IFRS 9 Financial Instruments

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:

• cash
• an equity instrument of another entity
• a contractual right to receive cash or another financial asset from another entity
• a contractual right to exchange F.instruments with another entity under favourable conditions
• a non-derivative contract obliged to receive a variable number of the entity's own equity
instruments'

A financial liability is any liability that is a:

• 'contractual obligation to deliver cash or another financial asset to another entity
• contractual obligation to exchange F.instruments with another entity under unfavourable
condition that are potentially unfavourable
• a non-derivative contract obliged to deliver a variable number of the entity’s own equity
instruments.'

An equity instrument is 'any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities' (Assets – Liabilities = Equity)
*Share * Fixed number of entity's own equity instrument

Debt or equity?
When a company issues a financial instrument (like shares or bonds), it must classify it as either debt
(a liability) or equity (ownership). This decision impacts how the company looks on the financial
statements.
 Preference shares → classified liability → dividends expense PL
 Ordinary shares (Fixed number) → classified Equity → dividends deduct from Retaining
earnings (reported in the statement of change in Equity)

Offse ng IAS 32
Offsetting between a financial asset and a financial liability may be in very limited circumstances.
The net Amount may be reported when the entity:
• 'has a legally enforceable right to set off the amounts
• intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously

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 1- Financial liabilities
Initial recognition of financial liabilities
At initial recognition, financial liabilities are measured at fair value.
• If the financial liability will be held at FV PL, transaction costs should be expensed to PL
• If the financial liability will not be held at FV PL, transaction costs should be deducted from its CA
Subsequent measurement of financial liabilities
• amortised cost
• fair value through profit or loss.

Calculating Amortised cost

The initial CA a financial liability measured at amortised cost is its FV less any transaction costs.
The DR Finance cost PL **
CR Liability **
then Dr Liability **
Cr Cash **

Opening liability Finance cost Cash payments Closing liability

X X (X) X
Financial position PL CF Financial position

An en ty issued a loan note with a 50,000 nominal value at a discount of 16% of nominal value.
the cost of issue was 2,000, interest of 5% of the nominal value is payable annually in arrears
The bond must be redeemed at a premium of 4,611, the effec ve rate of interest is 12% per year

Face value 50,000

discount 16% (50000*16%) -8,000
Issue costs -2,000
Initial recognition of liability 40,000
The liability is then measured at amortised cost:

Opening Finance Cash Closing

Year payments
balance cots 12% (5% nominal value)
balance
1 40,000 4,800 -2,500 42,300
2 42,300 5,076 -2,500 44,876
3 44,876 5,385 -2,500 47,761
4 47,761 5,731 -2,500 50,992
5 50,992 6,119 -2,500 54,612 4,612 Premuim

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Financial liability measured at "fair value through profit or loss
When a company has a financial liability measured at "fair value through profit or loss," here’s how
it’s treated in the accounts:
1. Initial Recognition:
o First, the liability is recorded at its fair value (usually the amount the company
received).
o Any additional costs, like legal fees or broker fees, are immediately recorded as
expenses in profit or loss.
2. Regular Re-measurement:
o At each reporting date, the company re-measures the liability at fair value.
o Any difference (gain or loss) from this re-measurement goes directly into profit or
loss.
3. If the Fair Value Option Is Used to Reduce Accounting Issues:
o In this case, the change in fair value is split into two parts:
 Part related to the company’s own credit risk (the chance that the company
might not be able to pay the liability): This part is recorded in other
comprehensive income.
 The remaining part of the fair value change: This is recorded in profit or loss
as usual.
The total fair value decline is $1 million. The $0.3 million related to own credit risk should be
recorded in OCI and the remaining $0.7 million recorded in profit or loss.
Dr Financial liability $1.0m
Cr Profit or loss $0.7m
Cr OCI $0.3m
The financial liability is traded in the short term and so is measured at FV PL
Assuming that the fair value of the liability cannot be observed from an active market, the fair value
can be calculated by discounting the future cash flows at a market rate of interest

