2.1.1 Receivables and payables

Unconditional receivables and payables are recognised as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash. [IFRS 9.B3.1.2(a)].

2.1.2 Firm commitments to purchase or sell goods or services

Under IFRS, assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order for goods or services does not generally recognise an asset for the consideration receivable (and the entity that places the order does not generally recognise a liability for the consideration to be paid) at the time of the commitment, but instead delays recognition until the ordered goods or services have been shipped, delivered or rendered. [IFRS 9.B3.1.2(b)].

This accounting applies on the assumption that the firm commitment to buy or sell non-financial items is not treated as if it were a derivative (see Chapter 45 at 3.5) nor designated as a hedged item in a fair value hedge (see Chapter 53 at 5.1). Where the firm commitment is treated as a derivative or designated as a hedged item in a fair value hedge, it would be recognised as an asset or liability before delivery.

2.1.3 Forward contracts

A forward contract is a contract which obliges one party to the contract to buy, and the other party to sell, the asset that is the subject of the contract for a fixed price at a future date.

A forward contract within the scope of IFRS 9 is recognised as an asset or a liability at commitment date, rather than on settlement. When an entity becomes a party to a forward contract, the fair values of the right and obligation are often equal, so that the net fair value of the forward at inception is zero. If the net fair value of the right and obligation is not zero, the contract is recognised as an asset or liability. [IFRS 9.B3.1.2(c)].

2.1.4 Option contracts

An option contract is a contract which gives one party to the contract the right, but not the obligation, to buy from, or sell to, the other party to the contract the asset that is the subject of the contract for a fixed price at a future date (or during a period of time). An option giving the right to buy an asset is referred to as a ‘call’ option and one giving the right to sell an asset as a ‘put’ option. An option is referred to as a ‘bought’ or ‘purchased’ option from the perspective of the party with the right to buy or sell (the ‘holder’) and as a ‘written’ option from the perspective of the party with the potential obligation to buy or sell.

Option contracts that are within the scope of IFRS 9 are recognised as assets or liabilities when the holder or writer becomes a party to the contract. [IFRS 9.B3.1.2(d)].

2.1.5 Planned future transactions (forecast transactions)

Planned future transactions, no matter how likely, are not assets and liabilities because the entity has not become a party to a contract. They are therefore not recognised under IFRS 9. [IFRS 9.B3.1.2(e)]. However, transactions that have been entered into as a hedge of certain ‘highly probable’ future transactions are recognised under IFRS 9 – this raises the issue of the accounting treatment of any gains or losses arising on such hedging transactions (see Chapter 53 at 5.2).

2.1.6 Transfers of financial assets not qualifying for derecognition by transferor – Impact on recognition

IFRS 9 states that, where a financial asset is transferred from one party to another in circumstances that preclude the transferor from derecognising the asset, the transferee should not recognise the transferred asset. Instead, the transferee derecognises the cash or other consideration paid and recognises a receivable from the transferor. [IFRS 9.B3.1.1]. If the transferor has both a right and an obligation to reacquire control of the entire transferred asset for a fixed amount (such as under a repurchase agreement – see Chapter 52 at 4.1), the transferee may account for its receivable at amortised cost if it meets the criteria for classification as measured at amortised cost. [IFRS 9. B3.2.15]. Underlying this principle appears to be a concern that more than one party cannot satisfy the criteria in IFRS 9 for recognition of the same financial asset at the same time. In fact, however, this principle may not hold in all circumstances, since it is common for the same assets to be simultaneously recognised by more than one entity – for example if the transferor adopts settlement date accounting and the transferee trade date accounting (see 2.2 below).

In addition, IFRS 9 clarifies that to the extent that a transfer does not qualify for derecognition, the transferor does not account for its contractual rights or obligations related to the transfer separately as derivatives if recognising both the derivative and either the transferred asset or the liability arising from the transfer would result in recognising the same rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer of financial assets from being accounted for as a sale. In that case, the call option is not separately recognised as a derivative asset. [IFRS 9.B3.2.14].

