ACC00713 Report S1 2018: AASB 9 Financial Instruments CBA Impact

This report provides a detailed analysis of the implementation of AASB 9 on financial instruments, including financial assets, liabilities, and equity instruments, with a specific focus on the Commonwealth Bank of Australia. It describes the measurement processes relevant to AASB 9 and explains different types of financial instruments used by the bank. The report also examines the perspectives of investors regarding the potential impacts of adopting AASB 9, and determines the impact on the bank's financial performance, assets, liabilities, and selected financial ratios. The analysis covers the recognition and measurement of financial instruments according to AASB standards, including AASB 7, AASB 9, AASB 13, AASB 132, and AASB 139. Furthermore, it discusses the implications of adopting AASB 9 on expected credit loss models, classification, measurement requirements, and hedge accounting rules.

Accounting and Financial
Reporting

Executive Summary
The report is providing the detailed description of the implementation of the AASB 9 in the
financial instruments with including the financial assets, financial liabilities, and the equity
instruments. The description of the measurement processes of the financial instruments is
made which are relevant to the AASB 9. Apart from this, the explanation of the different
types of the financial instruments is on the basis of the Commonwealth Bank of Australia.
The examples of the financial instruments for the chosen company are recognized and are
measured by which the changes in the financial instruments can be easily made. Apart from
this, the various perspectives of the investors are explained which are surrounding the
discussion of the potential impacts on the adoption of the new AASB 9 standards. The
determination of the impact on the financial performance, assets, selected financial ratio and
the liabilities are explained in this study.
1

Table of Contents
Executive Summary...............................................................................................................................1
Part A....................................................................................................................................................3
Question 1.........................................................................................................................................3
Question 2.........................................................................................................................................4
Question 3.........................................................................................................................................5
Part B.....................................................................................................................................................5
References.............................................................................................................................................8
2

Part A
Question 1
According to the current accounting standard AASB 9, the financial instruments are
identified as the classification of the financial assets and the measurement models. The
financial instrument is depicted to be a contract which is giving rise to the financial asset as
well as on entity is found to be showing the development of the financial liability. The
financial assets are found to be including the appropriate management of the cash. The equity
instrument is depicted to be another instrument which is involved in providing an appropriate
contractual right for receiving the cash and another financial asset from another entity (Jones,
2013)a. It is used for exchanging the financial liabilities with other entities which are found to
be potentially favorable and also the entity is focusing on the development of the financial
assets. The financial assets are including the cash at the banks, deposits, trade receivables and
the other loans as well as the bonds. Apart from this, the derivatives and the other equity
interests are found to be dependent on the swapping options as well as the contracts are
prepared for showing the improvement in the swapping processes. The focus on making the
measurement of the models for the financial assets are carried out which is enabled of
showing the appropriate recognition of the fair values for the organization and also is found
to be directly impacting the attributes as the acquisition of the financial assets are seen. For
this reason, the classification of the financial assets, as well as the cash flow characteristics,
are found to be dependent on the business model by which the measurement of the financial
assets can be easily carried out (Shapiro, 2014).
Apart from this, the contractual cash flow characteristics test is depicted to be dependent on
the identification of the Cash flows by which the sole payment of the principle and the
interests related to the principal amount is explained with considering the appropriate
variability in the contractual tests. The changes in the equity prices are depicted to be
showing the exposure to the risks as the volatility is identified and the exposures are
identified which are found to be changed in the form of the equity prices. The focus on
measuring the instruments related to the subject is essential as it is helping in showing the
features linked with the study and also it is focusing on the development of the distribution of
the recovery processes (Horngren, Sundem and Elliott, 2014). The cost of the investment and
the return achieved on the implementation of the equity instruments are depicted to be
showing the focus on the classification of the financial stability. The designing of the equity
3

