Questions and Answers
What does PFRS 9 establish?
PFRS 9 applies to all financial instruments except those dealt under other standards.
True
When does the initial recognition of financial assets and liabilities occur?
Only when the entity becomes party to the contractual provisions of the instrument.
The classification of financial assets includes _____, FVOCI, and FVPL.
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What are the two bases for classifying financial assets?
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Match the classification types with their conditions:
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The hold to collect business model is appropriate even if some sales are expected to occur in the future.
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What describes a held for trading security?
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Debt instruments can be measured at amortized cost or FVOCI.
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What must be true for equity instruments to be measured at FVPL?
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Financial assets that do not qualify under the SPPI test are classified as _____ at FVPL.
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How are financial assets initially measured?
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Gains and losses on financial assets measured at FVPL are recognized in profit or loss.
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What happens when a financial asset is derecognized?
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Financial liabilities are subsequently measured at _____ after initial recognition.
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Reclassification of financial liabilities is allowed at initial recognition.
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What is the initial measurement of financial liabilities?
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Study Notes
PFRS 9 Overview
- Establishes financial reporting principles for financial assets and liabilities, focusing on classification and measurement.
- Applies to all financial instruments except those governed by other standards.
Initial Recognition
- Financial assets (FA) and financial liabilities (FL) are recognized only when the entity becomes party to the contractual provisions.
Classification of Financial Assets
- Classification categories include Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI), and Fair Value through Profit or Loss (FVPL).
- Classification depends on the entity's business model and the cash flow characteristics of the asset.
Amortized Cost Classification
- Must be classified as amortized cost if:
- The business model is to hold to collect cash flows.
- Qualifies under the Solely Payments of Principal and Interest (SPPI) test.
FVOCI Classification
- Requires a business model of holding to collect and sell.
- Must also meet the SPPI test.
FVPL Classification
- Applied when the financial asset does not satisfy the conditions for Amortized Cost or FVOCI, such as held for trading securities.
Exceptions in Asset Classification
- Allows for irrevocable election on initial recognition to classify equity instruments as FVOCI.
- Prevents or reduces accounting mismatches.
Investment in Equity Securities
- Classified as FVOCI if elected.
Measurement of Financial Assets
- Initially measured at fair value plus transaction costs, except FVPL which expensed transaction costs.
- Principal changes over the asset's life and fair value reflects current market conditions.
Transaction Costs
- Incremental costs directly attributable to acquisition or disposal, different from general costs.
Subsequent Measurement
- Financial assets are subsequently measured at Amortized Cost, FVOCI, or FVPL.
- Gains and losses for FVPL recognized in profit or loss; for FVOCI, recognized in other comprehensive income (OCI) with exceptions for impairment losses.
Derecognition of Financial Assets
- Derecognition occurs when contractual rights expire or assets are transferred.
Business Model Concept
- Defines how an entity manages financial assets to generate cash flows, impacting the classification.
Impairment Model
- PFRS 9 uses the expected credit loss model for assets measured at Amortized Cost or FVOCI.
- For assets measured at FVPL, changes are recognized as unrealized gains or losses.
Classification and Measurement of Financial Liabilities
- Generally measured at amortized cost.
- FL may be classified at FVPL under certain conditions.
- Reclassification of financial liabilities after initial recognition is prohibited.
Initial Measurement of Financial Liabilities
- Initially measured at fair value minus transaction costs.
Subsequent Measurement of Financial Liabilities
- Financial liabilities classified as held for trading are measured at fair value with profit or loss impact from changes in fair value.
- Designated FVPL liabilities are also measured at fair value, potentially impacting OCI or profit and loss.
Key Terms
- SPPI Test: Criteria for cash flow characteristics of financial assets to qualify for amortized cost.
- Effective Interest Method: Used to calculate interest recognized in profit or loss.
Each point distills critical information on PFRS 9, capturing its essence and applications in financial reporting.
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Description
This quiz provides an overview of PFRS 9, focusing on the principles of financial reporting related to financial assets and liabilities. You will learn about the classification categories, initial recognition, and specifics of Amortized Cost and FVOCI classifications. Test your knowledge on how these classifications impact financial instruments.
