MFRS 9

Financial Instruments

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 Introduction to Financial Instruments
• Financial instruments is all about financing the business and identifying
whether the instrument relates to asset, liability or equity component.
• Examples:
 Issuance of shares – is an equity component of the financial
instrument
 Issuance of bonds – is a liability component of the financial
instrument
 Subscription of financial instrument issued by other entities – is the
asset component of the financial instrument
Definitions
The definition and presentation of financial instruments, financial assets,
financial liabilities and equity instruments are covered in MFRS 132.

MFRS 9 and MFRS 139 deal with the recognition and measurement of
financial instruments including derivatives and hedging.

MFRS 7 – Financial Instruments: Disclosures. Relates to disclosures of

financial instruments, this is a standard newly developed by the IASB.

MFRS 9 further classifies financial instruments into:

• Primary instruments, and
• Derivatives.
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Primary Instruments
Primary instruments are all financial instruments other than derivatives.
MFRS 132 categorises the primary instruments into financial assets, financial
liabilities and equity instruments.

Derivatives
• Derivative is a contract that allows an entity to speculate or hedge against
future changes in the market. It is a contract to buy or sell or settle in cash or in
a primary instrument.
• A derivative derives its value from the host or underlying instrument.
• The holder or writer is not required to invest or receive the notional amount of
primary instrument at the inception of the contract.

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Types of Financial Instruments

Financial Assets under the old MFRS 139

a. Held to Maturity – instruments that are held until its maturity period

b. Loans and Receivables – unquoted securities with fixed determinable

payments, also include trade receivables or any forms of receivables

c. Trading or financial assets at Fair Value Through Profit and Loss (FVTPL) –
instruments that an entity holds with the intention of selling them in the future
for short-term profit making

d. Available for Sale – other securities which are not classified as any of the other
three classifications of financial assets (a to c) as listed
 CLASSIFICATION OF FINANCIAL ASSETS
On recognition under the new MFRS 9, financial assets are classified as
measured at either:
• Fair value (through profit or loss or other comprehensive income); or
• Amortised cost.
The classification depends on:
(a) The entity’s business model for managing the financial assets; and
(b) The contractual cash flow characteristics of the financial asset.
If both of the business model and contractual cash flow tests are met, the
financial asset is classified as measured at amortised cost.
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FINANCIAL LIABILITIES
On recognition, MFRS 9 requires financial liabilities are
classified as measured at:
a. Fair value through profit or loss; or
b. Amortised cost.

Financial liabilities are classified at fair value through profit

or loss if they are held for trading or are designated at fair
value through profit or loss upon initial recognition.

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RECOGNITION OF FINANCIAL ASSET AND
FINANCIAL LIABILITY

• MFRS 9 requires recognition of a financial asset or a

financial liability when, and only when, the entity becomes
a party to the contractual provisions of the instrument.
• Two dates on which the instrument can be recognised (or
derecognised) are:
trade date; and
settlement date.
• All financial assets and financial liabilities to be
recognised on the statement of financial position.

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MEASUREMENT
• Initially, financial assets and financial liabilities are measured
at the transaction price, which is the fair value of the
consideration given or received.

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 Transaction Costs
• Transaction costs, such as fees and commission, are included in the initial
measurement of financial assets and financial liabilities except for instruments that are
accounted for at fair value through profit or loss.
• For those that are measured at fair value through profit or loss, the transaction costs
directly attributable to the acquisition or issue are written off in the profit or loss
immediately.
• For financial assets, costs that are directly attributable to the acquisition of the asset
are added to the amount initially recognised.
• For financial liabilities, costs directly related to the issue of debt are deducted from the
amount of debt recognised initially.
• For financial instruments carried at amortised cost, the transaction costs are included
in the amortised cost and are amortised through the profit or loss over the life of the
instrument. 10
CURRENT ASSET:
RECEIVABLES

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 Learning Outcomes
At the end of this chapter, you should be able to:
• Determine initial recognition and measurement of receivables.
• Show the presentation and disclosure of receivables in the financial
statements.
• Use judgement and estimates in determining impairment of receivables.
• Apply MFRS 13 Fair Value Measurement for receivables.

