end of five years unless the facility is renegotiated and extended. They also become repayable immediately
in the event that H breaches the covenants. For the purposes of this illustration, any other amounts payable
by H to Q (such as non-utilisation fees) have been ignored.
After one year, no drawdowns have been made and H’s credit risk has increased (although it has not breached
any of the covenants and there is no expectation of default). As a result of this change in credit risk, the fair
value of the facility is €200 (positive value to H, negative value to Q).
Shortly afterwards H draws down the maximum €10,000 available under the facility. Because of the change
in credit risk, the loan resulting from the drawdown has a fair value at that date of €9,800. The €200 difference
3678 Chapter 45
between the fair value of €9,800 of the financial instrument created and the €10,000 cash transferred
effectively represents the change in fair value of the commitment arising from the change in H’s credit risk.
Should Q (H) initially measure the resulting asset (liability) at its €9,800 fair value or at €10,000, being the
amount of cash actually exchanged? If it is recognised at €9,800, how is the ‘spare’ €200 accounted for,
particularly does Q (H) recognise it as a loss (profit)?
In order to be able to answer this question, we need to consider the accounting of the
loan commitment up until the date of drawdown and how its carrying amount impacts
the initial measurement of the resulting loan.
3.7.1
Loan commitments outside the scope of IFRS 9
If neither H nor Q designates the loan commitment at fair value through profit or loss,
since the commitment cannot be settled net and it is not at a below-market interest rate,
it is then outside the scope of IFRS 9.
If Q applies IFRS 9, the accounting for the loan commitment would be as follows:
• When Q and H enter into the loan commitment, Q records a provision for expected
credit losses under the impairment requirements of IFRS 9 (see Chapter 47 at 11).
• When the credit risk increases in the following year, nothing is recognised in the
accounts of H in respect of the facility because the commitment is not recognised,
but Q assesses and recognises any impact the increase in credit risk may have had
on the provision for expected credit loss.
Therefore, until the time of drawdown, the only accounting entries for Q are in relation
to the impairment requirements applicable to loan commitments.
At the time the loan is drawn down, Q classifies it within financial assets at amortised
cost and H classifies it within financial liabilities at amortised cost. The general
requirement under IFRS 9 as noted at 3.1 above would require the asset (liability) to
initially be measured at its fair value, i.e. €9,800. This would lead to the recognition of
a loss (profit) of €200 – this is because the spare €200 arising as difference between the
fair value (€9,800) and the amount delivered (€10,000) does not represent any other
asset or liability arising from the transaction.
However, the Basis for Conclusions on IFRS 9 explains that the effect of the loan
commitment exception is to achieve consistency with the measurement basis of the
resulting loan when the holder exercises its right, i.e. amortised cost. Changes in the fair
value of these commitments resulting from changes in market interest rates or credit
spreads will therefore not be recognised or measured, in the same manner that changes in
such rates and spreads will not affect the amortised cost of the financial asset (or financial
liability) recognised once the right is exercised. [IFRS 9.BCZ2.3]. This is exactly what the ‘spare’
€200 represents so, in accordance with the underlying rationale and objective of allowing
loan commitments to be excluded from the scope of IFRS 9, it seems appropriate to
initially measure the asset or liability arising in this case at €10,000. It is worth mentioning
that the expected credit loss provision previously recognised for the loan commitment is
incorporated into the allowance for the drawn down loan upon initial recognition.
The treatment under the loan commitment exception is consistent with that for similar
assets arising from regular way transactions recognised using settlement date accounting
(see 3.6 above). This is relevant because the IASB introduced the loan commitment
Financial instruments: Recognition and initial measurement 3679
exception as a result of issues identified by the IGC and the only solution the IGC could
identify at the time involved treating loan commitments as regular way transactions and
using settlement date accounting.6
3.7.2
Loan commitments within the scope of IFRS 9
If, in the above example, Q accounted for the loan commitment at fair value through profit
or loss the issue of the spare €200 would not arise. At the time the loan was drawn down
the commitment would have already been recognised as a €200 liability and an equivalent
loss would have been recorded in profit or loss. The loan would then be recognised at its
fair value of €9,800 and the €200 balance of the cash movement over this amount would
be treated as the settlement of the loan commitment liability. Therefore, no further gain
or loss would need to be recognised at this point. Once the loan is recognised at its fair
value, it is subsequently subject to the impairment rules of IFRS 9.