2.1.7 Cash collateral

The implementation guidance to IFRS 9 addresses the recognition of cash collateral. When an entity receives cash collateral that is not legally segregated (e.g. not treated as ‘client money’), it must recognise the cash and a related payable to the entity providing such collateral. The reason is that the ultimate realisation of a financial asset is its conversion into cash, and hence, no further transformation is required before the economic benefits of the cash received can be realised.

On the other hand, the entity providing the cash collateral derecognises the cash and recognises a receivable from the receiving entity. [IFRS 9.IG.D.1.1].

The accounting treatment of ‘client money’ is discussed in more detail in Chapter 52 at 3.7. The requirements related to non‑cash collateral are addressed in Chapter 52 at 5.5.2.

2.1.8 Principal versus agent

When an entity acts as an intermediary in transactions involving financial instruments, the question of whether it is acting as an agent or a principal may arise. This is a particularly relevant matter for brokers and similar institutions.

The Interpretations Committee has addressed this matter in relation to clearing brokers in the context of centrally cleared client derivatives. Diversity in practice had been observed with some brokers applying the guidance on principal versus agent included in IFRS 15 – Revenue from Contracts with Customers – to determine whether they should account for back to back derivatives with their client and the central clearing counterparty. In June 2017, the Committee concluded that the clearing broker should first apply the requirements for financial instruments and observed that:

• if the transaction(s) results in contracts that are within the scope of IFRS 9, then the clearing member applies to those contracts the recognition requirements of IFRS 9. In the statement of financial position, the clearing member presents the assets and liabilities arising from its contracts with the clearing house separately from those arising from its contracts with its clients, unless net presentation is required pursuant to the offsetting requirements in IAS 32. This implies the clearing member is considered to act as principal in both the derivative contracts with the clearing house and its clients;
• if the transaction(s) is not within the scope of IFRS 9 and another standard does not specifically apply, only then would the clearing member apply the hierarchy in paragraphs 10–12 of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – to determine an appropriate accounting policy for the transaction(s) (see Chapter 3 at 4.3), e.g. using the principal versus agent guidance in IFRS 15 (see Chapter 28 at 3.4).¹

2.2.1 Financial assets: general requirements

As discussed at 2.1 above, the general requirement under IFRS 9 is to recognise a financial asset or a financial liability on its statement of financial position when, and only when, the entity becomes a party to the contractual provisions of the instrument (i.e. the trade date). [IFRS 9.3.1.1]. However the application of this general requirement to certain transactions known as ‘regular way’ purchases and sales presents some challenges. Below we discuss those challenges and the accounting policy choice that IFRS 9 has provided as a solution.

A regular way purchase or sale is defined as a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned. [IFRS 9 Appendix A]. By contrast, a contract that does not require delivery and can be settled by net settlement (i.e. payment or receipt of cash or other financial assets equivalent to the change in value of the contract) is not a regular way transaction, but is accounted for between the trade date and settlement date as a derivative in accordance with the requirements of IFRS 9 (see Chapter 50 at 2.4). [IFRS 9.B3.1.4].

Many financial markets provide a mechanism whereby all transactions in certain financial instruments (particularly quoted equities and bonds) entered into on a particular date are settled by delivery a fixed number of days after that date. The date on which the entity commits itself to purchase or sell an asset is called the ‘trade date’ and the date on which it is settled by delivery of the assets that are the subject of the agreement is called the ‘settlement date’. [IFRS 9.B3.1.5, 6]. One effect of this mechanism is that, while legal title to the assets that are the subject of the transaction passes only on or after settlement date, the buyer is effectively exposed to the risks and rewards of ownership of the assets from trade date.