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 Types of Receivables

Receivables are cash arising from the sale of goods and services in the
ordinary course of business or the entity

Amounts owed by Written promise (as “Nontrade” (interest, loans

customers that result from evidenced by a formal to officers, advances to
the sale of goods and instrument) for amounts to employees, and income
services. be received. taxes refundable).

Accounts Receivable Notes Receivable Other Receivables

DEFINITION AND CLASSIFICATION OF TRADE
RECEIVABLES
• MFRS132 defines trade receivables as an entity’s claims to future
cash collection of cash or services, a non-derivatives financial
instrument (financial asset) with fixed or determinable payments that
are not quoted in an active market in MFRS139.
• According to MFRS132 Financial Instrument: Presentation, a financial
asset is any asset that is :
a) Cash;
b) An equity instrument of another entity;
c) A contractual right;
d) A control that will or may be settled by the entity’s own equity
instruments.
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DEFINITION AND CLASSIFICATION OF TRADE
RECEIVABLES
• Appendix A of MFRS 132 provides examples of financial assets that
represents a contractual right to receive cash in the future:
a) Trade receivables
b) Notes receivables
c) Loan receivables
d) Bond receivables

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DEFINITION AND CLASSIFICATION OF TRADE RECEIVABLES
Example 1
• Focus Eye Bhd is a company selling eyeware products. In January, the company
agrees to sell goods on credit to a customer, Mr X. The products sold are:
• 10 units of Elegant eyeware @ RM500 per unit
• 20 units of Smart eyeware @ RM300 per unit
• Focus Eye gives a credit term of 30 days to Mr X for the debt settlement. Are the
goods sold to Mr X current assets? Are the assets sold considered items of
receivables?
Answer
• Yes, The goods sold by Focus Eyeware are current assets because they are held
for the purpose of trading and are sold in its normal operating cycle. The assets
are expected to be realised within 12 months.
• Yes, the assets are items of receivables because they are sold as part of the
normal operating cycle of the company and the company has contractual rights to
receive cash in future. 16
DEFINITION AND CLASSIFICATION OF TRADE RECEIVABLES
Example 2
• Due to technological advancement, Focus Eye Bhd decides to sell their old
equipments on credit to Mr Z. The payments is to be made within 12 months.
Are the equipments sold to Mr Z current assets? Are the assets sold items of
receivables?

Answer:
• No. The equipments are not current assets because they are not held for the
purpose of trading and are sold in their normal operating cycle and they are
expected to be realised within 12 months.
• No. The assets are not items of receivables because the assets are not sold as
part of the normal operating cycle of the company and the company has no
contractual rights to receive cash in the future.
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 INITIAL RECOGNITION OF TRADE RECEIVABLES
• MFRS139 states that an entity shall recognise a financial asset
of a financial liability in its statement of financial position when,
and only when, the entity becomes a party to the contractual
provision of the instruments.
• Trade receivables are assets that are associated with the legal
rights including the right of ownership.
Example 3
• Focus Eye Bhd sells goods to Company A at a cost of RM20,000. Company A pays a
deposit of RM5,000 on 1 January and settles the remaining balance of RM15,000 in
the future. The contract is an unconditional receivable. Is Company A considered a
party to the contractual provisions of the instruments?
Answer:
• Company A considered a party because Company A has acquired the goods from
Focus Eye and promised to settle the balance in the future. Focus Eye has a
contractual right to receive the cash in the future.
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INITIAL MEASUREMENT OF TRADE RECEIVABLES

• The amount to be recorded for trade receivables account is at fair

value because it arise from the sale of goods or services on credit in
the ordinary course of the entity.
• The initial measurement of trade receivables can be done as follows:
• Dr Trade receivables account
• Cr Sales account or service revenue account
• When cash is collected from the trade receivables account, the entry
is as follows:
• Dr Bank or cash account
• Cr Trade receivables account

