investment in an equity instrument where an entity has made an irrevocable election to
present in other comprehensive income subsequent changes in the fair value of the
investment, the entire change in the carrying amount, including the effect of changes in
foreign currency rates, is presented in other comprehensive income. [IFRS 9.5.7.5, B5.7.3, E.3.4].
In cases where some portion of the change in carrying amount is recognised in profit or
loss and some in other comprehensive income, e.g. if the amortised cost of a foreign
currency bond measured at fair value through other comprehensive income has
increased in foreign currency (resulting in a gain in profit or loss) but its fair value has
decreased in foreign currency (resulting in a loss recognised in other comprehensive
income), those two components cannot be offset for the purposes of determining gains
or losses that should be recognised in profit or loss or in other comprehensive income.
[IFRS 9.B5.7.2-7.2A, E.3.4].
The Board developed the example below to illustrate the separation of the currency
component for a financial asset that is measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of IFRS 9. To simplify the
example, the Board did not reflect the need to record expected credit losses.
[IFRS 9.IG.E.3.2]. A more complex illustration, including expected credit losses is included
in Chapter 47 Example 47.20 at 9.2.
Example 46.18: Foreign currency debt security measured at fair value through
other comprehensive income (separation of currency component)
On 31 December 2018, Company A, whose functional currency is the euro, acquires a dollar bond for its fair
value of $1,000. The bond is the same as the one in Example 46.4 at 3.2 above, i.e. it has five years to maturity
and a $1,250 principal, carries fixed interest of 4.7% paid annually ($1,250 × 4.7% = $59 per year), and has
an effective interest rate of 10%.
A classifies the bond as subsequently measured at fair value through other comprehensive income in accordance
with paragraph 4.1.2A of IFRS 9, and thus recognises gains and losses in other comprehensive income. The
exchange rate is initially $1 to €1.50 and the carrying amount of the bond is €1,500 ($1,000 × 1.50).
€
€
Bond 1,500
Cash 1,500
On 31 December 2019, the dollar has appreciated and the exchange rate is $1 to €2.00. The fair value of the
bond is $1,060 and therefore its carrying amount is €2,120 ($1,060 × 2.00). Its amortised cost is $1,041 (or
€2,082 = $1,041 × 2.00) and the cumulative gain or loss to be included in other comprehensive income is the
difference between its fair value and amortised cost, i.e. a gain of €38 (€2,120 – €2,082; or, alternatively,
[$1,060 – $1,041] × 2.00).
Interest received on the bond on 31 December 2019 is $59 (or €118 = $59 × 2.00). Interest revenue determined
in accordance with the effective interest method is $100 ($1,000 × 10%) of which $41 ($100 – $59) is the
accretion of the initial discount.
Financial instruments: Subsequent measurement 3715
It is assumed that the average exchange rate during the year is $1 to €1.75 and that the use of an average
exchange rate provides a reliable approximation of the spot rates applicable to the accrual of interest during
the year. Therefore, reported interest revenue is €175 ($100 × 1.75) including accretion of the initial discount
of €72 ($41 × 1.75).
The exchange difference recognised in profit or loss is €525, which comprises three elements: a €500 gain
from the retranslation of the initial amortised cost ($1,000 × [2.00 – 1.50]); a €15 gain from the retranslation
of interest revenue received ($59 × [2.00 – 1.75]) and a €10 gain on the retranslation of the interest revenue
accreted ($41 × [2.00 – 1.75]).
€
€
Bond 620
Cash 118
Interest revenue (P&L)
175
Exchange gain (P&L)
525
Fair value change in other comprehensive
38
income (equity)
On 31 December 2020, the dollar has appreciated further and the exchange rate is $1 to €2.50. The fair value
of the bond is $1,070 and therefore its carrying amount is €2,675 ($1,070 × 2.50). Its amortised cost is $1,086
(or €2,715 = $1,086 × 2.50) and the cumulative gain or loss to be included in other comprehensive income is
the difference between its fair value and the amortised cost, i.e. a loss of €40 (€2,675 – €2,715; or,
alternatively, [$1,070 – $1,086] × 2.50). Therefore, there is a debit to other comprehensive income equal to
the change in the difference during 2020 of €78 (€40 + €38).
Interest received on the bond on 31 December 2020 is $59 (or €148 = $59 × 2.50). Interest revenue determined
in accordance with the effective interest method is $104 ($1,041 × 10%), of which $45 ($104 – $59) is the
accretion of the initial discount.
