Financial instruments

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Financial instrument is a contract that results in cash flows.

The method of accounting of financial instruments is implemented in the application in accordance with the following IFRS standards:

• IFRS (IAS) 17 "Lease" (hereinafter referred to as IFRS 17).
• IFRS (IAS) 32 "Financial Instruments: Presentation" (hereinafter referred to as IFRS 32).
• IFRS (IAS) 39 "Financial Instruments: Recognition and Measurement" (hereinafter referred to as IFRS 39).
• IFRS 7 "Financial Instruments: Disclosures" (hereinafter referred to as IFRS 7).
• IFRS 9 "Financial Instruments".
• IFRS 13 "Fair Value Measurement".
• IFRS 16 "Lease".

Financial instruments in the standard solution

In the application, you can take advantage of parallel accounting of transactions with financial instruments in accordance with IFRS. All cash transactions for receipt and repayment of financial instruments must be translated to IFRS from NAS.

Parallel accounting allows you to add data to information on financial instruments that are not available under NAS: payment schedules, interest rates, and so on. Enter this information in IFRS manually.

With parallel accounting of financial instruments, you can automatically revalue financial instruments, discount them, accrue discount depreciation and interest expenses using the effective interest rate method and in accordance with specified schedules.

Most financial instruments are recognized under NAS: financial investments, credits, loans, and accounts receivable and payable. Derived instruments that have zero fair (nominal) value during recognition are an exception. Usually, they are not recorded under NAS as of the date of signing the financial instrument contract.

With the NAS data translation tool, transactions on recognition, repayment, and revaluation of financial instruments are transferred to the IFRS subsystem, where they are recorded regardless of the NAS accounting system using parallel accounting documents.

During operations with the accounting subsystem of financial instruments in the Contracts catalog, ensure that these contracts are complete for the recognition of financial instruments. To do this, the person responsible for this accounting section must make sure that all contracts subject to recognition in IFRS accounting are available in the contract catalog.

To access the financial instrument accounting tools, click Financial instruments.

Before you start creating parallel accounting documents for financial instruments, create the Financial object types catalog items. The items of this catalog can be classified in accordance with IFRS 9 or IAS 39, and other applicable standards.

Financial objects created in the Financial object types catalog are not only financial instruments but also other accounting objects for which the "Financial instruments" subsystem can be used. For example, assets/liabilities under pension plans, assets/liabilities under financial lease.

Before you start creating parallel accounting documents for financial instruments, create the Accounting parameters of financial objects catalog items.

The item of this catalog is a financial object type (see above), that is, an item of the Financial object types catalog, for which the accounts of the IFRS chart of accounts are determined. Once the accounting parameters are created for the financial object type, it can be classified into the category of measurement of financial assets or liabilities in accordance with IFRS 9, IAS 39 Financial Instruments, or IFRS 16 Leases. The procedure for recognizing revaluation and other financial income and expenses in the IFRS chart of accounts and in the financial reporting is predetermined.

The application has a wizard for selecting accounting parameters of financial instruments in accordance with IFRS 9. You can use it to classify instruments.

With the wizard, you can select one of the categories of financial instruments after the user answers to the questions related to testing their specifics.

Based on the results of the answers to the questions, the financial instrument can be classified as:

• Accounted for at depreciable cost.
• Accounted for at fair value through other comprehensive income.
• Accounted for at fair value through profit or loss.

Initial measurement and subsequent accounting of financial instruments

Initial measurement of financial instruments

The application can automatically identify the initial cost of financial instruments based on discounting of the future cash flow schedule for the specified instrument at market rate. These financial instruments belong to the instruments that are accounted for at depreciated cost and are not hybrid, that is, they do not contain contingent payments that occur upon specific events. To do it, go to "Financial instrument accounting parameters" and select Market rate in the Financial object types catalog.

If the financial instrument belongs to the instruments accounted for at fair value, enter the value manually when entering the document to the system.

Subsequent measurement of financial instruments

After the initial recognition, measure financial assets and liabilities:

• At depreciated cost using the effective interest rate method.
• At fair value through profit, loss, or other comprehensive income.

To learn more about the accounting procedure in the application of financial instrument transactions broken down by these measurement methods, read the following articles.

Subsequent measurement of financial instruments accounted for at depreciated cost is automatic. It uses a closing operation of the financial instruments.

The closing operation accrues depreciation of the discount on financial instruments if it was recognized at the date of their initial recognition date. The closing operation also accrues interest on financial instruments, revalues financial instruments that are denominated in a foreign currency, and automatically reclassifies the amount by maturity to generate notes for disclosure of information on financial risks.

To record modifications of financial instruments after their initial recognition, for example, changes in loan repayment schedules or cash flows under the contract, post the Record of financial instruments at depreciated cost document and select the Change accruals operation type.

Configure the respective mapping (account mapping) in the translation template. Then change the cash flow schedule for the financial instrument in the document.

For subsequent measurement of financial instruments accounted for at fair value, post the Record of financial instruments at fair value document at the date of each revaluation.