Absent any special provisions, the accounting analysis for regular way transactions under IFRS 9 would therefore be that, between trade date and settlement date, an entity has a forward contract to purchase an asset (see 2.1.3 above) which, in common with all derivatives, should be recorded at fair value, with all changes in fair value recognised in profit or loss (see Chapter 48 at 4), unless the special rules for hedge accounting apply (see Chapter 53). This would not only be somewhat onerous but would also have the effect that changes in a financial asset's fair value between trade date and settlement date would be recognised in profit or loss, even though the asset itself may not be measured at fair value through profit or loss after initial recognition.

To avoid this, IFRS 9 permits assets subject to regular way transactions to be recognised, or derecognised, either as at the trade date (‘trade date accounting’) or as at the settlement date (‘settlement date accounting’). [IFRS 9.B3.1.3, B3.1.5, B3.1.6]. This accounting policy choice can be made separately for each of the main categories of financial asset identified by IFRS 9, i.e. debt instruments measured at amortised cost, debt instruments at fair value through other comprehensive income (FVOCI), financial assets mandatorily measured at fair value through profit or loss, debt instruments designated as measured at fair value through profit or loss and equity investments designated as measured at FVOCI (see Chapter 48). Once chosen, the accounting policy needs to be applied consistently and symmetrically (i.e. to acquisitions and disposals) to each category. [IFRS 9.B3.1.3].

IFRS 9 provides additional guidance for determining whether a transaction meets the definition of ‘regular way’ which is further discussed below.

2.2.2 Financial liabilities

The above requirements apply only to transactions in financial assets. IFRS 9 does not contain any specific requirements about trade date accounting and settlement date accounting for transactions in financial instruments that are classified as financial liabilities. Therefore, the general recognition and derecognition requirements for financial liabilities in IFRS 9 normally apply. Consequently, financial liabilities are normally recognised on the date the entity ‘becomes a party to the contractual provisions of the instrument’ (see 2.1 above); in addition, they are not generally recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of IFRS 9. Financial liabilities are derecognised only when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires (see Chapter 52 at 6). [IFRS 9.IG.B3.2].

In January 2007, the IFRS Interpretations Committee addressed the accounting for short sales of securities when the transaction terms require delivery of the securities within the time frame established generally by regulation or convention in the marketplace concerned. Constituents explained that in practice, many entities apply trade date accounting to such transactions. Specifically, industry practice recognised the short sales as financial liabilities at fair value with changes in fair value recognised in profit or loss. Profit or loss would be the same as if short sales were accounted for as derivatives, but the securities would be presented differently on the statement of financial position. Those constituents argued that a short sale is created by a transaction in a financial asset and hence the implementation guidance noted in the previous paragraph is not relevant.

The Committee acknowledged that requiring entities to account for short positions as derivatives may create considerable practical problems for their accounting systems and controls with little, if any, improvement to the quality of financial information presented. For these reasons, and because there was little diversity in practice, the Committee decided not to take the issue onto its agenda and thus industry practice remains prevalent.²

2.2.3 Trade date accounting

As noted above, the trade date is the date on which an entity commits itself to purchase or sell an asset. Trade date accounting requires:

1. in respect of an asset to be bought: recognition on the trade date of the asset and the liability to pay for it, which means that during the period between trade date and settlement date, the entity accounts for the asset as if it already owned it; and
2. in respect of an asset to be sold: derecognition on the trade date of the asset, together with recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment.

IFRS 9 notes that, generally, interest does not start to accrue on the asset and corresponding liability until the settlement date when title passes. [IFRS 9.B3.1.5].

