Recognition of

Financial
Instruments

This topic covers page 10-9 to 10-15 of the book.

 Lesson Objectives
 To understand the scope and initial recognition of the
Financial Instruments.

 State the classifications of Financial Assets and Financial

Liabilities

 Describe the Accounting Treatment used in the Financial

Instruments
 SCOPE OF THE
RECOGNITION
IFRS 9 – Financial Instruments
● Establishes the principles for recognizing and measuring financial
assets and liabilities.
● Applies to all entity and to all types of financial instruments except
those specifically excluded,
 Investments
 Subsidiaries
 Associates
 Joint Ventures
 Other Joint arrangements
Initial Recognition

“A financial asset or financial liability should be recognized in the

Statement of Financial Position when the reporting entity
becomes a party to the contractual provisions of the instruments.
Regular Ways of Transactions

01 02
Trade Date Accounting Settlement Date Accounting

At the Trade Date At the Settlement

Fair Value
Date
Same way as the asset itself
depending on its
classification.
Derecognition of Financial Instruments
An entity should derecognized a financial asset when:
• The contractual rights to the cash flows from the financial asset expires
• It transfers substantially all the risks and rewards of the ownership to
another party.

An entity should derecognized a financial liability when it EXTINGUISHES.

Discharged Cancelled Expires

Risk and Rewards Test
Control Test
Is it possible for only the part of a financial asset or liability to be
derecognized?

YES, This is allowed if the part comprises;

a) Only specifically identified cash flows: or
b) Only a fully proportionate (pro rata) share of the total cash flows.

The amount to be included in the net profit or loss for the period is calculated as
follows:

Carrying Amount of Asset/Liability (portioned) Transferred xxx

Less Proceeds received/paid
(xxx)
Difference to profit or loss
xxx
Classification of

Financial
Instruments
Classification of
Financial Asset
 Test Category

01 02
Business Contractual
Model Cash Flows
Characteristics

*Think of it as BONDS
Objective of it is which the asset is to hold
assets to collect contractual cash Give rise on specified date to cash flows
flows. that are solely payments of principal
and interest on the principle amount
of outstanding.
Business Model Test in Detail
 An assessment of the “business model” is not made at an individual financial instrument level.
 The assessment is based on how the key management personnel actually manage the
business, rather than management’s intentions for specific financial assets.
 An entity may have more than one business model for managing its financial assets and the
classification need not to be determined at the reporting entity level.
 Although the objective of an entity’s business model may be to hold financial asset to collect
contractual cash flows, the entity’s need not to hold all those assets until maturity.

Contractual Cash Flows Characteristics

 Contractual cash flows that are solely payments of principal and interest on the principal
amount outstanding are consistent with a basic lending arrangement. In a basic lending
arrangement, consideration for the time value of money and credit risk are typically the most
significant elements of interest.
Classification of Financial Asset
IFRS 9 requires that financial assets are
classified as measured at either:

-01- -02- -03-

Amortization Fair Value through Other Fair Value through
Cost Comprehensive
Income Profit or Loss
(FVOCI) (FVTPL)

{Business Model and {All financial assets that

Contractual Cash {Choice: Financial Asset is not held for trading
doesn’t meet any of the
Flows} Debt: Business Model and Contractual Cash Flows } tests}
 Factoring of
Receivables
The business model test must be considered in the case of factoring.
• The receivables are SOLD to the factor, which then collects the cash from the customers.
• The factor buys accounts receivables as it makes a profit either by charging a fee, charging an
interest or by paying below the face value of the receivables.

a) With recourse – means that the seller has to compensate the factor for any unpaid receivables.
b) Without recourse – means that the factor bears the cost of unpaid receivables. There will be a
higher charge for this service to compensate the factor for the higher risks taken.
 Factoring without
Recourse
Company A transfers $500 million of receivables, without recourse, for proceeds of
$400 million. The journal entry would be as follows:

Note: $100 million is considered interest expense. It shows that the company obtained cash flow earlier than it would have if it
waited for the receivables to be collected.
 Factoring with
Recourse
Company A transfers $500 million of receivables, with recourse, for proceeds of $450 million less a
$50 million holdback. Later on, the factor is able to collect receivables of $490 million ($10 million
receivables uncollectible). The journal entries are as follows, with the initial journal entry below:
 Factoring with Recourse
Note: The account “Due from factor” is the potential payment for possible non-collectibles.
After the factor collected $490 million of receivables ($10 million uncollectible):
 Accounting for Factoring of
Receivables
1. If the receivables have been sold, then there will be the removed from the balance sheet
and replaced by cash. However, if the seller retains significant risks and benefits relating to
receivables like, slow payment risks, non-payment risks and the benefits of being paid more or
sooner than expected, the seller should continue to recognize asset and the proceeds of sale
will be recognized as a liability in the balance sheet.

2. IF ALL THE BENEFITS AND RISKS HAVE BEEN DISPOSED OF, then there is a genuine sale
and the receivables will be derecognized. The difference between the net proceeds plus any
amount retained by the factor and the amortized cost (face-allowances for returns, discounts
and bad debt, if any) of the receivables factored will be charged to profit or loss. Any amount
by the factor (e.g. Factors’ Holdback or Receivables from Factors) is recognized and reported
as current asset, a portion retained to cover probable sales returns, discount and allowance.
Re-Classification of Financial Assets

● An entity changes its business model for managing financial assets it should

reclassify all affected financial assets based on general classification criteria.

Reclassification is accounted for prospectively from the reclassification date which
is the first day of the first reporting period following the change in business model
that results in an entity reclassifying financial assets.
● Reclassification of financial liabilities is not allowed .
 Classification of
Financial Liabilities
 Classification of
Financial Liabilities

Fair Value through

Amortization Cost
Profit or Loss

• Held of trading
• Upon initial recognition it is
designation at fair value through
profit and loss.
THANKS
FOR
LISTENING!!

about the
topic
Ask a questions if there are
any clarifications you want
to elaborate..
“If naglisod ka sa Accounting. Ayaw
kabalaka! Mas naglisod sad ko ;)”

-someone from accounting

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