AASB 9 Financial Instruments December 2010 (Cth)
| Compiled AASB Standard | AASB 9 |
Financial Instruments
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. Early application is permitted. It incorporates relevant amendments made up to and including 17 December 2014.
Prepared on 20 March 2015 by the staff of the Australian Accounting Standards Board.
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COPYRIGHT
© 2015 Commonwealth of Australia
This compiled AASB Standard contains IFRS Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The Director of Finance and Administration, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007.
All existing rights in this material are reserved outside Australia.
Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Australia should be addressed to the IFRS Foundation at align="center">CONTENTS
COMPILATION DETAILS
COMPARISON WITH IFRS 9
ACCOUNTING STANDARD
AASB 9 FINANCIAL INSTRUMENTS
Paragraphs
Objective and application 1.1 – Aus1.8
Scope 2.1
Recognition and derecognition
Initial recognition 3.1.1
Regular way purchase or sale of financial assets 3.1.2
Derecognition of financial assets 3.2.1 – 3.2.9
Transfers that qualify for derecognition 3.2.10 – 3.2.14
Transfers that do not qualify for derecognition 3.2.15
Continuing involvement in transferred assets 3.2.16 – 3.2.21
All transfers 3.2.22 – 3.2.23
Derecognition of financial liabilities 3.3.1 – 3.3.4
Classification
Classification of financial assets 4.1.1 – 4.1.4
Option to designate a financial asset at fair value through profit or loss 4.1.5 – 4.1.6
Classification of financial liabilities 4.2.1
Option to designate a financial liability at fair value through profit or loss 4.2.2 – 4.2.3
Embedded derivatives 4.3.1
Hybrid contracts with financial asset hosts 4.3.2
Other hybrid contracts 4.3.3 – 4.3.7
Reclassification 4.4.1 – 4.4.3
Measurement
Initial measurement 5.1.1 – 5.1.3
Subsequent measurement of financial assets 5.2.1 – 5.2.3
Subsequent measurement of financial liabilities 5.3.1 – 5.3.2
Reclassification of financial assets 5.6.1 – 5.6.3
Gains and losses 5.7.1 – 5.7.4
Investments in equity instruments 5.7.5 – 5.7.6
Liabilities designated as at fair value through profit or loss 5.7.7 – 5.7.9
Hedge accounting
Objective and scope of hedge accounting 6.1.1 – 6.1.3
Hedging instruments
Qualifying instruments 6.2.1 – 6.2.3
Designation of hedging instruments 6.2.4 – 6.2.6
Hedged items
Qualifying items 6.3.1 – 6.3.6
Designation of hedged items 6.3.7
Qualifying criteria for hedge accounting 6.4.1
Accounting for qualifying hedging relationships 6.5.1 – 6.5.7
Fair value hedges 6.5.8 – 6.5.10
Cash flow hedges 6.5.11 – 6.5.12
Hedges of a net investment in a foreign operation 6.5.13 – 6.5.14
Accounting for the time value of options 6.5.15
Accounting for the forward element of forward contracts and foreign currency basis spreads of financial instruments 6.5.16
Hedges of a group of items
Eligibility of a group of items as the hedged item 6.6.1
Designation of a component of a nominal amount 6.6.2 – 6.6.3
Presentation 6.6.4 – 6.6.5
Nil net positions 6.6.6
Option to designate a credit exposure as measured at fair value through profit or loss
Eligibility of credit exposures for designation at fair value through profit or loss 6.7.1
Accounting for credit exposures designated at fair value through profit or loss 6.7.2 – 6.7.4
Effective date and transition
Effective date 7.1.2 – 7.1.4
Transition 7.2.1 – 7.2.14
Entities that have applied AASB 9 (2009) or AASB 9 (2010) early 7.2.15
Transition for hedge accounting (Chapter 6) 7.2.16 – 7.2.21
Appendices:
A. Defined Terms Page 30
B. Application Guidance Page 32
DELETED IFRS 9 TEXT Page 73
IMPLEMENTATION GUIDANCE ON IFRS 9
(available on the AASB website)
BASIS FOR CONCLUSIONS ON IFRS 9
(available on the AASB website)
Australian Accounting Standard AASB 9 Financial Instruments (as amended) is set out in paragraphs 1.1 – 7.2.21 and Appendices A and B. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. AASB 9 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
COMPILATION DETAILS
Accounting Standard AASB 9 Financial Instruments as amended
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. It takes into account amendments up to and including 17 December 2014 and was prepared on 20 March 2015 by the staff of the Australian Accounting Standards Board (AASB).
This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 9 (December 2010) as amended by other Accounting Standards, which are listed in the Table below.
Table of Standards
| Standard | Date made | Application date | Application, saving or transitional provisions |
| AASB 9 | 6 Dec 2010 | (beginning) 1 Jan 2018 | see (a) below |
| AASB 2011-7 | 29 Aug 2011 | (beginning) 1 Jan 2013 | see (b) below |
| AASB 2011-8 | 2 Sep 2011 | (beginning) 1 Jan 2013 | see (c) below |
| AASB 2012-6 | 10 Sep 2012 | (beginning) 1 Jan 2013 | see (d) below |
| AASB 2013-9 | 20 Dec 2013 | Pt B (beginning) 1 Jan 2014 Pt C (beginning) 1 Jan 2015 | see (e) below see (f) below |
| AASB 2014-1 | 4 Jun 2014 | Pt A (beginning) 1 Jul 2014 Pt E (beginning) 1 Jan 2017 | see (g) below see (h) below |
| AASB 2014-5 | 12 Dec 2014 | (beginning) 1 Jan 2017 | see (i) below |
| AASB 2014-8 | 17 Dec 2014 | (beginning) 1 Jan 2015 | see (j) below |
(a) AASB 9 applies to annual reporting periods beginning on or after 1 January 2018 (instead of 1 January 2017) as a result of amendments made by Part E of AASB 2014-1 Amendments to Australian Accounting Standards.
Entities may elect to apply this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9.
(b) AASB 2011-7 has been amended by AASB 2012-6 (made 10 September 2012) and AASB 2012-10 (made 18 December 2012).
Entities may elect to apply the amendments to AASB 9 in this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9, provided that AASB 10 Consolidated Financial Statements and associated Standards are also applied.
(c) AASB 2011-8 has been amended by AASB 2011-10 (made 5 September 2011) and AASB 2012-6 (made 10 September 2012).
Entities may elect to apply the amendments to AASB 9 in this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9, provided that AASB 13 Fair Value Measurement is also applied to such periods.
(d) Entities may elect to apply the amendments to AASB 9 in this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9.
(e) Early application of Part B of this Standard is not permitted.
(f) Entities may elect to apply Part C of this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9.
(g) Entities may elect to apply the amendments to AASB 9 in Part A of this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 July 2014.
(h) Entities may elect to apply Part E of this Standard as set out in paragraphs Aus1.3 and Aus1.4 of AASB 9.
(i) Entities may elect to apply the amendments to AASB 9 (2010) in this Standard only as set out in paragraph Aus1.4 of AASB 9 (2010), provided that AASB 15 Revenue from Contracts with Customers is also applied to such periods.
(j) Entities may elect to apply the amendments to AASB 9 (2010) in this Standard if, and only if, the entity’s date of initial application is before 1 February 2015.
