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Classification of financial - EY

Applying IFRS. Classification of financial instruments under IFRS 9. May 2015. Contents 1. Introduction ..4. 2. Classification of financial assets ..4. Debt Equity instruments and 3. The business model assessment ..7. Holding-to-collect contractual cash flows ..8. Holding-to-collect contractual cash flows and selling ..8. FVTPL business models ..9. 4 Characteristics of the contractual cash flows of the The meaning of principal' ..10. The meaning of interest' ..10. Modified contractual cash flows ..12. Contractually linked instruments.

May 2015 Applying IFRS – Classification of financial instruments under IFRS 9 2 Appendix: Q&As to the classification of financial instruments .....29

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Transcription of Classification of financial - EY

1 Applying IFRS. Classification of financial instruments under IFRS 9. May 2015. Contents 1. Introduction ..4. 2. Classification of financial assets ..4. Debt Equity instruments and 3. The business model assessment ..7. Holding-to-collect contractual cash flows ..8. Holding-to-collect contractual cash flows and selling ..8. FVTPL business models ..9. 4 Characteristics of the contractual cash flows of the The meaning of principal' ..10. The meaning of interest' ..10. Modified contractual cash flows ..12. Contractually linked instruments.

2 17. 5. Classifying financial liabilities ..20. 6. Designation as FVTPL ..21. 7. Designation of non-derivative equity instruments as at FVOCI ..21. 8 Reclassification of financial instruments ..22. 9 Effective date and transition ..25. Date of initial application ..25. Applying the business model assessment ..25. Applying the SPPI test ..25. Making and revoking designations ..26. Restatement of comparatives ..27. Derecognition prior to the date of initial application ..27. Transition adjustments and 1 May 2015 Applying IFRS Classification of financial instruments under IFRS 9.

3 Appendix: Q&As to the Classification of financial instruments ..29. The business model assessment ..29. Level and granularity of the assessment ..29. Impact of sales on the assessment ..31. FVTPL business models ..40. The SPPI test ..41. Instruments without 'modified' cash flows ..41. De-minimis and non-genuine features ..43. Modified time value of money element ..44. Modified timing and amount of contractual cash flows ..46. Non-SPPI Features ..48. Subordination features, non-recourse and full-recourse loans ..52. Contractually linked instruments.

4 53. FVTPL and FVOCI Options ..57. Designation of a financial asset as at Designation of non-derivative equity instruments as at FVOCI ..57. Designation of a financial liability as at FVTPL ..59. Reclassification of financial assets ..61. Effective date and May 2015 Applying IFRS Classification of financial instruments under IFRS 9 2. What you need to know IFRS 9 financial Instruments (IFRS 9 or the Standard) introduces a new Classification model for financial assets that is more principles-based than the current requirements under IAS 39 financial Instruments: Recognition and Measurement.

5 financial assets are classified according to their contractual cash flow characteristics and the business models under which they are held. Instruments will be classified either at amortised cost, the newly established measurement category fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). IFRS 9 will require an increased amount of judgement in performing the contractual cash flow characteristics test and the business model assessment. Entities are advised to analyse early the impact of the new Classification and measurement model as it could lead to higher profit or loss volatility and could have an impact on capital.

6 The Classification and measurement requirements must be adopted with the other IFRS 9 requirements from 1 January 2018, with early application permitted. 3 May 2015 Applying IFRS Classification of financial instruments under IFRS 9. 1. Introduction In July 2014, the International Accounting Standards Board (the IASB or the Board) issued the final version of IFRS 9 financial Instruments, bringing together the Classification and measurement, impairment and hedge accounting aspects of the IASB's project to replace IAS 39 financial Instruments: Recognition and Measurement and all previous versions of IFRS 9.

7 The Classification of financial instruments determines how they are accounted for and, in particular, how they are measured on an ongoing basis. This publication highlights The more principles-based approach of IFRS 9 requires the careful use of the factors that need to be judgment in its application. Some fact patterns have no simple and distinct considered in arriving outcome. We highlight in this publication, the factors that need to be considered at a conclusion. in arriving at a conclusion. Further issues and questions are likely to be raised during the course of implementation.

8 2. Classification of financial assets IFRS 9 has the following measurement categories in which financial assets are classified: Debt instruments at amortised cost Debt instruments at fair value through other comprehensive income (FVOCI). with cumulative gains and losses reclassified to profit or loss upon derecognition Debt instruments, derivatives and equity instruments at fair value through profit or loss (FVTPL). Equity instruments designated as measured at FVOCI with gains and losses remaining in other comprehensive income (OCI), , without recycling The Classification is based on both the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

9 The synopsis below illustrates the thought process on which the Classification of financial assets is based. Illustration 2-1 Synopsis Classification May 2015 Applying IFRS Classification of financial instruments under IFRS 9 4. Illustration 2-2 below summarises the outcome of the thought process depicted in Illustration 2-1 above: Illustration 2-2 Outcome chart Classification Contractual cash flow characteristics test Pass Fail Held within a business model whose Amortised cost FVTPL. objective is to hold financial assets in order to collect contractual cash flows Business model Held within a business model whose FVOCI FVTPL.

10 Objective is achieved by both collecting (with recycling). contractual cash flows and selling financial assets financial assets which are neither held FVTPL FVTPL. at amortised cost nor at FVOCI. Conditional fair value option is elected FVTPL n/a1. Options Option elected to present changes in n/a2 FVOCI. fair value of an equity instrument not (no recycling). held for trading in OCI. 1. financial assets which fail the contractual cash flow characteristics test are measured at FVTPL. 2. Only debt instruments can pass the contractual cash flow characteristics test.


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