Liabilities and equity

IFRS 9 · Financial instruments and amortised cost

Opening + interest at the effective rate − cash at the coupon = closing.

Draft: not yet reviewed by a teacher

Why it exists

Financial instruments are easy to show as something they are not: call debt "shares", charge interest at the coupon rather than the real cost of the money, sell receivables while keeping all the risk. IAS 32 and IFRS 9 make the substance of the contract show, and IFRS 7 makes the risks disclosed.

Key rules

A financial liability is a contractual obligation to deliver cash or another financial asset. If the issuer cannot avoid paying, it is debt whatever it is called: redeemable preference shares are a liability and their dividends are finance costs.
A convertible is split on issue: liability = PV of the future payments at the rate for similar debt without conversion; equity = proceeds − liability. The equity is never remeasured.
A liability at amortised cost is first recognised net of issue costs; each year's expense = opening balance × the effective rate.
A financial asset at amortised cost is a debt instrument held to collect cash flows that are solely principal and interest. Transaction costs are added to the asset.
Shares are FVTPL by default (transaction costs expensed at once). For shares not held for trading, an irrevocable FVTOCI election can be made on purchase: remeasurement goes to OCI and is never reclassified to profit or loss; dividends go to P/L.
Factoring: if the risks and rewards (above all the risk of non-payment) pass to the factor, the receivables are derecognised; if they stay (with recourse), the receivables stay and the cash received is a loan.

Examples

On 1 January 2026 Bakı Kabel issued 5% loan notes with a nominal value of 20,000 thousand AZN at 95% (19,000), with issue costs of 640, redeemable at par in 2030; the effective rate is 7%.

Initially: 19,000 − 640 = 18,360
2026: interest 18,360 × 7% = 1,285; coupon 1,000; closing 18,645
2027: interest 18,645 × 7% = 1,305; coupon 1,000; closing 18,950
By 2030 the balance reaches 20,000; finance costs over five years are 6,640 = coupons 5,000 + discount 1,000 + costs 640

An amortised cost table for loan notes

Convertible notes of 5,000, coupon 4%, three years; similar debt without conversion carries 8% (factors 0.926, 0.857, 0.794).

Liability: 200 × 2.577 + 5,000 × 0.794 = 515 + 3,970 = 4,485
Equity: 5,000 − 4,485 = 515
First-year expense: 4,485 × 8% = 359

Splitting a convertible

How it works

The effective rate is the rate at which the PV of all future payments equals the amount received (or paid). So it captures everything: the coupon, any discount on issue, any premium on redemption and the issue costs.

The table is the same for a liability and an asset:

opening balance;
plus interest at the effective rate (an expense for debt, income for an asset);
less the cash at the coupon (nominal × coupon rate);
closing balance, which reaches exactly the redemption amount at the end.

A debt asset held both to collect and to sell is also at FVTOCI, but its cumulative gain is reclassified to profit or loss on disposal.

Expected credit losses (ECL) reduce financial assets, but FR does not ask for them to be calculated in depth.

Traps

Taught in the course

Key rules

A financial liability is a contractual obligation to deliver cash or another financial asset. If the issuer cannot avoid paying, it is debt whatever it is called: redeemable preference shares are a liability and their dividends are finance costs.

A convertible is split on issue: liability = PV of the future payments at the rate for similar debt without conversion; equity = proceeds − liability. The equity is never remeasured.

A liability at amortised cost is first recognised net of issue costs; each year's expense = opening balance × the effective rate.

A financial asset at amortised cost is a debt instrument held to collect cash flows that are solely principal and interest. Transaction costs are added to the asset.

Shares are FVTPL by default (transaction costs expensed at once). For shares not held for trading, an irrevocable FVTOCI election can be made on purchase: remeasurement goes to OCI and is never reclassified to profit or loss; dividends go to P/L.

Factoring: if the risks and rewards (above all the risk of non-payment) pass to the factor, the receivables are derecognised; if they stay (with recourse), the receivables stay and the cash received is a loan.