Table of Amendments
| Paragraph affected | How affected | By … [paragraph] |
| Aus1.3 | amended amended amended amended | AASB 2012-6 [13] AASB 2013-9C [63] AASB 2014-1E [65] AASB 2014-8 [8] |
| Aus1.4 | amended | AASB 2014-8 [8] |
| Aus1.5 | deleted | AASB 2014-8 [8] |
| Aus1.6 | deleted | AASB 2013-9B [37, 38] |
| Aus1.7 | amended amended amended amended | AASB 2012-6 [13] AASB 2013-9C [63] AASB 2014-1E [65] AASB 2014-8 [8] |
| 3.1.1 | amended | AASB 2014-5 [23] |
| 3.2.1 | amended amended | AASB 2011-7 [25] AASB 2012-6 [14, 29] |
| 3.2.14 | amended amended | AASB 2011-8 [28] AASB 2012-6 [15, 39] |
| 4.2.1 | amended amended | AASB 2014-1A [22] AASB 2014-5 [23] |
| 4.2.2-4.2.3 | amended | AASB 2013-9C [64] |
| 4.3.7 | amended amended | AASB 2011-8 [28] AASB 2012-6 [15, 39] |
| 4.4.3 | amended | AASB 2013-9C [64] |
| 5.1.1 | amended amended amended | AASB 2011-8 [28] AASB 2012-6 [15, 39] AASB 2014-5 [23] |
| 5.1.1A | added amended | AASB 2011-8 [29] AASB 2012-6 [15, 39] |
| 5.1.3 | added | AASB 2014-5 [23] |
| 5.2.1 | amended amended amended amended | AASB 2011-8 [30] AASB 2012-6 [15, 39] AASB 2013-9C [65] AASB 2014-5 [23] |
| 5.2.2-5.2.3 | amended | AASB 2013-9C [65] |
| 5.3.1 | amended | AASB 2013-9C [65] |
| 5.3.2 | amended amended | AASB 2013-9C [65] AASB 2014-1E [66] |
| 5.4.1-5.4.3 (and preceding heading) | deleted amended | AASB 2011-8 [31] AASB 2012-6 [15, 39] |
| 5.6.2 | amended amended | AASB 2011-8 [32] AASB 2012-6 [15, 39] |
| 5.7.1 | amended | AASB 2013-9C [65] |
| 5.7.1A | added | AASB 2014-5 [23] |
| 5.7.2-5.7.4 | amended | AASB 2013-9C [65] |
| 5.7.5 | amended | AASB 2014-1A [22] |
| 5.7.6 | amended | AASB 2014-5 [23] |
| 6.1-6.4 (and preceding headings) | added | AASB 2013-9C [66] |
| 6.4.1 | added amended | AASB 2013-9C [66] AASB 2014-1E [67] |
| 6.5-6.5.7 | added | AASB 2013-9C [66] |
| 6.5.8-6.5.9 (and preceding headings) | added | AASB 2013-9C [66] |
| 6.5.10 | added amended | AASB 2013-9C [66] AASB 2014-1E [68] |
| 6.5.11-6.7.4 (and preceding headings) | added | AASB 2013-9C [66] |
| 7.1.1 | note amended | AASB 2014-8 [9] |
| 7.1.2 | added amended amended amended | AASB 2011-7 [25] AASB 2012-6 [14, 29] AASB 2013-9C [67] AASB 2014-8 [9] |
| 7.1.3 | added amended deleted added | AASB 2011-8 [33] AASB 2012-6 [15, 39] AASB 2013-9C [67] AASB 2014-1A [22] |
| 7.1.4 | added | AASB 2014-5 [23] |
| 7.2.1-7.2.2 | amended | AASB 2013-9C [67] |
| 7.2.3 | deleted renumbered from 7.2.4 amended | AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.4 | renumbered as 7.2.3 renumbered from 7.2.5 amended | AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.5 | amended amended renumbered as 7.2.4 renumbered from 7.2.6 | AASB 2011-8 [32] AASB 2012-6 [15, 39] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.6 | renumbered as 7.2.5 renumbered from 7.2.7 | AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.7 | renumbered as 7.2.6 renumbered from 7.2.8 | AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.8 | renumbered as 7.2.7 renumbered from 7.2.9 | AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.9 | renumbered as 7.2.8 renumbered from 7.2.10 amended | AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.10 | amended renumbered as 7.2.9 renumbered from 7.2.11 amended | AASB 2012-6 [13] AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.11 | amended amended renumbered as 7.2.10 renumbered from 7.2.12 | AASB 2011-8 [32] AASB 2012-6 [15, 39] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.12 | amended amended renumbered as 7.2.11 renumbered from 7.2.13 | AASB 2011-8 [32] AASB 2012-6 [15, 39] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.13 | renumbered as 7.2.12 renumbered from 7.2.14 amended | AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.14 | amended renumbered as 7.2.13 renumbered from 7.2.15 | AASB 2012-6 [13] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.15 | renumbered as 7.2.14 renumbered from 7.2.16 amended | AASB 2013-9C [67] AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.16 (and preceding heading) | renumbered as 7.2.15 added | AASB 2013-9C [67] AASB 2013-9C [67] |
| 7.2.17-7.2.21 | added | AASB 2013-9C [67] |
| 7.3 (preceding heading) | amended | AASB 2013-9C [67] |
| 7.3.1-7.3.2 | note amended | AASB 2014-8 [9] |
| Appendix A | amended amended amended amended | AASB 2011-8 [12] AASB 2013-9C [68] AASB 2014-1E [69] AASB 2014-5 [24] |
| B3.1.2 | amended | AASB 2013-9C [69] |
| B3.2.1-B3.2.3 | amended amended | AASB 2011-7 [26] AASB 2012-6 [14, 29] |
| B3.2.11 | amended amended | AASB 2011-8 [34] AASB 2012-6 [15, 39] |
| B3.2.13 | amended | AASB 2014-5 [25] |
| B3.2.17 | amended amended | AASB 2011-8 [34] AASB 2012-6 [15, 39] |
| B4.1.30 | amended | AASB 2013-9C [69] |
| B4.3.8 | amended | AASB 2013-9C [69] |
| B4.3.12 | amended amended | AASB 2011-7 [26] AASB 2012-6 [14, 29] |
| B5.1.1 | amended amended | AASB 2011-8 [34] AASB 2012-6 [15, 39] |
| B5.1.2A | added amended | AASB 2011-8 [35] AASB 2012-6 [15, 39] |
| B5.2.2A | added amended | AASB 2011-8 [35] AASB 2012-6 [15, 39] |
| B5.4.1-B5.4.13 (and preceding headings) | deleted amended | AASB 2011-8 [36] AASB 2012-6 [15, 39] |
| B5.4.14 (and preceding heading) | amended amended | AASB 2011-8 [37] AASB 2012-6 [15, 39] |
| B5.4.16 | amended amended | AASB 2011-8 [37] AASB 2012-6 [15, 39] |
| B5.7.1 | amended | AASB 2014-5 [25] |
| B5.7.2 | amended | AASB 2013-9C [69] |
| B5.7.15 | amended amended | AASB 2011-7 [26] AASB 2012-6 [14, 29] |
| B5.7.19 | amended | AASB 2012-6 [13] |
| B5.7.20 | amended amended | AASB 2011-8 [37] AASB 2012-6 [15, 39] |
| B6.2.1-B6.5.23 (and preceding headings) | added | AASB 2013-9C [70] |
| B6.5.24 | added amended | AASB 2013-9C [70] AASB 2014-1E [70] |
| B6.5.25-B6.5.32 | added | AASB 2013-9C [70] |
| B6.5.33 | added amended | AASB 2013-9C [70] AASB 2014-1E [71] |
| B6.5.34-B6.5.35 (and preceding heading) | added | AASB 2013-9C [70] |
| B6.5.36 | added amended | AASB 2013-9C [70] AASB 2014-1E [72] |
| B6.5.37-B6.5.39 | added | AASB 2013-9C [70] |
| B6.6.1-B6.6.16 (and preceding headings) | added | AASB 2013-9C [70] |
COMPARISON WITH IFRS 9
AASB 9 and IFRS 9
AASB 9 Financial Instruments as amended incorporates IFRS 9 Financial Instruments as issued and amended by the International Accounting Standards Board (IASB). Paragraphs that have been added to this Standard (and do not appear in the text of IFRS 9) are identified with the prefix “Aus”, followed by the number of the preceding IASB paragraph and decimal numbering. Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability.
Compliance with IFRS 9
Entities that comply with AASB 9 as amended will simultaneously be in compliance with IFRS 9 as amended.
ACCOUNTING STANDARD AASB 9
The Australian Accounting Standards Board made Accounting Standard AASB 9 Financial Instruments under section 334 of the Corporations Act 2001 on 6 December 2010.
This compiled version of AASB 9 applies to annual reporting periods beginning on or after 1 January 2018. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 17 December 2014 (see Compilation Details).
ACCOUNTING STANDARD AASB 9
FINANCIAL INSTRUMENTS
Chapter 1 Objective and application
1.1 The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.
Aus1.2 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b) general purpose financial statements of each other reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Aus1.3 This Standard applies to annual reporting periods beginning on or after 1 January 2018 and may be applied early only as set out in paragraph Aus1.4. However, AASB 9 (December 2014) supersedes this Standard. An entity shall apply AASB 9 (December 2014) for annual reporting periods beginning on or after 1 January 2018.
Aus1.4 For annual reporting periods beginning before 1 January 2018, an entity may apply this Standard from:
(a) any date between the issue of this Standard and 31 December 2010, for entities initially applying this Standard before 1 January 2011; or
(b) the beginning of the first reporting period in which the entity adopts this Standard, for entities initially applying this Standard on or after 1 January 2011;
if, and only if, the entity’s date of initial application (as described in paragraph 7.2.2) is before 1 February 2015. When an entity elects to apply this Standard, it must apply all of the requirements in this Standard at the same time (but see also paragraphs 7.1.2, 7.2.15 and 7.2.16). If an entity applies this Standard, it shall disclose that fact and at the same time apply the amendments in AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (as amended) and the amendments in Part E of AASB 2014-1 Amendments to Australian Accounting Standards.
Aus1.5 [Deleted by the AASB]
Aus1.6 [Deleted by the AASB]
Aus1.7 When applied or operative, this Standard supersedes AASB 9 issued in December 2009 (as amended). However, for annual reporting periods beginning before 1 January 2018, an entity may elect to apply AASB 9 issued in December 2009 (as amended) or this Standard as amended to September 2012, instead of applying this Standard (as amended to December 2014) if, and only if, the entity’s date of initial application is before 1 February 2015.
Aus1.8 When applied or operative, this Standard supersedes Interpretation 9 Reassessment of Embedded Derivatives, as identified in AASB 1048 Interpretation of Standards. The requirements added to AASB 9 in December 2010 incorporate the requirements previously set out in paragraphs 5 and 7 of Interpretation 9. As a consequential amendment, AASB 1 First-time Adoption of Australian Accounting Standards incorporates the requirements previously set out in paragraph 8 of Interpretation 9.
Chapter 2 Scope
2.1 An entity shall apply this Standard to all items within the scope of AASB 139 Financial Instruments: Recognition and Measurement.
Chapter 3 Recognition and derecognition
3.1 Initial recognition
3.1.1 An entity shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument (see paragraphs B3.1.1 and B3.1.2). When an entity first recognises a financial asset, it shall classify it in accordance with paragraphs 4.1.1-4.1.5 and measure it in accordance with paragraphs 5.1.1-5.1.3. When an entity first recognises a financial liability, it shall classify it in accordance with paragraphs 4.2.1 and 4.2.2 and measure it in accordance with paragraph 5.1.1.
