PFRS 9: FINANCIAL INSTRUMENTS
Definition
Financial Instruments: is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
Financial Asset
● any asset
Financial Liability
● any liability
Equity Instrument: any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Recognition: An entity shall recognize a financial asset or a financial liability in its statement of
financial position, only when the entity becomes party to the contractual provisions of the
instrument.
Derecognition of Financial Asset
An entity shall derecognize a financial asset when, and only when:
a. the contractual rights to the cash flows from the financial asset expire, or
b. it transfers the financial asset and the transfer qualifies for derecognition rules.
Transfer of Financial Asset
An entity transfers a financial asset if, and only if, it either:
a. transfers the contractual rights to receive the cash flows of the financial asset, or
b. retains the contractual rights to receive the cash flows of the financial asset but assumes a
contractual obligation to pay the cash flows to one or more recipient.
● When an entity retains the contractual rights to receive the cash flows of a financial asset
(the ‘original asset’),
● When an entity transfers a financial asset, it shall evaluate the extent to which it retains the
risks and rewards of ownership of the financial asset.
Derecognition of Financial Liability
● An entity shall remove a financial liability when, and only when, it is extinguished, when the
obligation specified in the contract is discharged or cancelled or expires
● An exchange between an existing borrower and lender of debt instruments with
substantially different terms shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.
Classification of Financial Asset
Initial Recognition: The first time to record an amount at the accounting book.
Subsequent Recognition: Update the amount at the accounting book.
Irrevocable: cannot be changed, the first one to use should not be change.
● An entity may, at initial recognition, irrevocably designate a financial asset as measured at
fair value through profit or loss if doing so eliminates or significantly reduces a measurement
or recognition inconsistency
Shall classify financial assets as subsequently measured at amortized cost, fair value through other
comprehensive income or fair value through profit or loss on the basis of both:
a. the entity’s business model for managing the financial assets and (how company manage the
financial asset)
b. the contractual cash flow characteristics of the financial asset. (the characteristics of financial
assets)
A financial asset shall be measured at amortized cost if both of the following conditions are met:
a. the financial asset is held within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and
b. the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
A financial asset shall be measured at fair value through other comprehensive income if both of the
following conditions are met:
a. the financial asset is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and
b. the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding
Business Model FVPL OCI AC
In the form of Equity
Held for Trading D X X
Not Held for Trading D By X
Irrevocabl
e Election
In the form of Debt
Held for Trading D X X
Held for Collections of By X D
Contractual Cash Flows Irrevocabl
e Election
Held for Collection of By D X
Contractual Cash Flows Irrevocabl
and Sale e Election
Classification of Financial Liabilities
● An entity shall classify all financial liabilities as subsequently measured at amortized cost.
(Subsequent Measure is at Amortized Cost)
● at initial recognition, irrevocably designate a financial liability as measured at fair value
through profit or loss when permitted, or when doing so results in more relevant information.
(Initial Recognition Measure is at FVPL)
Reclassification
● changing the classification
When, and only when, an entity changes its business model for managing financial assets it shall
reclassify all affected financial assets. An entity shall not reclassify any financial liability.
Amortized Cost to Fair Value through Profit or Loss
● Any gain or loss arising from a difference between the previous amortized cost of the
financial asset and fair value is recognized in profit or loss.
Fair Value through Profit or Loss to Amortized Cost
● Its fair value at the reclassification date becomes its new gross carrying amount.
Amortized Cost to Fair Value through OCI
● Any gain or loss arising from a difference between the previous amortized cost of the
financial asset and fair value is recognized in other comprehensive income.
Fair Value through OCI to Amortized Cost
● The financial asset is reclassified at its fair value at the reclassification date. However, the
cumulative gain or loss previously recognized in other comprehensive income is removed
from equity and adjusted against the fair value of the financial asset at the reclassification
date.
Fair Value through Profit or Loss to Fair Value through OCI
● The financial asset continues to be measured at fair value.
Fair Value through OCI to Fair Value through Profit or Loss
● The financial asset continues to be measured at fair value. The cumulative gain or loss
previously recognized in other comprehensive income is reclassified from equity to profit or
loss as a reclassification adjustment at the reclassification date.
Initial Measurement
● Except for trade receivables, at initial recognition, an entity shall measure a financial asset or
financial liability at its fair value plus or minus.