instruments are made which will enable to focus on making the improvement of the equity
opportunities and also is surrounding the appropriate consideration of the business processes.
The selection of the equity instrument is depicted to be used in the AASB 9 are representing
the appropriate identification of the objectives and due to this reason, it is beneficial for
carrying out the activities in an appropriate way (Khan and Jain, 2007).
Question 2
The measurement of the financial instruments with relevant to the AASBs are provided in the
following points:-
 AASB 7 Financial Instruments: Disclosure: It is found to be stating the significance of
the financial instruments for the purpose of financial positioning and the performance.
The measurement process is carried out by categorizing the financial position as well
as it is found to be offsetting the financial liabilities and the assets (Needles and
Powers, 2012). The allowances are also included for positioning the credit losses and
also the compound financial instruments can be properly positioned with including
the embedded derivatives.
 AASB 9 Financial Instruments: It is helping in defining the new classification model
so that the positioning of the financial assets, as well as the liabilities, can be easily
made and also it is surrounding the appropriate development of the asset on one
entity. The inclusion of the contractual rights and the financial assets enables the
organization to receive the assets by including all the entities (Britton and Waterston,
2013).
 AASB 13 Fair Value Measurement: The changes in the focus on the fair
representation of the values present in the financial instruments are targeted and also
it is aiming at making the changes in the financial positions. The processing of the fair
value measurement is depicted to be surrounding the appropriate measurement of the
activities. The enhancement of the activities is surrounding the fair representation of
the activities as found to be surrounding the study (Shim and Siegel, 2008).
 AASB 132 Financial Instruments: Presentation: The AASB132 is incorporating the
whole processes with including all the interpretations by which the enhancement of
the activities can be easily made. The incorporation of the activities is surrounding the
appropriate development of the accounting standards by which the measurement of
the activities can be easily made (Porter and Norton, 2017).
4

 AASB 139 Financial Instruments: Recognition and Measurement: The recognition of
the financial instrument measurement is carried out which is surrounding the
appropriate development of the study as well as the accounting processes can be
easily carried out. The incorporation of the international financial reporting standards
can be easily made which will enable to focus on attaining the activities in an
appropriate way (Rayman, 2013).
Question 3
The Commonwealth Bank of Australia consists of the financial instruments that represent 5
percent of the total liabilities and 17 percent of the total assets. The financial instruments that
are held at the fair value consist of the derivative liabilities and assets, available for the sale
securities, life investment contracts, and bills discounted (Annual Report, 2017). The
derivative financial instruments are referred to the contracts of which the value is being
derived from the underlying index, price or other variables. It consists of the future options,
interest rate, forward rate agreement, credit swaps, currency, and equity. The derivative is
being entered into for hedging or trading purpose. The initial recognition, losses or gains are
recognized in the profit or loss statement. The derivatives are being used for managing the
exposures to foreign currency, interest rate, credit and commodity risk consisting of
exposures that arise from the forecast transactions. The derivatives are being classified as the
hedge for hedging or held for training. The held for the trading derivatives are the contracts
that are being entered for meeting the needs of the customers and undertaken positioning
activities and undertake market making (Shim, Siegel and Shim, 2012). The hedges
derivatives are referred to the instruments that are held for the purpose of risk management.
The management of the exposures is the main aim of the organization. The hedge relationship
consists of the cash flow hedges, net investment hedges and the fair value hedges.
Part B
The adoption of the new AASB will impose a significant impact on the liabilities, assets,
financial performance and financial ratios of the organizations. AASB 9 will introduce an
‘expected credit loss model, revised classification, measurement requirements and model and
hedge accounting rules as per the Commonwealth Bank of Australia. AASB 9 is expected
that the credit loss model will replace the existing incurred losses model need for recognizing
the impairment. It needs the organization for recognizing the credit loses which will be based
on the forward unbiased looking information. AASB need the recognition of the credit losses
5

