versus agent ........................................................................ 3661
2.2
‘Regular way’ transactions................................................................................ 3662
2.2.1
Financial assets: general requirements .......................................... 3662
2.2.1.A
No established market ................................................. 3663
2.2.1.B
Contracts not settled according to marketplace
convention: derivatives ............................................... 3663
2.2.1.C
Multiple active markets: settlement provisions ...... 3664
2.2.1.D
Exercise of a derivative ............................................... 3664
2.2.2
Financial liabilities ............................................................................. 3664
2.2.3 Trade
date
accounting
......................................................................
3665
2.2.4
Settlement date accounting ............................................................. 3665
2.2.5 Illustrative examples ......................................................................... 3666
2.2.5.A
Exchanges of non-cash financial assets ................... 3669
3 INITIAL MEASUREMENT ............................................................................. 3670
3658 Chapter 45
3.1
General requirements ....................................................................................... 3670
3.2
Trade receivables without a significant financing component ................. 3671
3.3
Initial fair value, transaction price and ‘day 1’ profits .................................. 3671
3.3.1
Interest-free and low-interest long-term loans ............................3672
3.3.2
Measurement of financial instruments following
modification of contractual terms that leads to initial
recognition of a new instrument ....................................................... 3673
3.3.3
Financial guarantee contracts and off-market loan
commitments ....................................................................................... 3673
3.3.4
Loans and receivables acquired in a business combination ......3674
3.3.5
Acquisition of a group of assets that does not constitute a
business .................................................................................................3674
3.4
Transaction costs ................................................................................................ 3675
3.4.1
Accounting treatment ........................................................................ 3675
3.4.2 Identifying
transaction costs ........................................................... 3676
3.5
Embedded derivatives and financial instrument hosts ............................... 3677
3.6 Regular
way
transactions .................................................................................. 3677
3.7
Assets and liabilities arising from loan commitments.................................. 3677
3.7.1
Loan commitments outside the scope of IFRS 9 ........................ 3678
3.7.2 Loan
commitments
within
the scope of IFRS 9 .......................... 3679
List of examples
Example 45.1:
Regular way transactions – Forward contract ............................ 3663
Example 45.2:
Regular way transactions – Share purchase by call option ...... 3664
Example 45.3:
Trade date and settlement date accounting – regular way
purchase .............................................................................................. 3666
Example 45.4:
Trade date and settlement date accounting – regular way
sale ........................................................................................................ 3667
Example 45.5:
Trade date and settlement date accounting – exchange of
non-cash financial assets .................................................................. 3670
Example 45.6:
Off-market loan with origination fee .............................................3672
Example 45.7:
Changes in the contractual terms of an existing equity
instrument............................................................................................. 3673
Example 45.8:
Transaction costs – initial measurement ...................................... 3676
Example 45.9:
Drawdown under a committed borrowing facility ...................... 3677
3659
Chapter 45
Financial instruments:
Recognition and
initial measurement
1 INTRODUCTION
The introduction to Chapter 40 provides a general background to the development of
accounting for financial instruments. Chapter 41 deals with what qualifies as financial
assets and financial liabilities and other contracts that are treated as if they were
financial instruments.
This chapter deals with the question of when financial instruments should be recognised
in financial statements and their initial measurement under IFRS 9 – Financial
Instruments, which for most entities supersedes IAS 39 – Financial Instruments:
Recognition and Measurement – for periods beginning on or after 1 January 2018.
Initial measurement is normally based on the fair value of an instrument and most, but
not all, of the detailed requirements of IFRS governing fair values are dealt with in
IFRS 13 – Fair Value Measurement – which is covered in Chapter 14. IFRS 9 also
contains some requirements addressing fair value measurements of financial
instruments and these are covered at 3.3 below.
