International Financial Reporting Standards_guide.pdf

218 Chapter 18 Financial Instruments (IFRS 9)
18.4.2 A financial asset may be measured at amortized cost only if both of the following
requirements are met:
■ it is held within a business model whose objective is to hold assets in order to collect
contractual cash flows; and
■ 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 outstanding.
18.4.3 For the purposes of applying IFRS 9, interest must represent the consideration for the
time value of money and for the credit risk associated with the principal amount outstanding
during a particular period of time.
18.4.4 All financial instruments that are not measured at amortized cost must be measured
at fair value. An instrument that meets the requirements of IFRS 9 to be measured at amortized
cost may be designated at fair value if that designation eliminates or significantly
reduces a measurement or recognition inconsistency.
18.4.5 If a hybrid contract that contains an embedded derivative is in the scope of IFRS 9
the classification requirements are applied to the entire hybrid contract. Embedded derivatives
may not be separated; instead, the entire instrument will be measured at either fair
value or amortized cost based on the classification criteria in IFRS 9. These rules only apply
to hybrid contracts where the host contract is a financial asset. For instruments where the
host contract is a financial liability or a nonfinancial instrument the current IAS 39 rules
remain applicable.
18.4.6 Reclassification of financial instruments is possible only when an entity changes its
business model for managing financial assets. Such changes are expected to be very infrequent
and must be significant to the entity’s operations and demonstrable to external parties.
The reclassification will be applied prospectively from the first day of the reporting period
following the change in business model. For example, if an entity has a financial year from
April 1, X1 to March 31, X2 and the entity has a change in business model on February 15,
X2, the reclassification will take effect from April 1, X2.
18.4.7 Initially financial assets must be measured at fair value, and for financial assets not
measured at fair value through profit or loss, fair value plus transaction costs.
18.4.8 Subsequent to initial recognition, financial assets measured at amortized cost must
be measured in line with the IAS 39 requirements for determining amortized cost. All financial
assets measured at fair value must be measured at fair value in line with the IAS 39
requirements for determining fair value.
18.4.9 At initial recognition an entity may make an irrevocable election to present in other
comprehensive income subsequent changes in the fair value of an investment in an equity
instrument that is not held for trading. Dividends on these investments are recognized in profit
or loss in accordance with IAS 18 when the entity’s right to receive payment is established.
18.4.10 Gains or losses on financial assets measured at amortized cost that are not part of
a hedging relationship are recognized in profit or loss. Gains or losses on financial assets
measured at fair value that are not part of a hedging relationship are recognized in profit or
loss. The only exception is for equity instruments where the entity has elected to present
gains and losses on that instrument in other comprehensive income as per irrevocable election
discussed in 18.4.9 above.