Face value 10,000

Rate of interest paid in arrears 5%
Market rate 10%

31-12-X2 500 1/1.1 455

31-12-X3 10500 1/1.1 ^2 8,678
FV of liability at year end 9,132
* The interest payments are $10m × 5% = $0.5m
The fair value of the liability at the year-end is $9.13 million
The following adjustment is required :
Dr Liability ($10m – $9.13m) 868
Cr Profit or loss 868

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 2- Compound instruments
is a financial instrument that has characteristics of both equity and liabilities.
An example "debt that can be redeemed either in cash or in a fixed number of equity shares".

Presentation of compound instruments

IAS 32 requires compound financial instruments be split into two components:
 a liability component (the obligation to repay cash)
 an equity component (the obligation to issue a fixed number of shares).
These two elements must be shown separately in the financial statements.

The initial recognition of compound instruments

must be split into a liability component and an equity component:
• The liability component is calculated as the present value of the repayments,
discounted at a market rate of interest for a similar instrument without conversion rights.
• The equity component is calculated as the difference between the cash proceeds from the
issue of the instrument and the value of the liability component.
*After initial recognition, the liability will be measured at amortised cost. The equity component
remains unchanged.
EX: 1 January 20X4 issued $10 million 3% bonds at par , Interest is paid in arrears
The loan notes will be redeemed in cash at par on 31 December 20X6
or in the form of a fixed number of ordinary shares
The interest rate on similar bonds without a conversion op on is 6%.
*The fair value can be calculated by discounting the future cash flows at a market rate of interest

Date Cash flow $m Discount rate Present value $m

31/12/X4 0.3 1/1.06 0.28
31/12/X5 0.3 1/1.06^2 0.27
31/12/X6 10.3 1/1.06^3 8.65
––––––
9.20
––––––
Dr Cash $10.0m
Cr Liability $9.20m
Cr Equity (bal. fig.) $0.80m
The equity is not remeasured. The liability is then measured at amortised cost
B/f Interest at 6% Cash paid C/f
9.2 0.55 (0.3) 9.45
In the year ended 31 December 20X4, interest of $0.55 million is charged to profit or loss. The
liability on the statement of financial posi on is $9.45 million.
If the conversion rights are exercised to share capital
Share premium = convert value (share capital) – (Equity + financial liability in converted date)
Dr Liability **
Dr Other components of equity **
Cr Share capital **
Cr Share premium **
*If the option of conversion is not chosen, the liabilities for settlement will be reduced and remain
Equity components in equity probably as non-distributable reserve
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Created by : Enas Sharaf
3- Financial Assets

IFRS 9 says that an en ty should recognise a financial asset 'when, and only when, the entity
becomes party to the contractual provisions of the instrument'

Classification and measurement: investments in shares

Investments in
shares

FVPL FVOCI
If not held for
Default position
short-term trading
and an irrevocable
designation is made.

Initial recognition : Initial recognition :

Fair value Fair value plus costs
Subsequent treatment : Subsequent treatment :
Revalue each reporting Revalue each reporting
date with gain or loss in date with gain or loss in
PL OCI

Investments in shares
FVPL

Default position

FVOC

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 I

Classification and measurement: investments in debt

*Reclassification if change in business model Basis

1- business model objective
2- contractual cash flow

• Amortised cost
This applies when the entity plans to keep the financial asset (like a bond) until redemption and
collect the principal and the contractual cash flow on specified date without selling it before the
maturity date
• Fair value through other comprehensive income
This method applies when the entity plans to both collect the principal and the contractual cash
flow on specified date, as well as sell the asset in the future. The asset is measured at fair value,
and changes in its value are recorded in OCI.
• Fair value through profit or loss.
If the investment doesn't fit the first two categories, it will be measured at FV PL
Any change in the asset's value will impact in PL