Accounting categories of financial assets and liabilities under IFRS 9

In accordance with IFRS 9, to measure the financial asset after the initial recognition, in the current standard the financial assets are classified into the following categories as follows:

• Financial instruments measured at fair value through profit or loss.
• Financial instruments measured at depreciated cost.
• Financial instruments measured at fair value through other comprehensive income.

These categories are applied to measure and recognize profit or loss from the financial instruments. An enterprise can use other descriptions for these categories or other categorization to provide financial statement.

Depreciated cost accounting using the effective interest rate method in the FI program

According to the business model used by the company to manage financial assets, the following financial instruments can be classified as financial instruments accounted for at depreciable cost:

• Issued loans
• Received promissory bills
• Accounts receivable
• Purchased bonds
• Issued bonds
• Received credits
• Issued promissory bills
• Accounts payable

In addition to the above instruments, you can generate native kinds of financial instruments accounted for at depreciated cost in the Financial object types and Financial instrument accounting parameters catalogs.

Operations with financial instrument catalogs

When creating an item in the Financial object types catalog, click At depreciated cost in the Accounting method field. Then click Asset or Liability in accordance with definitions of financial assets and liabilities of IFRS 9, IFRS 16.

In the Discounting rate kind and Market interest rate fields, specify data of the Financial instrument quoted price in an active market catalog. In the catalog, select the required item. In the Quotation type list, select an interest rate (Market interest rate or Bank interest rate). Click Quotation values of financial instruments to create interest rate records in the information register, where the quotation values are specified as of dates.

To drill down the financial instrument accounted for at depreciated cost by repayment due dates, set up the Debt intervals catalog.

When entries are generated, the Closing operation by financial instruments document automatically classifies the depreciated cost by repayment due dates. This grouping is used to make notes to reporting for financial risk management.

Accounting for accounts receivable and accounts payable

Amounts of account receivable and account payable are translated from the NAS accounting system. Fair value of accounts receivable and accounts payable as of the recognition date usually matches the measurement under NAS if it is short-term and associated with the company's core business.

Fair value of long-term accounts receivable and accounts payable as of the recognition date may differ because the time value of money must be accounted for in IFRS. You can discount the debt amount received from NAS using the Record of financial instruments at depreciated cost document. The amount of the discount (the difference between the nominal and discounted amount) is automatically recorded in the application as an adjustment of the fair value of the debt and is calculated based on the cash flow schedule of the financial instrument. When the debt is recognized, the document makes an entry of discount accrual.

The debt is later assessed at depreciated cost.

The application calculates the depreciated cost of short-term debt at the end of the reporting period using the following formula:

DCstd = NAstd - BDRBstd, where

• DCstd is a depreciated cost of a short-term debt at the end of the reporting period.
• NAstd is a nominal amount of a short-term debt at the end of the reporting period.
• BDRBstd is a bad debt reserve balance for short-term accounts receivable at the end of the reporting period.

The application calculates the depreciated cost of long-term debt at the end of the reporting period using the following formula:

DCltd = NAltd - Dltd + ADltd - BDRBltd, where

• DCltd is a depreciated cost of a long-term debt at the end of the reporting period.
• NAltd is a nominal amount of a long-term debt at the end of the reporting period.
• Dltd is a discount defined at the recognition of a long-term debt.
• ADltd is an accumulated discount depreciation at the reporting date.
• BDRBltd is a bad debt reserve balance for long-term accounts receivable at the end of the reporting period.

Accounting for financial instruments at depreciated cost (except for accounts receivable and accounts payable)

To translate financial instruments accounted for at depreciated cost to the IFRS parallel accounting subsystem, click Fill in in the Record of financial instruments at depreciated cost document. Upon translation, a financial instrument is classified into the applicable accounting category under IFRS 9.

In the IFRS subsystem, there is parallel accounting of the following transactions with financial instruments accounted for at depreciated cost:

• Cost adjustment of financial instruments accounted for at depreciated cost upon initial instrument recognition based on the cash flow schedule.
• Classification of financial instruments accounted for at depreciated cost into the applicable accounting category of IFRS 9.
• Subsequent measurement of financial instruments accounted for at depreciated cost: discount depreciation, schedule change, and accrual of reserves for bad debts.
• Recognition of financial instrument impairment.
• Reclassification of financial instruments accounted for at depreciated cost to the category of financial instruments accounted for at fair value through profit or loss.
• Derecognition of the old financial instrument accounted for at depreciated cost. Recognition of the new one, for example, within one contract due to a change in the initial instrument conditions, that is, modification of financial assets and liabilities with a significant change in the contract conditions.
• Period closing operation for financial instruments. Recognition of financial income and expenses, calculation of depreciated cost at the end of the reporting period, data generation for IFRS disclosure.
• Financial instrument derecognition due to its early assignment or sale.

Adjusting cost of financial instruments accounted for at depreciated cost upon initial recognition

To determine or calculate fair value of financial instruments accounted for at depreciated cost for initial measurement in accordance with IFRS, use the Record of financial instruments at depreciated cost document.

