Financial instruments and share-based payment
What the exam tests
IFRS 9 classification and measurement, expected credit losses (ECL), modification and derecognition, hedge accounting basics, and IFRS 2 equity- and cash-settled awards.
Core rules
- IFRS 9 classifies debt at amortised cost if the business model is hold to collect and cash flows are solely payments of principal and interest (SPPI); FVOCI if hold to collect and sell and SPPI; otherwise FVTPL.
- Equity investments default to FVTPL; an irrevocable FVOCI election is available, with dividends in profit or loss and no recycling.
- ECL: 12-month ECL unless credit risk has increased significantly, then lifetime ECL; trade receivables may use the simplified lifetime approach.
- IFRS 2 equity-settled awards are measured at grant-date fair value and not remeasured; expense is spread over vesting, adjusted for service and non-market performance conditions. Market conditions are built into fair value. Cash-settled awards are remeasured to fair value each reporting date.
Worked example
On 1 January 20X1 an entity grants 1,000 options to each of 100 employees, vesting after three years, fair value 5 each. It expects 90% to vest. Year 1 expense = 100 × 1,000 × 90% × 5 ÷ 3 = 150,000, with a credit to equity. If a market condition (e.g. share price target) is attached, the 5 fair value already reflects it; the entity does not reverse expense if the target is missed, but it does adjust for actual leavers.
Traps
- Remeasuring equity-settled awards for share price movements.
- Treating a market condition as a vesting adjustment.
- Applying ECL to FVTPL assets.
- Calculating interest on credit-impaired assets on the gross balance rather than amortised cost.