IFRS 9 – Financial Instruments

Part 1: Introduction + Executive Summary
Part 2: Financial Instruments – Introduction

Part 3: Financial Instruments Standards – IAS 32/IAS 39/IFRS 7/IFRS 9, Recognition and Measurement

Part 4: Financial asset, Financial Liability
Part 5: Appendix

Read IFRS 9 Summary Online  IFRS 9 Test

2 Financial Instruments Standards – IAS 32/IAS 39/IFRS 7/IFRS 9

Financial instruments are evolving specie in the world of business and thus standardizing such thing that is still evolving is a quite a challenge. For the same reason accounting world is also adapting to it. With IAS 32 and 39 as the first attempt we now have four different standards at the moment covering different aspects of financial instruments in bits and pieces.

As of now we have four different standards as follows:

IAS 32: guiding on presentation of financial instruments

IAS 39: This standard is to be replaced completely by IFRS 9 in near future and thus cover those areas that are yet to be covered by IFRS 9. This relates to much important area which is recognition and measurement but only for those cases where IFRS 9 is still catching up or for which IFRS 9 is not yet applicable.

IFRS 7: details guidance on disclosures of financial instruments

IFRS 9: As mentioned earlier contains guidance on measurement and recognition on financial instruments that will ultimately replace IAS 39.

What is financial instrument?

As described in the introduction 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

2.1 What is financial asset?

A financial asset is any asset that is:

  1. cash;
  2. an equity instrument of another entity;
  3. a contractual right:
    1. to receive cash or another financial asset from another entity; or
    2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
  4. a contract that will or may be settled in the entity’s own equity instruments and is:
    1. a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s  own equity instruments; or
    1. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another  financial asset for a fixed number of the entity’s own equity instruments.

2.2 What is financial liability?

A financial liability is any liability that is:

  1. a contractual obligation:
    1. to deliver cash or another financial asset to another entity; or
    2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
  2. a contract that will or may be settled in the entity’s own equity instruments and is:
    1. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
    2. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

3 Recognition and measurement

As financial instruments results in assets and liabilities therefore, guidance was needed on recognition of assets/liabilities and their measurement. However, the case with financial instruments is a little different from usual assets and liabilities.

We will be discussing the recognition, classification and measurement of assets and liabilities separately by dividing the discussion for each as follows:

  1. Initial recognition, and initial measurement
  2. Subsequent classification and subsequent measurement
  3. Derecognition