Regular way purchase or sale of financial assets
3.1.2 A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting (see paragraphs B3.1.3-B3.1.6).
3.2 Derecognition of financial assets
3.2.1 In consolidated financial statements, paragraphs 3.2.2-3.2.9, B3.1.1, B3.1.2 and B3.2.1-B3.2.17 are applied at a consolidated level. Hence, an entity first consolidates all subsidiaries in accordance with AASB 10 Consolidated Financial Statements and then applies those paragraphs to the resulting group.
3.2.2 Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 3.2.3-3.2.9, an entity determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows.
(a) Paragraphs 3.2.3-3.2.9 are applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions.
(i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, paragraphs 3.2.3-3.2.9 are applied to the interest cash flows.
(ii) The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument, paragraphs 3.2.3-3.2.9 are applied to 90 per cent of those cash flows. If there is more than one counterparty, each counterparty is not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share.
(iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows from a financial asset, paragraphs 3.2.3-3.2.9 are applied to 90 per cent of those interest cash flows. If there is more than one counterparty, each counterparty is not required to have a proportionate share of the specifically identified cash flows provided that the transferring entity has a fully proportionate share.
(b) In all other cases, paragraphs 3.2.3-3.2.9 are applied to the financial asset in its entirety (or to the group of similar financial assets in their entirety). For example, when an entity transfers (i) the rights to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of the cash flows from a group of receivables, but provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the principal amount of the receivables, paragraphs 3.2.3-3.2.9 are applied to the financial asset (or a group of similar financial assets) in its entirety.
In paragraphs 3.2.3-3.2.12, the term ‘financial asset’ refers to either a part of a financial asset (or a part of a group of similar financial assets) as identified in (a) above or, otherwise, a financial asset (or a group of similar financial assets) in its entirety.
3.2.3 An entity shall derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset as set out in paragraphs 3.2.4 and 3.2.5 and the transfer qualifies for derecognition in accordance with paragraph 3.2.6.
(See paragraph 3.1.2 for regular way sales of financial assets.)
3.2.4 An entity transfers a financial asset if, and only if, it either:
(a) transfers the contractual rights to receive the cash flows of the financial asset; or
(b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 3.2.5.
3.2.5 When an entity retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met.
(a) The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition.
(b) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows.
(c) The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents (as defined in AASB 107 Statement of Cash Flows) during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients.
3.2.6 When an entity transfers a financial asset (see paragraph 3.2.4), it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:
(a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.
(b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall continue to recognise the financial asset.
(c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the financial asset. In this case:
(i) if the entity has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.
(ii) if the entity has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see paragraph 3.2.16).
3.2.7 The transfer of risks and rewards (see paragraph 3.2.6) is evaluated by comparing the entity’s exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. An entity has retained substantially all the risks and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer (eg because the entity has sold a financial asset subject to an agreement to buy it back at a fixed price or the sale price plus a lender’s return). An entity has transferred substantially all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of the future net cash flows associated with the financial asset (eg because the entity has sold a financial asset subject only to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of the cash flows from a larger financial asset in an arrangement, such as a loan sub-participation, that meets the conditions in paragraph 3.2.5).
3.2.8 Often it will be obvious whether the entity has transferred or retained substantially all risks and rewards of ownership and there will be no need to perform any computations. In other cases, it will be necessary to compute and compare the entity’s exposure to the variability in the present value of the future net cash flows before and after the transfer. The computation and comparison are made using as the discount rate an appropriate current market interest rate. All reasonably possible variability in net cash flows is considered, with greater weight being given to those outcomes that are more likely to occur.
3.2.9 Whether the entity has retained control (see paragraph 3.2.6(c)) of the transferred asset depends on the transferee’s ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control.
Transfers that qualify for derecognition
3.2.10 If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the servicing, a servicing liability for the servicing obligation shall be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset in accordance with paragraph 3.2.13.
3.2.11 If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognise the new financial asset, financial liability or servicing liability at fair value.
3.2.12 On derecognition of a financial asset in its entirety, the difference between:
(a) the carrying amount (measured at the date of derecognition); and
(b) the consideration received (including any new asset obtained less any new liability assumed);
shall be recognised in profit or loss.
3.2.13 If the transferred asset is part of a larger financial asset (eg when an entity transfers interest cash flows that are part of a debt instrument, see paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between:
(a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised; and
(b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed);
shall be recognised in profit or loss.
3.2.14 When an entity allocates the previous carrying amount of a larger financial asset between the part that continues to be recognised and the part that is derecognised, the fair value of the part that continues to be recognised needs to be measured. When the entity has a history of selling parts similar to the part that continues to be recognised or other market transactions exist for such parts, recent prices of actual transactions provide the best estimate of its fair value. When there are no price quotes or recent market transactions to support the fair value of the part that continues to be recognised, the best estimate of the fair value is the difference between the fair value of the larger financial asset as a whole and the consideration received from the transferee for the part that is derecognised.
Transfers that do not qualify for derecognition
3.2.15 If a transfer does not result in derecognition because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the entity shall continue to recognise the transferred asset in its entirety and shall recognise a financial liability for the consideration received. In subsequent periods, the entity shall recognise any income on the transferred asset and any expense incurred on the financial liability.
Continuing involvement in transferred assets
3.2.16 If an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset, and retains control of the transferred asset, the entity continues to recognise the transferred asset to the extent of its continuing involvement. The extent of the entity’s continuing involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset. For example:
(a) When the entity’s continuing involvement takes the form of guaranteeing the transferred asset, the extent of the entity’s continuing involvement is the lower of (i) the amount of the asset and (ii) the maximum amount of the consideration received that the entity could be required to repay (‘the guarantee amount’).
(b) When the entity’s continuing involvement takes the form of a written or purchased option (or both) on the transferred asset, the extent of the entity’s continuing involvement is the amount of the transferred asset that the entity may repurchase. However, in the case of a written put option on an asset that is measured at fair value, the extent of the entity’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price (see paragraph B3.2.13).
(c) When the entity’s continuing involvement takes the form of a cash settled option or similar provision on the transferred asset, the extent of the entity’s continuing involvement is measured in the same way as that which results from non-cash settled options as set out in (b) above.
3.2.17 When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recognises an associated liability. Despite the other measurement requirements in this Standard, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is:
(a) the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost, or
(b) equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair value.
3.2.18 The entity shall continue to recognise any income arising on the transferred asset to the extent of its continuing involvement and shall recognise any expense incurred on the associated liability.
3.2.19 For the purpose of subsequent measurement, recognised changes in the fair value of the transferred asset and the associated liability are accounted for consistently with each other in accordance with paragraph 5.7.1, and shall not be offset.
3.2.20 If an entity’s continuing involvement is in only a part of a financial asset (eg when an entity retains an option to repurchase part of a transferred asset, or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the entity retains control), the entity allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, the requirements of paragraph 3.2.14 apply. The difference between:
(a) the carrying amount (measured at the date of derecognition) allocated to the part that is no longer recognised; and
(b) the consideration received for the part no longer recognised;
shall be recognised in profit or loss.
3.2.21 If the transferred asset is measured at amortised cost, the option in this Standard to designate a financial liability as at fair value through profit or loss is not applicable to the associated liability.
All transfers
3.2.22 If a transferred asset continues to be recognised, the asset and the associated liability shall not be offset. Similarly, the entity shall not offset any income arising from the transferred asset with any expense incurred on the associated liability (see AASB 132 Financial Instruments: Presentation paragraph 42).
3.2.23 If a transferor provides non-cash collateral (such as debt or equity instruments) to the transferee, the accounting for the collateral by the transferor and the transferee depends on whether the transferee has the right to sell or repledge the collateral and on whether the transferor has defaulted. The transferor and transferee shall account for the collateral as follows:
(a) If the transferee has the right by contract or custom to sell or repledge the collateral, then the transferor shall reclassify that asset in its statement of financial position (eg as a loaned asset, pledged equity instruments or repurchase receivable) separately from other assets.
(b) If the transferee sells collateral pledged to it, it shall recognise the proceeds from the sale and a liability measured at fair value for its obligation to return the collateral.
(c) If the transferor defaults under the terms of the contract and is no longer entitled to redeem the collateral, it shall derecognise the collateral, and the transferee shall recognise the collateral as its asset initially measured at fair value or, if it has already sold the collateral, derecognise its obligation to return the collateral.
(d) Except as provided in (c), the transferor shall continue to carry the collateral as its asset, and the transferee shall not recognise the collateral as an asset.
3.3 Derecognition of financial liabilities
3.3.1 An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished – ie when the obligation specified in the contract is discharged or cancelled or expires.
3.3.2 An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.
3.3.3 The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.
3.3.4 If an entity repurchases a part of a financial liability, the entity shall allocate the previous carrying amount of the financial liability between the part that continues to be recognised and the part that is derecognised based on the relative fair values of those parts on the date of the repurchase. The difference between (a) the carrying amount allocated to the part derecognised and (b) the consideration paid, including any non-cash assets transferred or liabilities assumed, for the part derecognised shall be recognised in profit or loss.
Chapter 4 Classification
4.1 Classification of financial assets
4.1.1 Unless paragraph 4.1.5 applies, an entity shall classify financial assets as subsequently measured at either amortised cost or fair value on the basis of both:
(a) the entity’s business model for managing the financial assets; and
(b) the contractual cash flow characteristics of the financial asset.