In simple terms, it depends on the entity's goal: whether it plans to hold the asset and collect
interest, sell it at some point, or track its market value regularly

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 Classification and measurement: investments in debt

Investments in
debt

Amortised FVOCI FVPL

cost

Initial recognition: Initial recognition: Initial recognition:

Fair value plus costs Fair value plus costs Fair value
Subsequent treatment:
Subsequent treatment: Interest income is Subsequent treatment:
Interest income is recognised at the Revalue each reporting date
recognised at the effective rate. with gain or loss in SPL.
effective rate. Revalue each reporting date
with gain or loss in OCI.

On 1 January 20X1, Galbraith purchases 1 million $10 5% loan notes for their nominal value. It also
incurs $0.1 million of direct costs on the purchase. The effec ve rate of interest is 12%
The fair value of the investment at 31 December 20X1 is $11.5 million.

initially recognised Interest at 12% Cash receipt Total Gain Fair value
10.1 1.21 (0.5) 10.81 0.69 11.5
Amortised cost : Interest income of $1.21 million is recorded in profit or loss. The asset is
carried at $10.81 million at the repor ng date.
Fair value through OCI : Interest income of $1.21 million is recorded in profit or loss. A gain of $0.69
million is recorded in OCI. The asset is carried at $11.5 million at the reporting date.
Fair value through profit or loss : The financial asset is ini ally recognised at its fair value of $10 million.
The fees of $0.1 million are expensed to profit or loss.
The financial asset is ini ally recognised at its fair value of $10 million. The fees of $0.1 million are
expensed to profit or loss.
The financial asset will be revalued to $11.5 million at the repor ng date with a gain of $1.5 million
($11.5m – $10m) recorded in profit or loss.

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4- Impairment of financial assets
Loss allowances must be recognised for financial assets that are debt instruments and which are
measured at amortised cost or at FVTOCI

Measuring expected losses ECL

• unbiased and probability-weighted
• reflective of the time value of money
• based on info about past events, current conditions and forecasts of future economic conditions.

ECL Model
General approach Simplified approach
Credit Risk
Credit Risk Objective evidence in
not increase ECL life time
increase significantly impairment
significantly
ECL 12 Month ECL life time ECL 12 life me Provision matrix
Rate * Gross amount Rate * Gross amount Rate * Net amount Fixed Rate if number of days
(Effective Rate) (gross – allowance) not over due

Credit loss: The present value of the difference between the contractual cash flows and the cash flows
that the entity expects to receive.
Expected credit losses: The weighted average credit losses.
Lifetime ECL: The expected credit losses that results from all possible default events.
12M ECL: The portion of lifetime expected credit losses that result from default events that might occur
12 months a er the repor ng date.

Evidence of impairment means signs that an asset has lost value, like:
*Issuer’s financial trouble: Serious money problems.
*Contract breach: Missing payments or not following terms.
*The borrower being granted concessions
*it becoming probable that the borrower will enter bankruptcy

To assess whether there has been a significant increase in credit risk, IFRS 9 requires en es to :
compare the asset's risk of default at the reporting date with its risk of default at the date of initial
recognition.
Entities should not rely solely on past info when determining if credit risk has increased significantly.
An entity can assume that credit risk has not increased significantly if the instrument has a low
credit risk at the reporting date.
Credit risk can be assumed to have increased significantly if contractual payments are more than
30 days overdue at the repor ng date.

If an asset is credit impaired at the repor ng date, IFRS 9 says that the ECL should be measured as
the difference between the asset’s gross CA and the PV of the estimated future cash flows when
discounted at the original effective rate of interest.
ECL = Gross Carrying Amount - Present Value of Future Cash Flows
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Accounting entries for loss allowance
*If the financial asset is measured at amortised cost, then the entry to increase an allowance is:
Dr Profit or loss **
Cr Allowance (SFP) **
The allowance account reduces the net carrying amount of the financial asset.