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INITIAL MEASUREMENT OF TRADE RECEIVABLES
Example 4
• Based on the information in Example 1, what would be the amount
initially measured as trade receivables? Prepare the journal entry to
record the trade receivables.
Answer:
• The gross amount is RM11,000 as Focus Eye Bhd did not offer any
discount to Mr X.
• Dr Trade receivables account 11,000
• Cr Sales account 11,000

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SALES DISCOUNT
Entity offers sales discounts to its customers to encourage bulk
purchases and prompt payment. Example, trade discount and cash
discount.
Example 5
• During the year, Focus Eye Bhd sold goods to Gee Bhd for RM1,000.
A trade discount of 10% is given to Gee Bhd. Determine the amount to
be measured in the trade receivables account.
Answer:
• The initial measurement of receivables can be done as follows:
• Dr Trade receivable account 900
• Cr Sales account or service revenue account 900
(The amount to be recorded in the trade receivable account is RM900.
the trade discount of RM100 is not to be recognised in the financial
statement.)
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SALES DISCOUNT
A cash discount is given to encourage customers to make quick
payments.
Example 6
• In January, Focus Eye Bhd sold goods at a quoted price of
RM10,000 with a credit term of 2/20, net 90. determine the
amount to be measured in the trade receivables account.

Answer:
• The initial measurement of trade receivable can be done as
follows:
• Dr Trade receivables account 10,000
• Cr sales account or service revenue account 10,000
(The amount to be recoded in the trade receivable account is RM10,000)

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SALES DISCOUNT
When payment is received, the journal entry is as follows:
• Dr Bank or cash account 9,800
Dr Discount allowed 200
• Cr Trade receivables account 10,000

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SALES DISCOUNT
Example 7
• Focus Eye Bhd sold goods on credit to Aman Bhd amounting to
RM19,000. The trade discount given is RM1,000. The cost of goods
sold is RM11,000. The account is due in 60 days. Determine the
amount to be measured in the trade receivables account.

Answer:
The initial measurement of trade receivables can be done as follows:
• Dr Trade receivables account 18,000
• Cr Sales account or service revenue account
18,000
(The recognition in the trade receivables account will be at the gross
invoice price less trade discount, RM18,000. when cash is collected,
the bank or cash account is debited by RM18,000)
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 SALES RETURN
• Customers may return their products that do not meet their
requirements such as faulty product.
• The returned product is a sales return, which is a deduction of
account receivables and is recognised at quoted price.
• The initial measurement of a sales return is as follows:
• Dr Sales return account
• Cr Trade receivables account

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SALES RETURN
Example 8
• In January, Focus Eye Bhd sold goods on credit to its customer
amounting to RM19,000. the customer returned some faulty products
amounting to RM2,000. determine the amount to be measured in the
trade receivables account and sales return account.
Answer:
The initial measurement of receivables is as follows:
• Dr Trade receivable account 19,000
• Cr Service revenue account 19,000
The initial measurement of sales returned is as follows:
• Dr Sales return account 2,000
• Cr Trade receivables account 2,000
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 ALLOWANCE FOR DOUBTFUL DEBTS
• An entity should assess the receivables at the end of each accounting period to
analyse the collectability of the trade receivables.
• The inability to collect the receivables within the specific time will result the
decrease towards the value of receivables. To avoid this happens, entity is
advise to run an impairment test.
• The impairment of trade receivables will be tested and the amount of loss is to
be recognised in the statement of profit or loss.
The journal entry is as follows:
• Dr Bad debt account / Impairment Loss (PL)
• Cr Allowance for doubtful debt account / Impairment Loss Allowance (BS)

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ALLOWANCE FOR DOUBTFUL DEBTS
There are 2 methods to recognise bad debt and allowance
for bad debt:
1) Direct write-off method – it does not separately recognise
the specific and general allowance. The method is not
allowed by the standard.
2) Allowance method - Companies estimate uncollectible
accounts receivable as the companies need to charge an
expense for uncollectable debts by end of the year.