4.1.2 A financial asset shall be measured at amortised cost if both of the following conditions are met:
(a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows.
(b) 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 amount outstanding.
Paragraphs B4.1.1-B4.1.26 provide guidance on how to apply these conditions.
4.1.3 For the purpose of applying paragraph 4.1.2(b), interest is consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time.
4.1.4 A financial asset shall be measured at fair value unless it is measured at amortised cost in accordance with paragraph 4.1.2.
Option to designate a financial asset at fair value through profit or loss
4.1.5 Despite paragraphs 4.1.1-4.1.4, an entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see paragraphs B4.1.29-B4.1.32).
4.1.6 AASB 7 Financial Instruments: Disclosures requires the entity to provide disclosures about financial assets it has designated as at fair value through profit or loss.
4.2 Classification of financial liabilities
4.2.1 An entity shall classify all financial liabilities as subsequently measured at amortised cost using the effective interest method, except for:
(a) financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value.
(b) financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. Paragraphs 3.2.15 and 3.2.17 apply to the measurement of such financial liabilities.
(c) financial guarantee contracts as defined in Appendix A. After initial recognition, an issuer of such a contract shall (unless paragraph 4.2.1(a) or (b) applies) subsequently measure it at the higher of:
(i) the amount determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets; and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of AASB 15 Revenue from Contracts with Customers.
(d) commitments to provide a loan at a below-market interest rate. After initial recognition, an issuer of such a commitment shall (unless paragraph 4.2.1(a) applies) subsequently measure it at the higher of:
(i) the amount determined in accordance with AASB 137; and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of AASB 15.
(e) contingent consideration of an acquirer in a business combination to which AASB 3 Business Combinations applies. Such contingent consideration shall subsequently be measured at fair value.
Option to designate a financial liability at fair value through profit or loss
4.2.2 An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when permitted by paragraph 4.3.5, or when doing so results in more relevant information, because either:
(a) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see paragraphs B4.1.29-B4.1.32); or
(b) a group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel (as defined in AASB 124 Related Party Disclosures), for example, the entity’s board of directors and chief executive officer (see paragraphs B4.1.33-B4.1.36).
4.2.3 AASB 7 requires the entity to provide disclosures about the financial liabilities it has designated as at fair value through profit or loss.
4.3 Embedded derivatives
4.3.1 An embedded derivative is a component of a hybrid contract that also includes a non-derivative host – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument.
Hybrid contracts with financial asset hosts
4.3.2 If a hybrid contract contains a host that is an asset within the scope of this Standard, an entity shall apply the requirements in paragraphs 4.1.1-4.1.5 to the entire hybrid contract.
Other hybrid contracts
4.3.3 If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative shall be separated from the host and accounted for as a derivative under this Standard if, and only if:
(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host (see paragraphs B4.3.5 and B4.3.8);
(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
(c) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (ie a derivative that is embedded in a financial liability at fair value through profit or loss is not separated).
4.3.4 If an embedded derivative is separated, the host contract shall be accounted for in accordance with the appropriate Standard. This Standard does not address whether an embedded derivative shall be presented separately in the statement of financial position.
4.3.5 Despite paragraphs 4.3.3 and 4.3.4, if a contract contains one or more embedded derivatives and the host is not an asset within the scope of this Standard, an entity may designate the entire hybrid contract as at fair value through profit or loss unless:
(a) the embedded derivative(s) do(es) not significantly modify the cash flows that otherwise would be required by the contract; or
(b) it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.
4.3.6 If an entity is required by this Standard to separate an embedded derivative from its host, but is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, it shall designate the entire hybrid contract as at fair value through profit or loss.
4.3.7 If an entity is unable to measure reliably the fair value of an embedded derivative on the basis of its terms and conditions, the fair value of the embedded derivative is the difference between the fair value of the hybrid contract and the fair value of the host. If the entity is unable to measure the fair value of the embedded derivative using this method, paragraph 4.3.6 applies and the hybrid contract is designated as at fair value through profit or loss.
4.4 Reclassification
4.4.1 When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with paragraphs 4.1.1-4.1.4.
4.4.2 An entity shall not reclassify any financial liability.
4.4.3 The following changes in circumstances are not reclassifications for the purposes of paragraphs 4.4.1-4.4.2:
(a) an item that was previously a designated and effective hedging instrument in a cash flow hedge or net investment hedge no longer qualifies as such;
(b) an item becomes a designated and effective hedging instrument in a cash flow hedge or net investment hedge; and
(c) changes in measurement in accordance with Section 6.7.
Chapter 5 Measurement
5.1 Initial measurement
5.1.1 Except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
5.1.1A However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A.
5.1.2 When an entity uses settlement date accounting for an asset that is subsequently measured at amortised cost, the asset is recognised initially at its fair value on the trade date (see paragraphs B3.1.3-B3.1.6).
5.1.3 Notwithstanding the requirement in paragraph 5.1.1, at initial recognition, an entity shall measure trade receivables that do not have a significant financing component (determined in accordance with AASB 15) at their transaction price (as defined in AASB 15).
5.2 Subsequent measurement of financial assets
5.2.1 After initial recognition, an entity shall measure a financial asset in accordance with paragraphs 4.1.1-4.1.5 at fair value or amortised cost (see paragraphs 9 and AG5-AG8C of AASB 139).
5.2.2 An entity shall apply the impairment requirements in paragraphs 58-65 and AG84-AG93 of AASB 139 to financial assets measured at amortised cost.
5.2.3 An entity shall apply the hedge accounting requirements in paragraphs 6.5.8-6.5.14 (and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial asset that is designated as a hedged item.
5.3 Subsequent measurement of financial liabilities
5.3.1 After initial recognition, an entity shall measure a financial liability in accordance with paragraphs 4.2.1-4.2.2 (see paragraphs 9 and AG5-AG8 of AASB 139).
5.3.2 An entity shall apply the hedge accounting requirements in paragraphs 6.5.8-6.5.14 (and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial liability that is designated as a hedged item.
5.4.1-5.4.3[Deleted by the IASB]
5.5 Amortised cost measurement – not used
5.6 Reclassification of financial assets
5.6.1 If an entity reclassifies financial assets in accordance with paragraph 4.4.1, it shall apply the reclassification prospectively from the reclassification date. The entity shall not restate any previously recognised gains, losses or interest.
5.6.2 If, in accordance with paragraph 4.4.1, an entity reclassifies a financial asset so that it is measured at fair value, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair value is recognised in profit or loss.
5.6.3 If, in accordance with paragraph 4.4.1, an entity reclassifies a financial asset so that it is measured at amortised cost, its fair value at the reclassification date becomes its new carrying amount.
5.7 Gains and losses
5.7.1 A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless:
(a) it is part of a hedging relationship (see paragraphs 6.5.8-6.5.14 and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk);
(b) it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income in accordance with paragraph 5.7.5; or
(c) it is a financial liability designated as at fair value through profit or loss and the entity is required to present the effects of changes in the liability’s credit risk in other comprehensive income in accordance with paragraph 5.7.7.
5.7.1A Dividends are recognised in profit or loss only when:
(a) the entity’s right to receive payment of the dividend is established;
(b) it is probable that the economic benefits associated with the dividend will flow to the entity; and
(c) the amount of the dividend can be measured reliably.
5.7.2 A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging relationship (see paragraphs 6.5.8-6.5.14 and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk) shall be recognised in profit or loss when the financial asset is derecognised, impaired or reclassified in accordance with paragraph 5.6.2, and through the amortisation process. A gain or loss on a financial liability that is measured at amortised cost and is not part of a hedging relationship (see paragraphs 6.5.8-6.5.14 and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk) shall be recognised in profit or loss when the financial liability is derecognised and through the amortisation process.
5.7.3 A gain or loss on financial assets or financial liabilities that are hedged items in a hedging relationship shall be recognised in accordance with paragraphs 6.5.8-6.5.14 and, if applicable, paragraphs 89-94 of AASB 139 for the fair value hedge accounting for a portfolio hedge of interest rate risk.
5.7.4 If an entity recognises financial assets using settlement date accounting (see paragraphs 3.1.2, B3.1.3 and B3.1.6), any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost (other than impairment losses). For assets measured at fair value, however, the change in fair value shall be recognised in profit or loss or in other comprehensive income, as appropriate under paragraph 5.7.1.
Investments in equity instruments
5.7.5 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 within the scope of this Standard that is not held for trading and is also not contingent consideration of an acquirer in a business combination to which AASB 3 applies.
5.7.6 If an entity makes the election in paragraph 5.7.5, it shall recognise in profit or loss dividends from that investment in accordance with paragraph 5.7.1A.
Liabilities designated as at fair value through profit or loss
5.7.7 An entity shall present a gain or loss on a financial liability designated as at fair value through profit or loss as follows:
(a) the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income (see paragraphs B5.7.13-B5.7.20); and
(b) the remaining amount of change in the fair value of the liability shall be presented in profit or loss;
unless the treatment of the effects of changes in the liability’s credit risk described in (a) would create or enlarge an accounting mismatch in profit or loss (in which case paragraph 5.7.8 applies). Paragraphs B5.7.5-B5.7.7 and B5.7.10-B5.7.12 provide guidance on determining whether an accounting mismatch would be created or enlarged.
5.7.8 If the requirements in paragraph 5.7.7 would create or enlarge an accounting mismatch in profit or loss, an entity shall present all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss.