*If the financial asset is measured at FVOCI then the entry to record an increase in the allowance is:
Dr Profit or loss **
Cr OCI **

Impairment reversals
means re-evaluating assets that had been previously written down due to impairment (a decrease in value).
According to IFRS 9, companies must recalculate the "loss allowance" (the amount set aside for potential
losses) on each reporting date.

If this allowance changes based on a new assessment, any gains or losses from the revaluation of the allowance
are recorded in profit or loss. This means that if the asset's situation improves (for example, a customer pays
part of its debt or becomes less risky), a portion of the loss recorded earlier can be "reversed."

Examples:

1. If the company set aside a loss allowance of 1,000 EGP for a customer but the customer made a payment
or became less risky, the loss allowance can be reduced, and this adjustment will appear in the profit
or loss statement.
2. If the value of an asset was wri en down by 5,000 EGP due to a market decline, but later the market
value increased, part or all of the earlier loss can be reversed and recognized in the profit or loss.

The goal of this process is to ensure that the loss allowance reflects the actual current economic condition of
the assets.

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5- Derecognition of financial instruments

A financial liability
should be derecognised when the obligation is discharged, cancelled or expires.
•The difference between any consideration transferred and the carrying amount of the financial
liability is recognised in profit or loss.

A financial asset
should be derecognised if one of the following has occurred:
• The contractual rights have expired or
• The financial asset has been sold and substantially all the risks and rewards of ownership have been
transferred from the seller to the buyer.
• For investments in equity instruments held at FVOCI, the cumulative gains and losses recognised
in OCI are not reclassified to profit or loss on disposal.
• For investments in debt instruments held at FVOCI , the cumulative gains and losses recognised
in OCI are reclassified to profit or loss on disposal.
Modification of debt
 If the terms of an existing loan are changed, or
 an existing loan is exchanged for a new loan with the existing lender
a decision must be made as to whether the changes:
 create a new loan arrangement, or
 are just a modification of the existing financial liability
The accounting treatment will depend on whether the new terms are deemed to be substantially
different or not.
To be substantially different:
 the present value of the cash flows under the new arrangement, including fees (all discounted at the
original effec ve rate), must be at least 10% different to the present value of the remaining cash flows
under the original arrangement.
Substantially different - create a new financial liability
Difference of 10% or more
 Derecognise the existing liability
 Recognise a new liability at its fair value
 The difference is recognised in the statement of profit or loss
 Any fees incurred are recognised in the statement of profit or loss.
Not substantially different – treat the original liability as if it has been modified
Difference of less than 10%
 Do not derecognise the existing liability
 Restate the liability to the present value of the revised cash flows (discounted at
the original effective rate)
 Deduct any fees paid from the value of the liability
 Any difference is recognised in the statement of profit or loss.

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Created by : Enas Sharaf
 6- Derivatives
IFRS 9 says that a deriva ve is a financial instrument with the following characteris cs:
(a) Its value changes in response to the change in a specified interest rate, security price,
commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index
or similar variable (called the ‘underlying’).
(b) It requires little or no initial net investment relative to other types of contracts that have
a similar response to changes in market conditions.
(c) It is settled at a future date.

A contract to buy or sell a non-financial item (such as inventory or PPE) is only a derivative if:
• it can be settled net in cash (or using another financial asset), and
• the contract was not entered into for the purpose of receipt or delivery of the item to meet
the entity's operating requirements.

to be settled net in cash when:

• the terms of the contract permit either party to settle the contract net
• the entity has a practice of settling similar contracts net
• the entity, for similar contracts, has delivery of the item and quickly selling it to benefit its FV.
• the non-financial item is readily convertible to cash.

