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EUROPEAN COMMISSION Budget Budget execution Accounting

EUROPEAN UNION ACCOUNTING RULE 11

FINANCIAL INSTRUMENTS


EU ACCOUNTING RULE 11: FINANCIAL INSTRUMENTS

Version: 3 Date: December 2011 Page 2 of 35

I N D E X

1. Objective ....................................................................................................................................... 3

2. Scope ............................................................................................................................................. 3

3. Definitions..................................................................................................................................... 3

4. Presentation ................................................................................................................................... 7

5. Recognition ................................................................................................................................... 9

6. Measurement ............................................................................................................................... 10

6.1 Initial measurement ............................................................................................................ 10

6.2 Subsequent measurement ................................................................................................... 11

6.3 Recognition of gains and losses ......................................................................................... 15

6.4 Reclassification .................................................................................................................. 16

7. Impairment .................................................................................................................................. 18

8. Derecognition .............................................................................................................................. 21

8.1 Derecognition of financial assets ....................................................................................... 21

8.2 Derecognition of financial liabilities.................................................................................. 25

9. Disclosures .................................................................................................................................. 26

10. Effective date .............................................................................................................................. 34

11. Reference to other rules .............................................................................................................. 34

Annex: Categories of financial instruments ....................................................................................... 35




1. Objective The objective of this EU Accounting Rule is to prescribe the accounting treatment of financial in-struments. It applies to the classification, presentation, recognition and measurement of financial instruments as well as to disclosures on financial instruments and the risk management in the con-text of financial instruments.

2. Scope This EU accounting rule applies to accounting for all financial instruments (financial assets, finan-cial liabilities, equity instruments, financial guarantees) in the consolidated financial statements of the European Union except:

• Interests in controlled entities, joint ventures and associates (except where otherwise re-quired by EU Accounting Rule 1);

• Trust funds falling under the scope of EU Accounting Rule 1 (Group accounting); • Leases (EU Accounting Rule 8); • Pre-financing (EU Accounting Rule 5); • Employers rights and obligations under EU Accounting Rule 12 (Employee benefits); • Loan commitments in the scope of EU Accounting Rule 10 (Provisions); and • Non-exchange transactions under EU Accounting Rule 17 (revenue from non-exchange

transactions): initial recognition and initial measurement of rights and obligations.

3. Definitions The following terms are used in this accounting rule with the meanings specified:

1) Assets are resources controlled by an entity as a result of past events and from which future eco-nomic benefits or service potential are expected to flow to the entity.

2) A financial instrument is any contract that gives rise to a financial asset of one entity and a fi-nancial liability or equity instrument of another entity.

3) A financial asset is any asset that is: (a) Cash; (b) An equity instrument of another entity; (c) A contractual right:

(i) To receive cash or another financial asset from another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions

that are potentially favorable to the entity; or (d) A contract that will or may be settled in the entity’s own equity instruments and is:




(i) A non-derivative for which the entity is or may be obliged to receive a variable number

of the entity’s own equity instruments; or (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of

cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instru-ments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

4) A financial liability is any liability that is: (a) A contractual obligation:

(i) To deliver cash or another financial asset to another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions

that are potentially unfavorable to the entity; or (b) A contract that will or may be settled in the entity’s own equity instruments and is:

(i) A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or

(ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instru-ments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

5) An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

6) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

7) A puttable instrument is a financial instrument that gives the holder the right to put the instru-ment back to the issuer for cash or another financial asset or is automatically put back to the is-suer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.

8) A derivative is a financial instrument or other contract within with all three of the following characteristics: (a) Its value changes in response to the change in a specified interest rate, financial instrument

price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the "underlying");




(b) It requires no initial net investment or an initial net investment that is smaller than would be

required for other types of contracts that would be expected to have a similar response to changes in market factors; and

(c) It is settled at a future date.

9) A financial asset or financial liability at fair value through surplus or deficit is a financial asset or financial liability that is classified as held for trading. A financial asset or financial lia-bility is classified as held for trading if it is: (a) It is acquired or incurred principally for the purpose of selling or repurchasing it in the near

term; (b) On initial recognition it is part of a portfolio of identified financial instruments that are man-

aged together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

(c) It is a derivative (except for a derivative that is a financial guarantee contract).

10) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to ma-turity other than:

(a) Those that the entity upon initial recognition classifies as held for trading; (b) Those that the entity designates as available for sale; and (c) Those that meet the definition of loans and receivables.

11) Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:

(a) Those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading;

(b) Those that the entity upon initial recognition designates as available for sale; or (c) Those for which the holder may not recover substantially all of its initial investment, other

than because of credit deterioration, which shall be classified as available for sale. An interest acquired in a pool of assets that are not loans or receivables (e.g., an interest in a mutual fund or a similar fund) is not a loan or receivable.

12) Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity in-vestments or (c) financial assets at fair value through surplus or deficit.

13) A financial guarantee contract is a contract that requires the issuer to make specified pay-ments to reimburse the holder for a loss it incurs because a specified debtor fails to make pay-ment when due in accordance with the original or modified terms of a debt instrument.

14) The amortised cost of a financial asset or financial liability is the amount at which the finan-cial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference




between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

15) The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest revenue or interest expense over the relevant period.

16) The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter pe-riod to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (e.g., prepayment, call and similar options) but shall not consider fu-ture credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a finan-cial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instru-ments).

17) Monetary items are units of currency held and assets and liabilities to be received or paid in fixed or determinable number of units of currency.

18) An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract—with the effect that some of the cash flows of the combined in-strument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign ex-change rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable inde-pendently of that instrument, or has a different counterparty from that instrument, is not an em-bedded derivative, but a separate financial instrument.

19) Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s statement of financial position.

20) A regular way purchase or sale is 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 regula-tion or convention in the marketplace concerned.

21) Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (e.g. fees and commissions paid to agents, bro-kers, advisers, dealers, levies by regulatory agencies and security exchanges and transfer taxes and duties, but not debt premiums, discounts, financing costs, or internal administrative or




holding costs). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.

22) Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

23) Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

24) Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

25) Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associ-ated with financial liabilities that are settled by delivering cash or another financial asset.

26) Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: cur-rency risk, interest rate risk, and other price risk.

27) Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the mar-ket.

28) A financial asset is past due when a counterparty has failed to make a payment when contrac-tually due.

29) An EU entity in the sense of this accounting rule is an entity that prepares financial statements in accordance with the Financial Regulation of the European Union and falls under the consoli-dation scope of the EU.

4. Presentation Liabilities and net assets / equity 1) An EU entity that issues financial instruments shall classify the instrument, or its component

parts, on initial recognition as a financial liability, a financial asset or an equity instrument in ac-cordance with the substance of the contractual arrangement and the definitions of a financial lia-bility, a financial asset and an equity instrument.

2) When an EU entity applies the definitions in point 3 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions (a) and (b) below are met. (a) The instrument includes no contractual obligation:

(i) To deliver cash or another financial asset to another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions

that are potentially unfavorable to the issuer.




(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is:

(i) A non-derivative that includes no contractual obligation for the issuer to deliver a varia-ble number of its own equity instruments; or

(ii) A derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose the issuer’s own equity instruments do not include puttable instruments that would be classified as equity instruments, instruments that oblige the issuer to deliver pro rata shares of its net assets on liquidation, or instruments that are contracts for the future receipt or delivery of the issuer’s own equity instruments.

A contractual obligation, including one arising from a derivative financial instrument, that will or may result in the future receipt or delivery of the issuer’s own equity instruments, but does not meet conditions (a) and (b) above, is not an equity instrument.

3) In general, a critical feature in differentiating a financial liability from an equity instrument is the existence of a contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or another financial asset to the other party (the holder) or to exchange financial as-sets or financial liabilities with the holder under conditions that are potentially unfavorable to the issuer. Although the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or similar distributions declared, or distributions of the net assets/equity, the issuer does not have a contractual obligation to make such distributions because it cannot be required to deliver cash or another financial asset to another party.

4) The substance of a financial instrument, rather than its legal form, governs its classification on the entity’s statement of financial position (balance sheet). Substance and legal form are com-monly consistent, but not always. Some financial instruments take the legal form of equity in-struments but are liabilities in substance and others may combine features associated with equity instruments and features associated with financial liabilities.

5) Risk capital loans (included in risk capital operations) are formally (legally) loans granted by the EU to investors in the MEDA region. The investor is required to reimburse the value of its un-derlying equity investment at the end of the term of the loan. Although formally a loan, the fi-nancial asset has the characteristics and substance of an equity investment and so is accounted for as such.

Offsetting 6) A financial asset and a financial liability shall be offset and the net amount presented in the

statement of financial position when, and only when, an EU entity: (a) Currently has a legally enforceable right to set off the recognised amounts; and (b) Intends either to settle on a net basis, or to realise the asset and settle the liability simultane-

ously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability.




7) Offsetting a recognised financial asset and a recognised financial liability and presenting the net

amount differs from the derecognition of a financial asset or a financial liability. Although off-setting does not give rise to recognition of a gain or loss, the derecognition of a financial instru-ment not only results in the removal of the previously recognised item from the statement of fi-nancial position but also may result in recognition of a gain or loss.

8) The conditions set out in paragraph 6 are generally not satisfied and offsetting is usually inap-propriate when: (a) Several different financial instruments are used to emulate the features of a single financial

instrument (a "synthetic instrument"); (b) Financial assets and financial liabilities arise from financial instruments having the same

primary risk exposure (e.g., assets and liabilities within a portfolio of forward contracts or other derivative instruments) but involve different counterparties;

(c) Financial or other assets are pledged as collateral for non-recourse financial liabilities; (d) Financial assets are set aside in trust by a debtor for the purpose of discharging an obligation

without those assets having been accepted by the creditor in settlement of the obligation (e.g., a sinking fund arrangement); or

(e) Obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance contract.

5. Recognition 1) An EU entity shall recognise a financial asset or a financial liability in its statement of financial

position when, and only when, the entity becomes a party to the contractual provisions of the in-strument.

2) Where assets arise out of contractual arrangements in a non-exchange transaction and otherwise meet the definition of a financial instrument, they are: (a) Initially recognised in accordance with EU Accounting Rule 17 (Revenue from non-

exchange transactions); (b) Initially measured:

(i) At fair value using the principles in EU Accounting Rule 17; and (ii) Taking account of transaction costs that are directly attributable to the acquisition of the

financial asset, where the asset is subsequently measured other than at fair value through surplus or deficit.

3) An embedded derivative shall be separated from the host contract and accounted for as a deriva-tive if, and only if: (a) The economic characteristics and risks of the embedded derivative are not closely related to

the economic characteristics and risks of the host contract; (b) A separate instrument with the same terms as the embedded derivative would meet the defi-

nition of a derivative; and




(c) The hybrid (combined) instrument is not measured at fair value with changes in fair value

recognized in surplus or deficit (i.e., a derivative that is embedded in a financial asset or fi-nancial liability at fair value through surplus or deficit is not separated); and

(d) The underlying information is available taken into account with cost/benefit considerations in mind.

If an embedded derivative is separated, the host contract shall be accounted for under this ac-counting rule if it is a financial instrument, and in accordance with other appropriate accounting rules if it is not a financial instrument.

6. Measurement

6.1 Initial measurement Fair value 1) When a financial asset or financial liability is recognised initially, an entity shall measure it at its

fair value plus, in the case of a financial asset or financial liability not at fair value through sur-plus or deficit, transaction costs that are directly attributable to the acquisition or issue of the fi-nancial asset or financial liability.