5.7.9 Despite the requirements in paragraphs 5.7.7 and 5.7.8, an entity shall present in profit or loss all gains and losses on loan commitments and financial guarantee contracts that are designated as at fair value through profit or loss.
Chapter 6 Hedge accounting
6.1 Objective and scope of hedge accounting
6.1.1 The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5). This approach aims to convey the context of hedging instruments for which hedge accounting is applied in order to allow insight into their purpose and effect.
6.1.2 An entity may choose to designate a hedging relationship between a hedging instrument and a hedged item in accordance with paragraphs 6.2.1-6.3.7 and B6.2.1-B6.3.25. For hedging relationships that meet the qualifying criteria, an entity shall account for the gain or loss on the hedging instrument and the hedged item in accordance with paragraphs 6.5.1-6.5.14 and B6.5.1-B6.5.28. When the hedged item is a group of items, an entity shall comply with the additional requirements in paragraphs 6.6.1-6.6.6 and B6.6.1-B6.6.16.
6.1.3 For a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities (and only for such a hedge), an entity may apply the hedge accounting requirements in AASB 139 instead of those in this Standard. In that case, the entity must also apply the specific requirements for the fair value hedge accounting for a portfolio hedge of interest rate risk and designate as the hedged item a portion that is a currency amount (see paragraphs 81A, 89A and AG114-AG132 of AASB 139).
6.2 Hedging instruments
Qualifying instruments
6.2.1 A derivative measured at fair value through profit or loss may be designated as a hedging instrument, except for some written options (see paragraph B6.2.4).
6.2.2 A non-derivative financial asset or a non-derivative financial liability measured at fair value through profit or loss may be designated as a hedging instrument unless it is a financial liability designated as at fair value through profit or loss for which the amount of its change in fair value that is attributable to changes in the credit risk of that liability is presented in other comprehensive income in accordance with paragraph 5.7.7. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial asset or a non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5.
6.2.3 For hedge accounting purposes, only contracts with a party external to the reporting entity (ie external to the group or individual entity that is being reported on) can be designated as hedging instruments.
Designation of hedging instruments
6.2.4 A qualifying instrument must be designated in its entirety as a hedging instrument. The only exceptions permitted are:
(a) separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the change in intrinsic value of an option and not the change in its time value (see paragraphs 6.5.15 and B6.5.29-B6.5.33);
(b) separating the forward element and the spot element of a forward contract and designating as the hedging instrument only the change in the value of the spot element of a forward contract and not the forward element; similarly, the foreign currency basis spread may be separated and excluded from the designation of a financial instrument as the hedging instrument (see paragraphs 6.5.16 and B6.5.34-B6.5.39); and
(c) a proportion of the entire hedging instrument, such as 50 per cent of the nominal amount, may be designated as the hedging instrument in a hedging relationship. However, a hedging instrument may not be designated for a part of its change in fair value that results from only a portion of the time period during which the hedging instrument remains outstanding.
6.2.5 An entity may view in combination, and jointly designate as the hedging instrument, any combination of the following (including those circumstances in which the risk or risks arising from some hedging instruments offset those arising from others):
(a) derivatives or a proportion of them; and
(b) non-derivatives or a proportion of them.
6.2.6 However, a derivative instrument that combines a written option and a purchased option (for example, an interest rate collar) does not qualify as a hedging instrument if it is, in effect, a net written option at the date of designation (unless it qualifies in accordance with paragraph B6.2.4). Similarly, two or more instruments (or proportions of them) may be jointly designated as the hedging instrument only if, in combination, they are not, in effect, a net written option at the date of designation (unless it qualifies in accordance with paragraph B6.2.4).
6.3 Hedged items
Qualifying items
6.3.1 A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction or a net investment in a foreign operation. The hedged item can be:
(a) a single item; or
(b) a group of items (subject to paragraphs 6.6.1-6.6.6 and B6.6.1-B6.6.16).
A hedged item can also be a component of such an item or group of items (see paragraphs 6.3.7 and B6.3.7-B6.3.25).
6.3.2 The hedged item must be reliably measurable.
6.3.3 If a hedged item is a forecast transaction (or a component thereof), that transaction must be highly probable.
6.3.4 An aggregated exposure that is a combination of an exposure that could qualify as a hedged item in accordance with paragraph 6.3.1 and a derivative may be designated as a hedged item (see paragraphs B6.3.3-B6.3.4). This includes a forecast transaction of an aggregated exposure (ie uncommitted but anticipated future transactions that would give rise to an exposure and a derivative) if that aggregated exposure is highly probable and, once it has occurred and is therefore no longer forecast, is eligible as a hedged item.
6.3.5 For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions with a party external to the reporting entity can be designated as hedged items. Hedge accounting can be applied to transactions between entities in the same group only in the individual or separate financial statements of those entities and not in the consolidated financial statements of the group, except for the consolidated financial statements of an investment entity, as defined in AASB 10, where transactions between an investment entity and its subsidiaries measured at fair value through profit or loss will not be eliminated in the consolidated financial statements.
6.3.6 However, as an exception to paragraph 6.3.5, the foreign currency risk of an intragroup monetary item (for example, a payable/receivable between two subsidiaries) may qualify as a hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates. In accordance with AASB 121, foreign exchange rate gains and losses on intragroup monetary items are not fully eliminated on consolidation when the intragroup monetary item is transacted between two group entities that have different functional currencies. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss.
Designation of hedged items
6.3.7 An entity may designate an item in its entirety or a component of an item as the hedged item in a hedging relationship. An entire item comprises all changes in the cash flows or fair value of an item. A component comprises less than the entire fair value change or cash flow variability of an item. In that case, an entity may designate only the following types of components (including combinations) as hedged items:
(a) only changes in the cash flows or fair value of an item attributable to a specific risk or risks (risk component), provided that, based on an assessment within the context of the particular market structure, the risk component is separately identifiable and reliably measurable (see paragraphs B6.3.8-B6.3.15). Risk components include a designation of only changes in the cash flows or the fair value of a hedged item above or below a specified price or other variable (a one-sided risk).
(b) one or more selected contractual cash flows.
(c) components of a nominal amount, ie a specified part of the amount of an item (see paragraphs B6.3.16-B6.3.20).
6.4 Qualifying criteria for hedge accounting
6.4.1 A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
(a) the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
(b) at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements (including its analysis of the sources of hedge ineffectiveness and how it determines the hedge ratio).
(c) the hedging relationship meets all of the following hedge effectiveness requirements:
(i) there is an economic relationship between the hedged item and the hedging instrument (see paragraphs B6.4.4-B6.4.6);
(ii) the effect of credit risk does not dominate the value changes that result from that economic relationship (see paragraphs B6.4.7-B6.4.8); and
(iii) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting (see paragraphs B6.4.9-B6.4.11).
6.5 Accounting for qualifying hedging relationships
6.5.1 An entity applies hedge accounting to hedging relationships that meet the qualifying criteria in paragraph 6.4.1 (which include the entity’s decision to designate the hedging relationship).
6.5.2 There are three types of hedging relationships:
(a) fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss.
(b) cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss.
(c) hedge of a net investment in a foreign operation as defined in AASB 121.
6.5.3 If the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, the hedged exposure referred to in paragraph 6.5.2(a) must be one that could affect other comprehensive income. In that case, and only in that case, the recognised hedge ineffectiveness is presented in other comprehensive income.
6.5.4 A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge.
6.5.5 If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the risk management objective for that designated hedging relationship remains the same, an entity shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again (this is referred to in this Standard as ‘rebalancing’ – see paragraphs B6.5.7-B6.5.21).
6.5.6 An entity shall discontinue hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. For this purpose, the replacement or rollover of a hedging instrument into another hedging instrument is not an expiration or termination if such a replacement or rollover is part of, and consistent with, the entity’s documented risk management objective. Additionally, for this purpose there is not an expiration or termination of the hedging instrument if:
(a) as a consequence of laws or regulations or the introduction of laws or regulations, the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. For this purpose, a clearing counterparty is a central counterparty (sometimes called a ‘clearing organisation’ or ‘clearing agency’) or an entity or entities, for example, a clearing member of a clearing organisation or a client of a clearing member of a clearing organisation, that are acting as a counterparty in order to effect clearing by a central counterparty. However, when the parties to the hedging instrument replace their original counterparties with different counterparties the requirement in this subparagraph is met only if each of those parties effects clearing with the same central counterparty.
(b) other changes, if any, to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty. Such changes are limited to those that are consistent with the terms that would be expected if the hedging instrument were originally cleared with the clearing counterparty. These changes include changes in the collateral requirements, rights to offset receivables and payables balances, and charges levied.
Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting continues for the remainder of the hedging relationship).
6.5.7 An entity shall apply:
(a) paragraph 6.5.10 when it discontinues hedge accounting for a fair value hedge for which the hedged item is (or is a component of) a financial instrument measured at amortised cost; and
(b) paragraph 6.5.12 when it discontinues hedge accounting for cash flow hedges.
Fair value hedges
6.5.8 As long as a fair value hedge meets the qualifying criteria in paragraph 6.4.1, the hedging relationship shall be accounted for as follows:
(a) the gain or loss on the hedging instrument shall be recognised in profit or loss (or other comprehensive income, if the hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5).
(b) the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item (if applicable) and be recognised in profit or loss. However, if the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, those amounts shall remain in other comprehensive income. When a hedged item is an unrecognised firm commitment (or a component thereof), the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss.
