ANNUAL REPORT 2017/18 51
NOTES TO THE FINANCIAL STATEMENTS
31 March 2018
27. ADOPTION OF NEW AND REVISED STANDARDS
(continued)
FRS 109 Financial Instruments
FRS 109 was issued in July 2015 to replace FRS 39
Financial Instruments: Recognition and Measurement
and introduced new requirements for (i) the
classification and measurement of financial assets and
financial liabilities (ii) general hedge accounting (iii)
impairment requirements for financial assets.
Key requirements for FRS 109 include:
• All recognised financial assets that are within the
scope of FRS 39 are now required to be subsequently
measured at amortised cost or fair value through
profit or loss (“FVTPL”). Specifically, debt investments
that are held within a business model whose objective
is to collect the contractual cash flows, and that have
contractual cash flows that are solely payments of
principal and interest on the principal outstanding
are generally measured at amortised cost at the end
of subsequent accounting periods. Debt instruments
that are held within a business model whose objective
is achieved both by collecting contractual cash flows
and selling financial assets, and that have contractual
terms that give rise on specified dates to cash flows
that are solely payments of principal and interest
on the principal amount outstanding, are measured
at fair value through other comprehensive income
(“FVTOCI”). All other debt investments and equity
investments are measured at FVTPL at the end of
subsequent accounting periods. In addition, under FRS
109, entities may make an irrevocable election, at initial
recognition, to measure an equity investment (that is
not held for trading) at FVTOCI, with only dividend
income generally recognised in profit or loss.
• With some exceptions, financial liabilities are
generally subsequently measured at amortised
cost. With regard to the measurement of financial
liabilities designated as at FVTPL, FRS 109 requires
that the amount of change in fair value of the
financial liability that is attributable to changes in
the credit risk of that liability is presented in other
comprehensive income, unless the recognition of
the effects of changes in the liability’s credit risk
in other comprehensive income would create or
enlarge an accounting mismatch to profit or loss.
Changes in fair value attributable to a financial
liability’s credit risk are not subsequently reclassified
to profit or loss. Under FRS 39, the entire amount of
the change in the fair value of the financial liability
designated as at FVTPL is presented in profit or loss.
In relation to the impairment of financial assets,
FRS 109 requires an expected credit loss model, as
opposed to an incurred credit loss model under FRS
39. The expected credit loss model requires an entity
to account for expected credit losses and changes
in those expected credit losses at each reporting
date to reflect changes in credit risk since initial
recognition. In other words, it is no longer necessary
for a credit event to have occurred before credit
losses are recognised.
• The new general hedge accounting requirements
retain the three types of hedge accounting
mechanisms currently available in FRS 39. Under FRS
109, greater flexibility has been introduced to the
types of transactions eligible for hedge accounting,
specifically broadening the types of instruments that
qualify for hedging instruments and the types of risk
components of non-financial items that are eligible for
hedge accounting. In addition, the effectiveness test
has been overhauled and replaced with the principle
of an ‘economic relationship’. Retrospective assessment
of hedge effectiveness is also no longer required.
Enhanced disclosure requirements about an entity’s risk
management activities have also been introduced.
FRS 109 will take effect from financial years beginning on
or after 1 January 2018. Management anticipates that the
initial application of the new FRS 109 will result in changes
to the accounting policies relating to the impairment
provisions of financial assets and liabilities. Management
will consider whether a lifetime or 12-month expected
credit losses on financial assets and liabilities should be
recognised, which is dependent on whether there has
been a significant increase in the credit risk of the assets
and liabilities from initial recognition to the date of initial
application of FRS 109. Additional disclosures will also be
made. It is currently impracticable to disclose any further
information on the known or reasonably estimable
impact to the University’s financial statements in the
period of initial application as management has yet to
complete its detailed assessment. Management does
not plan to early adopt the new FRS 109.