2) The best evidence of the fair value of a financial instrument at initial recognition, in an exchange transaction, is the transaction price (i.e., the fair value of the consideration given or received) un-less the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.

Financial support loans without market 3) Financial support loans granted by EU entities from borrowed funds are measured at nominal

value since these are not concessionary loans. Rather, these are loans granted with the sole pur-pose of providing financial support to the beneficiary – thus there is an absence of an active comparable market. The EU only borrows money so as to provide this assistance so therefore it does not seek out alternate investment opportunities for borrowed monies and thus there is no basis of comparison with market rates. Examples of such financial support facilities include the European Financial Stabilisation Mechanism and Balance of Payments loans. In accordance with paragraph 2 the transaction price is considered to be at fair value at day 1 of the transaction. The nominal interest rate thus is considered the effective interest rate reflecting the fact that there is no active market or similar transactions to compare with.

Concessionary loans 4) If the consideration given or received does not reflect the fair value of the financial instrument,

the fair value of the financial instrument is estimated, using a valuation technique. For example, the fair value of a long-term loan or receivable that carries no interest (concessionary loan) can be estimated as the present value of all future cash receipts discounted using the prevailing mar-ket rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate




and other factors) with a similar credit rating. The difference between the consideration given (loan) and the fair value at inception is recognised as an expense or a reduction of revenue unless it qualifies for recognition as some other type of asset (e.g. in accordance with EU Accounting Rule 17). Where the loan is a transaction with owners in their capacity as owners, for example, where a controlling entity provides a concessionary loan to a controlled entity, the difference may represent a capital contribution, i.e., an investment in an entity, rather than an expense.

Financial guarantees 5) Financial guarantee contracts are initially recognised at fair value. The premium received repre-

sents the fair value unless there is evidence to the contrary.

6) In the EU, several programmes provide financial guarantees to the participants at no or at nomi-nal consideration. At initial recognition, where no fee is charged or where the consideration is below fair value, an EU entity should firstly assess whether there are quoted prices available in an active market for financial guarantee contracts directly equivalent to that entered into. If this is the case, the financial guarantee should be recognised as financial liability using the market price. In case no active market for a directly equivalent guarantee contract exists; the EU entity applies the principles of EU Accounting Rule 10 to the financial guarantee contract at initial recognition.

7) Financial guarantees at no consideration and with a low probability of losses (i.e. guarantees un-der the guarantee fund for external actions) and the unexpected loss of financial guarantees with premium within the framework agreement of the co-operation agreement between the EU and the EIB (i.e. guarantees under the risk sharing finance facility and LGTT) shall be accounted for in accordance with EU Accounting Rule 10 (provisions) as contingent liability. In case the prob-ability of an expected loss of financial guarantees within the framework agreement of the co-operation agreement between the EU and the EIB exceeds 50%, it shall be immediately recog-nised as an expense in the economic outturn account. Financial guarantees issued at no consider-ation in the context of the budgetary instruments managed by the EIB are accounted for in ac-cordance with EU Accounting Rule 10.

6.2 Subsequent measurement Financial assets 1) For the purpose of measuring a financial asset after initial recognition, financial assets are classi-

fied into the following four categories defined in point 3 above: (a) Financial assets at fair value through surplus or deficit; (b) Held-to-maturity investments; (c) Loans and receivables; and (d) Available-for-sale financial assets. These categories apply to measurement and surplus or deficit recognition under this accounting rule. See the Annex for some examples.




2) After initial recognition, an entity shall measure financial assets, including derivatives that are

assets, at their fair values, without any deduction for transaction costs it may incur on sale or other disposal, except for the following financial assets: (a) Loans and receivables as defined in point 3, which shall be measured at amortised cost using

the effective interest method; (b) Held-to-maturity investments as defined in point 3, which shall be measured at amortised

cost using the effective interest method; and (c) Investments in equity instruments that do not have a quoted market price in an active market

and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, which shall be measured at cost.

All financial assets except those measured at fair value through surplus or deficit are subject to review for impairment in accordance with point 7 below. If a financial instrument that was pre-viously recognised as a financial asset is measured at fair value and its fair value falls below ze-ro, it is a financial liability measured in accordance with paragraph 3.

Financial liabilities 3) After initial recognition, an entity shall measure all financial liabilities at amortised cost using

the effective interest method, except for: (a) Financial liabilities at fair value through surplus or deficit. Such liabilities, including deriva-

tives that are liabilities, shall be measured at fair value except for a derivative liability that is linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured, which shall be measured at cost.

(b) Financial liabilities that arise when a transfer of a financial asset does not qualify for derec-ognition or when the continuing involvement approach applies. Paragraphs 9 and 11 of point 8 below apply to the measurement of such financial liabilities.

(c) Financial guarantee contracts as defined in point 3. After initial recognition, an issuer of such a contract shall (unless (a) or (b) applies) measure it at the higher of:

(i) The amount determined in accordance with EU Accounting Rule 10 (Provisions); and (ii) The amount initially recognised (see 6.1 above) less, when appropriate, cumulative amor-

tisation recognised in accordance with EU Accounting Rule 4 (Revenue from exchange transactions).

Financial guarantee contracts as described in point 6.1 paragraph 7 are subsequently meas-ured in accordance with EU Accounting Rule 10.

(d) Commitments to provide a loan at a below-market interest rate. After initial recognition, an issuer of such a commitment shall (unless paragraph (a) applies) measure it at the higher of:

(i) The amount determined in accordance with EU Accounting Rule 10; and (ii) The amount initially recognised less, when appropriate, cumulative amortisation recog-

nised in accordance with EU Accounting Rule 4.




4) In some cases, financial assets are acquired at a deep discount that reflects incurred credit losses.

Entities include such incurred credit losses in the estimated cash flows when computing the ef-fective interest rate.