6.5.9 When a hedged item in a fair value hedge is a firm commitment (or a component thereof) to acquire an asset or assume a liability, the initial carrying amount of the asset or the liability that results from the entity meeting the firm commitment is adjusted to include the cumulative change in the fair value of the hedged item that was recognised in the statement of financial position.
6.5.10 Any adjustment arising from paragraph 6.5.8(b) shall be amortised to profit or loss if the hedged item is a financial instrument (or a component thereof) measured at amortised cost. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for hedging gains and losses. The amortisation is based on a recalculated effective interest rate at the date that amortisation begins.
Cash flow hedges
6.5.11 As long as a cash flow hedge meets the qualifying criteria in paragraph 6.4.1, the hedging relationship shall be accounted for as follows:
(a) the separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and
(ii) the cumulative change in fair value (present value) of the hedged item (ie the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge.
(b) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (ie the portion that is offset by the change in the cash flow hedge reserve calculated in accordance with (a)) shall be recognised in other comprehensive income.
(c) any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve calculated in accordance with (a)) is hedge ineffectiveness that shall be recognised in profit or loss.
(d) the amount that has been accumulated in the cash flow hedge reserve in accordance with (a) shall be accounted for as follows:
(i) if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see AASB 101 Presentation of Financial Statements) and hence it does not affect other comprehensive income.
(ii) for cash flow hedges other than those covered by (i), that amount shall be reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see AASB 101) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognised or when a forecast sale occurs).
(iii) however, if that amount is a loss and an entity expects that all or a portion of that loss will not be recovered in one or more future periods, it shall immediately reclassify the amount that is not expected to be recovered into profit or loss as a reclassification adjustment (see AASB 101).
6.5.12 When an entity discontinues hedge accounting for a cash flow hedge (see paragraphs 6.5.6 and 6.5.7(b)) it shall account for the amount that has been accumulated in the cash flow hedge reserve in accordance with paragraph 6.5.11(a) as follows:
(a) if the hedged future cash flows are still expected to occur, that amount shall remain in the cash flow hedge reserve until the future cash flows occur or until paragraph 6.5.11(d)(iii) applies. When the future cash flows occur, paragraph 6.5.11(d) applies.
(b) if the hedged future cash flows are no longer expected to occur, that amount shall be immediately reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see AASB 101). A hedged future cash flow that is no longer highly probable to occur may still be expected to occur.
Hedges of a net investment in a foreign operation
6.5.13 Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment (see AASB 121), shall be accounted for similarly to cash flow hedges:
(a) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised in other comprehensive income (see paragraph 6.5.11); and
(b) the ineffective portion shall be recognised in profit or loss.
6.5.14 The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or loss as a reclassification adjustment (see AASB 101) in accordance with paragraphs 48-49 of AASB 121 on the disposal or partial disposal of the foreign operation.
Accounting for the time value of options
6.5.15 When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option (see paragraph 6.2.4(a)), it shall account for the time value of the option as follows (see paragraphs B6.5.29-B6.5.33):
(a) an entity shall distinguish the time value of options by the type of hedged item that the option hedges (see paragraph B6.5.29):
(i) a transaction related hedged item; or
(ii) a time-period related hedged item.
(b) the change in fair value of the time value of an option that hedges a transaction related hedged item shall be recognised in other comprehensive income to the extent that it relates to the hedged item and shall be accumulated in a separate component of equity. The cumulative change in fair value arising from the time value of the option that has been accumulated in a separate component of equity (the ‘amount’) shall be accounted for as follows:
(b) a hedging relationship is discontinued before the end of its term. The hedging instrument in that hedging relationship can be designated as the hedging instrument in another hedging relationship (for example, when adjusting the hedge ratio on rebalancing by increasing the volume of the hedging instrument or when designating a whole new hedging relationship).
Accounting for the time value of options
B6.5.29 An option can be considered as being related to a time period because its time value represents a charge for providing protection for the option holder over a period of time. However, the relevant aspect for the purpose of assessing whether an option hedges a transaction or time-period related hedged item are the characteristics of that hedged item, including how and when it affects profit or loss. Hence, an entity shall assess the type of hedged item (see paragraph 6.5.15(a)) on the basis of the nature of the hedged item (regardless of whether the hedging relationship is a cash flow hedge or a fair value hedge):
(a) the time value of an option relates to a transaction related hedged item if the nature of the hedged item is a transaction for which the time value has the character of costs of that transaction. An example is when the time value of an option relates to a hedged item that results in the recognition of an item whose initial measurement includes transaction costs (for example, an entity hedges a commodity purchase, whether it is a forecast transaction or a firm commitment, against the commodity price risk and includes the transaction costs in the initial measurement of the inventory). As a consequence of including the time value of the option in the initial measurement of the particular hedged item, the time value affects profit or loss at the same time as that hedged item. Similarly, an entity that hedges a sale of a commodity, whether it is a forecast transaction or a firm commitment, would include the time value of the option as part of the cost related to that sale (hence, the time value would be recognised in profit or loss in the same period as the revenue from the hedged sale).
(b) the time value of an option relates to a time-period related hedged item if the nature of the hedged item is such that the time value has the character of a cost for obtaining protection against a risk over a particular period of time (but the hedged item does not result in a transaction that involves the notion of a transaction cost in accordance with (a)). For example, if commodity inventory is hedged against a fair value decrease for six months using a commodity option with a corresponding life, the time value of the option would be allocated to profit or loss (ie amortised on a systematic and rational basis) over that six-month period. Another example is a hedge of a net investment in a foreign operation that is hedged for 18 months using a foreign-exchange option, which would result in allocating the time value of the option over that 18-month period.
B6.5.30 The characteristics of the hedged item, including how and when the hedged item affects profit or loss, also affect the period over which the time value of an option that hedges a time-period related hedged item is amortised, which is consistent with the period over which the option’s intrinsic value can affect profit or loss in accordance with hedge accounting. For example, if an interest rate option (a cap) is used to provide protection against increases in the interest expense on a floating rate bond, the time value of that cap is amortised to profit or loss over the same period over which any intrinsic value of the cap would affect profit or loss:
(a) if the cap hedges increases in interest rates for the first three years out of a total life of the floating rate bond of five years, the time value of that cap is amortised over the first three years; or
(b) if the cap is a forward start option that hedges increases in interest rates for years two and three out of a total life of the floating rate bond of five years, the time value of that cap is amortised during years two and three.
B6.5.31 The accounting for the time value of options in accordance with paragraph 6.5.15 also applies to a combination of a purchased and a written option (one being a put option and one being a call option) that at the date of designation as a hedging instrument has a net nil time value (commonly referred to as a ‘zero-cost collar’). In that case, an entity shall recognise any changes in time value in other comprehensive income, even though the cumulative change in time value over the total period of the hedging relationship is nil. Hence, if the time value of the option relates to:
(a) a transaction related hedged item, the amount of time value at the end of the hedging relationship that adjusts the hedged item or that is reclassified to profit or loss (see paragraph 6.5.15(b)) would be nil.
(b) a time-period related hedged item, the amortisation expense related to the time value is nil.
B6.5.32 The accounting for the time value of options in accordance with paragraph 6.5.15 applies only to the extent that the time value relates to the hedged item (aligned time value). The time value of an option relates to the hedged item if the critical terms of the option (such as the nominal amount, life and underlying) are aligned with the hedged item. Hence, if the critical terms of the option and the hedged item are not fully aligned, an entity shall determine the aligned time value, ie how much of the time value included in the premium (actual time value) relates to the hedged item (and therefore should be treated in accordance with paragraph 6.5.15). An entity determines the aligned time value using the valuation of the option that would have critical terms that perfectly match the hedged item.
B6.5.33 If the actual time value and the aligned time value differ, an entity shall determine the amount that is accumulated in a separate component of equity in accordance with paragraph 6.5.15 as follows:
(a) if, at inception of the hedging relationship, the actual time value is higher than the aligned time value, the entity shall:
(i) determine the amount that is accumulated in a separate component of equity on the basis of the aligned time value; and
(ii) account for the differences in the fair value changes between the two time values in profit or loss.
(b) if, at inception of the hedging relationship, the actual time value is lower than the aligned time value, the entity shall determine the amount that is accumulated in a separate component of equity by reference to the lower of the cumulative change in fair value of:
(i) the actual time value; and
(ii) the aligned time value.
Any remainder of the change in fair value of the actual time value shall be recognised in profit or loss.
Accounting for the forward element of forward contracts and foreign currency basis spreads of financial instruments
B6.5.34 A forward contract can be considered as being related to a time period because its forward element represents charges for a period of time (which is the tenor for which it is determined). However, the relevant aspect for the purpose of assessing whether a hedging instrument hedges a transaction or time-period related hedged item are the characteristics of that hedged item, including how and when it affects profit or loss. Hence, an entity shall assess the type of hedged item (see paragraphs 6.5.16 and 6.5.15(a)) on the basis of the nature of the hedged item (regardless of whether the hedging relationship is a cash flow hedge or a fair value hedge):
(a) the forward element of a forward contract relates to a transaction related hedged item if the nature of the hedged item is a transaction for which the forward element has the character of costs of that transaction. An example is when the forward element relates to a hedged item that results in the recognition of an item whose initial measurement includes transaction costs (for example, an entity hedges an inventory purchase denominated in a foreign currency, whether it is a forecast transaction or a firm commitment, against foreign currency risk and includes the transaction costs in the initial measurement of the inventory). As a consequence of including the forward element in the initial measurement of the particular hedged item, the forward element affects profit or loss at the same time as that hedged item. Similarly, an entity that hedges a sale of a commodity denominated in a foreign currency against foreign currency risk, whether it is a forecast transaction or a firm commitment, would include the forward element as part of the cost that is related to that sale (hence, the forward element would be recognised in profit or loss in the same period as the revenue from the hedged sale).
