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Your revision guide - IFRS 6 to 9

06 November 2017

Your pocket guide for IFRS 6 through to IFRS 9

IFRS 6 specifies some aspects of the financial reporting for costs incurred for exploration for and evaluation of mineral resources (for example, minerals, oil, natural gas and similar non-regenerative resources), as well as the costs of determination of the technical feasibility and commercial viability of extracting the mineral resources. IFRS 6:
• Permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements
of paragraphs 11–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting IFRS 6.
• Requires entities recognising exploration and evaluation assets
to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.
• Varies the recognition of impairment from that in IAS 36 Impairment of Assets but measures the impairment in accordance with that Standard once the impairment is identified.

IFRS 7 requires entities to provide disclosures in their financial statements that enable users to evaluate:
• The significance of financial instruments for the entity’s financial position and performance.
• The nature and extent of risks arising from financial instruments
to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s 
key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create. 
IFRS 7 applies to all entities, including entities that have few financial instruments (for example, a manufacturer whose only financial instruments are cash, accounts receivable and accounts payable) and those that have many financial instruments (for example, a financial institution most of whose assets and liabilities are financial instruments). 

IFRS 8 requires an entity whose debt or equity securities are publicly traded to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the different business activities in which it engages and the different economic environments in which it operates. 
It specifies how an entity should report information about its operating segments in annual financial statements and in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers.


IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early 
application permitted. 

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. 
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.

Financial assets: When it first recognises a financial asset, the entity classifies it on the basis of the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:
Amortised cost - a financial asset is measured at amortised cost if both of the following conditions are met:
• the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
• 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. 

• Fair value through other comprehensive income—financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. 

• Fair value through profit or loss—any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss. 
When, and only when, an entity changes its business model for managing financial assets it must reclassify all affected financial assets. 

Financial liabilities: 
All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss. Such liabilities include derivatives (other than derivatives that are financial guarantee contracts or are designated and effective hedging instruments), other liabilities held for trading and liabilities that an entity designates to be measured at fair value through profit or loss (see ‘fair value option’ below). 
After initial recognition, an entity cannot reclassify any financial liability. 

Fair value option: 
An entity may, at initial recognition, irrevocably designate a financial asset or liability that would otherwise have to be measured at amortised cost or fair value through other comprehensive income to be measured at fair value through profit or loss if doing so would eliminate or significantly reduce a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) or otherwise result in more relevant information. 

Impairment of financial assets is recognised in stages: 

Stage 1—as soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or loss and
a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets, interest revenue is calculated on the gross carrying amount (ie without deduction for expected credit losses).
Stage 2—if the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in profit or loss. The calculation of interest revenue is the same as for Stage 1.
Stage 3—if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost (ie the gross carrying amount less the loss allowance). Financial assets in this stage will generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets.

Hedge accounting: 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. Hedge accounting is optional. An entity applying hedge accounting designates a hedging relationship between a hedging instrument and
a hedged item. For hedging relationships that meet the qualifying criteria in IFRS 9, an entity accounts for the gain or loss on the hedging instrument and the hedged item in accordance with the special hedge accounting provisions of IFRS 9.
IFRS 9 identifies three types of hedging relationships and prescribes special accounting provisions for each:
• 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.
• 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.
• hedge of a net investment in a foreign operation as defined in IAS 21. When an entity first applies IFRS 9, it may choose to continue to apply the 
hedge accounting requirements of IAS 39, instead of the requirements in IFRS 9, to all of its hedging relationships.

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