5) If an entity revises its estimates of payments or receipts (e.g. due to restructuring of debt instru-ments), the entity shall adjust the carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect actual and revised estimated cash flows. The entity re-calculates the carrying amount by computing the present value of estimated future cash flows at the financial instrument’s original effective interest rate (see also paragraph 6 of point 7). The adjustment is recognised in surplus or deficit as revenue or expense.

Fair value hierarchy

Quoted prices 6) The best evidence of fair value is quoted prices in an active market. Fair value is not an amount

that an EU entity would receive or pay in a forced transaction, involuntary liquidation or distress ale – it reflects rather the credit quality of the instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Fair value is defined in terms of a price agreed by a willing buyer and a willing seller in an arm’s length transaction. The objective of determining fair value for a financial instrument that is traded in an active mar-ket is to arrive at the price at which a transaction would occur at the end of the reporting period in that instrument (i.e., without modifying or repackaging the instrument) in the most advanta-




geous active market to which the entity has immediate access. However, the entity adjusts the price in the more advantageous market to reflect any differences in counterparty credit risk be-tween instruments traded in that market and the one being valued.

7) The appropriate quoted market price for an asset held or liability to be issued is usually the cur-rent bid price and, for an asset to be acquired or liability held, the asking price. When an entity has assets and liabilities with offsetting market risks, it may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. When current bid and asking prices are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If condi-tions have changed since the time of the transaction (e.g., a change in the risk-free interest rate following the most recent price quote for a government bond), the fair value reflects the change in conditions by reference to current prices or rates for similar financial instruments, as appropri-ate. Similarly, if the entity can demonstrate that the last transaction price is not fair value (e.g., because it reflected the amount that an entity would receive or pay in a forced transaction, invol-untary liquidation or distress sale), that price is adjusted. The fair value of a portfolio of financial instruments is the product of the number of units of the instrument and its quoted market price. If a published price quotation in an active market does not exist for a financial instrument in its en-tirety, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the component parts.

Valuation technique 8) If the market for a financial instrument is not active, an entity establishes fair value by using a

valuation technique. The objective of using a valuation technique is to establish what the transac-tion price would have been on the measurement date in an arm’s length exchange motivated by normal operating considerations.

9) Valuation techniques include using recent arm’s length market transactions between knowledge-able, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a val-uation technique commonly used by market participants to price the instrument and that tech-nique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the entity uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted eco-nomic methodologies for pricing financial instruments. Periodically, an entity calibrates the val-uation technique and tests it for validity using prices from any observable current market transac-tions in the same instrument (i.e., without modification or repackaging) or based on any available observable market data.

10) If a rate is quoted in an active market, the EU entity uses the market-quoted rate as an input into valuation technique to determine fair value. If the market-quoted rate does not include credit risk or other factors that market participants would include in valuing the instrument, the entity




adjusts for those factors. Factors to be considered are time value of money, credit risk, foreign currency exchange prices, commodity prices, equity prices, volatility, prepayment/surrender risk and servicing costs for a financial instrument.

11) A valuation technique would be expected to arrive at a realistic estimate of the fair value if (a) it reasonably reflects how the market could be expected to price the instrument and (b) the in-puts to the valuation technique reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. Therefore, a valuation technique (a) in-corporates all factors that market participants would consider in setting a price and (b) is con-sistent with accepted economic methodologies for pricing financial instruments. In accordance with EU Accounting Rule 2 (point 6) the balance between benefit and cost, a pervasive con-straint, must be considered when deciding on the use of valuation techniques.

12) In applying discounted cash flow analysis, an entity uses one or more discount rates equal to the prevailing rates of return for financial instruments having substantially the same terms and characteristics, including the credit quality of the instrument, the remaining term over which the contractual interest rate is fixed, the remaining term to repayment of the principal and the currency in which payments are to be made. Short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is im-material.

13) The fair value of investments in equity instruments that do not have a quoted market price in an active market and derivatives that are linked to and must be settled by delivery of such an un-quoted equity instrument is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that instrument or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.

14) There are many situations in which the variability in the range of reasonable fair value esti-mates of investments in equity instruments that do not have a quoted market price and deriva-tives that are linked to and must be settled by delivery of such an unquoted equity instrument is likely not to be significant. Normally it is possible to estimate the fair value of a financial asset that an entity has acquired from an outside party. However, if the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably as-sessed, an entity is precluded from measuring the instrument at fair value.

6.3 Recognition of gains and losses 1) Interest, dividends or similar distributions, losses, and gains relating to a financial instrument or

a component that is a financial liability shall be recognised as revenue or expense in surplus or deficit. Distributions to holders of an equity instrument shall be debited by the entity directly to net assets. Transaction costs incurred on transactions in net assets shall be accounted for as a de-duction from net assets.

2) The classification of a financial instrument as a financial liability or an equity instrument deter-mines whether interest, dividends or similar distributions, losses, and gains relating to that in-strument are recognised as revenue or expense in surplus or deficit. Thus, dividends or similar




distributions on shares wholly recognised as liabilities are recognised as expenses in the same way as interest on a bond. Changes in the fair value of an equity instrument are not recognised in the financial statements.

3) Gains and losses related to changes in the carrying amount of a financial liability are recognised as revenue or expense in surplus or deficit.

4) A gain or loss arising from a change in the fair value of a financial asset or financial liability shall be recognised, as follows. (a) A gain or loss on a financial asset or financial liability classified as at fair value through sur-

plus or deficit shall be recognised in surplus or deficit. (b) A gain or loss on an available-for-sale financial asset shall be recognised directly in net as-

sets through the statement of changes in net assets (except for impairment losses; see point 7; and foreign exchange gains and losses; see paragraph 5 below), until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in net assets shall be recognised in surplus or deficit. However, interest calculated using the effective in-terest method is recognised in surplus or deficit. Dividends or similar distributions on an available-for-sale equity instrument are recognised in surplus or deficit when the entity’s right to receive payment is established.