By default, the application considers the rate under contracts of credits and loans received, and loans issued as the market rate. If the rate is non-market, enter the market rate manually on the Instrument parameters tab. The application automatically calculates the financial instrument's discounted amount at market rate, which will be fair value of the financial instrument accounted for at depreciated cost upon initial recognition.

If the financial instrument payment schedule is different from its NAS data, you can import it using Microsoft Excel. To do it, click FI flow and Import.

Based on the schedule, the application calculates the difference between the fair value of IFRS and the initial cost of NAS (discount or premium of a financial instrument accounted for at depreciated cost) and makes entries.

On the Additional expenses tab, manually enter the amount of additional expenses of financial instruments for all financial instruments accounted for at depreciated cost.

Classifying financial instruments accounted for at depreciated cost into the applicable accounting category under IFRS 9

To classify a financial instrument into the category of financial instruments accounted for at depreciated cost, fill the Accounting parameters of financial objects field in the Record of financial instruments at depreciated cost document.

In the Accounting parameters of financial objects catalog, select an object kind accounted for at depreciated cost and IFRS accounts that record the financial instrument and its financial income and expenses.

Subsequent measurement of depreciated cost of financial instruments

For subsequent measurement of financial instruments accounted for at depreciated cost, open the Record of financial instruments at depreciated cost document and use the instrument measurement at effective interest rate (hereinafter referred to as "EIR").

The application calculates the effective interest rate according to the cash flow schedule for the financial instrument, which must include cash flows for all contract conditions of the financial instrument (for example, payment of an insurance premium or a fee for issuing a financial instrument). Cash flows include all fees and sums paid or received by parties under the contract that are an integral part of the effective interest rate, transaction costs, and other premiums or discounts.

The application calculates the financial instrument's depreciated cost using the following formula:

DC = IC + AEI - PDR - IR - IRB, where

• IC is the initial financial instrument cost defined at the recognition date as a fair value amount plus direct costs. Fair value may include the amount of discounts (bonuses) for financial instruments.
• AEI is the interest accrued at the effective interest rate at the depreciated cost calculation date (accumulated).
• PDR are payments to repay the principal debt of the financial instruments that are received (paid) at the depreciated cost calculation date (accumulated).
• IR are payments to repay the interest debt that are received (paid) at the depreciated cost calculation date (accumulated).
• IRB is the provision balance for impairment of financial instruments accounted for at depreciated cost at the reporting date.

Closing operation of the period for financial instruments at depreciated cost

On period-end closing under IFRS, the Period closing operation by financial instruments document is created. It calculates the following indicators of financial instruments accounted for at depreciated cost to generate reporting under IFRS:

• Financial income is interest payable, financial expenses are interest receivable at effective interest rate.
• Amount of the depreciated cost of financial instruments at the end of the reporting period.
• Short-term and long-term part of financial instruments at the end of the reporting period.
• Allocation of the depreciated cost of financial instruments by repayment due dates to generate IFRS notes.

As a result of the closing operation, information on financial income or expenses by FI at depreciated cost appears in the profit and loss statement. The depreciated cost of a financial instrument as of the reporting date appears in the report on the financial state.

Accounting for financial instruments at fair value

The fair value of financial instruments after initial recognition is determined in accordance with IFRS 13.

The application involves parallel accounting of the following instruments classified in this category:

• Corporate shares (quoted)
• Corporate bonds (quoted)
• Corporate shares

In addition to the listed instruments, you can generate native kinds of financial instruments at fair value in the Financial object types and Financial instrument accounting parameters catalogs.

Operations with financial instrument catalogs

In the Accounting method radio button field of the Financial object types catalog item, select At fair value.

Then, click Asset or Liability in the radio button field in accordance with definitions of financial assets and liabilities of IFRS 9, IFRS 16.

If a financial instrument is derived, select the Derived financial instrument check box.

To account for financial instruments at fair value, create the Securities catalog items. If the catalog items have already been created, fill attributes required for accounting under IFRS if it is for all kinds of securities. For derived financial instruments, create the Contracts catalog item and fill the required attributes to register a derived financial instrument in the application.

In the Nominal currency and Quotation currency fields of the Securities catalog item, select currencies from the list.

In the Stock exchange code field, specify a security identification number. For example, ISIN (International Securities Identification Number).

In the Issuer and Exchange fields, select the required item from the Counterparties catalog. In the Financial instrument accounting parameters field, select an item from the catalog with the same name, where accounting parameters of this security are specified.

In the Level of fair value hierarchy field, select a hierarchy level of the fair value measurement of the financial instrument: Level 1, Level 2, or Level 3. You can use this enumeration to prepare financial instrument notes.

To create information registers with quotation values, click Quotation values of financial instruments. In the registers, specify a date when a quotation is valid, its value, and kind. For example, BID, OFFER, and other are text fields.

To revalue a derived financial instrument, open the Contracts catalog and go to to the Contract tab. In the Contract kind field, select With supplier or With customer. The entry algorithm will depend on this when this derived financial instrument is revalued. This contract is entered under a basic contract. For example, a forward contract for the delivery/purchase of equipment.