Using the same assumptions as in the previous year, interest income is €234 ($104 × 2.25) including accretion
of the initial discount of €101 ($45 × 2.25).
The exchange difference recognised in profit or loss is €547, which again comprises three elements: a €521
gain from the retranslation of the opening amortised cost ($1,041 × [2.50 – 2.00]); a €15 gain from the
retranslation of interest income received ($59 × [2.50 – 2.25]) and an €11 gain on the retranslation of the
interest income accreted ($45 × [2.50 – 2.25]).
€
€
Bond 555
Cash 148
Fair value change in other comprehensive
78
income (equity)
Interest revenue (P&L)
234
Exchange gain (P&L)
547
The treatment would be different for equity instruments measured at fair value through
other comprehensive income. Under IAS 21, these are not considered monetary items and
exchange differences would form part of the change in the fair value of the instrument,
which would be recognised in other comprehensive income with no recycling.
4.2 Foreign
entities
IFRS 9 did not amend the application of the net investment method of accounting for foreign
entities set out in IAS 21 (see Chapter 15 at 6). Therefore, for the purpose of preparing its own
accounts for inclusion in consolidated accounts, a foreign entity that is part of a group applies
the principles at 4.1 above by reference to its own functional currency. Consequently, the
treatment of gains and losses on, say, trading assets held by a foreign entity should follow the
3716 Chapter 46
treatment in the example below, adapted from the Implementation Guidance of IFRS 9.
[IFRS 9.IG.E.3.3]. Another situation where foreign exchange differences on monetary items are
recognised in other comprehensive income is when the long-term debt is considered to form
part of the net investment in the foreign entity.
Example 46.19: Interaction of IAS 21 and IFRS 9 – foreign currency debt
investment
Company A is domiciled in the US and its functional currency and presentation currency is the US dollar.
A has a UK domiciled subsidiary, B, whose functional currency is sterling. B is the owner of a debt instrument
which is held
for trading and is therefore carried at fair value through profit or loss in accordance with IFRS 9.
In B’s financial statements for 2019, the fair value and carrying amount of the debt instrument is £100. In A’s
consolidated financial statements, the asset is translated into US dollars at the spot exchange rate applicable
at the end of the reporting period, say 2.0, and the carrying amount is US$200 (£100 × 2.0).
At the end of 2020, the fair value of the debt instrument has increased to £110. B reports the trading asset at
£110 in its statement of financial position and recognises a fair value gain of £10 in profit or loss. During the
year, the spot exchange rate has increased from 2.0 to 3.0 resulting in an increase in the fair value of the
instrument from US$200 to US$330 (£110 × 3.0). Therefore, A reports the trading asset at US$330 in its
consolidated financial statements.
Since B is classified as a foreign entity, A translates B’s statement of comprehensive income ‘at the exchange
rates at the dates of the transactions’. Since the fair value gain has accrued through the year, A uses the
average rate of 2.5 (= [3.0 + 2.0] ÷ 2) as a practical approximation. Therefore, while the fair value of the
trading asset has increased by US$130 (US$330 – US$200), A recognises only US$25 (£10 × 2.5) of this
increase in profit or loss. The resulting exchange difference, i.e. the remaining increase in the fair value of
the debt instrument of US$105 (US$130 – US$25), is recognised in other comprehensive income until the
disposal of the net investment in the foreign entity.
5
EFFECTIVE DATE AND TRANSITION
This section covers the effective date and transition issues specific to subsequent
measurement. For other transition provisions related to IFRS 9, please refer to
Chapter 44 at 10.2, Chapter 47 at 16.2 and Chapter 49 at 13.3.
5.1 Effective
date
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, although
entities were permitted to apply the standard earlier.
5.1.1
Modified financial liabilities that do not result in derecognition
In October 2017, the Board clarified in the Basis for Conclusions that the requirements
in IFRS 9 for adjusting the amortised cost of a financial liability when a modification (or
exchange) does not result in the derecognition of the financial liability are consistent
with the requirements for adjusting the gross carrying amount of a financial asset when
a modification does not result in the derecognition of the financial asset (see Chapter 48
at 6.2.2 and 3.8.1 above). [IFRS 9.BC4.252-253]. The IASB did not specify an effective date for
this addition to the Basis for Conclusions as it is not considered to be part of the
authoritative standard. By default it has the same effective date as IFRS 9. Treating all
modifications in a similar manner as to changes of estimates represents a change in
practice for many entities compared to under IAS 39. Such entities have had to apply
this change retrospectively on first time application of IFRS 9.