5) Any foreign exchange gains and losses on monetary assets and monetary liabilities are recog-nised in surplus or deficit. A monetary available-for-sale financial asset is treated as if it were carried at amortised cost in the foreign currency. Accordingly, for such a financial asset, ex-change differences resulting from changes in amortised cost are recognised in surplus or deficit and other changes in carrying amount are recognised in accordance with paragraph 4(b). For available-for-sale financial assets that are not monetary items (e.g., equity instruments), the gain or loss that is recognised directly in net assets under paragraph 4(b) includes any related foreign exchange component.

6) For financial assets and financial liabilities carried at amortised cost, a gain or loss is recognised in surplus or deficit when the financial asset or financial liability is derecognised or impaired, and through the amortisation process.

6.4 Reclassification 1) An EU entity shall not classify any financial assets as held to maturity if the EU entity has, dur-

ing the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity investments) other than sales or reclassifications that: (a) Are so close to maturity or the financial asset’s call date (e.g., less than three months before

maturity) that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;

(b) Occur after the entity has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or




(c) Are attributable to an isolated event that is beyond the entity’s control, is non-recurring and

could not have been reasonably anticipated by the entity. 2) An entity:

(a) Shall not reclassify a derivative out of the "fair value through surplus or deficit" category while it is held or issued; and

(b) May, if a financial asset is no longer held for the purpose of selling or repurchasing it in the near term (notwithstanding that the financial asset may have been acquired or incurred prin-cipally for the purpose of selling or repurchasing it in the near term), reclassify that financial asset out of the fair value through surplus or deficit category if the requirements in para-graph 3 or 5 are met.

An entity shall not reclassify any financial instrument into the fair value through surplus or defi-cit category after initial recognition.

3) A financial asset to which paragraph 2(b) applies (except a financial asset of the type described in paragraph 5) may be reclassified out of the fair value through surplus or deficit category only in rare circumstances.

4) If an entity reclassifies a financial asset out of the fair value through surplus or deficit category in accordance with paragraph 3, the financial asset shall be reclassified at its fair value on the date of reclassification. Any gain or loss already recognised in surplus or deficit shall not be reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amor-tised cost, as applicable.

5) A financial asset to which paragraph 2(b) applies that would have met the definition of loans and receivables (if the financial asset had not been required to be classified as held for trading at ini-tial recognition) may be reclassified out of the fair value through surplus or deficit category if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity.

6) A financial asset classified as available for sale that would have met the definition of loans and receivables (if it had not been designated as available for sale) may be reclassified out of the available-for-sale category to the loans and receivables category if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity.

7) If an entity reclassifies a financial asset out of the fair value through surplus or deficit category in accordance with paragraph 5 or out of the available-for-sale category in accordance with para-graph 6, it shall reclassify the financial asset at its fair value on the date of reclassification. For a financial asset reclassified in accordance with paragraph 5, any gain or loss already recognised in surplus or deficit shall not be reversed. The fair value of the financial asset on the date of reclas-sification becomes its new cost or amortised cost, as applicable. For a financial asset reclassified out of the available-for-sale category in accordance with paragraph 6, any previous gain or loss on that asset that has been recognised directly in net assets in accordance with paragraph 4(b) of point 6.3 shall be accounted for in accordance with paragraph 11 below.




8) If, as a result of a change in intention or ability, it is no longer appropriate to classify an invest-

ment as held to maturity, it shall be reclassified as available for sale and remeasured at fair value, and the difference between its carrying amount and fair value shall be accounted for in accord-ance with paragraph 4(b) of point 6.3.

9) Whenever sales or reclassification of more than an insignificant amount of held-to-maturity in-vestments do not meet any of the conditions in point 2, any remaining held-to-maturity invest-ments shall be reclassified as available for sale. On such reclassification, the difference between their carrying amount and fair value shall be accounted for in accordance with paragraph 4(b) of point 6.3.

10) If a reliable measure becomes available for a financial asset or financial liability for which such a measure was previously not available, and the asset or liability is required to be measured at fair value if a reliable measure is available, the asset or liability shall be remeasured at fair val-ue, and the difference between its carrying amount and fair value shall be accounted for in ac-cordance with paragraph 4 of point 6.3.

11) If, as a result of a change in intention or ability or in the rare circumstance that a reliable meas-ure of fair value is no longer available or because the two preceding financial years referred to in paragraph 1 have passed, it becomes appropriate to carry a financial asset or financial liabil-ity at cost or amortised cost rather than at fair value, the fair value carrying amount of the fi-nancial asset or the financial liability on that date becomes its new cost or amortised cost, as applicable. Any previous gain or loss on that asset that has been recognised directly in net as-sets in accordance with paragraph 4(b) of point 6.3 shall be accounted for as follows:

(a) In the case of a financial asset with a fixed maturity, the gain or loss shall be amortised to surplus or deficit over the remaining life of the held-to-maturity investment using the effec-tive interest method. Any difference between the new amortised cost and maturity amount shall also be amortised over the remaining life of the financial asset using the effective inter-est method, similar to the amortisation of a premium and a discount. If the financial asset is subsequently impaired, any gain or loss that has been recognised directly in net assets is rec-ognised in surplus or deficit in accordance with paragraph 10 of point 7.

(b) In the case of a financial asset that does not have a fixed maturity, the gain or loss shall re-main in net assets until the financial asset is sold or otherwise disposed of, when it shall be recognised in surplus or deficit. If the financial asset is subsequently impaired any previous gain or loss for available for sale financial assets that has been recognised directly in net as-sets is recognised in surplus or deficit in accordance with paragraph 10 of point 7.

