Transaction Cost Treatment Ifrs 9
Takako Dito
IFRS 9 sets the guiding principles for financial reporting of financial assets and financial liabilities. All financial instruments and entities are in the scope of IFRS 9, with specific exceptions noted in paragraph IFRS 9.2.1. Generally, an entity recognises a financial asset or liability in its financial statements when it becomes party to the contractual provisions of the instrument (IFRS 9.3.1.1).
The settlement date is the date when an asset is delivered. Settlement date accounting refers to the recognition of an asset on the day it is received by the entity, and the derecognition of an asset and recognition of any gain or loss on disposal on the day it is delivered by the selling entity. If settlement date accounting is used, any change in the fair value of the asset to be received between the trade date and the settlement date is accounted for in the same way as the acquired asset. Specifically, for assets measured at amortised cost, changes in fair value during this interval are not recognised. Conversely, for assets classified at FVTPL, these fair value changes are indeed recognised in P/L. (IFRS 9.B3.1.6).
Paragraphs IFRS 9.IG.D.2.1-3 provide examples illustrating the application of trade date and settlement date accounting. Both methods yield the same impact on P/L or OCI, with the only difference being the timing of recognition of the underlying financial asset.
The same method should be consistently applied for all purchases and sales of financial assets that are classified similarly under IFRS 9 (IFRS 9.B3.1.3). Regardless of the chosen approach, the trade date should be considered the date of initial recognition for applying the impairment requirements (IFRS 9.5.7.4).
Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. These are typically not recognised as they are outside the scope of IFRS 9, with the exception of certain loan commitments as specified in paragraph IFRS 9.2.3. See this forums topic and paragraphs IFRS 9.BCZ2.2-8 for a more comprehensive discussion.
Generally, financial assets and liabilities are initially recognised at fair value, with an adjustment for directly attributable transaction costs. However, for items classified at fair value through profit or loss (FVTPL), transaction costs are expensed immediately (IFRS 9.5.1.1). The fair value of a financial instrument at initial recognition is typically, though not always, the transaction price (IFRS 9.B5.1.2A). IFRS 13 details conditions that might suggest a divergence between the fair value and the transaction price.
It is not explicitly stated how the deferred difference should be recognised as a gain or loss. The Basis for Conclusions to IAS 39 suggested that straight-line amortisation may be suitable in some cases, but not all (IAS 39.BC222(v)(ii)). IFRS 9 does not elaborate on this, therefore, straight-line amortisation can be applied whenever reasonable.
As an exception to the general rule, trade receivables are initially recognised in line with IFRS 15 provisions, i.e., at their transaction price, potentially considering a significant financing component (IFRS 9.5.1.3).
As previously stated, for financial assets not classified as fair value through profit or loss (FVTPL), transaction costs are added to the fair value at initial recognition. For financial liabilities, transaction costs are deducted from the fair value at initial recognition (IFRS 9.5.1.1).
For debt investments measured at amortised cost, transaction costs are, in effect, amortised through P/L over the life of the instrument. For equity investments measured at fair value through OCI, transaction costs are recognised in other comprehensive income as part of a change in fair value at the next remeasurement (IFRS 9.IG.E.1.1).
Any fees exchanged between parties to the contract (for example, between a lender and a borrower) that are an integral part of the effective interest rate are not considered transaction costs, and they are amortised as discussed here.
On 1 January 20X1, Contractor X provides a security deposit of $3m to Client Y to secure a contract. This deposit will be repaid once the contract has concluded (after three years) but without any interest. The current market yield for corporate bonds issued by businesses with a similar credit standing to Client Y stands at 3%.
Contractor X recognises the deposit at $2.75m, which represents the present value of a $3m cash flow after three years (i.e. $3m/(1.03)^3). The difference between the amount paid ($3m) and the deposit recognised ($2.75m) is recognised as the incremental cost of obtaining a contract. The accounting entries at the time of initial recognition are as follows:
After three years, the capitalised incremental costs of obtaining the contract will have been entirely amortised to P/L and the interest on the cash collateral will have been recognised as interest income.
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IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a 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 the financial liability.
In April 2001 the International Accounting Standards Board (Board) adopted IAS 39 Financial Instruments: Recognition and Measurement, which had originally been issued by the International Accounting Standards Committee in March 1999.
The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly, the Board divided its project to replace IAS 39 into three main phases. As the Board completed each phase, it issued chapters in IFRS 9 that replaced the corresponding requirements in IAS 39.
In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and measurement of financial assets. In October 2010 the Board added the requirements related to the classification and measurement of financial liabilities to IFRS 9. This includes requirements on embedded derivatives and how to account for changes in own credit risk on financial liabilities designated under the fair value option.
In October 2010 the Board also decided to carry forward unchanged from IAS 39 the requirements related to the derecognition of financial assets and financial liabilities. Because of these changes, in October 2010 the Board restructured IFRS 9 and its Basis for Conclusions. In December 2011 the Board deferred the mandatory effective date of IFRS 9.
In November 2013 the Board added a Hedge Accounting chapter. IFRS 9 permits an entity to choose as its accounting policy either to apply the hedge accounting requirements of IFRS 9 or to continue to apply the hedge accounting requirements in IAS 39. Consequently, although IFRS 9 is effective (with limited exceptions for entities that issue insurance contracts and entities applying the IFRS for SMEs Standard), IAS 39, which now contains only its requirements for hedge accounting, also remains effective.
In May 2017 when IFRS 17 Insurance Contracts was issued, it amended the derecognition requirements in IFRS 9 by permitting an exemption for when an entity repurchases its financial liability in specific circumstances.
In October 2017 IFRS 9 was amended by Prepayment Features with Negative Compensation (Amendments to IFRS 9). The amendments specify that particular financial assets with prepayment features that may result in reasonable negative compensation for the early termination of such contracts are eligible to be measured at amortised cost or at fair value through other comprehensive income.
In September 2019 the Board amended IFRS 9 and IAS 39 by issuing Interest Rate Benchmark Reform to provide specific exceptions to hedge accounting requirements in IFRS 9 and IAS 39 for (a) highly probable requirement; (b) prospective assessments; (c) retrospective assessment (IAS 39 only); and (d) separately identifiable risk components. Interest Rate Benchmark Reform also amended IFRS 7 to add specific disclosure requirements for hedging relationships to which an entity applies the exceptions in IFRS 9 or IAS 39.
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