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IFRS FOR INVESTMENT FUNDS May 2012, Issue 4 Welcome to the series Our series of IFRS for Investment Funds publications addresses practical application issues that investment funds may encounter when applying IFRS. It discusses the key requirements and includes guidance and illustrative examples. The issues cover such topics as presentation and measurement of financial assets carried at fair value, liability vs equity classification for financial instruments issued by investment funds andsegment reporting. This series considers accounting issues from currently effective IFRS as well as forthcoming requirements. Further discussion and analysis about IFRS is included in our publication Insights into IFRS. In this issue: Classification of financial assets and liabilities under IFRS 9 IFRS 9 Financial Instruments is to supersede IAS 39 Financial instruments: Recognition and Measurement. Its classification requirements represent a significant change from IAS 39 for financial assets and a limited one for financial liabilities. This publication covers the following key questions related to classification under IFRS 9 which may be of particular interest to investment funds. 1. What are the new classification requirements for financial assets? 2. How are debt investments classified? 3. How is the objective of the business model in which the asset is held assessed? 4. Are the cash flows solely payments of principal and interest? 5. How are contractually linked instruments classified? 6. How are debt investments classified on initial application of IFRS 9? 7. How are investments in equity instruments classified? 8. How are investments in equity instruments classified on initial application of IFRS 9? 9. How are financial liabilities classified? 10.What are the new presentation requirements for financial liabilities designated at fair value through profit or loss? 11. What about reclassification of financial assets and transitional provisions? The standard is effective for annual periods beginning on or after 1 January 2015, with early application permitted. In November 2011 the IASB initiated a project of limited amendments to IFRS 9. In January 2012 the IASB and the FASB decided to jointly redeliberate selected aspects of their classification and measurement models to seek to reduce key differences. The redeliberations are to include the following topics relevant to the classification of financial assets: • business model and cash flow characteristics of financial assets eligible for classification and measurement at amortised cost; • a possible ‘fair value through other comprehensive income’ category for debt investments; and • whether to re-introduce bifurcation of embedded derivatives for financial assets. The target date for issuing an exposure draft with the proposed changes is the second half of 2012. This publication includes the IASB’s tentative decisions on this project up to and including the April 2012 meeting. We have highlighted in each question a potential impact from the IASB discussions assuming that the tentative decisions made up to and including the April 2012 meeting remain unchanged. This publication does not consider financial instruments designated in hedging relationships. 2 | IFRS for Investment Funds 1. What are the new classification requirements for financial assets? IFRS 9 Financial Instruments has introduced new classification categories for financial assets. The classification depends on the type of business model within which those financial assets are held and on the contractual characteristics of a financial asset. There are two classifications: at fair value and at amortised cost. Classification of financial assets upon initial recognition Financial assets under IFRS 9: • amortised cost; and • fair value. Financial assets under IAS 39: • fair value through profit or loss; • held to maturity; • loans and receivables; and • available-for-sale. This publication considers separately classification of debt investments, investments in equity instruments and derivatives. Only debt instruments can be classified as measured at amortised cost. Investments in equity instruments and derivatives are always classified as measured at fair value. Equity instruments are defined in the same way as in IAS 32 Financial Instruments: Presentation. This means that a holder of an investment assesses whether the instrument meets the definition of equity from the perspective of the issuer. The table below summarises the classification and measurement requirements of IFRS 9. Classification and measurement requirements for financial assets under IFRS 9 Debt investments Eligible for classification as measured at amortised cost, if both of the following conditions are met. • The investment is held in a business model whose objective is to collect contractual cash flows (held-to-collect (HTC) business model). • 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 (SPPI). If a financial asset does not meet both of the above criteria, then it is classified as measured at fair value through profit or loss. Investments in equity instruments Classified as measured at fair value. Changes in fair value are recognised: • in profit or loss; or • in other comprehensive income (OCI) if optional election is made. The OCI option does not apply to: • instruments held-for-trading; • puttable instruments and obligations arising on