IFRS9 Financial Instruments及IFRS15.docx

IFRS 9 Financial InstrumentsFinancial Asset Debt Instrument (Amortized Cost) ImpairmentThe impairment model in IFRS 9 is based on the premise of providing for expected losses.Step 1: The 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); orStep 2: Full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument).A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument hasincreased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15.IFRS 9 Financial InstrumentsFinancial Asset Debt Instrument (Amortized Cost) ImpairmentThe Standard suggests that investment grade rating might be an indicator for a low credit risk.The requirements also contain a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. ACCA-P2 4 IFRS 9 Financial InstrumentsFinancial Asset Debt Instrument (Amortized Cost) ImpairmentTransystems has a portfolio of $40,000 financial assets (debt instruments) that have two years to maturity and are correctly accounted for at amortized cost. Each asset has a coupon rate of 10% as well as an effective interest rate of 10%. No previous impairment loss has been recognized.At the year-end information has emerged that the sector in which the borrowers operate is experiencing tough economic conditions.IFRS 9 Financial InstrumentsFinancial Asset Debt Instrument (Amortized Cost) ImpairmentAfter considering a range of possible outcomes, the overall rate of return from the portfolio is expected to be approximately 8% per annum for each of the next two years.The director of Transystem believe that it is unnecessary to carry out impairment as there is no objective impairment indicator although the credit risk of portfolio has increased significantly since initial recognition. ACCA-P2 5 IFRS 9 Financial InstrumentsFinancial Asset Debt Instrument (Amortized Cost) ImpairmentAs the credit risk of Transystem portfolio has increased significantly, a loss allowance for full lifetime expected credit losses is required. The expected credit loss is $1,388 (i.e. 40,000*2% *0.9091+40,000*2%*0.8264).This is recognized as the impairment loss thus creating an expense to be charged to profit or loss and offset against the carrying value of the financial asset on the statement of financial position.IAS 39 Financial Instruments: Recognition and MeasurementHedging AccountingA hedging relationship qualifies for hedge accounting only if all of the following criteria are met:1. The hedging relationship consists only of eligible hedging instruments and eligible hedged items;2. At the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entitys risk management objective and strategy for undertaking the hedge; ACCA-P2 6 IAS 39 Financial Instruments: Recognition and MeasurementHedging Accounting3. The hedging relationship meets all of the hedge effectiveness requirements:(1) There is an economic relationship between the hedged item and the hedging instrument;(2) The effect of credit risk does not dominate the value changes that result from that economic relationship; and(3) The hedge ratio of the hedging relationship is the same as that actually used in the economic hedge;IAS 39 Financial Instruments: Recognition and MeasurementDiscontinue of HedgesWhen an entity discontinues hedge accounting for a fair value hedge, the hedged items return to the standards it previously belongs to such as IAS 2 inventory.When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash flows are still expected to occur, the amount that has been accumulated in the cash flow hedge reserve (OCI) remains there until the future cash flows occur; if the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified to profit or loss. IAS 39 Financial Instruments: Recognition and MeasurementHedge of a Net InvestmentHedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of a monetary item that is accounted for as part of the net investment, is accounted for similarly to cash flow hedges:1. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized in OCI; and2. The ineffective portion is recognized in profit or loss.IAS 39 Financial Instruments: Recognition and MeasurementHedge of a Net InvestmentThe cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign operation.P2 Corporate ReportingIFRS 15 Revenue fromContracts with CustomersObjective of IFRS 15The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Recognition of RevenueThe core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework.Recognition of Revenue Five Step ModelStep 1: Identify the contract with the customerA contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: The contract has been approved by the parties to the contract; Each partys rights in relation to the goods or services to be transferred can be identified; The payment terms for the goods or services to be transferred can be identified; ACCA-P2 3 Recognition of Revenue Five Step ModelStep 1: Identify the contract with the customerA contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: The contract has commercial substance; and It is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.Recognition of Revenue Five Step ModelStep 2: Identify the performance obligations in the contractAt the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify as a performance obligation: a good or service (or bundle of goods or services) that is distinct; or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Recognition of Revenue Five Step ModelStep 2: Identify the performance obligations in the contractA good or service is distinct if both of the following criteria are met: The customer can benefit from the good or services on its own or in conjunction with other readily available resources; and The entitys promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.Recognition of Revenue Five Step ModelStep 2: Identify the performance obligations in the contractA series of distinct goods or services is transferred to the customer in the same pattern if both of the following criteria are met: Each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time; and A single method of measuring progress would be used to measure the entitys progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. Step 3: Determine the transaction priceThe transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services.Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract includes a significant financing arrangement and, if so, adjust for the time value of money.Recognition of Revenue Five Step ModelStep 4: Allocate the transaction price to the performance obligations in the contractsWhere a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices.Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. Recognition of Revenue Five Step ModelStep 4: Allocate the transaction price to the performance obligations in the contractsIf a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15 suggests various methods that might be used, including: Adjusted market assessment approach; Expected cost plus a margin approach; Residual approach (only permissible in limited circumstances);Recognition of Revenue Five Step ModelStep 5: Recognize revenue when (or as) the entity satisfies aperformance obligationRevenue is recognized as control is passed, either over time or at a point in time. Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. Presentation in Financial StatementsContracts with customers will be presented in an entitys statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entitys performance and the customers payment.A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer.Contract CostThe incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover those costs. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. success fees paid to agents).The asset recognized in respect of the costs to obtain or fulfil a contract is amortized on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates. IFRS 15 ExampleCaravans is a retailer of caravans, dormer vans and mobile homes, with a year end of 31 March 2015. It is now having trouble selling one model the $30,000 Mini-Lux and so is offering incentives for customers who buy this model before 31 March 2015:(i) Customers buying this model before 31 March 2015 will receive a period of interest free credit, provided they pay an installment of $18,000 and the balance of $12,000 on 31 March 2017.IFRS 15 Example(ii) a 3-year service plan, normally worth $1,500, is included free in the price of the caravan. On 31 March 2015, a customer agrees to buy a Mini-lux caravan, paying the installment $18,000 and the delivery was arranged immediately.Required:Explain how to treat the contract in the financial statements for the years ended 31 March 2015 in accordance with IFRS 15 Revenue from contracts with customers assuming a 10% discount rate. The transaction price is would be $27,917 (18,000 + 12,000 * 0.8264) as the second payment would be received two years later. The allocation of transaction price would be on the basis of relative standalone selling price of each distinct good or service is applied. The allocation is as follows: The amount of Mini-Lux = $27,917 * 30,000 / (30,000 + 1,500) = $26,588 The amount of service = $27,917 * 1,500 / (30,000 + 1,500) = $1,329IFRS 15 ExampleOn 31 March 2015, delivery is arranged so the performance obligation of Mini-Lux is satisfied while 3-year service is not performed at this time. The accounting treatment for the revenue recognition, therefore, is as follows:Dr. Cash $18,000Dr. Accounts receivable $9,917Cr. Revenue (P&L) $26,588Dr. Deferred revenue (liability) $1,329 Revenue Application Substance over FormSale and Repurchase Agreements The seller concurrently agrees to repurchase the same goods at a later date, or when the seller has a call option to repurchase, or the buyer has a put option to require the repurchase, by the seller, of the goods.For a sale and repurchase agreement on an asset other than a