The new financial instruments framework requires all financial assets and financial liabilities to be classified by characteristic and/or management intent.  Their classification must be documented:

  • On the first effective date of the standard
  • At inception date for every new financial instrument entered into thereafter

The classification of financial assets and liabilities determines how they are accounted for on an ongoing basis.  The company may elect to account for most financial assets or financial liabilities at fair value; however, election is irrevocable once made.

All financial assets are classified in one of four categories:

CategoryDefinition
Held for trading Includes:
  • Financial instruments acquired for purpose of trading or as part of a trading portfolio
  • All derivatives that are not designated in hedging relationships
  • Any financial instrument designated as trading
Held to maturity (HTM)
  • A financial asset with fixed payments and maturity that the entity has the intent and ability to hold to maturity
Loans and receivables
  • A financial asset, that is not a debt security, resulting from a delivery of assets in exchange for a promise to pay
Available for sale Includes:
  • Non-derivative financial assets designated as available for sale
  • Financial assets not classified in another category
Other liabilities A financial liability not classified as held for trading

Transition

All financial instruments should be classified on date of adoption of Section 3855.

Certain existing financial instruments are remeasured on date of adoption with the offsetting adjustment to opening retained earnings (Held for trading) or other comprehensive income (Available for sale)

Other Considerations

  • How will your company review and classify its existing financial instruments?
  • Are your systems able to manage financial instrument classification categories and related measurement differences? How will new financial instruments be classified?
  • How will the classifications be documented? How will documentation be controlled?

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