IFRS 15- COMPENDIUM OF NEW STANDARDS ISSUED BY THE

IFRS 9-
Revenue INTERNATIONAL ACCOUNTING STANDARD BOARD.
Financial
From IFRS 16 -
Instrument:
Contract Leases Complied by
Recognition &
with Adegbite Olusegun James , AAT.
Measurement
Customers
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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TABLE OF CONTENT
IFRS 9: Financial Instrument (Recognition & Measurement)………………..………………….1
IFRS 15: Revenue from Contract with customers …………………………………………….....7
IFRS 16: Leases……………………………………………………………………….……...…….11
Definition of Key Terms……………….………………………………....................................….12

IFRS 9: FINANCIAL INSTRUMENT (RECOGNITION & MEASUREMENT)

IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted.
Objective: The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that
will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of
an entity’s future cash flow
Financial Instrument is a contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another entity
(IASB)
There are two main class of financial instrument namely;
 Debt instrument
 Equity Instrument
Scope
This Standard shall be applied by all entities to all types of financial instruments except:
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with IFRS 10 Consolidated Financial
Statements , IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures . However, in some cases, IFRS
10, IAS 27 or IAS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with
some or all of the requirements of this Standard.

(b) Rights and obligations under leases to which IFRS 16 Leases applies. However:

(i) finance lease receivables (i.e. net investments in finance leases) and operating lease receivables recognized by a lessor are subject to
the derecognition and impairment requirements of this Standard;
(ii) lease liabilities recognized by a lessee are subject to the derecognition requirements

(c) employers’ rights and obligations under employee benefit plans, to which IAS 19 Employee benefit applies.

Recognition criteria under IFRS 9

IFRS 9 requires an entity to recognize 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
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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Subsequent measurement

Subsequent measurement under IFRS 9 is based on the intention for which a

financial instrument is held by an entity and how an entity elects to measure its
financial instrument to the extent that it is practicable.

Financial liabilities
All financial liabilities are subsequently measured at amortized 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.

Financial Asset

Financial Assets are subsequently measured based on the intention for which it is held by an entity. The intentions for which financial asset
are held are mainly;

1. To collect contractual cash flow

2. To sell
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3. To hold and sell.

In General terms, financial assets can be classified as follows;

1. At Amortized cost
2. At Fair value through profit or loss
3. At Fair value through OCI;

A Financial asset is measured at amortized cost provided it meets the following test;

1. The business model test: The business model test is held when a company holds a financial instrument to collect contractual cash flow and
not to sell to realize its fair value changes.
2. Contractual cash flow test: This test is met when the contractual terms of the instrument gives rise to payment of solely principal and
interest on the principal amount.

Where the intention for which an entity holds a financial instrument is to sell it prior to maturity; such financial instrument shall be measured
at fair value through profit or loss with any fair value changes recognized in profit or loss.

However, when an entity elects to hold and sell a financial asset; such financial asset shall be measured at fair value through OCI with any fair
value changes recognized in other comprehensive income.

EQUITY INSTRUMENT

Generally, equity instruments should be designated at fair value through profit or loss. However, an entity may elect to designate an equity
instrument at fair value through OCI- this is an irrevocable election and must be made at initial recognition.

Note: Dividend income on an equity instrument held at FVTPL should be recognized in profit or loss
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IMPAIRMENT OF FINANCIAL INSTRUMENT

The general purpose of an impairment test is to ensure that an asset is not carried for financial reporting purposes at an amount that exceeds
its recoverable amount. To do so would overstate a reporting entity‘s financial position and performance. In time past; Ias 39 requires that an
entity should recognize impairment on an incurred loss basis.

The incurred loss model is based on the perspective of allocating a credit loss to the period when that loss is incurred. Due to increased credit
risk and the need for entities to faithfully and prudently recognize financial instruments in their books- The expected credit loss basis for
impairment was introduced as part of the revision to existing Ias 39 impairment model for financial asset.

Under an expected loss model, revenue is reduced to reflect expected future credit losses at inception. Over the life of the financial asset the
income is the same under both models. However, provided credit losses occur as expected the expected loss model will mean lower net
income in the early periods and higher net income towards the end of the financial asset‘s life (after losses have been incurred) compared to
the incurred loss model.

The expected credit loss model in IFRS 9 Financial Instruments uses a dual measurement approach where the loss allowance is measured at an
amount equal to either the 12-month expected credit losses (Stage 1) or the lifetime expected credit losses (Stages 2 and 3).

• “Stage 1: As soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognized 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 (i.e. without adjustment for expected credit losses).

• Stage 2: If the credit risk increases significantly and the resulting credit quality is not considered to be low credit risk, full lifetime expected
credit losses are recognized. Lifetime expected credit losses are only recognized if the credit risk increases significantly from when the entity
originates or purchases the financial instrument. The calculation of interest revenue on financial assets remains 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 amortized cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be
individually assessed. Lifetime expected credit losses are still recognized on these financial assets.” The distinction between Stages 2 and 3 is
that under Stage 2, impairment is typically assessed on a collective basis, whereas under Stage 3, it is assessed on an individual basis. The
impairment measurement basis depends upon whether there has been a significant increase in credit risk since initial recognition. Generally, if
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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there has been a significant increase in credit risk since initial recognition, then impairment is measured at lifetime expected credit losses. In
Stages 1 and 2, interest revenue is calculated based on the gross carrying amount. Under Stage 3, interest revenue is calculated based on the
amortized cost of the financial asset (i.e., the gross carrying amount adjusted for the loss allowance).

