The publication of IFRS 9, Financial Instruments, represents the completion of the first s

tage of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard. The new standard purports to enhance the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity.

Required:

(a) (i) Discuss the approach taken by IFRS 9 in measuring and classifying financial assets and the main effect that IFRS 9 will have on accounting for financial assets. (11 marks)

(ii) Grainger, a public limited company, has decided to adopt IFRS 9 prior to January 2012 and has decided to restate comparative information under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The entity has an investment in a financial asset which was carried at amortised cost under IAS 39 but will be valued at fair value through profit and loss (FVTPL) under IFRS 9. The carrying value of the assets was $105,000 on 30 April 2010 and $110,400 on 30 April 2011. The fair value of the asset was $106,500 on 30 April 2010 and $111,000 on 30 April 2011. Grainger has determined that the asset will be valued at FVTPL at 30 April 2011.

Required:

Discuss how the financial asset will be accounted for in the financial statements of Grainger in the year ended 30 April 2011. (4 marks)

(b) Recently, criticisms have been made against the current IFRS impairment model for financial assets (the incurred loss model). The issue with the incurred loss model is that impairment losses (and resulting write-downs in the reported value of financial assets) can only be recognised when there is evidence that they exist and have been incurred. Reporting entities are not allowed currently to consider the effects of expected losses. There is a view that earlier recognition of loan losses could potentially reduce the problems incurred in a credit crisis.

Grainger has a portfolio of loans of $5 million which was initially recognised on 1 May 2010. The loans mature in 10 years and carry an interest rate of 16%. Grainger estimates that no loans will default in the first two years, but from the third year onwards, loans will default at an annual rate of about 9%. If the loans default as expected, the rate of return from the portfolio will be approximately 9·07%. The number of loans are fixed without any new lending or any other impairment provisions.

Required:

(i) Discuss briefly the issues related to considering the effects of expected losses in dealing with impairment of financial assets. (4 marks)

(ii) Calculate the impact on the financial statements up to the year ended 30 April 2013 if Grainger anticipated the expected losses on the loan portfolio in year three. (4 marks)

Professional marks will be awarded in question 4 for clarity and quality of discussion. (2 marks)