*Common derivatives
Forward contract Futures contracts Options Swaps
These give the holder
obliged to buy or sell a the right, but not the
obliged to buy or sell a
defined amount of a obligation, to buy or
standard quantity of a
specific underlying asset sell a specific
specific underlying item at Two parties agree to
at a specified price at a underlying
a specified future date. exchange periodic
specified future date asset on or before a
payments at specified
specified future date
intervals over a
*Value change with
specified time period.
underling ( its price
*Country Party (Such as in an interest
Contract have standard from something out)
*Contract tailor-made rate swap)
terms and are traded on a *No initial net
*Not traded on a
financial exchange investment or smaller
financial exchange
than other similar
type of investment

Measurement of derivatives
On initial recognition, derivatives should be measured at FV. Transaction costs are expensed to PL.
At the reporting date, derivatives are remeasured to FV. Movements in FV are recognised in PL

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Created by : Enas Sharaf
7- Embedded derivatives
is a 'component of a hybrid contract that also includes a non-derivative host, with the effect that
some of the cash flows of the combined instrument vary in a way similar to a standalone derivative'.
• if the host contract is within the scope of IFRS 9 then the en re contract must be classified and
measured in accordance with that standard.
• If the host contract is not within the scope of IFRS 9 (i.e. it is not a financial asset or liability),
then the embedded derivative can be separated out and measured at FVPL if:
(i) 'the economic risks and characteristics of the embedded derivative are not closely related to
those of the host contract
(ii) a separate instrument with the same terms as the embedded derivative would meet the definition
of a derivative, and
(iii) the en re instrument is not measured at fair value with changes in FVPL' (IFRS 9, para 4.3.3).

Bond
Option redeems the
2000 100$
Bond at Specific Price
6% 5 years

Hybrid
Instrument

Host embedded
Contract derivatives

non-
Derivatives
derivatives

Financial
Asset Otherwise
liabilitiy
Treated on one instrument Should be separated
And apply the rules of
IFRS 9
Bond Derivatives
Amortised cost FVPL
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Created by : Enas Sharaf
 8- Hedge accounting
Derivatives can be used to manage risks, such as changes in fair values or variability in cash flows
Derivatives are a financial instrument. They are classified to be measured at fair value through profit or
loss. This treatment can introduce volatility into the statement of profit or loss.
A hedged item is an asset or liability that exposes the entity to risks of changes in Fv or future CF
• A recognised asset or liability
• An unrecognised firm commitment – a binding agreement for the exchange of a specified quantity
of resources at a specified price on a specified future date
• A highly probable forecast transaction – an uncommitted but anticipated future transaction.

A hedging instrument is a designated derivative, or a non-derivative financial assets or financial liability,

whose FV or CF are expected to offset changes in FV or future CF of the hedged item.
Fair value hedge : to hedge movements in the fair value of a recognized asset or liability or a firm
commitment that could impact profit or loss (or OCI for investments in equity designated as FVOCI).
Cash flow hedge: to hedge movements in the cash flows associated with a recognised item or a highly
probable forecast transaction that could impact profit or loss.
Criteria for hedge accounting
Under IFRS 9, hedge accoun ng rules can only be applied if the hedging relationship meets criteria :
1-The relationship between the hedging instruments and the hedged items must be eligible: This means
the financial instruments and the items being hedged must meet the requirements
2-Documentation of the relationship from the start: Before starting, there must be official
documentation that explains what is being hedged against and how the instruments will be used.
3-The relationship must be effective: This means any changes in the hedging instruments or items must
match each other
*If these conditions are met, you can officially use Hedge Accounting

Accounting treatment of a fair value hedge At the reporting date:

• The hedging instrument will be remeasured to FV.
• The CA of the hedged item will be adjusted for the change in FV since the inception of the hedge.
Gain or (loss) of hedged items or hedged instruments will be recorded:
• in PL in most cases, but
• in OCI if the hedged item is an investment in equity that is measured at FVOCI
1. If the hedged item results in the recognition of a financial asset or liability:
o The gain or loss recorded in equity due to the hedge must be transferred to profit or loss in the period
when the hedged forecast cash flows affect profit or loss.
2. If the hedged item results in the recognition of a non-financial asset or liability:
o The gain or loss that was in equity must be adjusted against the carrying amount of the non-financial
asset or liability. This is not a reclassification adjustment, so it doesn't affect OCI
Simplification:
 Financial assets or liabilities: The gain or loss recorded in equity gets moved to profit or loss.
 Non-financial assets or liabilities: The gain or loss doesn't go to profit or loss but is adjusted in the
value of the asset or liability, without affecting OCI.
This is just a way to ensure that if the hedge succeeds or fails, it's properly reflected in the company's
accounts.
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Created by : Enas Sharaf
Cash flow hedge accounting
 In a cash flow hedge, if the hedge is effective, the hedging instrument (like futures contracts) is
adjusted based on changes in its market value.
 These changes are recorded in other comprehensive income (OCI), which is a part of the financial
statements but doesn't show up in profit or loss.
 The exception: If the gain or loss from the hedging instrument is greater than the gain or loss from
the hedged item (the thing you're protecting), the excess gain or loss on the hedging instrument is
recorded in profit or loss instead of OCI.
In simpler terms:
 If the hedge is working well (i.e., it’s "effective"), its value is adjusted based on market changes.
 Normally, those changes go into "other comprehensive income."
 If the changes in the hedging instrument are bigger than those in the item being hedged, the
difference is shown in "profit or loss."

Under-hedged cash flow hedge

a gain of $8,800 was made when measured at market value. The corresponding loss in respect of future
cash flows amounted to $9,100 in fair value terms.
The entries required are as follow:
Dr Hedging instrument (SFP) $8,800
Cr Other comprehensive income $8,800
Over-hedged cash flow hedge
a gain of $10,200 was made when measured at market value. The corresponding loss in respect of future
cash flows amounted to $9,500 in fair value terms.
The entries required are as follow:
Dr Hedging instrument (SFP) $10,200
Cr Other comprehensive income $9,500
Cr Profit or loss $700

Discontinuing hedge accounting

• The hedging instrument expires or is exercised, sold or terminated.
• The hedge no longer meets the hedging criteria.
• A forecast future transaction that qualified as a hedged item is no longer highly probable.
If the forecast transaction is no longer expected to occur
Gains and losses recognised in OCI must be taken to PL immediately
If the transaction is still expected to occur
the gains and losses will be retained in equity until the former hedged transaction occurs.

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Created by : Enas Sharaf
 9- Disclosure
disclosure of Financial Instruments (IFRS 7) requires companies to provide certain information about their
financial instruments in their financial statements. Here’s a simplified explanation:
1. Significance of Financial Instruments:
Companies must explain how financial instruments (like loans, investments, or derivatives) affect
their financial position and performance. This includes reporting on income, expenses, gains, and
losses separately for each type of financial instrument.
2. Risk Information:
They must also disclose the risks associated with those financial instruments. These risks could
include credit risk, liquidity risk, and market risk. The company must detail how they manage those
risks and whether the risks have changed from the previous period.
o Qualitative Disclosures: These include a narrative about the types of risks (e.g., what
financial instruments are at risk) and the company's strategies to handle them.
o Quantitative Disclosures: These include numerical data that shows how much risk exposure
the company has at the reporting date. For example, how much of their financial
instruments are exposed to credit risk, liquidity risk, or market risk.
3. Types of Risks:
o Credit Risk: The risk that a party will not be able to fulfill its financial obligations.
o Liquidity Risk: The risk that an entity will not be able to meet its short-term financial
obligations.
o Market Risk: The risk of changes in market variables like interest rates or stock prices.
In short, IFRS 7 requires companies to provide both descrip ve and numerical data about the risks and
impacts of financial instruments on their business.

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Created by : Enas Sharaf