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 ALLOWANCE FOR DOUBTFUL DEBTS
Journal entries under Allowance Method
1. Recording allowance for doubtful debts 3. Recording the write-off an uncollectible account
Dr Bad debts account Dr Allowance for doubtful debts account
Cr Allowance for doubtful debts account Cr Accounts receivable
Closing entries 4. Record bad debt recovered (reinstate accounts
Dr Statement of profit or loss account receivables)
Cr Bad debt account Dr Accounts receivable
Cr Bad debt recovered account
2. A decrease in allowance for doubtful debts 5. Record payment received from accounts
Dr Allowance for doubtful debts account receivables
Cr Bad debt account Dr Cash
Cr Accounts receivable
Closing entries Closing entries
Dr Bad debt account Dr Bad debt recovered account
Cr Statement of profit or loss account Cr Statement of profit or loss account

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ALLOWANCE FOR DOUBTFUL DEBTS
2 methods are used to estimate bad debts:
1) Percentage of credit sales
2) Percentage of trade receivables
Example 9
During the current year, Focus Eye Bhd has a total credit sales of
RM1,200,000. of this amount, RM200,000 remains uncollectible as at
year end. It is estimated that RM12,000 of these sales will be
uncollectible by year end.
The journal entry to record the estimated debts is as follows:
Dr Bad debt expenses account 12,000
Cr Allowance for doubtful dents account 12,000
Bad debts will be recorded as an expense in the statement of profit or loss
and the allowance for doubtful debts will be deducted from the accounts
receivables. 30
BAD DEBTS
Bad debt is the debt that a business is certain that it will be able to
collect.
The journal entry is:
• Dr Allowance for doubtful debts account
• Cr Trade receivables account
(to write-off bad debts)

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BAD DEBTS
Example 10
• The manager of Focus Eye Bhd authorises a write-off of the RM500 from
the total uncollectable debts of RM12,000 at year end. How will it reflected
in the statement of financial position?
• Answer:
• Dr Allowance for doubtful debts accounts 500
• Cr Trade receivables account 500
• The items will be presented in the Statement of Financial Position as
follows:
Previous year Current year
RM RM
Trade receivables 200,000 200,000
Write-off (bad debts) - (500)
Allowance for doubtful debts (12,000) (11,500)
Net value 188,000 188,000
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LIABILITIES

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Learning Outcomes
At the end of this chapter, you should be able to:
1. Define and classify different types of liabilities
2. Conduct initial measurement of different types of liabilities
3. Present different types of liabilities in the financial
statements

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DEFINITION OF LIABIILTIES
An item is a liability when: Example:
(a) it is a present obligation A new machine was purchased
(b) it is a result of past from a supplier on credit basis. The
transactions or other full settlement will be made in 30
past events days. The machine is bought for
(c) it can be measured production purpose.
reliably or using a
substantial degree of Solution:
estimation There is a present obligation
resulted from the purchase of the
new machine and the amount of
settlement can be measured
reliably. The obligation is a liability.
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DEFINITION AND CLASSIFICATION OF LIABIILTIES
• MFRS defines current liability when:
a) The entity expects to settle the liability in its normal operating
cycle;
b) The entity holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within 12 months after the
reporting period;
d) The entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting period.
Terms of a liability that could, at the option of the counterparty,
result in its settlement by the issue of the equity instruments do
not affect its classification.
• Other liabilities that do not meet the above classification are classified
as non-current liabilities.

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TRADE PAYABLES
• Trade payables are cash owed by the entity to the suppliers
of goods and services.
• MFRS132 – defines payables as financial liabilities that give
rise to a contractual obligation to pay cash or other assets,
to the suppliers of goods or services that has a contractual
right to receive cash.
• Objective of providing information on trade payables allows
suppliers to ascertain the entity’s current credit status i.e.
whether or not the entity is able to settle their credit.

