IFRS 9 Financial Instruments Quiz
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Questions and Answers

How should an issuer subsequently measure a contract after initial recognition?

  • At the higher of the loss allowance and the initial amount less cumulative income (correct)
  • At the initial amount plus any future income expected
  • At the lower of the initial amount and the loss allowance
  • At fair value with changes recognised in equity

What should be taken into account when measuring a commitment to provide a loan at a below-market interest rate?

  • The loss allowance and the initial amount less cumulative income, if applicable (correct)
  • Only future cash flows projected from the loan
  • The cumulative income recognised under IFRS 12
  • The initial amount and any changes in market interest rates

What is the method of measuring contingent consideration in a business combination under IFRS 3?

  • At fair value with changes recognised in profit or loss (correct)
  • At the initial recognition amount adjusted for inflation
  • At historical cost less any previous adjustments
  • At the amount initially recognised with annual adjustments

Which section outlines how to determine the loss allowance for an issuer's contracts?

<p>Section 5.5 (B)</p> Signup and view all the answers

In what scenario is the measurement of the amount initially recognised relevant?

<p>When calculating cumulative income recognised under IFRS 15 (B)</p> Signup and view all the answers

What is the main objective of IFRS 9?

<p>To provide a comprehensive framework for financial instrument accounting. (D)</p> Signup and view all the answers

Which of the following reflects the format of the IFRS 9 document?

<p>It includes appendices A to C and emphasizes principles in bold type. (C)</p> Signup and view all the answers

What does IAS 8 provide guidance on?

<p>Selecting and applying accounting policies in absence of explicit guidance. (B)</p> Signup and view all the answers

What was one of the approvals by the IFRS Board in July 2014?

<p>Issue of IFRS 9 Financial Instruments. (A)</p> Signup and view all the answers

Which amendment was issued in October 2017 regarding IFRS 9?

<p>Prepayment Features with Negative Compensation. (A)</p> Signup and view all the answers

Which of the following statements accurately describes the authority of IFRS 9?

<p>All paragraphs have equal authority. (C)</p> Signup and view all the answers

What significant concept does Appendix A in IFRS 9 focus on?

<p>Defined terms relevant to IFRS 9. (D)</p> Signup and view all the answers

What is the purpose of the Basis for Conclusions in IFRS 9?

<p>To provide the rationale behind key principles of the standard. (C)</p> Signup and view all the answers

What method shall be used to calculate interest revenue for financial assets?

<p>Effective interest method (B)</p> Signup and view all the answers

Which financial assets require the use of the credit-adjusted effective interest rate from initial recognition?

<p>Purchased or originated credit-impaired financial assets (A)</p> Signup and view all the answers

What should an entity do if it chooses to apply IAS 39's hedge accounting requirements?

<p>Disregard the relevant hedge accounting requirements in Chapter 6 (C)</p> Signup and view all the answers

What must an entity apply to financial assets that subsequently become credit-impaired?

<p>Effective interest rate (C)</p> Signup and view all the answers

Which of the following statements is true regarding hedge accounting?

<p>Financial liabilities can be designated as hedged items. (A)</p> Signup and view all the answers

When does an entity recognize the date of initial recognition for loan commitments and financial guarantee contracts?

<p>When the entity becomes a party to the irrevocable commitment (A)</p> Signup and view all the answers

What should an entity do if it previously measured the loss allowance at lifetime expected credit losses but no longer meets the requirement for it?

<p>Measure the loss allowance at an amount equal to 12-month expected credit losses (C)</p> Signup and view all the answers

How should an entity recognize the adjustment of the loss allowance at the reporting date?

<p>In profit or loss as an impairment gain or loss (C)</p> Signup and view all the answers

What does an entity assess at each reporting date regarding credit risk?

<p>Whether the credit risk on a financial instrument has increased significantly (D)</p> Signup and view all the answers

What should an entity compare to assess significant increases in credit risk?

<p>The risk of default as at the reporting date with the risk at initial recognition (B)</p> Signup and view all the answers

What can an entity assume if a financial instrument is determined to have low credit risk at the reporting date?

<p>The credit risk has not increased significantly since initial recognition (B)</p> Signup and view all the answers

What is the primary basis for measuring expected credit losses?

<p>The change in the risk of default occurring (A)</p> Signup and view all the answers

Which of the following statements is true regarding the recognition of expected credit losses?

<p>Expected credit losses must be recognized as an impairment adjustment at the reporting date (C)</p> Signup and view all the answers

What should an entity do when there is reasonable and supportable forward-looking information available?

<p>Consider both forward-looking and past due information. (D)</p> Signup and view all the answers

Under what condition can an entity use past due information to assess significant increases in credit risk?

<p>When the information is not available without undue cost or effort. (D)</p> Signup and view all the answers

What is the rebuttable presumption regarding credit risk when contractual payments are more than 30 days past due?

<p>Credit risk has increased significantly since initial recognition. (C)</p> Signup and view all the answers

When is a gain or loss on a financial asset measured at fair value recognized in profit or loss?