7. Impairment Impairment indicators 1) An EU entity shall assess at the end of each reporting period whether there is any objective evi-

dence that a financial asset or group of financial assets is impaired. If any such evidence exists,




the entity shall apply paragraph 6 below (for financial assets carried at amortised cost), para-graph 9 below (for financial assets carried at cost) or paragraph 10 below (for available-for-sale financial assets) to determine the amount of any impairment loss.

2) A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that oc-curred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment, rather the combined effect of several events may have caused the im-pairment. Losses expected as a result of future events, no matter how likely, are not recognised. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events: (a) Significant financial difficulty of the issuer or obligor; (b) A breach of contract, such as a default or delinquency in interest or principal payments; (c) The lender, for economic or legal reasons relating to the borrower’s financial difficulty,

granting to the borrower a concession that the lender would not otherwise consider; (d) It becoming probable that the borrower will enter bankruptcy or other financial reorganisa-

tion; (e) The disappearance of an active market for that financial asset because of financial difficul-

ties; or (f) Observable data indicating that there is a measurable decrease in the estimated future cash

flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, includ-ing:

(i) Adverse changes in the payment status of borrowers in the group (e.g., an increased num-ber of delayed payments); or

(ii) National or local economic conditions that correlate with defaults on the assets in the group (e.g., an increase in the unemployment rate in the geographical area of the borrowers, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry condi-tions that affect the borrowers in the group).

3) The disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not evidence of impairment. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information. A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment (e.g., a decline in the fair value of an investment in a debt instrument that results from an increase in the risk-free interest rate).

4) In addition to the types of events in paragraph 2, objective evidence of impairment for an in-vestment in an equity instrument includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument




may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.

5) In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances. For example, this may be the case when a borrower is in financial difficulties and there are few available his-torical data relating to similar borrowers. In such cases, an entity uses its experienced judgment to estimate the amount of any impairment loss. Similarly an entity uses its experienced judgment to adjust observable data for a group of financial assets to reflect current circumstances (peer group experience adjusted for changes such as commodity prices). The use of reasonable esti-mates is an essential part of the preparation of financial statements and does not undermine their reliability.

Financial Assets Carried at Amortised Cost 6) If there is objective evidence that an impairment loss on loans and receivables or held-to-

maturity investments carried at amortised cost has been incurred, the amount of the loss is meas-ured as the difference between the asset’s carrying amount and the present value of estimated fu-ture cash flows (excluding future credit losses that have not been incurred) discounted at the fi-nancial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). If the terms of a loan, receivable or held-to-maturity investment are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognised in surplus or deficit.

7) An entity first assesses whether objective evidence of impairment exists individually for finan-cial assets that are individually significant, and individually or collectively for financial assets that are not individually significant (see paragraph 2). If an entity determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics terms (e.g., on the basis of a credit risk evaluation or grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors,) and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. Impairment losses recognised on a group basis represent an interim step pending the identification of impairment losses on individual assets in the group of financial assets that are collectively assessed for impairment. As soon as information is available that spe-cifically identifies losses on individually impaired assets in a group, those assets are removed from the group. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group.

8) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an im-




provement in the debtor’s credit rating), the previously recognised impairment loss shall be re-versed either directly or by adjusting an allowance account. The reversal shall not result in a car-rying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the rever-sal shall be recognised in surplus or deficit.

Financial Assets Carried at Cost 9) If there is objective evidence that an impairment loss has been incurred on an unquoted equity

instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

Available-For-Sale Financial Assets 10) When a decline in the fair value of an available-for-sale financial asset has been recognised di-

rectly in net assets and there is objective evidence that the asset is impaired (see paragraph 2 above), the cumulative loss that had been recognised directly in net assets shall be removed from net assets and recognised in surplus or deficit even though the financial asset has not been derecognised. The amount of the cumulative loss that is removed from net assets and recog-nised in surplus or deficit shall be the difference between the acquisition cost (net of any prin-cipal repayment and amortisation) and current fair value, less any impairment loss on that fi-nancial asset previously recognised in surplus or deficit.

11) Impairment losses recognised in surplus or deficit for an investment in an equity instrument classified as available for sale shall not be reversed through surplus or deficit.

12) If, in a subsequent period, the fair value of a debt instrument classified as available for sale in-creases and the increase can be objectively related to an event occurring after the impairment loss was recognised in surplus or deficit, the impairment loss shall be reversed, with the amount of the reversal recognised in surplus or deficit.

13) Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest revenue is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

8. Derecognition

8.1 Derecognition of financial assets 1) An entity shall derecognise a financial asset when, and only when:

(a) The contractual rights to the cash flows from the financial asset expire or are waived; or




(b) It transfers the financial asset as set out in paragraphs 2 and 3 below and the transfer quali-

fies for derecognition in accordance with paragraph 4 below.

The term financial asset refers to either a part of a financial asset (or a part of a group of similar fi-nancial assets) as identified in paragraph 17 below or, otherwise, a financial asset (or a group of similar financial assets) in its entirety. 2) An entity transfers a financial asset if, and only if, it either:

(a) Transfers the contractual rights to receive the cash flows of the financial asset; or (b) Retains the contractual rights to receive the cash flows of the financial asset, but assumes a

contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 3.

3) When an entity retains the contractual rights to receive the cash flows of a financial asset (the "original asset"), but assumes a contractual obligation to pay those cash flows to one or more en-tities (the "eventual recipients"), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met: (a) The entity has no obligation to pay amounts to the eventual recipients unless it collects

equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition.

(b) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows.

(c) The entity has an obligation to remit any cash flows it collects on behalf of the eventual re-cipients without material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and in-terest earned on such investments is passed to the eventual recipients.

4) When an entity transfers a financial asset, it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case: (a) If the entity transfers substantially all the risks and rewards of ownership of the financial as-

set, the entity shall derecognise the financial asset and recognise separately as assets or lia-bilities any rights and obligations created or retained in the transfer.

(b) If the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall continue to recognise the financial asset.