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TRADE PAYABLES – INITIAL RECOGNITION
• MFRS139 – an entity shall recognize a financial liability in
its statement of financial position when, and only when, the
entity becomes a party to the contractual provisions of the
instrument.
• A party to the contractual provision refers to as when an
entity acquires goods or services on credit, and has an
obligation to the supplier to settle the credit in the future.

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TRADE PAYABLES – INITIAL RECOGNITION
Example 1
• Focus Eye Bhd purchased goods amounting to RM10,000
from its supplier, Vision Bhd. Focus Eye is offered terms of
credit of 2/10, net 30. Focus Eye agrees to settle the credit
on day 15 after the purchase. Is Focus Eye a party of the
contractual provision of trade payables?
Answer:
• Yes. Focus Eye Bhd became a party when they agreed to
purchase and pay cash on day 15.

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TRADE PAYABLES – INITIAL RECOGNITION
Example 2
• Refer to Example 1, assume Focus Eye agrees to settle the
credit using its investment on day 10 after the purchase. Is
Focus Eye a party to the contractual provision of trade
payables?
Answer:
• Yes. Focus Eye Bhd became a party to the contractual
provision of trade payables when they agreed to purchase
and pay by other means of financial assets (investment) on
day 10.

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TRADE PAYABLES – INITIAL RECOGNITION
Example 3
• Based on Example 1, assumes that Focus Eye Bhd has
agreed to settle the credit on day 10 after the purchase. Is
there a discount given to Focus Eye? When is the purchase
recognized?
Answer:
• Yes. Focus Eye receives a discount of 2 Percent because
the bill was paid within the discount period. The purchase is
recognized on the purchase date.

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TRADE PAYABLES – INITIAL MEASUREMENT

An entity shall measure Example:

trade payables at the An entity purchased goods amounting to RM10,000
from its supplier. The entity agreed to settle the credit
fair value plus on day 15 after the purchase.
transaction cost.
Solution:
The trade payable would be recorded as below:
Debit Purchases a/c 10,000
Credit Trade payables a/c 10,000

When cash is paid on day 15

Debit Trade payables 10,000
Credit Bank 10,000

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 TRADE PAYABLES – INITIAL MEASUREMENT
The bases for the measurement of trade payables are:
• Historical cost – liabilities are recorded at the amount of proceeds
received in exchange of the obligation, or at the amounts of cash or cash
equivalents expected to be paid to satisfy the liability in the normal
course of the business.
• Current cost – liabilities are carried at the undiscounted amount of cash
or cash equivalents that would be required to settle the obligation
currently;
• Realizable value – liabilities are carried at their settlement value that is
the undiscounted amounts of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course of the business
• Present value – liabilities are carried at the present discounted value of
the future net cash outflows that are expected to be required to settle the
liabilities in the normal course of the business.

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TRADE PAYABLES – INITIAL MEASUREMENT
The measurement of the transaction price is recorded as
follows:
Dr Purchases account
Cr Trade payables account
• When payment is made:
Dr Trade payables account
Cr Cash account

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TRADE PAYABLES – INITIAL MEASUREMENT
Example 4:
• Focus Eye Bhd purchased goods amounting to RM10,000 from its
supplier, Vision Pro Bhs. Focus Eye is offered terms of credit of 2/10,
net 30 and they agree to settle the credit on day 15 after the
purchase. What is the amount of trade payables? Prepare the journal
entry to record the credit purchase.
Answer:
The amount of trade payables is RM10,000.
Journal entry:
Dr Purchases 10,000
Cr Trade payables 10,000
(recording the credit purchase)

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 TRADE PAYABLES – INITIAL MEASUREMENT
Example 5:
Based on Example 4, let us assume that Focus Eye agrees with the credit terms and
settle the amount within 10 days. What is the amount of trade payables? Prepare the
journal entries to record the credit purchase and payment.
Answer:
The amount of trade payable is RM10,000.
Dr Purchase 10,000
Cr Trade payables 10,000
(to record the credit purchase)
Dr Trade payables 10,000
Cr Cash 9,800
Cr Discount received 200
(to record the payment)

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PRESENTATION OF TRADE PAYABLES
Trade payables are presented as an item of current liabilities in the
statement of financial position.