<p>When it is part of a hedging relationship (C)</p> Signup and view all the answers

Under what circumstance is a gain or loss from an equity instrument not recognized in profit or loss?

<p>If the entity elects to present it in other comprehensive income (D)</p> Signup and view all the answers

When can the rebuttable presumption of increased credit risk be rebutted?

<p>When reasonable and supportable information shows risk has not increased. (C)</p> Signup and view all the answers

What must an entity assess if the contractual cash flows of a financial asset have been modified?

<p>Whether there is a significant increase in credit risk. (A)</p> Signup and view all the answers

What must occur for dividends to be recognized in profit or loss?

<p>The right to receive the payment must be established (C)</p> Signup and view all the answers

When is a gain or loss on a financial asset measured at amortized cost recognized?

<p>When the asset is derecognized or reclassified (A)</p> Signup and view all the answers

Which of the following is a criterion for determining significant increases in credit risk?

<p>Comparison of default risk at the reporting date to initial recognition. (D)</p> Signup and view all the answers

What does not apply when an entity finds significant increases in credit risk before contractual payments are more than 30 days past due?

<p>The presumption cannot be rebutted. (C)</p> Signup and view all the answers

What type of financial liability's changes in credit risk are presented in other comprehensive income?

<p>Financial liabilities designated at fair value through profit or loss (B)</p> Signup and view all the answers

What basis forms the comparison for assessing the risk of default on a modified financial asset?

<p>Both modified and original contractual terms. (D)</p> Signup and view all the answers

What is required for an entity to recognize impairment gains or losses?

<p>The decline in value must be permanent (D)</p> Signup and view all the answers

What should an entity do if it reclassifies financial assets out of the amortized cost measurement category?

<p>Apply specific paragraphs related to reclassification (A)</p> Signup and view all the answers

Which of the following conditions is NOT necessary for recognizing dividends in profit or loss?

<p>The dividend must be declared by the board (C)</p> Signup and view all the answers

Flashcards

Loss allowance measurement

The amount of loss that is anticipated on a contract, calculated according to Section 5.5.

Initial Recognition Amount

The amount a contract was initially recognized at.

Cumulative Income

The total amount of income recognized over the life of the contract, following IFRS 15.

Fair Value

The current market price of a contingent consideration to be subsequently measured.

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Subsequent Measurement

Re-evaluating a contract's value. Based on higher of loss allowance or initial recognition, less any recognized income (IFRS 15).

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IFRS 9 Financial Instruments

A standard for the accounting of financial instruments, outlining principles and requirements.

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Accounting Policies

Policies used to select and apply accounting methods. IAS 8 provides a guide if no specific IFRS exists.

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Defined Terms (Appendix A)

Key terms used in IFRS 9, with italics when first appearing, for precise understanding.

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Transition (IFRS 9)

The process for adopting and shifting to IFRS 9 accounting standards.

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Amendments to IFRS 9

Updates and changes to the IFRS 9 standard that refine or improve the guidance.

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Hedge Accounting

IFRS 9 part that addresses accounting for hedging activities, linking to other standards.

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IFRS 9 (Date)

Standard's release date, affecting when the rules must be used.

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Application Guidance (Appendix B)

Clarification and examples relating to the implementation and usage of IFRS 9.

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Hedge accounting requirements (IFRS 9)

Rules for how to account for financial instruments that are used to hedge risks. Follows IFRS 9 standards or IAS 39, depending on the entity's choice.

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Effective Interest Method

A way to calculate interest revenue on financial assets. The interest rate is applied to the carrying amount of the asset.

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Credit-impaired financial asset (purchased/originated)

Financial assets where there's a significant risk the borrower may not pay back the loan.

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Amortized cost accounting (financial assets)

Method of accounting for the change in value of a financial asset, calculating interest based on effective interest rate

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Subsequently credit-impaired financial assets

Financial assets that were previously not deemed credit-impaired, but then meet the criteria for impairment.

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Irrevocable Commitment Date

The date when an entity becomes obligated to a loan commitment or financial guarantee, marking the start of impairment assessment.

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Lifetime Expected Credit Losses (ECL)

The total amount of losses an entity anticipates over the entire life of a financial instrument.

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12-Month Expected Credit Losses (ECL)

The losses an entity expects to incur within the next 12 months on a financial instrument.

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Significant Increase in Credit Risk

A considerable change in the likelihood of a borrower defaulting on a financial instrument since it was initially recorded.

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Assessing Credit Risk Changes

Comparing the probability of default at the current reporting date to the initial recording date to determine if credit risk has significantly increased.

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Low Credit Risk

A financial instrument where the risk of the borrower defaulting is considered minimal.

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Impairment Gain or Loss

The adjustment made to the loss allowance on a financial instrument due to changes in credit risk, recognized in profit or loss.

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Reasonable and Supportable Information

Data used to assess credit risk changes that is reliable and obtainable without excessive cost or effort.

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Past Due Information

Data about a borrower's previous payment history, specifically when payments were missed or delayed.