(c) If the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the finan-cial asset. In this case:

(i) If the entity has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.




(ii) If the entity has retained control, it shall continue to recognise the financial asset to the

extent of its continuing involvement in the financial asset (see paragraph 10 below).

5) If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing as-set or a servicing liability for that servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the servicing, a servicing liability for the servic-ing obligation shall be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the servic-ing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset in accordance with paragraph 8.

6) If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognise the new financial asset, financial liability or servicing liability at fair value.

7) On derecognition of a financial asset in its entirety, the difference between: (a) The carrying amount; and (b) The sum of (i) the consideration received (including any new asset obtained less any new li-

ability assumed) and (ii) any cumulative gain or loss that had been recognised directly in net assets;

shall be recognised in surplus or deficit.

8) If the transferred asset is part of a larger financial asset and the part transferred qualifies for de-recognition in its entirety, the previous carrying amount of the larger financial asset shall be allo-cated between the part that continues to be recognised and the part that is derecognised, based on the relative fair values of those parts on the date of the transfer. For this purpose, a retained ser-vicing asset shall be treated as a part that continues to be recognised. The difference between: (a) The carrying amount allocated to the part derecognised; and (b) The sum of (i) the consideration received for the part derecognised (including any new asset

obtained less any new liability assumed) and (ii) any cumulative gain or loss allocated to it that had been recognised directly in net assets;

shall be recognised in surplus or deficit. A cumulative gain or loss that had been recognised in net assets is allocated between the part that continues to be recognised and the part that is derec-ognised, based on the relative fair values of those parts.

9) If a transfer does not result in derecognition because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the entity shall continue to recognise the transferred asset in its entirety and shall recognise a financial liability for the consideration re-ceived. In subsequent periods, the entity shall recognise any revenue on the transferred asset and any expense incurred on the financial liability.

10) If an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset, and retains control of the transferred asset, the entity continues to recognise




the transferred asset to the extent of its continuing involvement. The extent of the entity’s con-tinuing involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset. For example: When the entity’s continuing involvement takes the form of guaranteeing the transferred asset, the extent of the entity’s continuing involvement is the lower of (i) the amount of the asset and (ii) the maximum amount of the consideration re-ceived that the entity could be required to repay ("the guarantee amount").

11) When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recognises an associated liability. Despite the other measurement requirements in this accounting rule, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is:

(a) The amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost; or

(b) Equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair value.

12) The entity shall continue to recognise any revenue arising on the transferred asset to the extent of its continuing involvement and shall recognise any expense incurred on the associated liabil-ity. For the purpose of subsequent measurement, recognised changes in the fair value of the transferred asset and the associated liability are accounted for consistently with each other and shall not be offset.

13) If an entity’s continuing involvement is in only a part of a financial asset (e.g., when an entity retains an option to repurchase part of a transferred asset, or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the entity retains control), the entity allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recog-nises on the basis of the relative fair values of those parts on the date of the transfer. The differ-ence between:

(a) The carrying amount allocated to the part that is no longer recognised; and (b) The sum of (i) the consideration received for the part no longer recognised and (ii) any cu-

mulative gain or loss allocated to it that had been recognised directly in net assets; shall be recognised in surplus or deficit. A cumulative gain or loss that had been recognised in net assets is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.

14) If a transferred asset continues to be recognised, the asset and the associated liability shall not be offset. Similarly, the entity shall not offset any revenue arising from the transferred asset with any expense incurred on the associated liability.

15) If a transferor provides non-cash collateral (such as debt or equity instruments) to the transfer-ee, the accounting for the collateral by the transferor and the transferee depends on whether the




transferee has the right to sell or repledge the collateral and on whether the transferor has de-faulted. The transferor and transferee shall account for the collateral as follows:

(a) If the transferee has the right by contract or custom to sell or repledge the collateral, then the transferor shall reclassify that asset in its statement of financial position (e.g., as a loaned as-set, pledged equity instruments or repurchase receivable) separately from other assets.

(b) If the transferee sells collateral pledged to it, it shall recognise the proceeds from the sale and a liability measured at fair value for its obligation to return the collateral.

(c) If the transferor defaults under the terms of the contract and is no longer entitled to redeem the collateral, it shall derecognise the collateral, and the transferee shall recognise the collat-eral as its asset initially measured at fair value or, if it has already sold the collateral, derec-ognise its obligation to return the collateral.

(d) Except as provided in (c), the transferor shall continue to carry the collateral as its asset, and the transferee shall not recognise the collateral as an asset.

16) A regular way purchase or sale of financial assets shall be recognised and derecognised, as ap-plicable, using trade date accounting.

17) Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 1–16, an entity determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety. The criteria for only considering a part of a financial asset are:

(i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets).

(ii) The part comprises only a fully proportionate (pro rata) share of the cash flows from a fi-nancial asset (or a group of similar financial assets).

(iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets).

8.2 Derecognition of financial liabilities 1) An entity shall remove a financial liability (or a part of a financial liability) from its statement of

financial position when, and only when, it is extinguished — i.e., when the obligation specified in the contract is discharged, waived, cancelled or expires.

2) An exchange between an existing borrower and lender of debt instruments with substantially dif-ferent terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

3) The difference between the carrying amount of a financial liability (or part of a financial liabil-ity) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in surplus or deficit. Where an




obligation is waived by the lender or assumed by a third party as part of a non-exchange transac-tion, an entity applies EU Accounting Rule 17 (Revenue from non-exchange transactions).

4) If an entity repurchases a part of a financial liability, the entity shall allocate the previous carry-ing amount of the financial liability between the part that continues to be recognised and the part that is derecognised based on the relative fair values of those parts on the date of the repurchase. The difference between (a) the carrying amount allocated to the part derecognised and (b) the consideration paid, including any non-cash assets transferred or liabilities assumed, for the part derecognised shall be recognised in surplus or deficit.