● Initial Measurement of Financial Instrument is Fair Value +- Transaction Cost except trade
receivables
Subsequent Measurement of Financial Assets
After initial recognition, an entity shall measure a financial asset in accordance at:
(The initial recognition of it, you must continue it)
a. amortized cost;
b. fair value through other comprehensive income; or
c. fair value through profit or loss
An entity shall apply the impairment requirements to financial assets that are measured at amortized
cost and to financial assets that are measured at fair value through other comprehensive income.
● FVOCI and Amortized Cost has the only impairment requirements.
Subsequent Measurement of Financial Liabilities
After initial recognition, an entity shall measure a financial liability generally at amortized cost and
fair value for financial liabilities at fair value through profit or loss.
Modification of Contractual cash Flows
● Modification means there are changes.
● When the contractual cash flows of a financial asset are renegotiated or otherwise modified
and the renegotiation or modification does not result in the derecognition of that financial
asset in accordance with this Standard, an entity shall recalculate the gross carrying amount
of the financial asset and shall recognize a modification gain or loss in profit or loss.
Write-Off
● An entity shall directly reduce the gross carrying amount of a financial asset when the entity
has no reasonable expectations of recovering a financial asset in its entirety or a portion
thereof.
● A write-off constitutes a derecognition event.
Expected Credit Losses
Recognition: At each reporting date, an entity shall assess whether the credit risk on a financial
instrument has increased significantly since initial recognition.
Credit Risk: a possibility that you cannot paid the debt, or you cannot be paid.
An entity shall recognize a loss allowance for expected credit losses on a financial assets at fair value
through OCI, financial assets at amortized cost, a lease receivable, a contract asset or a loan
commitment and a financial guarantee contract to which the impairment requirements apply.
Lifetime expected credit losses: increased in significance
12 months credit losses: not increased significantly
Measurement
An entity shall measure expected credit losses of a financial instrument in a way that reflects:
a. an unbiased and probability‑weighted
b. the time value of money; and
c. reasonable and supportable information
Gain and Losses
Arising from Financial Instruments Measured at Fair Value
● A gain or loss on a financial asset or financial liability that is measured at fair value shall be
recognized in profit or loss
● Any gains or losses arising from financial instruments are part of profit and loss.
Dividends
Dividends are recognized in profit or loss only when:
a. the entity’s right to receive payment of the dividend is established;
b. it is probable that the economic benefits associated with the dividend will flow to the entity;
and
c. the amount of the dividend can be measured reliably.
Arising from Financial Instruments Measured at Amortized Cost
A gain or loss on a financial asset that is measured at amortized cost and is not part of a hedging
relationship shall be recognized in profit or loss when the financial asset is derecognized, reclassified,
through the amortization process or in order to recognize impairment gains or losses.
Arising from Liabilities Designated as at Fair Value through Profit or Loss
An entity shall present a gain or loss on a financial liability that is designated as at fair value through
profit or loss as follows:
a. the amount of change in the fair value of the financial liability that is attributable to changes
in the credit risk of that liability shall be presented in other comprehensive income; and
b. the remaining amount of change in the fair value of the liability shall be presented in profit or
loss
Arising from Assets Measured at Fair Value through OCI
A gain or loss on a financial asset measured at fair value through other comprehensive income in
accordance with paragraph 4.1.2A shall be recognized in other comprehensive income, except for
impairment gains or losses and foreign exchange gains and losses, until the financial asset is
derecognized or reclassified.
Presentation
Liabilities and Equity
● The issuer of a financial instrument shall classify the instrument, or its component parts, on
initial recognition as a financial liability, a financial asset or an equity instrument in
accordance with the substance of the contractual arrangement
Compound Financial Instrument
● The issuer of a non‑derivative financial instrument shall evaluate the terms of the financial
instrument to determine whether it contains both a liability and an equity component. Such
components shall be classified separately as financial liabilities, financial assets or equity
instruments.
Treasury Shares
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be
deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale,
issue or cancellation of an entity’s own equity instruments.
Offsetting a Financial Asset and a Financial Liability
A financial asset and a financial liability shall be offset and the net amount presented in the statement
of financial position when, and only when, an entity:
a. currently has a legally enforceable right to set off the recognized amounts; and
b. intends either to settle on a net basis, or to realize the asset and settle the liability
simultaneously.
