423,
Accounting standards:
2 IAS 32, Illustrative Examples, para. after main
Commission endorses ‘IAS 39 Fair Value Option’,
heading, IFRS 7, Guidance on implementing,
European Commission, 15 November 2005.
para.
after main heading and IFRS
9,
Illustrative Examples, para. after main heading
3409
Chapter 41
Financial instruments:
Definitions and scope
1 INTRODUCTION ........................................................................................... 3411
2 WHAT IS A FINANCIAL INSTRUMENT? ....................................................... 3412
2.1
Definitions ............................................................................................................ 3412
2.2 Applying
the
definitions
....................................................................................
3413
2.2.1
The need for a contract ..................................................................... 3413
2.2.2 Simple
financial instruments ............................................................ 3414
2.2.3 Contingent
rights
and obligations.................................................... 3414
2.2.4 Leases
....................................................................................................
3415
2.2.5
Non-financial assets and liabilities and contracts thereon ......... 3415
2.2.6 Payments
for
goods and services .................................................... 3417
2.2.7 Equity
instruments
.............................................................................
3417
2.2.8 Derivative
financial
instruments
...................................................... 3417
2.2.9 Dividends
payable
..............................................................................
3419
3 SCOPE .......................................................................................................... 3419
3.1
Subsidiaries, associates, joint ventures and similar investments ............... 3419
3.2 Leases
.................................................................................................................... 3421
3.3
Insurance and similar contracts ....................................................................... 3421
3.3.1
Weather derivatives .......................................................................... 3422
3.3.2
Contracts with discretionary participation features ................... 3422
3.3.3
Separating financial instrument components including
embedded derivatives from insurance contracts ........................ 3423
3.4
Financial guarantee contracts ......................................................................... 3423
3.4.1
Definition of a financial guarantee contract ................................. 3423
3.4.1.A
Reimbursement for loss incurred .............................. 3423
3.4.1.B Debt
instrument
............................................................
3424
3.4.1.C
Form and existence of contract ................................. 3425
3410 Chapter 41
3.4.2
Issuers of financial guarantee contracts ........................................ 3426
3.4.3
Holders of financial guarantee contracts ...................................... 3426
3.4.4
Financial guarantee contracts between entities under
common control ................................................................................. 3427
3.5
Loan commitments ............................................................................................. 3427
3.6 Equity
instruments.............................................................................................
3429
3.6.1
Equity instruments issued ................................................................ 3429
3.6.2 Equity
instruments held ................................................................... 3430
3.7
Business combinations ...................................................................................... 3430
3.7.1
Contingent consideration in a business combination ................ 3430
3.7.1.A
Payable by an acquirer ................................................ 3430
3.7.1.B
Receivable by a vendor ............................................... 3430
3.7.2
Contracts between an acquirer and a vendor in a business
combination ......................................................................................... 3431
3.8
Contingent pricing of property, plant and equipment and
intangible assets ................................................................................................. 3432
3.9
Employee benefit plans and share-based payment .................................... 3433
3.10 Reimbursement righ
ts in respect of provisions ........................................... 3433
3.11 Disposal groups classified as held for sale and discontinued operations ...... 3433
3.12 Indemnification assets ...................................................................................... 3434
3.13 Rights and obligations within the scope of IFRS 15 .................................... 3434
4 CONTRACTS TO BUY OR SELL COMMODITIES AND OTHER NON-
FINANCIAL ITEMS ....................................................................................... 3434
4.1
Contracts that may be settled net ................................................................... 3435
4.2
Normal sales and purchases (or own use contracts) ................................... 3436
4.2.1
Net settlement of similar contracts ................................................. 3437
4.2.2
Commodity broker-traders and similar entities .......................... 3438
4.2.3 Written
options
that
can be settled net ......................................... 3438
4.2.4
Electricity and similar ‘end-user’ contracts .................................. 3439
4.2.5
Other contracts containing volume flexibility ............................. 3440
4.2.6 Fair
value
option ................................................................................. 3441
List of examples
Example 41.1:
Rainfall contract – derivative financial instrument or
insurance contract? ........................................................................... 3422
Example 41.2:
Identifying classes of loan commitment ....................................... 3429
Example 41.3:
Determining whether a copper forward is within the
scope of IFRS 9 ................................................................................... 3437
Example 41.4:
Determining whether a put option on an office building is
within the scope of IFRS 9 .............................................................. 3438
3411
Chapter 41
Financial instruments:
Definitions and scope
1 INTRODUCTION
The standards which address financial instruments are IAS 32 – Financial Instruments:
Presentation, IFRS 7 – Financial Instruments: Disclosures – and IFRS 9 – Financial
Instruments, which became effective for periods beginning on or after 1 January 2018
and replaced substantially all of the requirements relating to the recognition and
measurement of financial instruments in IAS 39 – Financial Instruments: Recognition
and Measurement.
