The integrated guidelines for derivatives included in IAS 39 are included in IFRS 9 to assist preparers in determining when an embedded derivative is closely related to a credit institution or hosting agreement that does not fall within the scope of Standard (e.B leases, insurance contracts, contracts for the purchase or sale of a non-financial item). Expected credit losses on unused loan commitments should be discounted using the effective interest rate (or an approximation thereof) applied when accounting for the financial asset resulting from the obligation. Where the effective interest rate of a loan commitment cannot be determined, the discount rate should reflect the current market assessment of the fair value of the currency and the specific risks of cash flows, but only if and to the extent that those risks are not taken into account by adjusting the discount rate. This approach is also used to rule out expected credit losses from financial collateral arrangements. [IFRS 9 paragraphs B5.5.47] Point (a) of the above definition contains an exception with respect to Non-Financial Variables specific to a Party (e.g. B a fire that damages or destroys the property of an enterprise). This exception does not apply to variables that are only loosely related to the entity (p.B. most weather derivatives) (IFRS 9.BA.5). In short, this exception is intended to exclude insurance contracts from the scope of IFRS 9, but it can also apply to other contracts, as there is no consensus on what exactly a non-financial variable is. For example, financial indicators of an entity`s performance may be considered as non-financial variables specific to a party.
Interestingly, the term “closely related” is not directly defined in IFRS 9. Instead, there are examples that illustrate what is meant and why. IFRS 9.B4.3.5 provides examples where the economic characteristics and risks of an embedded derivative are not closely related to the hosting agreement, while IFRS 9.B4.3.8 illustrates the opposite. These two paragraphs are explained below. What applies for the purposes of declaring model F 08.01 of the PCFIN as a “hybrid contract”? Inflation-linked contracts for the purchase or sale of a non-financial item are common in the business world, but are not given as an example in IFRS 9. Paragraph IFRS 9. B4.3.8(f)(i) refers to an embedded derivative that is an index related to inflation. Such an integrated derivative does not need to be separated if it is not indebted and the index refers to inflation in the company`s economic environment. These criteria may also apply to regular contracts for the purchase or sale of a non-financial item.
Only contracts concluded with a party outside the reporting entity may be designated as hedging instruments. [IFRS 9, paragraph 6.2.3] The FinREP F 08.01 model collects data on “hybrid contracts”. The definition of `hybrid contracts` is set out in point 98(d) of Part 2 of Annex V to Commission Implementing Regulation (EU) No 680/2014: `hybrid contracts` include contracts with integrated derivatives. FinREP Communication F 08.01 concerns the distribution of financial liabilities by product and by counterparty sector. In accordance with point 98 of Part 2 of Annex V to Commission Implementing Regulation (EU) No 680/2014, as amended, the item `Debt securities issued` is broken down by type of product: `Certificates of deposit` (line 370), `Asset-backed securities` (line 380), `Covered bonds` (line 390), `Hybrid contracts` (line 400) and `Other debt securities issued` (line 410). `Hybrid contracts` shall include, in particular, contracts with integrated derivatives referred to in point (d) of paragraph 98. If an entity is unable to separately measure the embedded derivative, the fair value of the embedded derivative should be determined as the difference between the fair value of the hybrid contract and the fair value of the underlying (IFRS 184.108.40.206). If this is not possible either, the entire hybrid contract is measured at fair value through the income statement (IFRS 220.127.116.11).
Please note that a broad definition of hybrid contracts (as set out in option b or c above) may require additional guidance on the distribution of “debt securities issued” by type of product. For example, if an ABS contains an embedded derivative, does it have to be reported on lines 380, 400 or both 380 and 400? This would also apply to other types of products that may contain embedded derivatives (e.B. covered bonds, convertible composite financial instruments of the product type Other debt securities). An integrated 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 the same way as a stand-alone derivative. A derivative instrument that is linked to a financial instrument but is contractually transferable independently of that instrument or that has another counterparty is not an embedded derivative but a separate financial instrument. [IFRS 9, paragraph 4.3.1] A regular buy or sale usually leads to a fixed price between the trading date and the settlement date, which technically fits the definition of a derivative. However, these contracts are not recognised as derivatives because IFRS 9 contains special accounting requirements for these contracts (IFRS 9.BA.4). A payable instrument is a hybrid financial instrument in which the holder may require the issuer to redeem the instrument (i.e. to return it to the issuer). Where such an option is an amount of cash or other assets that varies according to the change in the price or an index of shares or commodities, that integrated derivative is not closely linked to the inclusion contract and should be segregated unless the issuer, at the time of initial recognition, designates the instrument due at fair value through the income statement (IFRS 9.B4.3.5(a); B4.3.6). IFRS 9 contains specific requirements for embedded derivatives, so an entity cannot circumvent the recognition and measurement requirements for derivatives by integrating a derivative into a non-derivative financial instrument or other contract (IFRS 9.BCZ4.92). An embedded derivative is defined as part of a hybrid contract that also includes a non-derivative host, with the result that some of the cash flows of the combined instrument vary in the same way as a stand-alone derivative (IFRS 18.104.22.168).
In general, multiple derivatives incorporated into a single hybrid contract are treated as a single embedded composite derivative. However, if a hybrid contract contains more than one embedded derivative and those derivatives relate to different exposures and are easily separable and independent of each other, they are accounted for separately (IFRS 9.B4.3.4). See also this discussion in our forum. When applying the model to a loan commitment, an entity shall take into account the risk of default under the loan as advanced, while an entity shall take into account the risk of default of the specified debtor when applying the model for financial collateral arrangements. [IFRS 9 paragraphs B5.5.31 and B5.5.32] In practice, it is sometimes difficult to determine a currency that is “generally used in contracts for the purchase or sale of non-financial items in the economic environment in which the transaction takes place”, as IFRS 9 does not provide guidance in this regard. The judgment must be applied by the entities. The product type listed on lines 370 to 410 is intended to be mutually exclusive, as specified in the validation rule v2277_m. As such, the category `hybrid contracts` includes contracts for integrated derivative instruments which are not otherwise classified as asset-backed securities in accordance with point (61) of Article 4(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (`the CRR`), or as covered bonds in accordance with Article 129, paragraph 1 of the CRR or as convertible composite financial instruments under the heading “Other debt securities issued”.
In the case of a payable instrument that can be repurchased at any time for cash up to a proportional proportion of the net asset value of an entity (e.B units of an open-ended investment fund or certain linked investment products in units of account), the separation of an embedded derivative and the recognition of each component results in the hybrid contract being measured in relation to the redemption amount payable to the end of reporting period. whether the holder has exercised its right to return the instrument to the issuer (IFRS 9.B4.3.7). The indexation of an interest rate on a debt security is by far the most widely used embedded derivative. A simple loan where interest rates change based on LIBOR is a hybrid instrument where the embedded derivative does not need to be separated. However, there may be more complex arrangements where evaluation is not easy, for example. B inverted floats or floats within range. IFRS 9 Financial Instruments, issued on July 24, 2014, replaces IAS 39 Financial Instruments: Recognition and Measurement by the IASB. The standard contains requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The IASB has completed its project to replace IAS 39 in stages and complete the standard at the end of each phase.
In the case of a fair value hedge, the gain or loss from the hedging instrument is recognised as earnings (or OIC) if the hedging of an equity instrument at FVTOCI and the gain or loss of hedging of the underlying transaction are adjusted for the carrying amount of the underlying transaction and recognised as earnings. . . .