The key components of an expected loss model are as follows:

(a) Net interest revenue is recognized on the basis of expected cash flows considering expected credit losses. That is, net interest revenue
reflects the total net return expected at inception. It is noted that for presentation purposes, an entity would report gross interest revenue
(before the impact of expected credit losses) and separately the portion of initial expected credit losses recognized in the period, the
difference being net interest income;

(b) Impairment losses are recognized from an adverse change in credit loss expectations. It is important to note that these reflect changes in
expectations and do not necessarily represent an actual or incurred loss;

(c) Gains arising from an improved change in credit loss expectations are recognized; and

(d) Impairment losses and gains are recognized in a separate line item in profit or loss when expectations change. There is no impairment
trigger (e.g. evidence that losses have been incurred) so expected cash flows and expected losses are subject to periodical re-estimation.

Measurement of expected credit losses

An entity shall measure expected credit losses of a financial instrument in a way that reflects:

(a) An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

(b) The time value of money; and

(c) Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current
conditions and forecasts of future economic conditions.
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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IFRS 15: Revenue from contract with customers

IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with earlier application permitted.
IFRS 15 establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue
and cash flows from a contract with a customer. Applying IFRS 15, an entity recognizes revenue to depict the transfer of promised goods or services
to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
A contract is an agreement between two or more parties that creates enforceable rights and obligations
Objective: The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial
statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

SCOPE
An entity shall apply this Standard to all contracts with customers, except the following:
(a) Lease contracts within the scope of IFRS 16 Leases; (b) contracts within the scope of IFRS 17 Insurance Contracts. However, an entity may
choose to apply this Standard to insurance contracts that have as their primary purpose the provision of services for a fixed fee in accordance
with paragraph 8 of IFRS 17;
(c) financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint
Ventures; and
(d) non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For
example, this Standard would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their
customers in different specified locations on a timely basis
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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Recognition Criteria under IFRS 15

An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are
committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred
(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the
contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be
transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the
customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be
entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price
concession.
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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IFRS 15 provides clear guidance on how revenue should be recognized for financial reporting purpose by identifying Five (5) step model that should
be followed in the revenue recognition process.

Revenue
recognition-
Five step model

identify the
Identify the
performance
contract with
obligations in the
customer
contract

allocate the Recognise revenue

transaction price to when (or as) the
determine the
each performance entity satisfies a
transaction price
obligation in the performance
contract obligation

Recognise revenue when (or as) the entity satisfies a performance obligation Recognise revenue when (or as) the entity satisfies a
performance obli
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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KEY TERMS
1. Contract asset :An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that
right is conditioned on something other than the passage of time (for example, the entity’s future performance).
2. Contract liability: An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the
amount is due) from the customer.
3. Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in
exchange for consideration.
4. Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
5. Revenue: Income arising in the course of an entity’s ordinary activities.
6. Stand-alone selling price: The price at which an entity would sell a promised good or service separately to a customer
7. Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third parties.
8. Contract: An agreement between two or more parties that creates enforceable rights and obligations.
9. Performance obligation: A promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
Compiled by Adegbite Olusegun James, AAT

IFRS 16: Leases

IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted (as long as IFRS 15
is also applied).
Objective: The objective of IFRS 16 is to report information that
(a) Faithfully represents lease transactions and
(b) Provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet
that objective, a lessee should recognize assets and liabilities arising from a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more
than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use
the underlying leased asset and a lease liability representing its obligation to make lease payments.
A lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities
similarly to other financial liabilities. As a consequence, a lessee recognizes depreciation of the right-of-use asset and interest on the lease
liability. The depreciation would usually be on a straight-line basis. In the statement of cash flows, a lessee separates the total amount of cash
paid into principal (presented within financing activities) and interest (presented within either operating or financing activities) in accordance
with IAS 7.
Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease
payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain
to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The initial lease asset equals the lease liability in
most cases.The lease asset is the right to use the underlying asset and is presented in the statement of financial position either as part of
property, plant and equipment or as its own line item.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as
operating leases or finance leases, and to account for those two types of leases differently.
IFRS 16 replaces IAS 17 effective 1 January 2019, with earlier application permitted.
 Compendium of new standards issued by the IASB(IFRS 9, 15 & 16)
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IFRS 16 has the following transition provisions:

Existing finance leases: continue to be treated as finance leases.
Existing operating leases: option for full or limited retrospective restatement to reflect the requirements of IFRS 16.

DEFINITION OF TERMS USED IN THE TEXT

1. Equity: Equity is the residual interest in an entities asset after deducting all its liabilities
2. Equity instrument: It is a contract which evidences the residual interest in an entities asset after deducting all its liabilities
3. Financial Instrument:
4. Effective interest rate: The effective interest rate is the true rate of interest earned. It could also be referred to as the market interest
rate, the yield to maturity, the discount rate, the internal rate of return, the annual percentage rate (APR), and the targeted or required
interest rate.
5. Derivatives: A derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an
asset, index, or interest rate, and is often simply called the "underlying".
6. Impairment: Impairment is the amount by which carrying amount of an asset exceeds its recoverable value.
7. Lease: A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.
8. Lessor: A lessor, in its simplest expression, is someone who grants a lease. As such, a lessor is the owner of an asset that is leased under an
agreement to a lessee. The lessee makes a one-time or periodic payments to the lessor in return for the use of the asset.
9. Lessee: a person who holds the lease of a property; a tenant.