2.2.4 Settlement date accounting

As noted above, the settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting requires:

1. in respect of an asset to be bought: the recognition of the asset on the settlement date (i.e. the date it is received by the entity). Any change in the fair value of the asset to be received during the period between the trade date and the settlement date is accounted for in the same way as the acquired asset. In other words: [IFRS 9.5.7.4, IFRS 9.B3.1.6]
   • for assets carried at cost or amortised cost, the change in fair value is not recognised (other than impairment losses);
   • for assets classified as financial assets at fair value through profit or loss, the change in fair value is recognised in profit or loss; and
   • for financial assets measured at FVOCI, the change in fair value is recognised in other comprehensive income.
2. in respect of an asset to be sold: derecognition of the asset, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment on the settlement date (i.e. the date it is delivered by the entity). [IFRS 9.B3.1.6]. A change in the fair value of the asset between trade date and settlement date is not recorded in the financial statements because the seller's right to changes in the fair value ceases on the trade date. [IFRS 9.IG.D.2.2].

2.2.5 Illustrative examples

Examples 49.3 and 49.4 below (which are based on those in the implementation guidance appended to IFRS 9) illustrate the application of trade date and settlement date accounting to the various categories of financial asset identified by IFRS 9. [IFRS 9.IG.D.2.1, D.2.2]. For simplicity purposes, these examples do not address the accounting entries related to impairment charges. The accounting treatment for these categories of assets is discussed in more detail in Chapter 50 through to Chapter 54.

As illustrated above, for a regular way purchase, the key difference between trade date and settlement date accounting is the timing of recognition of a financial asset. Regardless of the method used, the impact on profit or loss, OCI and net assets is the same.

As illustrated above, for a regular way sale, the key differences between trade date and settlement date accounting relate to the timing of derecognition of a financial asset and the timing of recognition of any gain or loss arising from the disposal of the financial asset, unless the financial asset is carried at fair value through profit or loss.

3.3.1 Interest-free and low-interest long-term loans

As noted in 3.3 above, the fair value of a financial instrument on initial recognition is normally the transaction price. IFRS 9 further explains that if part of the consideration given or received was for something other than the financial instrument, the entity should measure the fair value of the financial instrument in accordance with IFRS 13. For example, the fair value of a long-term loan or receivable that carries no interest could be estimated as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for instruments that are similar as to currency, term, type of interest rate, credit risk and other factors. Any additional amount advanced is an expense or a reduction of income unless it qualifies for recognition as some other type of asset. IFRS 13 requires the application of a similar approach in such circumstances. [IFRS 9.B5.1.1, IFRS 13.60]. For example, an entity may provide an interest free loan to a supplier in order to receive a discount on goods or services purchased in the future and the difference between the fair value and the amount advanced might well be recognised as an asset, for example under IAS 38 – Intangible Assets – if the entity obtains a contractual right to the discounted supplies.

Similar issues often arise from transactions between entities under common control. In fact, IFRS 13 suggests a related party transaction may indicate that the transaction price is not the same as the fair value of an asset or liability (see Chapter 14 at 13.3). For example, parents sometimes lend money to subsidiaries on an interest-free or low-interest basis where the loan is not repayable on demand. Where, in its separate financial statements, the parent (or subsidiary) is required to record a receivable (or payable) on initial recognition at a fair value that is lower than cost, the additional consideration will normally represent an additional investment in the subsidiary (or equity contribution from the parent).

Another example is a loan received from a government that has a below-market rate of interest which should be recognised and initially measured at fair value. The benefit of the below-market rate loan, i.e. the excess of the consideration received over the initial carrying amount of the loan, should be accounted for as a government grant. [IAS 20.10A]. The treatment of government grants is discussed further in Chapter 24.

If a financial instrument is recognised where the terms are ‘off-market’ (i.e. the consideration given or received does not equal the instrument's fair value) but instead a fee is paid or received in compensation, the instrument should be recognised at its fair value that includes an adjustment for the fee received or paid. [IFRS 9.B5.1.2].

Applying the requirements of IFRS 9 to the simple fact pattern provided by the IASB is a relatively straightforward exercise. In practice, however, it may be more difficult to identify those fees that are required by IFRS 9 to be treated as part of the financial instrument and those that should be dealt with in another way, for example under IFRS 15. In particular it may be difficult to determine the extent to which fees associated with a financial instrument that is not quoted in an active market represent compensation for off-market terms or for the genuine provision of services.