2 RECOGNITION
2.1 General
requirements
IFRS 9 provides that an entity must recognise a financial asset or a financial liability on
its statement of financial position when, and only when, the entity becomes a party to
the contractual provisions of the instrument. [IFRS 9.3.1.1]. Before that, the entity does not
have contractual rights or contractual obligations. Hence, there is no financial asset or
a financial liability, as defined in IAS 32 – Financial Instruments: Presentation, to
recognise. IFRS 9 provides a practical exception to the application of this general
principle for ‘regular way’ purchases of financial assets (see 2.2 below). IFRS 9 gives the
following examples of the more general application of this principle.
3660 Chapter 45
2.1.1
Receivables and payables
Unconditional receivables and payables are recognised as assets or liabilities when the
entity becomes a party to the contract and, as a consequence, has a legal right to receive
or a legal obligation to pay cash. [IFRS 9.B3.1.2(a)].
2.1.2
Firm commitments to purchase or sell goods or services
Under IFRS, assets to be acquired and liabilities to be incurred as a result of a firm
&nbs
p; 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 for goods or services does not generally recognise an asset for the
consideration receivable (and the entity that places the order does not generally
recognise a liability for the consideration to be paid) 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)].
This accounting applies on the assumption that the firm commitment to buy or sell non-
financial items is not treated as if it were a derivative (see Chapter 41 at 4) nor designated
as a hedged item in a fair value hedge (see Chapter 49 at 5.1). Where the firm
commitment is treated as a derivative or designated as a hedged item in a fair value
hedge, it would be recognised as an asset or liability before delivery.
2.1.3 Forward
contracts
A forward contract is a contract which obliges one party to the contract to buy, and the other
party to sell, the asset that is the subject of the contract for a fixed price at a future date.
A forward contract within the scope of IFRS 9 is recognised as an asset or a liability at
commitment date, rather than on settlement. When an entity becomes a party to a
forward contract, the fair values of the right and obligation are often equal, so that the
net fair value of the forward at inception is zero. If the net fair value of the right and
obligation is not zero, the contract is recognised as an asset or liability. [IFRS 9.B3.1.2(c)].
2.1.4 Option
contracts
An option contract is a contract which gives one party to the contract the right, but not the
obligation, to buy from, or sell to, the other party to the contract the asset that is the subject
of the contract for a fixed price at a future date (or during a period of time). An option giving
the right to buy an asset is referred to as a ‘call’ option and one giving the right to sell as a
‘put’ option. An option is referred to as a ‘bought’ or ‘purchased’ option from the
perspective of the party with the right to buy or sell (the ‘holder’) and as a ‘written’ option
from the perspective of the party with the potential obligation to buy or sell.
Option contracts that are within the scope of IFRS 9 are recognised as assets or liabilities
when the holder or writer becomes a party to the contract. [IFRS 9.B3.1.2(d)].
2.1.5
Planned future transactions (forecast transactions)
Planned future transactions, no matter how likely, are not assets and liabilities because
the entity has not become a party to a contract. They are therefore not recognised under
IFRS 9. [IFRS 9.B3.1.2(e)]. However, transactions that have been entered into as a hedge of
certain ‘highly probable’ future transactions are recognised under IFRS 9 – this raises
Financial instruments: Recognition and initial measurement 3661
the issue of the accounting treatment of any gains or losses arising on such hedging
transactions (see Chapter 49 at 5.2).
2.1.6
Transfers of financial assets not qualifying for derecognition by
transferor – Impact on recognition
IFRS 9 states that, where a financial asset is transferred from one party to another in
circumstances that preclude the transferor from derecognising the asset, the transferee
should not recognise the transferred asset. Instead, the transferee derecognises the cash
or other consideration paid and recognises a receivable from the transferor. If the
transferor has both a right and an obligation to reacquire control of the entire
transferred asset for a fixed amount (such as under a repurchase agreement –
see Chapter 48 at 4.1), the transferee may account for its receivable at amortised cost if
it meets the criteria for classification as measured at amortised cost. [IFRS 9.B3.1.1, B3.2.15].
Underlying this principle appears to be a concern that more than one party cannot
satisfy the criteria in IFRS 9 for recognition of the same financial asset at the same time.
In fact, however, this principle may not hold in all circumstances, since it is common for
the same assets to be simultaneously recognised by more than one entity – for example
if the transferor adopts settlement date accounting and the transferee trade date
accounting (see 2.2 below).