In the collapsible IFRS group, select the Derived financial instrument check box. In the Financial instrument contract field, select the respective contract from the Contracts catalog. In the Execution rate field, specify a currency purchase exchange rate under this contract. In the Quotation field, select an item from the Financial instrument quoted price in an active market catalog. In the Quotation type field, select Exchange rate or Bank quotation from the list and specify the respective value.

In the Financial instrument accounting parameters field, select an item with parameters specified for this derived financial instrument from the Accounting parameters of financial objects catalog. In the Level of fair value hierarchy field, select a hierarchy level of the fair value measurement of the financial instrument: Level 1, Level 2, or Level 3. You can use this enumeration to prepare financial instrument notes.

Accounting for financial instruments at fair value

The main part of financial instruments at fair value is recognized under NAS in market measurement and enters the IFRS subsystem through the translation from the NAS accounting system.

If financial instruments are not recognized in NAS (this is true for derived financial instruments), recognize them using the Record of financial instruments at fair value document.

In the IFRS subsystem, there is parallel accounting of the following transactions with financial instruments at fair value:

• Classification of financial instruments at fair value.
• Initial financial instrument recognition at fair value that are not recognized in NAS.
• Revaluation of financial instruments accounted for at fair value through profit, loss, or other comprehensive income.
• Recognition of impairment of financial assets held for sale.
• Reclassification of financial assets accounted for at fair value through other comprehensive income into the category of financial assets accounted for at fair value through profit or loss.
• Financial instrument derecognition at fair value with recognition of the financial result.

Classification of financial instruments at fair value. To classify a financial instrument into the category of financial instruments at fair value, use the Record of financial instruments at fair value document and fill the Accounting parameters of financial objects field.

In the Accounting parameters of financial objects catalog, select a financial instrument kind and a payment structure for the financial instrument (if it is debt). Using the wizard to select a financial instrument category, the application automatically offers you to select an accounting category for financial instruments and their revaluation method: Through profit/loss or Through other comprehensive income.

So, to classify financial instruments at fair value, select the financial object type, the measurement method at fair value, and one of the IFRS account categories that are measured at fair value.

Revaluation of financial instruments at fair value. To automatically revalue financial instruments at fair value, use the Record of financial instruments at fair value document with the Revaluation transaction type.

Revalue financial instruments through profit or loss or through other comprehensive income.

Before revaluation, enter quotation (market price) values in the Quotation values of financial instruments catalog. Fill the catalog from the security card.

The application automatically calculates the revaluation after you click Fill in lines.

IFRS revaluation entries are automatically generated after you post the document.

Reclassification of financial assets to another accounting category. You can reclassify financial instruments accounted for at fair value through other consolidated income to the category of financial instruments accounted for at fair value through profit or loss. To reclassify financial instruments at fair value, use the Record of financial instruments at fair value document. In the document header, select the Reclass transaction type.

In the Translation templates catalog, configure the respective mapping (account mapping).

After that, you are shown a new FI accounting parameters before reclass field and fields for entering new financial instrument accounting parameters. The fields show a reclassification date, the number of reclassified securities, and the transaction measurement in the contract currency and the functional currency. A reclassification entry is automatically generated when you post the document. If financial instruments accounted for at fair value and revalued through other consolidated income are reclassified, an entry to write off the accumulated revaluation from capital to retained profit is generated.

Financial instrument derecognition at fair value with recognition of the financial result. To record the Financial instrument derecognition at fair value, use the Record of financial instruments at fair value document. Once you select the Derecognition transaction type in the document header, information entry fields appear. There, manually enter the date of the financial instrument derecognition. The application automatically generates entries for Financial instrument derecognition at fair value when you post the document.

Accounting for derived financial instruments. A type of financial instruments accounted for at fair value is derived financial instruments.

To automatically revalue derived financial instruments, use the Record of financial instruments at fair value document with the Revaluation transaction type.

Operations with financial instrument documents

You can account for financial instruments at fair value or depreciated cost. To enter information on financial instruments in the system, use the Record of financial instruments at depreciated cost and Record of financial instruments at fair value documents.

Information on financial instruments is information on the repayment schedules of debt financial instruments, additional expenses, and commissions related to the purchase of financial instruments. To enter information on the initial recognition of financial assets and liabilities, on changes in the measurement of previously recognized assets and liabilities (for example, as a result of changes in the repayment schedules) in the system, use the Record of financial instruments at depreciated cost document. To enter information on the derecognition of financial instruments, use the same document. Future cash flows of a financial instrument are reset to zero upon derecognition, and cash flow arising from the derecognition of the financial instrument (income received as a result of its sale) is entered in the schedule instead of them.

When you post this document, the financial instrument discount is recorded as part of financial expenses if the fair value of the financial instrument is adjusted upon recognition.

To revalue financial instruments at fair value, use the Record of financial instruments at fair value document. There, enter data on the market value of the financial instruments and revalue them through income or expenses from the financial instrument revaluation.