In many cases it will be clear whether an asset, liability, equity share or other similar
instrument should be accounted for in accordance with one or more of these standards.
However, at the margins, determining whether these standards should be applied is not
so easy.
Firstly, one needs to determine whether the definition of a financial instrument is met;
secondly, not all financial instruments are within the scope of each of these standards
– some are within the scope of other standards and some are not within the scope of
any standard; and finally, certain contracts that do not meet the definition of a financial
instrument are within the scope of some of these standards.
This chapter addresses these issues in three main sections covering the following
broad areas:
• application of the definitions used in IFRS, i.e. determining what a financial
instrument actually is (see 2 below);
• determining which financial instruments are within the scope of which standards
(see 3 below); and
• assessing whether a non-financial contract is to be accounted for as if it were a
financial instrument (see 4 below).
3412 Chapter 41
2
WHAT IS A FINANCIAL INSTRUMENT?
2.1 Definitions
The main terms used in the standards that apply to financial instruments are defined in
IAS 32 as follows:
A financial instrument is any contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a
contractual
right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments. For this purpose the entity’s own equity instruments do not
include certain puttable and similar financial instruments classified by exception
as equity instruments (see Chapter 43 at 4.6) or instruments that are themselves
contracts for the future receipt or delivery of the entity’s own equity instruments.
A financial liability is any liability that is:
(a) a
contractual
obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i)
a non-derivative for which the entity is or may be obliged to deliver a variable
number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments. For this purpose, rights, options or warrants to acquire a fixed
number of the entity’s own equity instruments for a fixed amount of any currency
are equity instruments if the entity offers the rights, options or warrants pro rata
to all of its existing owners of the same class of its own non-derivative equity
instruments. Also, for this purpose the entity’s own equity instruments do not
include certain puttable and similar financial instruments classified by exception
as equity instruments, or instruments that are themselves contracts for the future
receipt or delivery of the entity’s own equity instruments.
Financial instruments: Definitions and scope 3413
An equity instrument is any contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities. [IAS 32.11].
For the purpose of these definitions, ‘entity’ includes individuals, partnerships,
incorporated bodies, trusts and government agencies. [IAS 32.14].
2.2
Applying the definitions
2.2.1
The nee
d for a contract
The terms ‘contract’ and ‘contractual’ are important to the definitions and refer to ‘an
agreement between two or more parties that has clear economic consequences that the
parties have little, if any, discretion to avoid, usually because the agreement is
enforceable by law’. Such contracts may take a variety of forms and need not be
in writing. [IAS 32.13].
The Interpretations Committee examined the question of what constitutes a contract in
the context of gaming transactions. This is because, in some jurisdictions, a wager does
not give rise to a contract that is enforceable under local contract law. The Interpretations
Committee staff noted that a gaming transaction constitutes an agreement between two
or more parties that has clear economic consequences for both. Furthermore, in most
countries, gambling is heavily regulated and only parties acting within a regulated
framework are licensed to operate gaming institutions, so that such entities cannot
realistically fail to pay out on a good wager and therefore the gaming institution will have
little or no discretion as to whether it pays out on the bet. Consequently, the
Interpretations Committee agreed that a wager should be treated as a contract.1
Whilst this seems an entirely plausible analysis in context, it is a little difficult to
reconcile with the conclusions of the Interpretations Committee and the IASB
concerning the existence (or otherwise) of a contractual obligation to make payments
on certain preference shares and similar securities. In those cases, terms of an
instrument that effectively force the issuer to transfer cash or other financial assets to
the holder although not legally required to do so (often referred to as ‘economic
compulsion’), are not taken into account (see Chapter 43 at 4.5.6).
A contractual right or contractual obligation to receive, deliver or exchange financial
instruments is itself a financial instrument. A chain of contractual rights or contractual
obligations meets the definition of a financial instrument if it will ultimately lead to the
receipt or payment of cash or to the acquisition or issue of an equity instrument.
[IAS 32.AG7].
Assets and liabilities relating to non-contractual arrangements that arise as a result of
statutory requirements imposed by governments, such as income taxes or levies are not
financial liabilities or financial assets because they are not contractual. [IAS 32.AG12].
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 674