liquidation classified as equity by the issuer by exception; and • derivative instruments that meet the definition of equity of the issuer. Derivatives Classified as measured at fair value. Gains and losses on re-measurement are recognised in profit or loss. © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. IFRS for Investment Funds | 3 Classification and measurement requirements for financial assets under IFRS 9 Debt investments On initial recognition, an investment fund may choose to designate a financial asset that otherwise would qualify for amortised cost accounting as measured as at fair value through profit or loss. This optional designation is permitted only if it eliminates or significantly reduces an accounting mismatch. Further discussed in Questions 2-6. Investments in equity instruments Derivatives Further discussed in Questions 7-8. Another significant change from IAS 39 is the removal of the requirement to separate embedded derivatives from a financial asset host (if the host is within the scope of IFRS 9). Instead, under IFRS 9 the whole combined instrument is assessed for classification either as at fair value or amortised cost. Under IAS 39 an embedded derivative is separated if: • the embedded feature meets the definition of a derivative; • the embedded derivative is not closely related to the host; and • the entire contract is not measured at fair value through profit or loss. IFRS 9 retains the IAS 39 requirement to separate embedded derivatives from host contracts that are: • financial liabilities; • financial assets not within the scope of IFRS 9; and • other contracts not within the scope of IFRS 9. The IASB discussion on limited amendments to IFRS 9 Business model and cash flows characteristics assessment for amortised cost classification for financial assets Under the current version of IFRS 9, a financial asset is required to meet two tests to be eligible for classification at other than fair value. The first test relates to the entity’s business model (see Question 3) and the second test relates to the asset’s cash flow characteristics (see Question 4). The IASB tentatively decided that a financial asset would qualify for amortised cost classification if: • it is held within a business model whose objective is to hold the asset in order to collect contractual cash flows; and • its contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. These tentative decisions are largely in line with the current requirements of IFRS 9. The IASB also tentatively decided to clarify the primary objective of ‘hold to collect’ by providing additional implementation guidance on the types of business activities and the frequency and nature of sales that would prohibit financial assets from qualifying for amortised cost measurement. This may help preparers in navigating the current guidance and examples in IFRS 9 about assessing whether a more than infrequent level of sales is consistent with a ‘hold to collect’ business model (see Question 3). © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | IFRS for Investment Funds Bifurcation of financial assets and financial liabilities IFRS 9 currently does not permit bifurcation of financial assets but requires bifurcation of embedded derivatives from financial liabilities if they are not closely related. At their April 2012 meeting the IASB tentatively decided to retain the current IFRS 9 guidance on bifurcation. This means that financial assets that do not qualify for amortised cost classification (see Question 2) would not be bifurcated; instead, they would be classified and measured in their entirety at fair value through profit or loss. Financial liabilities, on the other hand, would be bifurcated using the existing ‘closely-related’ bifurcation requirements currently in IFRS 9 (see Question 9). In relation to their decision to bifurcate financial liabilities, the IASB also confirmed that the ‘own credit’ guidance in IFRS 9 would be retained (see Question 10). A possible ‘fair value through OCI’ classification category for debt investments At future meetings on the classification and measurement of financial instruments, the IASB will consider a possible third classification category for financial assets – debt instruments measured at fair value through OCI. © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. IFRS for Investment Funds | 5 2. How are debt investments classified? The assessment of whether a debt investment is eligible for classification at amortised cost may involve judgement. Investment funds can use the steps in the flowchart below to help determine the appropriate classification. 1. HTC business model test (see Question 3). Is financial asset held within a HTC business model? No Yes 2. SPPI test (see Question 4). Are the cash flows from the financial asset solely payments of principal and interest? No Yes 3. Fair value option applied? Yes Fair value through profit or loss No Amortised cost IFRS 9 retains the option in IAS 39 to voluntarily designate a financial asset as at fair value through profit or loss. This optional designation is permitted only if it eliminates or significantly reduces a measurement or recognition inconsistency (‘accounting mismatch’) that otherwise would arise from measuring financial assets or financial liabilities, or recognising gains or losses on them, on different bases. ... - tailieumienphi.vn
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