Example:

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OTHER CURRENT LIABILITIES
Information on other Example 6:
Focus Eye owes its employees RM20,000 for
current liabilities are useful
wages at the end of an accounting period. Has
to the existing and potential Focus Eye become a party to the contractual
investors, lenders and provision?
other creditors in helping
them making decisions Answer:
Unpaid wages is not a financial liability.
about the entity.
Therefore, Focus Eye is not a party to the
Other current liabilities are contractual provision. The company will only
make an adjusting entry to accrue the expense
not financial liabilities at the end of the accounting period.
because there is no
contractual liabilities to be
settled

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OTHER CURRENT LIABILITIES – INITIAL RECOGNITION
Example 7:
An entity shall recognized An entity owes its employees,
other current liabilities when: RM5,000 for salaries at the end of
(a) It is probable that an the accounting period.
outflow of resources
embodying economic Answer:
benefits will result from the There will be an outflow of
settlement of a present resources resulting from the
obligation. settlement of a present obligation
(b) The amount of the of RM5,000 in the next accounting
settlement can be period and the amount can be
measured reliably. measured reliably. RM5,000 will be
recognized as a current liability in
the financial statement.
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OTHER CURRENT LIABILITIES – INITIAL RECOGNITION
Example 8:
• Focus eye Bhd pays its salesperson a 5 per cent commission on
sales. Focus Eye’s current year sales is RM600,000, but until year
end, its payment on sales commission is only RM20,000. determine
whether it is probable that an outflow of resources embodying
economic benefits will result from the settlement of the present
obligation, and the amount can be measured reliably. Is unpaid
commission a current liability?
Answer:
• Yes, the settlement of the obligation in the next accounting period will
result in an outflow of resources such as cash. The RM10,000 unpaid
commission can be measured reliably.

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OTHER CURRENT LIABILITIES – INITIAL RECOGNITION
Continued…
• Yes, unpaid commission is a current liability because:
a) The entity expects to settle the liability in its normal operating cycle;
b) The entity holds the liability primarily for the purpose of trading.
c) The liability is due to be settled within twelve months after the
reporting period;
d) The entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting period.
Terms of a liability that could, at the option of the counterparty,
result in its settlement by the issue of the equity instruments do not
affect its classification.

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OTHER CURRENT LIABILITIES – INITIAL MEASUREMENT

Other current liabilities are Example 9:

measured at historical cost An entity owes its employees,
which is the amount of RM5,000 for salaries at the end of
proceeds received in exchange the accounting period.
for the obligation.
Answer:
The accrued salaries can be
recorded as below:
Debit Salaries 5,000
Credit Accrued salaries 5,000

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OTHER CURRENT LIABILITIES – INITIAL RECOGNITION
Item Adjusting entries
Accrued expenses: Dr Expenses
•Wages Cr Accrued expenses
•Salaries
•Commission
•Interest
•utilities
Advanced from customers Dr Cash
Cr Prepaid revenue
Dividend payable Dr Dividend
Cr Dividend payable
Tax payable Dr Tax expense
Cr Tax payable

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OTHER CURRENT LIABILITIES – INITIAL RECOGNITION
Example 10:
Refer to Example 8. initial measurement for unpaid
commission would be:
Dr Commission expense 30,000
Cr Cash 20,000
Cr Accrued commission 10,000

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PRESENTATION OF OTHER CURRENT LIABILITIES

Other current liabilities are presented in the statement of financial

position.

Example:

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