IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley lFRS: Practicallmplementation Guide and Workbook

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Loans and recei vables and financial asse ts that are held for tradin g, includin g derivatives, cannot be class ified as held-t o-maturity investment s. 3,1.9 The third category-loans and receivables-includes financial assets with fixed or deter– minable payments that are not quoted price in an active market. For example, an entity may clas– sify items such as account receivables, note receivables, and loans to customers in this category. Financi al assets with a quoted price in an active market and financial asse ts that are held for trad– ing, includ ing derivatives, cannot be classi fied as loans and receivables. In addition, financia l assets for which the holder may not recover substantially all of its investment (other than because of credit deterioration) cannot be class ified as loans and receivables. In addition to not being quoted in an active market, loans and recei vables differ from held-t o-maturity investments in that there is no requirement that the entit y demonstrates a positive intenti on and abilit y to hold loans and receiv– abl es to maturity . 3.1.10 The fourth category-availablej or-sale fi nancial assets-includes financial assets that do not fall into any of the other categori es of financial assets or that the entity otherwi se has elected to classify into this category. For example, an entit y could classify some of its investments in debt and equity instruments as avai lable-for-sa le financial asse ts. Financial asse ts that are held for trading, including derivatives, cannot be classified as available-for-sa le financial assets. This case illustrates how to classify a fi nancial asset or fin ancial liability into one of the categories offi – nancial assets orfi nancial liabilities. Facts Entity A is conside ring how to classify these financial assets and financial liabilities: (a) An acco unts receivable that is not held for trading (b) An investment in an equity instrument quoted in an active market that is not held for trading (c) An investment in an equity instrument that is not held for trading and does not have a quoted price , and whose fair value cannot be reliably measured (d) A purchased debt security that is not quoted in an active market and that is not held for trading (e) A purchased debt instrument quoted in an active market that Entity A plans to hold to maturit y. If market interest rates fall sufficiently, Entity A will consider selling the debt instrument to re– alize the associate d gain. (f) A "strategic" investment in an equ ity instrument that is not quoted in an active market. Entity A has no intention to sell the investment. (g) An investment in a financial asset that is held for trading Required Indicate into which category or categories each item can be class ified. Please note that some of the items can be classified into more than one category. Solution (a) An accounts receivable that is not held for trading shou ld be classified into the catego ry of loans and receivables, unless the entity elects to designate it as either at fair value through profit or loss or available for sale. (b) An investment in an equity instrument that has a quoted price and that is not held for trading should be classified as an available-for-sale financial asset, unless the entity elects to designate it as at fair value through profit or loss. (c) An investment in an equity instrument that is not held for trading and does not have a quoted price, and whose fair value cannot be reliably measured, should be class ified as an available– for-sale financial asse t. (d) A purchased debt security that is not quoted in an active market and that is not held for trading should be classified into the category loans and receivables unless the entity designates it as ei– ther at fair value through profit or loss or available for sale. (e) This purchased debt instrument should be classified as ava ilable for sale unless the entity elects to designate it as at fair value through profit or loss. Even though the debt instrument is quoted in an active market and Entity A plans to hold it to maturity, Entity A cannot classify it as held to maturity because Entity A will consider selling the debt instrument if market interest rates fall sufficiently. Case Study 2