3.3.2 Measurement of financial instruments following modification of contractual terms that leads to initial recognition of a new instrument

An entity may agree (with the holder or the issuer) to modify the terms of an instrument that it already recognises in its financial statements as a financial asset, a financial liability or an equity instrument. In such a scenario, an entity needs to consider whether the modification of the terms triggers derecognition of the existing instrument and recognition of a new instrument (see Chapter 52 at 3.4.1). If so, the new instrument would be initially measured at fair value in accordance with the general requirements discussed at 3.1 above.

For example, when the contractual terms of an issued equity instrument are modified such that it is subsequently reclassified as a financial liability, it should be measured at its fair value on the date it is initially recognised as a financial liability, with any difference between this amount and the amount recorded in equity being taken to equity. This follows IAS 32 which prohibits the recognition of gains or losses on the purchase, issue, or cancellation of an entity's own equity instrument.³

The accounting for a modification of a financial asset (or financial liability) that results in the recognition of a new financial asset (or financial liability) is dealt with in more detail in Chapter 52 at 3.4 and 6.2.

3.3.3 Financial guarantee contracts and off-market loan commitments

The requirement to measure financial instruments at fair value on initial recognition also applies to issued financial guarantee contracts that are within the scope of IFRS 9 as well as to commitments to provide a loan at a below-market interest rate (see Chapter 45 at 3.4 and 3.5).

When issued to an unrelated party in a stand-alone arm's length transaction, the fair value of a financial guarantee contract at inception is likely to equal the premium received, unless there is evidence to the contrary. [IFRS 9.B2.5(a)]. There is likely to be such evidence where, say, a parent provided to a bank a financial guarantee in respect of its subsidiary's borrowings and charged no fee.

When an off-market loan is provided to an entity's subsidiary (see 3.3.1 above), a ‘spare debit’ arises in the separate financial statements of the parent as a result of the recognition of the loan at fair value. The same situation can arise when a parent provides a subsidiary with an off-market loan commitment. Again, it is normally appropriate to treat this difference as an additional cost of investment in the subsidiary in the separate accounts of the parent (and as an equity contribution from the parent in the accounts of the subsidiary).

3.3.4 Loans and receivables acquired in a business combination

Consistent with IFRS 9 and IFRS 13, IFRS 3 – Business Combinations – requires financial assets acquired in a business combination to be measured by the acquirer on initial recognition at their fair value. [IFRS 3.18].

IFRS 3 contains application guidance explaining that an acquirer should not recognise a separate valuation allowance (i.e. bad debt provision) in respect of loans and receivables for contractual cash flows that are deemed to be uncollectible at the acquisition date. This is because the effects of uncertainty about future cash flows are included in the fair value measure (see Chapter 9 at 5.5.5 and Chapter 51 at 7.3.1). [IFRS 3.B41].

3.3.5 Acquisition of a group of assets that does not constitute a business

Where a group of assets that does not constitute a business is acquired, IFRS 3 requires the acquiring entity to:

• identify and recognise the individual identifiable assets acquired and liabilities assumed; and
• allocate the cost of the group to the individual identifiable assets and liabilities based on their relative fair values at the date of the acquisition. [IFRS 3.2(b)].

The Interpretations Committee has considered how to allocate the transaction price to the identifiable assets acquired and liabilities assumed when:

• the sum of the individual fair values of the identifiable assets and liabilities is different from the transaction price; and
• the group of assets includes identifiable assets and liabilities initially measured both at cost and at an amount other than cost, e.g. financial instruments which are measured on initial recognition at their fair value.

Such a transaction or event does not give rise to goodwill. The Committee observed that if an entity initially considers that there might be a difference between the transaction price for the group and the sum of the individual fair values of the identifiable assets and liabilities, it first reviews the procedures used to determine those individual fair values to assess whether such a difference truly exists before allocating the transaction price.