Financial instruments: Subsequent measurement 3717
5.2 Transition
IFRS 9 contains a general requirement that it should be applied retrospectively.
However, the standard does specify a number of exceptions and reliefs, one of which is
relevant to this chapter. [IFRS 9.7.2.1, 7.2.15].
5.2.1
Effective interest rate
On transition, it may be impracticable to apply retrospectively the effective interest
method to a financial asset or financial liability that is measured at amortised cost in
accordance with IFRS 9, e.g. if it was previously classified at fair value through profit or
loss. In those circumstances, the fair value of the financial asset or financial liability at
the end of each comparative period should be treated as the gross carrying amount or
the amortised cost amount, respectively. Also, the fair value of the financial asset or
financial liability at the date of initial application should be treated as its new gross
carrying amount or amortised cost amount, respectively, at that date. [IFRS 9.7.2.11].
References
1 Whilst paragraph 5.7.10 of IFRS 9 could be
4
IGC Q&A 10-19.
read as saying that the modification gains or
5
IGC Q&A 73-1.
losses should not be recognised in profit or loss,
6
IFRIC Update, July 2008.
we understand that it was the IASB’s intention
7 Information for Observers (May 2008 IFRIC
that they should be recognised in profit or loss.
meeting), Application of the Effective Interest
This is clear from reading paragraph 5.7.11 of
Rate Method, IASB, May 2008, Appendix.
IFRS 9 in conjunction with paragraph 5.4.3 of
8
IFRIC Update, July 2008.
IFRS 9, and therefore we view this as a drafting
9
IFRIC Update, May 2009.
error in paragraph 5.7.10 of IFRS 9.
10 IFRIC Update, July 2008.
2
IGC Q&A 73-1.
11 IFRIC Update, June 2017.
3
IGC Q&A 76-1.
3718 Chapter 46
3719
Chapter 47
Financial instruments:
Impairment
1 INTRODUCTION .......................................................................................... 3725
1.1
Brief history and background of the impairment project ........................... 3725
1.2
Overview of the IFRS 9 impairment requirements .....................................3729
1.3
Key changes from the IAS 39 impairment requirements and the
implications .......................................................................................................... 3731
1.4
Key differences from the FASB’s standard .................................................... 3733
1.5
The IFRS Transition Resource Group for Impairment of Financial
Instruments (ITG) and IASB webcasts ............................................................ 3734
1.6
Other guidance on expected credit losses ..................................................... 3737
2 SCOPE .......................................................................................................... 3738
3 APPROACHES .............................................................................................. 3738
3.1
General approach ............................................................................................... 3739
3.2 Simplified
approach
...........................................................................................
3742
3.3
Purchased or originated credit-impaired financial assets .......................... 3743
4 IMPAIRMENT FOR CORPORATES ............................................................... 3745
5 MEASUREMENT OF EXPECTED CREDIT LOSSES ...................................... 3748
5.1
Definition of default .......................................................................................... 3748
5.2 Lifetime
expected
credit losses .......................................................................37
49
5.3
12-month expected credit losses .................................................................... 3750
5.4
Probability of default (PD) and loss rate approaches .................................. 3752
5.4.1
Probability of default (PD) approach .............................................. 3752
5.4.2
Loss rate approach ............................................................................. 3756
5.5
Expected life versus contractual period ........................................................ 3758
5.6 Probability-weighted
outcome
and multiple scenarios .............................. 3761
3720 Chapter 47
5.7
Time value of money ........................................................................................ 3766
5.8
Losses expected in the event of default ........................................................ 3768
5.8.1
Credit enhancements: collateral and financial guarantees ....... 3768
5.8.1.A
Guarantees that are integral to the contract ............ 3769
5.8.1.B
Guarantees that are not integral to the contract ..... 3770
5.8.2
Cash flows from the sale of a defaulted loan ................................ 3773
5.8.3
Treatment of collection costs paid to an external debt
collection agency ................................................................................. 3773
5.9
Reasonable and supportable information ...................................................... 3774
5.9.1
Undue cost or effort ........................................................................... 3774
5.9.2
Sources of information ...................................................................... 3775
5.9.3
Information about past events, current conditions and
forecasts of future economic conditions ....................................... 3776
5.9.4
Events and new information obtained after ECLs have
been calculated .................................................................................... 3777
5.9.5
Other issues concerning forward looking information ............... 3778
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 735