"Record of financial instruments at depreciated cost" document

The Record of financial instruments at depreciated cost document is created upon recognition of financial instruments accounted for at depreciated cost, upon changes in the repayment schedules of these instruments, their early derecognition as a result of assignment, and their early sale.

The document combines the following transaction types:

• Recognition of financial instruments.
• Change in the measurement of financial instruments (change in payment schedules and interest rates).
• Derecognition of financial instruments.

When you create a new document, in the Transaction type field, select a kind of the transaction whose information is entered by this document. One Record of financial instruments at depreciated cost document can include only one transaction type.

In the Financial instrument field of this document, select a data type corresponding to the instrument (contract or security) for financial instruments at depreciated cost. Fill the financial instrument data in the document table: a financial instrument counterparty or an issuer, contract start and end dates. Select a financial instrument kind from the Financial instrument accounting parameters catalog.

To determine the accounting parameters, you can use the financial instrument classification wizard. It has a recommended classification based on the results of the user's answers to questions about the business model for this financial instrument and the structure of cash flows for this instrument. You can manually select accounting parameters of a financial instrument without using the classification wizard. The business model characteristics and the cash flow structures for the financial instrument entered in the classification wizard are stored in the contract card.

Specify the interest rate under the contract in the contract card. To enter information on a payment schedule for a financial instrument, click FI flow. This opens and a window where you can enter the payment schedule for the financial instrument. The structure of the financial instrument schedule depends on the selected accounting parameters. Separately enter the principal debt and interest repayment schedule for interest financial instruments (credits and loans). Enter a schedule of minimum lease payments for lease contracts.

The schedule entry window contains the Instrument parameters, Principal debt, Interest, and Additional expenses tabs.

You can use the Principal debt and Interest tabs to enter information on the schedule of receiving and repaying the principal debt and interest. The application supports contracts with several tranches of debt receipt and repayment. You can enter information on the principal debt and interest repayment schedule manually or you can click Import and enter this data from a Microsoft Excel file.

The Instrument parameters tab displays general information on the accounting parameters of a financial instrument and the schedule start and end dates. On this tab, you can enter information on the market interest rate if the financial instrument is accounted for at market rate. You can select a rate used for the instrument in the Financial object types catalog.

The application can account for financial instruments at depreciable cost in accordance with the rate under the contract, at effective interest rate, or at market interest rate.

If you select the interest rate under the contract, the amount of interest under IFRS corresponds to NAS, and the interest is accrued in accordance with the schedule.

If you select the effective interest rate, the amount of interest accrual under IFRS is calculated based on the interest payment schedule and additional expenses (commissions). For example, if you repay interest for all periods along with the principal debt amount on the contract end date, the effective interest rate will be lower than rate under the contract because the contract terms provide for deferred interest payment. Additional expenses (for example, commissions or insurance) increase the effective interest rate under the contract.

If you select the market interest rate, the application accrues an adjustment for discounting of the financial instrument using the market interest rate. Interest under the contract is accrued using the effective interest rate. The principal debt amount is discounted using the market interest rate, including the accrued interest. The adjustment (discount) amount is then depreciated using the effective interest rate and the "Closing operation by financial instruments".

For lease contracts, the schedule entry window contains the Instrument parameters, Leased objects, Minimum rental payments, Additional expenses tabs.

You can use the Minimum rental payments and Additional expenses tabs to enter information on the payment schedule under the lease contract. You can enter information on the payment schedule manually or you can click Import and enter this data from a Microsoft Excel file. Additional expenses include contingent lease payments if the conditions for their fulfillment are met, insurance and other expenses.

You can use the Leased objects tab to enter information on NCA objects that are leased under the contract. The NCA objects whose information is entered on this tab will be recognized at net present value of the minimum lease payments. The initial NCA cost will be determined automatically if information on the market interest rate is entered on the Instrument parameters tab. If the NCA cost is specified on the Leased objects tab, this cost will be used as net present value of the minimum lease payments and the effective interest rate will be calculated.

On the Leased objects tab, enter information on "NCA accounting parameters": useful life, depreciation parameters, NCA class, derecognition and revaluation GL accounts, and so on.

On the Leased objects tab, enter information on the NCA commissioning date. The commissioning date may be later than the start date of the lease contract in case of advance payments under the contract. Lease liabilities are recognized at the same time with the NCA commissioning.

On the Leased objects tab, you can enter dates of early repayment and a date of the NCA object early repurchase. If you enter one of these dates, the application records the change in the repayment schedule of the financial instrument and records the early repayment of the lease liability. If you enter the date of early NCA repayment, the application generates an entry for the financial result of early repayment. The financial result is calculated as a difference between the amount of the lease liability repaid early and the residual value of the NCA object as of the repayment date.

The document table contains the Accounting data button. If you click it, the application will show the GL account balance of the financial instruments specified in the document as of the document date.

If the payment schedule changes due to changes in the financial instrument contract terms, create the Record of financial instruments at depreciated cost document with the changed schedule or other changed terms.