References
1
IFRIC Update, June 2017.
4
IFRIC Update, November 2017.
2
IFRIC Update, January 2007. Whilst the IFRIC
5 This discussion was included in the Basis for
discussion was held in the context of IAS 39,
Conclusions to IAS 39. [IAS 39.BC222(d)].
the discussion also holds true under IFRS 9 as
However, it holds true under IFRS 9 as the
the related requirements were brought into
related requirements were brought into IFRS 9
IFRS 9 unchanged.
unchanged.
3
IFRIC Update, November 2006. Whilst the 6 IAS 39 Implementation Guidance Committee
IFRIC discussion was held in the context of
(IGC), Q&A 30-1, July 2001.
IAS 39, the discussion also holds true under
IFRS
9 as the related requirements were
brought into IFRS 9 unchanged.
3680 Chapter 45
3681
Chapter 46
Financial instruments:
Subsequent
measurement
1 INTRODUCTION .......................................................................................... 3685
2 SUBSEQUENT MEASUREMENT AND RECOGNITION OF GAINS AND
LOSSES ......................................................................................................... 3685
2.1
Debt financial assets measured at amortised cost ....................................... 3687
2.2 Financial
liabilities
measured at amortised cost .......................................... 3687
2.3
Debt financial assets measured at fair value through other
comprehensive income .................................................................................... 3687
2.4
/> Financial assets and financial liabilities measured at fair value
through profit or loss ........................................................................................ 3688
2.4.1
Liabilities at fair value through profit or loss: calculating
the gain or loss attributable to changes in credit risk ................. 3688
2.4.2
Liabilities at fair value through profit or loss: assessing
whether an accounting mismatch is created or enlarged ........... 3691
2.5
Investments in equity investments designated at fair value through
other comprehensive income ......................................................................... 3693
2.6
Unquoted equity instruments and related derivatives ............................... 3694
2.7 Reclassifications
of
financial assets ................................................................ 3695
2.8
Financial guarantees and commitments to provide a loan at a
below-market interest rate .............................................................................. 3695
2.9
Exceptions to the general principles ............................................................. 3696
2.9.1
Hedging relationships ....................................................................... 3696
2.9.2 Regular
way
transactions
.................................................................
3696
2.9.3
Liabilities arising from failed derecognition transactions ......... 3697
3 AMORTISED COST AND THE EFFECTIVE INTEREST METHOD ................ 3697
3.1
Effective interest rate (EIR) ............................................................................. 3697
3682 Chapter 46
3.2
Fixed interest rate instruments ....................................................................... 3699
3.3
Floating interest rate instruments .................................................................... 3701
3.4 Prepayment,
call
and similar options ............................................................. 3703
3.4.1
Revisions to estimated cash flows .................................................. 3703
3.5
Perpetual debt instruments .............................................................................. 3705
3.6 Inflation-linked
debt instruments................................................................... 3705
3.7
More complex financial liabilities ................................................................... 3707
3.8 Modified
financial
assets and liabilities ......................................................... 3709
3.8.1
Accounting for modifications that do not result in
derecognition ..................................................................................... 3709
3.8.2
Treatment of modification fees ....................................................... 3712
4 FOREIGN CURRENCIES ................................................................................ 3713
4.1
Foreign currency instruments .......................................................................... 3713
4.2 Foreign
entities
...................................................................................................