The Committee concluded that a reasonable reading of the requirements of IFRS 3 results in two possible ways of accounting for the acquisition of the group:

1. Under the first approach, the entity accounts for the acquisition of the group as follows:
   • it identifies the individual identifiable assets acquired and liabilities assumed that it recognises at the date of the acquisition;
   • it determines the individual transaction price for each identifiable asset and liability by allocating the cost of the group based on the relative fair values of those assets and liabilities at the date of the acquisition; and then
   • it applies the initial measurement requirements in applicable IFRS to each identifiable asset acquired and liability assumed. The entity accounts for any difference between the amount at which the asset or liability is initially measured and its individual transaction price applying the relevant requirements.

     In the case of any financial instruments within the group, the entity should treat the difference between the fair value and allocated transaction price as a ‘day 1’ profit, the requirements for which are discussed at 3.3 above.

2. Under the second approach, any identifiable asset or liability that is initially measured at an amount other than cost is initially measured at the amount specified in the applicable IFRS, i.e. fair value in the case of a financial instrument. The entity first deducts from the transaction price of the group the amounts allocated to the assets and liabilities initially measured at an amount other than cost, and then determines the cost of the remaining identifiable assets and liabilities by allocating the residual transaction price based on their relative fair values at the date of the acquisition.

The Committee observed that an entity should apply its reading of the requirements consistently to all such acquisitions.⁴

3.4.1 Accounting treatment

As noted at 3.1 above, the initial carrying amount of an instrument should be adjusted for transaction costs, except for financial instruments subsequently carried at fair value through profit or loss and trade receivables that do not have a significant financing component in accordance with IFRS 15. The consequences of this requirement are:

• For financial instruments subsequently measured at amortised cost and debt instruments subsequently measured at fair value through other comprehensive income, transaction costs are included in the calculation of the amortised cost using the effective interest method, in effect reducing (increasing) the amount of interest income (expense) recognised over the life of the instrument. [IFRS 9.IG.E.1.1].
• For investments in equity instruments that are subsequently measured at fair value through other comprehensive income, transaction costs are recognised in other comprehensive income as part of the change in fair value at the next remeasurement and they are never reclassified into profit or loss. [IFRS 9.B5.7.1, IG.E.1.1].
• Transaction costs relating to the acquisition or incurrence of financial instruments at fair value through profit or loss are recognised in profit or loss as they are incurred. [IFRS 9.5.1.1].

Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. [IAS 32.38]. This is discussed in more detail in Chapter 47 at 6.2.

IFRS 9 does not address how to allocate transaction costs that relate to a hybrid financial instrument where the embedded derivative is separated from the host. Therefore entities should choose an accounting policy and apply it consistently. The approaches more commonly observed are to allocate the transaction costs:

• exclusively to the non-derivative host, in which case the transaction costs are included in full in its initial measurement; and
• to the non-derivative host and the embedded derivative in proportion to their fair values, i.e. in a similar fashion to compound financial instruments. Under this approach, the proportion attributable to the non-derivative host will be included in its initial measurement, while the proportion attributable to the embedded derivative will be expensed as incurred. This approach would need to be adapted if the debt host contract is a liability and the embedded derivative is an asset.

However, the choice of approach will usually only lead to a different accounting when the embedded derivative has an option feature and hence a non-zero fair value.

Transaction costs that would be incurred on transfer or disposal of a financial instrument are not included in the initial or subsequent measurement of the financial instrument. [IFRS 9.IG.E.1.1].

The following example illustrates the accounting treatment of transaction costs for a financial asset classified as measured at fair value through other comprehensive income.

In the example above, if the financial asset was a debt instrument measured at fair value through other comprehensive income, the initial recognition would follow the same accounting; however, the transaction costs of £2 would subsequently be amortised to profit or loss using the effective interest method. [IFRS 9.B5.2.2]. This is further discussed in Chapter 50 at 2.3.