In this case, the application automatically calculates the new schedule variance from the previously calculated one. The opened Materiality percentage IFRS field will display the calculated variance percentage of the net present value as of the schedule change date from the net present value as of the date of initial recognition of the financial instrument. If it is more than 10%, the new financial instrument is automatically recognized, and the old one is reversed ("10% test").

On the Additional expenses tab, fill expenses that were incurred when the financial instrument was created. For example, bank fees. These expenses will be included in the payment schedule under IFRS and included in the calculation of the effective interest rate.

"Record of financial instruments at fair value" document

You can use the Record of financial instruments at fair value document to recognize and revalue financial instruments accounted for at fair value and record the derecognition of these financial instruments. You can also use the document to recognize derived instruments that are not recorded in the accounting under NAS.

The document table is automatically filled when you click Fill in lines. The Financial instrument field shows non-derived and derived instruments measured at fair value. Fill the derived financial instruments for revaluation based on the Contracts catalog. Fill them under the contracts for the purchase of derived financial instruments that have the Derived financial instrument check box selected in the collapsible IFRS group. The system filters only financial instruments whose end date in the Valid until field on the Contract tab is later than the report date. That is, the system filters all derived financial instruments available at the reporting date for revaluation.

To select securities for revaluation, use the IFRS chart of accounts. Financial asset data is selected for all accounts with the Securities dimension.

The document contains all instruments that are used for revaluation at fair value.

The document table contains the Accounting data button. If you click it, the application will show the GL account balance of the financial instruments specified in the document as of the document date.

All fields of the Record of financial instruments at fair value document table are filled automatically based on the specified financial instrument accounting parameters and filled attributes in the Security or Contract (for derived financial instruments) catalog.

Once you click More at the bottom of the document, the screen displays data used to calculate the revaluation amount. Besides, entries for reclassification or Financial instrument derecognition at fair value are generated.

On the Information tab, fill the Revaluation date field based on the date closest to the reporting period end date at which quotations are available. You can change this date manually. In this case, the exchange rates will be used as of the specified revaluation date.

Fill the Counterparty field from the Counterparties and Contracts catalogs.

On the Quotations tab, fill the Functional currency exchange rate field based on the Currencies catalog. The field is a functional currency exchange rate to a nominal currency as of the document date.

Calculate the value in the Quotation exchange rate field based on the cross exchange rate from the Currencies catalog. It is calculated as an exchange rate of the financial instrument quotation to the functional currency relative to the nominal rate of the financial instrument to the functional currency.

Fill the FI quotation value, Quotation currency, and Quotation kind fields based on the filled attributes of the Securities catalog.

Fill the Quantity field based on quantitative accounting of the chart of accounts. You can also specify it manually. For derived financial instruments, fill the Contract execution exchange rate field from the Contracts catalog based on the contract execution exchange rate.

Calculate the revalued cost in the functional currency to calculate the revaluation amount for securities using the formula:

Revalued cost in functional currency = Quantity * Financial instrument quotation value * Quotation exchange rate * Functional currency exchange rate.

Revaluation amount in functional currency = Revalued cost in functional currency = Net book value in functional currency.

For derived financial instruments, calculate the amount for initial recognition and subsequent revaluation using the formula:

Revaluation amount in functional currency = Net book value in contract currency (Quotation exchange rate - Contract execution exchange rate).

The document generates an entry for the financial instrument revaluation and records the asset/liability and income/expense upon initial recognition and from subsequent revaluation for derived financial instruments, and income/expense from the revaluation of financial instruments available on the balance sheet. The document also generates entries that reverse accruals of revaluations on the first date of the next reporting period. The derived financial instrument is no longer recognized by this entry in the reporting and is no longer revalued when executing the contract.

The Reclass and Derecognition tabs display transaction dates and other necessary information.

Period closing operation by financial instruments

Period closing operation by financial instruments is generated after entering information and calculations for financial instruments in the above documents and after their posting. The closing operation generates the following entries:

• Accrual of financial income and expenses in accordance with IFRS.
• Reclassification of the short-term part of the long-term debt.
• Debt reclassification by delay intervals.
• Recording of fair value on the off-balance account to drill down in the reporting notes.
• Accrual of advances on leasing in accordance with the schedule.
• Reclassification of accumulated interest to a separate account for reporting.
• Reversing entry of debt reclassifications and fair value disclosure at the first date of the next reporting period.

Reversing entry of NAS financial expenses

The Record of documents at depreciated cost, Record of documents at fair value, and Closing operation by financial instruments documents accrue financial income and expenses (interest income and expenses, revaluation profit and loss, and so on) in the IFRS measurement in full, not including NAS data.

Reverse or do not translate NAS data on accrual of interest and revaluations for such financial instruments to avoid double accounting.

You can use the Reversing entry of NAS financial expenses document to automatically reverse all transactions of financial income and expense accrual (interest, revaluations, exchange rate differences) regarding the financial instruments accounted for under IFRS using the Record of documents at depreciated cost and Record of documents at fair value documents.

The document is filled automatically and reverses all of the above transactions transferred to IFRS using the Translation document.