In addition, IFRS 9 clarifies that to the extent that a transfer does not qualify for
derecognition, the transferor does not account for its contractual rights or obligations
related to the transfer separately as derivatives if recognising both the derivative and
either the transferred asset or the liability arising from the transfer would result in
recognising the same rights or obligations twice. For example, a call option retained by
the transferor may prevent a transfer of financial assets from being accounted for as a
sale. In that case, the call option is not separately recognised as a derivative asset.
[IFRS 9.B3.2.14].
2.1.7 Cash
collateral
The implementation guidance to IFRS 9 addresses the recognition of cash collateral.
When an entity receives cash collateral that is not treated as ‘client money’, it must
recognise the cash and a related payable to the entity providing such collateral. The
reason is that the ultimate realisation of a financial asset is its conversion into cash, and
hence, no further transformation is required before the economic benefits of the cash
received can be realised.
On the other hand, the entity providing the cash collateral derecognises the cash and
recognises a receivable from the receiving entity. [IFRS 9.D.1.1].
The accounting treatment of ‘client money’ is discussed in more detail in Chapter 48 at 3.7.
The requirements related to non-cash collateral are addressed in Chapter 48 at 5.5.2.
2.1.8
Principal versus agent
When an entity acts as an intermediary in transactions involving financial instruments,
the question of whether it is acting as an agent or a principal may arise. This is a
particularly relevant matter for brokers and similar institutions.
3662 Chapter 45
The Interpretations Committee has addressed this matter in relation to clearing brokers
in the context of centrally cleared client derivatives. Diversity in practice had been
observed with some brokers applying the guidance on principal versus agent included
in IFRS 15 – Revenue from Contracts with Customers – to determine whether they
should account for back to back derivatives with their client and the central clearing
counterparty. In June 2017, the Committee concluded that the clearing broker should
first apply the requirements for financial instruments and observed that:
• if the transaction(s) results in contracts that are within the scope of IFRS 9, then
the clearing member applies to those contracts the recognition requirements of
IFRS 9. In the statement of financial position, the clearing member presents the
assets and liabilities arising from its contracts with the clearing house separately
from those arising from its contracts with its clients, unless net presentation is
required pursuant to the off
setting requirements in IAS 32. This implies the
clearing member is considered to act as principal in both the derivative contracts
with the clearing house and its clients;
• if the transaction(s) is not within the scope of IFRS 9 and another standard does
not specifically apply, only then would the clearing member apply the hierarchy in
paragraphs 10–12 of IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors –to determine an appropriate accounting policy for the
transaction(s) (see Chapter 3 at 4.3), e.g. using the principal versus agent guidance
in IFRS 15 (see Chapter 28 at 5.4).1
2.2
‘Regular way’ transactions
2.2.1
Financial assets: general requirements
As discussed at 2.1 above, the general requirement under IFRS 9 is to recognise a
financial asset or a financial liability on its statement of financial position when, and only
when, the entity becomes a party to the contractual provisions of the instrument (i.e.
the trade date). [IFRS 9.3.1.1]. However the application of this general requirement to
certain transactions known as ‘regular way’ purchases and sales present some
challenges. Below we discuss those challenges and the accounting policy choice that
IFRS 9 has provided as a solution.
A regular way purchase or sale is defined as 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].
By contrast, a contract that does not require delivery and can be settled by net
settlement (i.e. payment or receipt of cash or other financial assets equivalent to the
change in value of the contract) is not a regular way transaction, but a derivative
accounted for in accordance with the requirements of IFRS 9 in respect of derivatives
(see Chapter 46 at 2.4). [IFRS 9.B3.1.4].
Many financial markets provide a mechanism whereby all transactions in certain
financial instruments (particularly quoted equities and bonds) entered into on a
particular date are settled by delivery a fixed number of days after that date. The
date on which the agreement is entered into is called the ‘trade date’ and the date
on which it is settled by delivery of the assets that are the subject of the agreement
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 724