9. Disclosures 1) When this accounting rule requires disclosures by class of financial instrument, an EU entity

shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An EU en-tity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.

Balance sheet / statement of financial position disclosures 2) The carrying amounts of each of the following categories shall be disclosed either in the state-

ment of financial position or in the notes: (a) Financial assets at fair value through surplus or deficit; (b) Held-to-maturity investments; (c) Loans and receivables; (d) Available-for-sale financial assets; (e) Financial liabilities at fair value through surplus or deficit; and (f) Financial liabilities measured at amortised cost.

3) If an EU entity has reclassified a financial asset as one measured: (a) At cost or amortised cost, rather than at fair value; or (b) At fair value, rather than at cost or amortised cost; it shall disclose the amount reclassified into and out of each category and the reason for that re-classification.

4) If the EU entity has reclassified a financial asset out of the fair value through surplus or deficit category or out of the available-for-sale category, it shall disclose: (a) The amount reclassified into and out of each category; (b) For each reporting period until derecognition, the carrying amounts and fair values of all fi-

nancial assets that have been reclassified in the current and previous reporting periods; (c) If a financial asset was reclassified in accordance with paragraph 3 of point 6.4, the rare sit-

uation, and the facts and circumstances indicating that the situation was rare;




(d) For the reporting period when the financial asset was reclassified, the fair value gain or loss

on the financial asset recognised in surplus or deficit or in net assets in that reporting period and in the previous reporting period;

(e) For each reporting period following the reclassification (including the reporting period in which the financial asset was reclassified) until derecognition of the financial asset, the fair value gain or loss that would have been recognised in surplus or deficit or in net assets if the financial asset had not been reclassified, and the gain, loss, revenue, and expense recognised in surplus or deficit; and

(f) The effective interest rate and estimated amounts of cash flows the entity expects to recover, as at the date of reclassification of the financial asset.

5) An EU entity may have transferred financial assets in such a way that part or all of the financial assets do not qualify for derecognition. The EU entity shall disclose for each class of such finan-cial assets: (a) The nature of the assets; (b) The nature of the risks and rewards of ownership to which the EU entity remains exposed; (c) When the EU entity continues to recognise all of the assets, the carrying amounts of the as-

sets, and of the associated liabilities; and (d) When the EU entity continues to recognise the assets to the extent of its continuing in-

volvement, the total carrying amount of the original assets, the amount of the assets that the EU entity continues to recognise, and the carrying amount of the associated liabilities.

6) An EU entity shall disclose: (a) The carrying amount of financial assets it has pledged as collateral for liabilities or contin-

gent liabilities, including amounts that have been reclassified; and (b) The terms and conditions relating to its pledge.

7) When an EU entity holds directly collateral (of financial or non-financial assets) and is permitted to sell or repledge the collateral in the absence of default by the owner of the collateral, it shall disclose: (a) The fair value of the collateral held; (b) The fair value of any such collateral sold or repledged, and whether the entity has an obliga-

tion to return it; and (c) The terms and conditions associated with its use of the collateral.

Collateral held by third parties as a result of tripartite repurchase agreements shall not be dis-closed.

8) When financial assets are impaired by credit losses and the EU entity records the impairment in a separate account (e.g., an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the carry-ing amount of the asset, it shall disclose a reconciliation of changes in that account during the pe-riod for each class of financial assets.




9) For loans payable recognised at the end of the reporting period, an EU entity shall disclose:

(a) Details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable;

(b) The carrying amount of the loans payable in default at the end of the reporting period; and (c) Whether the default was remedied, or the terms of the loans payable were renegotiated, be-

fore the financial statements were authorised for issue. 10) If, during the period, there were breaches of loan agreement terms other than those described in

paragraph 9, an EU entity shall disclose the same information as required by paragraph 9 if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the end of the reporting peri-od).

Disclosures on the economic outturn account / statement of financial performance 11) An EU entity shall disclose the following items of revenue, expense, gains, or losses either in

the statement of financial performance or in the notes: (a) Net gains or net losses on:

(i) Financial assets or financial liabilities at fair value through surplus or deficit; (ii) Available-for-sale financial assets, showing separately the amount of gain or loss recog-

nised in net assets during the period and the amount reclassified from net assets and recog-nised directly in surplus or deficit for the period;

(iii) Held-to-maturity investments; (iv) Loans and receivables; and (v) Financial liabilities measured at amortised cost;

(b) Total interest revenue and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through surplus or deficit;

(c) Fee revenue and expense (other than amounts included in determining the effective interest rate) arising from:

(i) Financial assets or financial liabilities that are not at fair value through surplus or deficit; and

(ii) Trust and other fiduciary activities that result in the holding or investing of assets on be-half of individuals, trusts, retirement benefit plans, and other institutions;

(d) Interest revenue on impaired financial assets accrued; and (e) The amount of any impairment loss for each class of financial asset.

Fair value disclosures 12) Except as set out in paragraph 18 below for each class of financial assets and financial liabili-

ties, an entity shall disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount.




13) In disclosing fair values, an EU entity shall group financial assets and financial liabilities into

classes, but shall offset them only to the extent that their carrying amounts are offset in the statement of financial position.

14) An EU entity shall disclose for each class of financial instruments the methods and, when a valuation technique is used, the assumptions applied in determining fair values of each class of financial assets or financial liabilities. For example, if applicable, an EU entity discloses infor-mation about the assumptions relating to prepayment rates, rates of estimated credit losses, and interest rates or discount rates. If there has been a change in valuation technique, the EU entity shall disclose that change and the reasons for making it.

15) To make the disclosures required by paragraph 16 an EU entity shall classify fair value meas-urements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

(a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) Inputs other than quoted prices included within Level 1 that are observable for the asset or

liability, either directly (i.e., as price) or indirectly (i.e., derived from pric

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