Provisions for impairment of financial instruments

To access provisions for financial instrument impairment, click Provisions of financial instruments.

Accounting for impaired receivables by accounts receivable and advances issued

In accordance with IFRS (IAS) 39 and IFRS 9, accounts receivable belong to financial assets for which expected credit losses are recognized.

Accounts receivables and expected credit losses are recognized for loans, promissory bills, deposits, and advances issued that are not financial assets but are subject to impairment testing.

This grouping and division of the financial assets for accounting is due to the high dynamics of accounts receivable and advances issued related to good shipment/service delivery. As a result, there are ever-changing risks of non-payment/non-compliance with the terms of the contract or payment delay that must be evaluated on each reporting date.

If, according to the company, the principles described in the current chapter are applicable to other financial assets, the company will reclassify these assets as accounts receivable.

In accordance with IFRS 9 Financial Instruments, impairment is accrued using the expected credit loss model.

Step 1. When a financial instrument arises or is acquired, a valuation provision is created for 12-month expected credit losses, and the loss is recorded in the profit and loss statement. The provision (interest income) is written off at the effective interest rate on the gross net book value.

Step 2. If credit risk increases significantly and if credit quality of a financial asset drops below the level of an asset with low credit risk, the valuation provision is increased to the amount of expected credit losses for the duration of the financial asset. The provision is written off at the effective interest rate on the gross net book value.

Step 3. If credit risk increases, when a financial asset becomes credit-impaired or defaulted, a valuation provision is created for the duration of the financial asset. The provision is written off at the effective interest rate on amortized cost, which is the gross net book value minus the valuation provision.

You can evaluate expected credit losses by comparing the new financial instrument recognized in the accounting to the repayment history of other similar financial instruments. The data to compare is the company's internal data, such as accounting registers for accounting of similar financial instruments, and external data, such as other companies' public financial statements that recognize impairment of similar financial instruments.

Financial assets may be impaired when there is a high level of counterparty credit risk, that is, the risk of debt default or payment delay. So, the main task in calculating the provision for such assets is to assess the probability of debt default or payment delay based on the available information about the counterparty.

You can accrue, recover, and use the provision for accounts receivable and advances issued. It is required to disclose these movement kinds in the reporting notes. The process of generation of entries for impaired receivables movements and advances issued is similar to the inventory entry generation.

Accounts receivable and advances issued can be recovered due to:

• Repayment of previously impaired debt.
• Change in the assessment of the debt default probability.

The first recovery option is generated automatically when the provision at the end of the period for this debt decreases. The second recovery option is monitored outside the system and recorded by manual entries or by changing the corresponding parameters of the counterparty/contract. The use of the provision (the provision account write-off in correspondence with the debt account) is also recorded manually if it is clear that this debt will not be repaid. It is also analyzed outside the system.

The calculation of the provision for accounts receivable and advances issued for IFRS is broken down by balance for each document of AR/AP accounting recorded in NAS. To get debt balance broken down by documents, use FIFO method.

From the NAS accounting system, AR/AP accounting transactions for a counterparty and a contract are translated with the dates when amounts of accounts receivable were recognized and the dates when amounts of payments for the same documents were recorded. To calculate debt balance broken down by documents, the payment received from the counterparty is mapped to the first accrual document of accrual of accounts receivable by date. This is how balance is generated for subsequent calculation of the provision under IFRS for each AR/AP accounting document.

Setting up accounting policies and accounting parameters

In the application, you can set up provision accounting for:

• Counterparty contract
• Provision calculation parameters

Setting up at counterparty contract level

Specify a payment period under the contract for each item of the Contracts catalog on the AR/AP accounting and payments tab.

You can set a payment period in delay days under the contract from the delivery date to the payment date. To do it, select or clear the Payment period is set and Use payment date check boxes.

If the amount of the provision for accounts receivable or an issued advance is entered manually, select the Manual debt reserve calculation check box in the contract card.

GL accounts of debt and provisions

Set up the grouping of GL accounts of accounts receivable and issued advances in the GL accounts of debt and provisions information register of the Allowances for expected credit losses of accounts receivable and advance payment transaction group. For each register item, specify GL accounts of accounts receivable (impaired and not impaired), their corresponding provision GL accounts, and their provision expense account for allocation to the Profit and loss statement.

Provision calculation parameters

The provision calculation parameters are qualitative and quantitative characteristics of counterparties required for calculation of the provision amount.

The following parameter groups are available in the application.

Non-calculated parameters:

• Counterparty reliability category
• Counterparty location

Calculated parameters:

• Payment delay intervals
• Maturity ratio

You can create any kinds of provision calculation parameters that record the quality of accounts receivable and advance payments issued.

To create and set up parameters, use the Calculation of provision parameters for receivables and issued advance payments catalog. To access it, click Allowances for expected credit losses of accounts receivable and advance payment.

To create a parameter, enter its name and select the Used check box if you want to use this parameter to calculate impairment of accounts receivable and advances issued.

In the Provision calculation parameter type radio button, select a parameter type.