(b) the forward element of a forward contract relates to a time-period related hedged item if the nature of the hedged item is such that the forward element has the character of a cost for obtaining protection against a risk over a particular period of time (but the hedged item does not result in a transaction that involves the notion of a transaction cost in accordance with (a)). For example, if commodity inventory is hedged against changes in fair value for six months using a commodity forward contract with a corresponding life, the forward element of the forward contract would be allocated to profit or loss (ie amortised on a systematic and rational basis) over that six-month period. Another example is a hedge of a net investment in a foreign operation that is hedged for 18 months using a foreign-exchange forward contract, which would result in allocating the forward element of the forward contract over that 18-month period.
B6.5.35 The characteristics of the hedged item, including how and when the hedged item affects profit or loss, also affect the period over which the forward element of a forward contract that hedges a time-period related hedged item is amortised, which is over the period to which the forward element relates. For example, if a forward contract hedges the exposure to variability in three-month interest rates for a three-month period that starts in six months’ time, the forward element is amortised during the period that spans months seven to nine.
B6.5.36 The accounting for the forward element of a forward contract in accordance with paragraph 6.5.16 also applies if, at the date on which the forward contract is designated as a hedging instrument, the forward element is nil. In that case, an entity shall recognise any fair value changes attributable to the forward element in other comprehensive income, even though the cumulative fair value change attributable to the forward element over the total period of the hedging relationship is nil. Hence, if the forward element of a forward contract relates to:
(a) a transaction related hedged item, the amount in respect of the forward element at the end of the hedging relationship that adjusts the hedged item or that is reclassified to profit or loss (see paragraphs 6.5.15(b) and 6.5.16) would be nil.
(b) a time-period related hedged item, the amortisation amount related to the forward element is nil.
B6.5.37 The accounting for the forward element of forward contracts in accordance with paragraph 6.5.16 applies only to the extent that the forward element relates to the hedged item (aligned forward element). The forward element of a forward contract relates to the hedged item if the critical terms of the forward contract (such as the nominal amount, life and underlying) are aligned with the hedged item. Hence, if the critical terms of the forward contract and the hedged item are not fully aligned, an entity shall determine the aligned forward element, ie how much of the forward element included in the forward contract (actual forward element) relates to the hedged item (and therefore should be treated in accordance with paragraph 6.5.16). An entity determines the aligned forward element using the valuation of the forward contract that would have critical terms that perfectly match the hedged item.
B6.5.38 If the actual forward element and the aligned forward element differ, an entity shall determine the amount that is accumulated in a separate component of equity in accordance with paragraph 6.5.16 as follows:
(a) if, at inception of the hedging relationship, the absolute amount of the actual forward element is higher than that of the aligned forward element the entity shall:
(i) determine the amount that is accumulated in a separate component of equity on the basis of the aligned forward element; and
(ii) account for the differences in the fair value changes between the two forward elements in profit or loss.
(b) if, at inception of the hedging relationship, the absolute amount of the actual forward element is lower than that of the aligned forward element, the entity shall determine the amount that is accumulated in a separate component of equity by reference to the lower of the cumulative change in fair value of:
(i) the absolute amount of the actual forward element; and
(ii) the absolute amount of the aligned forward element.
Any remainder of the change in fair value of the actual forward element shall be recognised in profit or loss.
B6.5.39 When an entity separates the foreign currency basis spread from a financial instrument and excludes it from the designation of that financial instrument as the hedging instrument (see paragraph 6.2.4(b)), the application guidance in paragraphs B6.5.34-B6.5.38 applies to the foreign currency basis spread in the same manner as it is applied to the forward element of a forward contract.
Hedge of a group of items (section 6.6)
Hedge of a net position
Eligibility for hedge accounting and designation of a net position
B6.6.1 A net position is eligible for hedge accounting only if an entity hedges on a net basis for risk management purposes. Whether an entity hedges in this way is a matter of fact (not merely of assertion or documentation). Hence, an entity cannot apply hedge accounting on a net basis solely to achieve a particular accounting outcome if that would not reflect its risk management approach. Net position hedging must form part of an established risk management strategy. Normally this would be approved by key management personnel as defined in AASB 124 Related Party Disclosures.
B6.6.2 For example, Entity A, whose functional currency is its local currency, has a firm commitment to pay FC150,000 for advertising expenses in nine months’ time and a firm commitment to sell finished goods for FC150,000 in 15 months’ time. Entity A enters into a foreign currency derivative that settles in nine months’ time under which it receives FC100 and pays CU70. Entity A has no other exposures to FC. Entity A does not manage foreign currency risk on a net basis. Hence, Entity A cannot apply hedge accounting for a hedging relationship between the foreign currency derivative and a net position of FC100 (consisting of FC150,000 of the firm purchase commitment – ie advertising services – and FC149,900 (of the FC150,000) of the firm sale commitment) for a nine-month period.
B6.6.3 If Entity A did manage foreign currency risk on a net basis and did not enter into the foreign currency derivative (because it increases its foreign currency risk exposure instead of reducing it), then the entity would be in a natural hedged position for nine months. Normally, this hedged position would not be reflected in the financial statements because the transactions are recognised in different reporting periods in the future. The nil net position would be eligible for hedge accounting only if the conditions in paragraph 6.6.6 are met.
B6.6.4 When a group of items that constitute a net position is designated as a hedged item, an entity shall designate the overall group of items that includes the items that can make up the net position. An entity is not permitted to designate a non-specific abstract amount of a net position. For example, an entity has a group of firm sale commitments in nine months’ time for FC100 and a group of firm purchase commitments in 18 months’ time for FC120. The entity cannot designate an abstract amount of a net position up to FC20. Instead, it must designate a gross amount of purchases and a gross amount of sales that together give rise to the hedged net position. An entity shall designate gross positions that give rise to the net position so that the entity is able to comply with the requirements for the accounting for qualifying hedging relationships.
Application of the hedge effectiveness requirements to a hedge of a net position
B6.6.5 When an entity determines whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met when it hedges a net position, it shall consider the changes in the value of the items in the net position that have a similar effect as the hedging instrument in conjunction with the fair value change on the hedging instrument. For example, an entity has a group of firm sale commitments in nine months’ time for FC100 and a group of firm purchase commitments in 18 months’ time for FC120. It hedges the foreign currency risk of the net position of FC20 using a forward exchange contract for FC20. When determining whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met, the entity shall consider the relationship between:
(a) the fair value change on the forward exchange contract together with the foreign currency risk related changes in the value of the firm sale commitments; and
(b) the foreign currency risk related changes in the value of the firm purchase commitments.
B6.6.6 Similarly, if in the example in paragraph B6.6.5 the entity had a nil net position it would consider the relationship between the foreign currency risk related changes in the value of the firm sale commitments and the foreign currency risk related changes in the value of the firm purchase commitments when determining whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met.
Cash flow hedges that constitute a net position
B6.6.7 When an entity hedges a group of items with offsetting risk positions (ie a net position), the eligibility for hedge accounting depends on the type of hedge. If the hedge is a fair value hedge, then the net position may be eligible as a hedged item. If, however, the hedge is a cash flow hedge, then the net position can only be eligible as a hedged item if it is a hedge of foreign currency risk and the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss and also specifies their nature and volume.
B6.6.8 For example, an entity has a net position that consists of a bottom layer of FC100 of sales and a bottom layer of FC150 of purchases. Both sales and purchases are denominated in the same foreign currency. In order to sufficiently specify the designation of the hedged net position, the entity specifies in the original documentation of the hedging relationship that sales can be of Product A or Product B and purchases can be of Machinery Type A, Machinery Type B and Raw Material A. The entity also specifies the volumes of the transactions by each nature. The entity documents that the bottom layer of sales (FC100) is made up of a forecast sales volume of the first FC70 of Product A and the first FC30 of Product B. If those sales volumes are expected to affect profit or loss in different reporting periods, the entity would include that in the documentation, for example, the first FC70 from sales of Product A that are expected to affect profit or loss in the first reporting period and the first FC30 from sales of Product B that are expected to affect profit or loss in the second reporting period. The entity also documents that the bottom layer of the purchases (FC150) is made up of purchases of the first FC60 of Machinery Type A, the first FC40 of Machinery Type B and the first FC50 of Raw Material A. If those purchase volumes are expected to affect profit or loss in different reporting periods, the entity would include in the documentation a disaggregation of the purchase volumes by the reporting periods in which they are expected to affect profit or loss (similarly to how it documents the sales volumes). For example, the forecast transaction would be specified as:
(a) the first FC60 of purchases of Machinery Type A that are expected to affect profit or loss from the third reporting period over the next ten reporting periods;
(b) the first FC40 of purchases of Machinery Type B that are expected to affect profit or loss from the fourth reporting period over the next 20 reporting periods; and
(c) the first FC50 of purchases of Raw Material A that are expected to be received in the third reporting period and sold, ie affect profit or loss, in that and the next reporting period.