3715
5 EFFECTIVE DATE AND TRANSITION .......................................................... 3716
5.1
Effective date ....................................................................................................... 3716
5.1.1
Modified financial liabilities that do not result in
derecognition ...................................................................................... 3716
5.2
Transition ..............................................................................................................3717
5.2.1
Effective interest rate .........................................................................3717
List of examples
Example 46.1:
Estimating the change in fair value of an instrument
attributable to its credit risk ............................................................ 3690
Example 46.2:
Liabilities at fair value through profit or loss: accounting
mismatch in profit or loss................................................................. 3692
Example 46.3:
Liabilities at fair value through profit or loss: no
accounting mismatch in profit or loss ........................................... 3693
Example 46.4:
Effective interest method – amortisation of premium or
discount on acquisition .................................................................... 3700
Example 46.5:
Effective interest method – stepped interest rates .................... 3700
Example 46.6:
Effective interest method – variable rate loan ............................. 3701
Example 46.7:
Fixed rate mortgage which reprices to market interest rate ..... 3701
Example 46.8:
Effective interest method – amortisation of discount
arising from credit downgrade ........................................................ 3702
Example 46.9:
Effective interest method – amortisation of discount
arising from accrued interest ........................................................... 3702
Example 46.10:
Effective interest rate – embedded prepayment options ......... 3703
Example 46.11:
Effective interest method – revision of estimates ...................... 3703
Financial instruments: Subsequent measurement 3683
Example 46.12:
Amortised cost – perpetual debt with interest payments
over a limited amount of time ......................................................... 3705
Example 46.13:
Application of the effective interest method to
inflation-linked debt instruments ................................................... 3706
Example 46.14:
Changes in credit spread ................................................................... 3710
Example 46.15:
Modification – troubled debt restructuring ................................... 3711
Example 46.16:
Modification – renegotiation of a fixed rate loan ......................... 3711
Example 46.17:
Accounting treatment of modification fees ................................... 3713
Example 46.18:
Foreign currency debt security measured at fair value
through other comprehensive income (separation of
currency component) ........................................................................ 3714
Example 46.19:
Interaction of IAS 21 and IFRS 9 – foreign currency debt
investment ............................................................................................ 3716
3684 Chapter 46
3685
Chapter 46
Financial instruments:
Subsequent
measurement
1 INTRODUCTION
The introduction
to Chapter 40 provides a general background to the development of
accounting for financial instruments under IFRS 9 – Financial Instruments. Chapter 41
deals with what qualify as financial assets and financial liabilities and other contracts
that are treated as if they were financial instruments, and Chapter 44 discusses the
classification of financial instruments. Chapter 45 addresses the question of when
financial instruments should be recognised in financial statements and their initial
measurement. The related question of when a previously recognised financial
instrument should be derecognised from the financial statements is dealt with in
Chapter 48. Hedge accounting is dealt with in Chapter 49 and the presentation and
disclosure of financial instruments are covered in Chapter 50.
This chapter discusses the subsequent measurement of financial instruments under
IFRS 9, including the requirements relating to amortised cost, the effective interest
method and foreign currency revaluation. The impairment of financial instruments is
addressed in Chapter 47.
Most, but not all, of the detailed requirements of IFRS governing the measurement of
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 2.6 below.
2
SUBSEQUENT MEASUREMENT AND RECOGNITION OF
GAINS AND LOSSES
As explained in Chapter 44 at 2 and 3, following the application of IFRS 9, financial
assets and financial liabilities are classified into one of the following measurement
categories: [IFRS 9.4.1.1, 4.2.1]
3686 Chapter 46
• debt financial assets at amortised cost;
• debt financial assets at fair value through other comprehensive income (with
cumulative gains and losses reclassified to profit or loss upon derecognition);
• debt financial assets, derivatives and investments in equity instruments at fair value
through profit or loss;
• investments in equity instruments designated as measured at fair value through
other comprehensive income (with gains and losses remaining in other
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 728