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Rebuttable Presumption

An assumption that a borrower's credit risk has increased significantly when payments are more than 30 days late, but this assumption can be challenged with supporting evidence.

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Undue Cost or Effort

The cost of obtaining information about a borrower's credit risk is too high or the process requires too much effort.

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Renegotiated Contractual Cash Flows

Changes made to the original terms of a loan agreement, for example, adjusting the payment schedule or interest rate.

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Modified Financial Asset

A financial asset that has undergone changes to its contractual cash flows, such as renegotiation or modification, without being fully derecognized.

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Risk of Default at Initial Recognition

The estimated probability of a borrower failing to meet their debt obligations at the time the loan was first granted.

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Risk of Default at Reporting Date

The estimated probability of a borrower failing to meet their debt obligations as of the current reporting date, taking into account any changes to the loan agreement.

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Gain or Loss Recognition

Changes in fair value of a financial asset or liability are generally recognized in profit or loss, unless specified exceptions apply.

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Hedging Relationship Exception

Gains or losses on financial assets or liabilities within a hedging relationship are not recognized in profit or loss.

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Equity Investment Exception

Gains and losses on certain equity investments can be presented in other comprehensive income, if the entity chooses to do so.

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Financial Liability Exception

Changes in the credit risk of a financial liability designated at fair value through profit or loss may be presented in other comprehensive income.

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Fair Value Through Other Comprehensive Income

Some changes in the fair value of financial assets measured at fair value through other comprehensive income are recognised in other comprehensive income.

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Dividend Recognition

Dividends are recognized in profit or loss only when the right to receive payment is established, it is probable that the economic benefits will flow to the entity, and the amount can be measured reliably.

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Amortised Cost Gain or Loss Recognition

Gains or losses on financial assets measured at amortised cost are recognized in profit or loss when the asset is derecognised, reclassified, through amortisation, or for impairment.

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Reclassification from Amortised Cost

If a financial asset is reclassified out of the amortised cost measurement category, specific rules apply.

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Study Notes

IFRS 9 Financial Instruments

  • Adoption of IAS 39: The International Accounting Standards Board (IASB) adopted IAS 39 in 2001, for the recognition and measurement of financial instruments originally issued by the IAS Committee in 1999.
  • Replacement of IAS 39: The IASB intended IFRS 9 to entirely replace IAS 39. This was implemented in phases, with new chapters replacing corresponding sections of IAS 39 as those phases were completed.
  • Financial Asset Classification and Measurement: IFRS 9 introduced classification and measurement requirements for financial assets in 2009.
  • Financial Liability Classification and Measurement: In 2010, IFRS 9 included requirements for financial liability classification and measurement, including embedded derivatives and own credit risk.
  • Derecognition: IFRS 9 standardized requirements for derecognizing financial assets and liabilities, including carrying forward some existing IAS 39 requirements.
  • Hedge Accounting chapter: IFRS 9 added a chapter on hedge accounting in 2013. Entities have the option to use either IFRS 9 or IAS 39 for hedge accounting, and both remain effective.
  • Limited Amendments (2014): IFRS 9 was amended in 2014 addressing certain application questions and introducing a 'fair value through other comprehensive income' measurement category for debt instruments. Impairment requirements related to expected credit losses were also added.
  • Amendments to IFRS 17 (2017): IFRS 17 on Insurance Contracts amended IFRS 9's derecognition requirements.
  • Amendments (2017): Prepayment Features with Negative Compensation (Amendments to IFRS 9) were added in 2017, to specify the measurement of particular financial assets with prepayment features.
  • Interest Rate Benchmark Reform: Amendments were made in 2019 and 2020 to IFRS 9 and IAS 39, IFRS 7, IFRS 4, and IFRS 16, regarding interest rate benchmark reform to financial instruments and hedging relationships.

IFRS 9 Structure and Content

  • Objective: To establish principles for financial reporting of financial instruments with a focus on presenting relevant and useful information to users (investors) for assessing future cash flows.
  • Scope: Covers the financial reporting of all financial instruments, excluding certain interests in subsidiaries, associates, and joint ventures, and rights and obligations under leases. Specific exclusions are detailed.
  • Recognition and Derecognition: Provides guidance on when to recognize and when to remove financial assets and financial liabilities from financial statements.
  • Classification: Describes how to classify financial assets as subsequently measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss, depending on their business model and contractual cash flows.
  • Measurement: Covers initial and subsequent measurement, including impairment, of assets relating to the classification.
  • Hedge Accounting: Detailing the requirements for hedging accounting.
  • Effective Date and Transition: Specifies the effective date of the standard including transition guidance.
  • Amendments: Describes specific amendments and transitions to the IFRS 9 standard. It is critical to follow any amendments to the standard because otherwise the approach is not considered up-to-date.

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IFRS 9 Financial Instruments PDF

Description

Test your understanding of IFRS 9 and its application in financial instruments. This quiz covers key concepts such as measurement of contracts, loan commitments, contingent considerations, and the role of IAS 8. Enhance your knowledge of IFRS guidelines and their implications in financial reporting.

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