Specifying the nature of the forecast transaction volumes would include aspects such as the depreciation pattern for items of property, plant and equipment of the same kind, if the nature of those items is such that the depreciation pattern could vary depending on how the entity uses those items. For example, if the entity uses items of Machinery Type A in two different production processes that result in straight-line depreciation over ten reporting periods and the units of production method respectively, its documentation of the forecast purchase volume for Machinery Type A would disaggregate that volume by which of those depreciation patterns will apply.
B6.6.9 For a cash flow hedge of a net position, the amounts determined in accordance with paragraph 6.5.11 shall include the changes in the value of the items in the net position that have a similar effect as the hedging instrument in conjunction with the fair value change on the hedging instrument. However, the changes in the value of the items in the net position that have a similar effect as the hedging instrument are recognised only once the transactions that they relate to are recognised, such as when a forecast sale is recognised as revenue. For example, an entity has a group of highly probable forecast sales in nine months’ time for FC100 and a group of highly probable forecast purchases in 18 months’ time for FC120. It hedges the foreign currency risk of the net position of FC20 using a forward exchange contract for FC20. When determining the amounts that are recognised in the cash flow hedge reserve in accordance with paragraph 6.5.11(a)-6.5.11(b), the entity compares:
(a) the fair value change on the forward exchange contract together with the foreign currency risk related changes in the value of the highly probable forecast sales; with
(b) the foreign currency risk related changes in the value of the highly probable forecast purchases.
However, the entity recognises only amounts related to the forward exchange contract until the highly probable forecast sales transactions are recognised in the financial statements, at which time the gains or losses on those forecast transactions are recognised (ie the change in the value attributable to the change in the foreign exchange rate between the designation of the hedging relationship and the recognition of revenue).
B6.6.10 Similarly, if in the example the entity had a nil net position it would compare the foreign currency risk related changes in the value of the highly probable forecast sales with the foreign currency risk related changes in the value of the highly probable forecast purchases. However, those amounts are recognised only once the related forecast transactions are recognised in the financial statements.
Layers of groups of items designated as the hedged item
B6.6.11 For the same reasons noted in paragraph B6.3.19, designating layer components of groups of existing items requires the specific identification of the nominal amount of the group of items from which the hedged layer component is defined.
B6.6.12 A hedging relationship can include layers from several different groups of items. For example, in a hedge of a net position of a group of assets and a group of liabilities, the hedging relationship can comprise, in combination, a layer component of the group of assets and a layer component of the group of liabilities.
Presentation of hedging instrument gains or losses
B6.6.13 If items are hedged together as a group in a cash flow hedge, they might affect different line items in the statement of profit or loss and other comprehensive income. The presentation of hedging gains or losses in that statement depends on the group of items.
B6.6.14 If the group of items does not have any offsetting risk positions (for example, a group of foreign currency expenses that affect different line items in the statement of profit or loss and other comprehensive income that are hedged for foreign currency risk) then the reclassified hedging instrument gains or losses shall be apportioned to the line items affected by the hedged items. This apportionment shall be done on a systematic and rational basis and shall not result in the grossing up of the net gains or losses arising from a single hedging instrument.
B6.6.15 If the group of items does have offsetting risk positions (for example, a group of sales and expenses denominated in a foreign currency hedged together for foreign currency risk) then an entity shall present the hedging gains or losses in a separate line item in the statement of profit or loss and other comprehensive income. Consider, for example, a hedge of the foreign currency risk of a net position of foreign currency sales of FC100 and foreign currency expenses of FC80 using a forward exchange contract for FC20. The gain or loss on the forward exchange contract that is reclassified from the cash flow hedge reserve to profit or loss (when the net position affects profit or loss) shall be presented in a separate line item from the hedged sales and expenses. Moreover, if the sales occur in an earlier period than the expenses, the sales revenue is still measured at the spot exchange rate in accordance with AASB 121. The related hedging gain or loss is presented in a separate line item, so that profit or loss reflects the effect of hedging the net position, with a corresponding adjustment to the cash flow hedge reserve. When the hedged expenses affect profit or loss in a later period, the hedging gain or loss previously recognised in the cash flow hedge reserve on the sales is reclassified to profit or loss and presented as a separate line item from those that include the hedged expenses, which are measured at the spot exchange rate in accordance with AASB 121.
B6.6.16 For some types of fair value hedges, the objective of the hedge is not primarily to offset the fair value change of the hedged item but instead to transform the cash flows of the hedged item. For example, an entity hedges the fair value interest rate risk of a fixed-rate debt instrument using an interest rate swap. The entity’s hedge objective is to transform the fixed-interest cash flows into floating interest cash flows. This objective is reflected in the accounting for the hedging relationship by accruing the net interest accrual on the interest rate swap in profit or loss. In the case of a hedge of a net position (for example, a net position of a fixed-rate asset and a fixed-rate liability), this net interest accrual must be presented in a separate line item in the statement of profit or loss and other comprehensive income. This is to avoid the grossing up of a single instrument’s net gains or losses into offsetting gross amounts and recognising them in different line items (for example, this avoids grossing up a net interest receipt on a single interest rate swap into gross interest revenue and gross interest expense).
Effective date and transition (chapter 7)
Transition (section 7.2)
Financial assets held for trading
B7.2.1 At the date of initial application of this Standard, an entity must determine whether the objective of the entity’s business model for managing any of its financial assets meets the condition in paragraph 4.1.2(a) or if a financial asset is eligible for the election in paragraph 5.7.5. For that purpose, an entity shall determine whether financial assets meet the definition of held for trading as if the entity had acquired the assets at the date of initial application.
Definitions (Appendix A)
Derivatives
BA.1 Typical examples of derivatives are futures and forward, swap and option contracts. A derivative usually has a notional amount, which is an amount of currency, a number of shares, a number of units of weight or volume or other units specified in the contract. However, a derivative instrument does not require the holder or writer to invest or receive the notional amount at the inception of the contract. Alternatively, a derivative could require a fixed payment or payment of an amount that can change (but not proportionally with a change in the underlying) as a result of some future event that is unrelated to a notional amount. For example, a contract may require a fixed payment of CU1,000 if six-month LIBOR increases by 100 basis points. Such a contract is a derivative even though a notional amount is not specified.
BA.2 The definition of a derivative in this Standard includes contracts that are settled gross by delivery of the underlying item (eg a forward contract to purchase a fixed rate debt instrument). An entity may have a contract to buy or sell a non-financial item that can be settled net in cash or another financial instrument or by exchanging financial instruments (eg a contract to buy or sell a commodity at a fixed price at a future date). Such a contract is within the scope of this Standard unless it was entered into and continues to be held for the purpose of delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements (see paragraphs 5-7 of AASB 139).
BA.3 One of the defining characteristics of a derivative is that it has an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. An option contract meets that definition because the premium is less than the investment that would be required to obtain the underlying financial instrument to which the option is linked. A currency swap that requires an initial exchange of different currencies of equal fair values meets the definition because it has a zero initial net investment.
BA.4 A regular way purchase or sale gives rise to a fixed price commitment between trade date and settlement date that meets the definition of a derivative. However, because of the short duration of the commitment it is not recognised as a derivative financial instrument. Rather, this Standard provides for special accounting for such regular way contracts (see paragraphs 3.1.2 and B3.1.3-B3.1.6).
BA.5 The definition of a derivative refers to non-financial variables that are not specific to a party to the contract. These include an index of earthquake losses in a particular region and an index of temperatures in a particular city. Non-financial variables specific to a party to the contract include the occurrence or non-occurrence of a fire that damages or destroys an asset of a party to the contract. A change in the fair value of a non-financial asset is specific to the owner if the fair value reflects not only changes in market prices for such assets (a financial variable) but also the condition of the specific non-financial asset held (a non-financial variable). For example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the car’s physical condition, the change in that residual value is specific to the owner of the car.
Financial assets and liabilities held for trading
BA.6 Trading generally reflects active and frequent buying and selling, and financial instruments held for trading generally are used with the objective of generating a profit from short-term fluctuations in price or dealer’s margin.
BA.7 Financial liabilities held for trading include:
(a) derivative liabilities that are not accounted for as hedging instruments;
(b) obligations to deliver financial assets borrowed by a short seller (ie an entity that sells financial assets it has borrowed and does not yet own);
(c) financial liabilities that are incurred with an intention to repurchase them in the near term (eg a quoted debt instrument that the issuer may buy back in the near term depending on changes in its fair value); and
(d) financial liabilities that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking.
BA.8 The fact that a liability is used to fund trading activities does not in itself make that liability one that is held for trading.
DELETED IFRS 9 TEXT
Deleted IFRS 9 text is not part of AASB 9.
Paragraph 7.1.1
This Standard is available for application. If an entity elects to apply this Standard it must apply all of the requirements in this Standard at the same time (but see also paragraphs 7.1.2, 7.2.16 and 7.3.2), disclose that fact and at the same time apply the amendments in Appendix C.
Paragraph 7.3.1
This Standard supersedes IFRIC 9 Reassessment of Embedded Derivatives. The requirements added to IFRS 9 in October 2010 incorporated the requirements previously set out in paragraphs 5 and 7 of IFRIC 9. As a consequential amendment, IFRS 1 First-time Adoption of International Financial Reporting Standards incorporated the requirements previously set out in paragraph 8 of IFRIC 9.
Paragraph 7.3.2
This Standard supersedes IFRS 9 issued in 2009 and IFRS 9 issued in 2010. However, an entity may elect to apply IFRS 9 issued in 2009 or IFRS 9 issued in 2010 instead of applying this Standard.
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