3.4.2 Identifying transaction costs

Transaction costs are defined as incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. An incremental cost is one that would not have been incurred had the financial instrument not been acquired, issued or disposed of. [IFRS 9 Appendix A].

Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisers, brokers, and dealers. They also include levies by regulatory agencies and securities exchanges, transfer taxes and duties. Debt premiums or discounts, financing costs and allocations of internal administrative or holding costs are not transaction costs. [IFRS 9.B5.4.8].

Treating internal costs as transaction costs could open up a number of possibilities for abuse by allowing entities to defer expenses inappropriately. However, internal costs should be treated as transaction costs only if they are incremental and directly attributable to the acquisition, issue or disposal of a financial asset or financial liability.⁵ Therefore, it will be rare for internal costs (other than, for instance, commissions paid to sales staff in respect of a product sold that results in the origination or issuance of a financial instrument) to be treated as transaction costs.

3.7.1 Loan commitments outside the scope of IFRS 9

If neither H nor Q designates the loan commitment at fair value through profit or loss, since the commitment cannot be settled net and it is not at a below-market interest rate, it is then outside the scope of IFRS 9.

The accounting for the loan commitment outside the scope of IFRS 9 would be as follows:

• When Q and H enter into the loan commitment, Q records a provision for expected credit losses under the impairment requirements of IFRS 9 (see Chapter 51 at 11).
• When the credit risk increases in the following year, nothing is recognised in the accounts of H in respect of the facility because the commitment is not recognised, but Q assesses and recognises any impact the increase in credit risk may have had on the provision for expected credit loss.

Therefore, until the time of drawdown, the only accounting entries for Q are in relation to the impairment requirements applicable to loan commitments.

At the time the loan is drawn down, Q classifies it within financial assets at amortised cost and H classifies it within financial liabilities at amortised cost. The general requirement under IFRS 9 as noted at 3.1 above would require the asset (liability) to initially be measured at its fair value, i.e. €9,800. This would lead to the recognition of a loss (profit) of €200 – this is because the spare €200 arising as difference between the fair value (€9,800) and the amount delivered (€10,000) does not represent any other asset or liability arising from the transaction.

However, the Basis for Conclusions on IFRS 9 explains that the effect of the loan commitment exception is to achieve consistency with the measurement basis of the resulting loan when the holder exercises its right, i.e. amortised cost. Changes in the fair value of these commitments resulting from changes in market interest rates or credit spreads will therefore not be recognised or measured, in the same manner that changes in such rates and spreads will not affect the amortised cost of the financial asset (or financial liability) recognised once the right is exercised. [IFRS 9.BCZ2.3]. This is exactly what the ‘spare’ €200 represents so, in accordance with the underlying rationale and objective of allowing loan commitments to be excluded from the scope of IFRS 9, it seems appropriate to initially measure the asset or liability arising in this case at €10,000. It is worth mentioning that the expected credit loss provision previously recognised for the loan commitment is incorporated into the allowance for the drawn down loan upon initial recognition.

The treatment under the loan commitment exception is consistent with that of similar assets arising from regular way transactions recognised using settlement date accounting (see 3.6 above). This is relevant because the IASB introduced the loan commitment exception as a result of issues identified by the IGC and the only solution the IGC could identify at the time involved treating loan commitments as regular way transactions and using settlement date accounting.⁶

3.7.2 Loan commitments within the scope of IFRS 9

If, in the above example, Q accounted for the loan commitment at fair value through profit or loss the issue of the spare €200 would not arise. At the time the loan was drawn down the commitment would have already been recognised as a €200 liability and an equivalent loss would have been recorded in profit or loss. The loan would then be recognised at its fair value of €9,800 and the €200 balance of the cash movement over this amount would be treated as the settlement of the loan commitment liability. Therefore, no further gain or loss would need to be recognised at this point. Once the loan is recognised, it will be accounted for in accordance with IFRS 9 in line with its classification.