with the application approach of three stages. If financial assets do not face the increase in the
credit risk and the provision equivalent to twelve months is expected recognition of credit
losses (Annual Report, 2017). If the financial assets face the credit risk then the provision
will be equivalent to the lifetime full expected loss is needed. The expected credit losses are
the weighted amounts identified by examining the possible results and taking into account the
past events, time value of money, the forecast of the economic conditions and current
conditions. The implementation of the AASB 9 will impose a significant impact on the
accounting treatments (Holton, 2012).
AASB 9 will replace the measurement and classification in AASB 139 that will classify the
financial assets on the basis of the business model to manage the financial assets and the
contractual flow of cash will represent payments of interests and payments. The financial
assets will be classified at the amortized cost as the financial assets, financial assets through
the profit or loss at the fair value. The nontrading equity instruments will be estimated at the
fair value. The impact can also be seen in the financial ratios such as the debt to equity. The
balance between the debt and equity can also be affected due to the introduction of AASB9.
AASB 9 would change the hedge accounting with the introduction of the principle-based
approach for effective hedge testing and increase the eligibility of hedge items and hedge
instruments. The adoption of the hedge accounting model which will form newly is optional
(PwC, 2017). Under AASB139, the current hedge accounting can continue for applying the
till the IASB accomplish the accounting for the risk management projects. The new hedge
accounting need of the group will be applied from 1 July 2018. The values of the financial
items in the assets and liabilities will be affected due to the implementation of AASB 9. It is
considered to be a major concern for the management team of Commonwealth Bank of
Australia. It will change the accounting treatment. The accountants and auditors have to
follow the accounting standards in order to ensure the appropriate depiction of the financial
position of the organization (Wolf, 2010).
The Commonwealth Bank of Australia has been in progress for the implementation of AASB
9. It is not practical for the disclosure of the financial impacts till the program of
implementation is further reliable and advanced estimation of the impacts. AASB 15
consisting of the revenue from the contracts with the customers has introduced the model for
the revenue recognition which is based on the control of the products and services transferred
to the customers. AASB 16 consisting of leases will amend the leases accounting. The lessees
would need for bringing all the leases on the financial position statement as the difference
6

between finance leases and operating leases has been removed (PwC, 2018). The accounting
of lessor largely remains unchanged. AASB 17 consists of the insurance contracts have
introduced the measurement approached for the accounting of the insurance contracts. It
consists of the building block approach for contracts of long-term, premium allocation
approach for a contract of short terms and variable free approach for the contracts of directing
participating. The contract level is to be lower which is expected under the current practices.
The implementation of AASB 9 will impose a significant impact on the financial liabilities,
equity instrument and financial assets of the bank (Gowthorpe, 2008). The management of
the bank needs to deal with the impacts that will occur due to the application of AASB9.
7

References
Annual Report (2017). Annual Report. [online] Commbank.com.au. Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf [Accessed 24 May 2018].
Britton, A. and Waterston, C. (2013). Financial accounting. Harlow: Financial Times
Prentice Hall.
Holton, R. (2012). Global finance. London [u.a.]: Routledge.
Horngren, C., Sundem, G. and Elliott, J. (2014). Introduction to financial accounting.
Harlow: Pearson Education Limited.
Jones, M. (2013). Accounting. Hoboken: John Wiley Inc.
Khan, M. and Jain, P. (2007). Financial management. New Delhi: Tata McGraw-Hill.
Needles, B. and Powers, M. (2012). Financial accounting. Mason, OH: South-Western
Cengage Learning.
Porter, G. and Norton, C. (2017). Financial accounting. Boston, MA: Cengage Learning.
PwC (2017). New standard - Financial instruments. [online] PwC. Available at:
https://www.pwc.com.au/ifrs/new-standard-financial-instruments.html [Accessed 24 May
2018].
PwC (2018). New standard - Financial instruments. [online] PwC. Available at:
https://www.pwc.com.au/ifrs/new-standard-financial-instruments.html# [Accessed 24 May
2018].
Rayman, R. (2013). Accounting Standards. Hoboken: Taylor and Francis.
Shapiro, A. (2014). Multinational financial management. Hoboken (NJ): J. Wiley.
Shim, J. and Siegel, J. (2008). Financial management. Hauppauge, N.Y.: Barron's
Educational Series.
Shim, J., Siegel, J. and Shim, J. (2012). Financial accounting. New York: McGraw-Hill.
Wolf, M. (2010). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.
Gowthorpe, C. (2008). Financial analysis. Oxford: CIMA.
8

9