The following parameters for calculating the impairment of accounts receivable and advance payments issued are available:

• Calculated. A quantitative debt characteristic, which is determined according to a customizable calculation formula.
• By counterparty. A non-calculated qualitative debt characteristic, which is determined by the counterparty.
• Under the contract. A non-calculated qualitative debt characteristic, which is determined by the contract.

When you select the Calculated parameter type, the Calculation formula field is displayed to create a parameter calculation formula.

If the parameter is not calculated, click By counterparty or Under the contract depending on the object to which the parameter belongs.

You cannot change the selected calculation parameter type.

Once you select the parameter type, click Create and fill all fields in the opened Provision calculation parameter groups window.

Provision calculation parameter groups

In the Provision calculation parameter groups catalog, create specific estimated values and group them for each provision calculation parameter.

In accordance with the standard solution, both calculated and non-calculated counterparty parameters are estimated by the user in this catalog using coefficients that adjust the debt amount. To determine the coefficient value, use expert, statistical, or experimental method.

For example, the calculated Payment delay intervals parameter with the Overdue less than 30 days value has a coefficient of 0.10. This means that the impaired receivable with the payment delay of less than 30 days is created in the amount of 10% of its amount. The coefficient value is determined by the user based on the statistics of overdue debt repayment of this group by debtors.

In each catalog item card, in the Coefficient field, specify a coefficient to calculate impaired receivables and issued advances.

In the Value from and Value to fields in the item card, specify calculated value range limits for calculated parameters. Enter a corresponding coefficient value for each range.

Ranges are not specified for non-calculated parameters. For each parameter value, enter the corresponding coefficient value.

Non-calculated counterparty parameters

Non-calculated parameters are characteristics of counterparties that cannot be quantified.

You can enter non-calculated counterparty parameters in the Counterparty reliability category and Counterparty location catalogs.

Counterparty reliability category

To enter the coefficient values by reliability categories, divide all counterparties into categories based on the counterparty's credit rating, their discipline in debt repayment to the company, analysis of claims from tax and judicial authorities, turnovers, and whether the counterparty's business have an active market, and so on.

For each counterparty category, manually enter the coefficient to adjust the debt amount.

By default, counterparties are divided into categories A, B, C, D and E, with coefficients assigned as follows: 0; 0.25; 0.5; 0.75; 1. So, category A is the most reliable, as when calculating the impairment, the debt amount of the counterparty belonging to category A is multiplied by a factor of 0, that is, no impairment is created.

Counterparty location

To enter coefficients by location, allocate all counterparties to geographical areas of their residence that affect AR/AP accounting and the probability of debt repayment.

For each such geographical area, manually set the coefficient to adjust the debt amount.

In the standard solution, counterparties are allocated according to their location: Eastern European countries, Western European countries, CIS countries. They are assigned the respective coefficients: 0; 0.4; 0.5; 1.

According to this order, counterparties from the same location comply with the terms of payment most strictly. When calculating the impairment, the debt amount of the counterparty from a specific location is multiplied by a factor of 0, that is, no impairment is created.

Calculated counterparty parameters

To enter calculated counterparty parameters, use the Payment delay intervals and Maturity ratio catalogs.

The ratios that characterize these parameters are calculated in accordance with the contract terms. This is the number of days of payment delay under the contract terms and the delay period ratio to the grace period under the contract.

Payment delay intervals

To enter coefficient values in the Payment delay intervals catalog, define relevant payment delay intervals for the company's business model that have significantly different probability of debt default.

In the standard solution, the default payment delay intervals are as follows:

• Undue debt.
• Overdue by less than 30 days.
• From 30 to 60 days.
• From 60 to 90 days.
• From 90 to 180 days.
• From 180 to 365 days.
• Over 365 days.

The following coefficients are set for these intervals: 0; 0.10; 0.50; 0.50; 0.50; 1.0; 1.0.

So, in accordance with the catalog settings, for undue debt, impairment is not created since the debt amount of a counterparty that is impairment is multiplied by factor 0 when calculating the impairment.

For debt overdue up to 30 days, impairment is created in the amount of 10% of the debt amount. For debt overdue from 30 to 60 days, impairment is created in the amount of 50% of the debt amount, and so on.

To automatically determine the delay interval and its coefficient, the Payment delay intervals catalog item has the following algorithm for obtaining the calculated value:

Calculated value = СтрокаДокументаРезерв.ПросрочкаДни.

This means that to search for a value of the coefficient corresponding to a certain interval of the debtor's overdue payment, the standard solution refers to the data row in the Allowances for expected credit losses of accounts receivable and advance payment document table. The document rows include the contract term information. In this row, select the Overdue, days column value.

The obtained value of the overdue days under the contract will be automatically mapped to the corresponding payment delay interval. For accounts receivable under the contract, the coefficient of this interval will be applied to calculate the allowances for expected credit losses of accounts receivable and advance payment.

Maturity ratio

To enter ratios in the Maturity ratio catalog, specify groups and set ranges for them. The ranges have a ratio value to calculate allowances for expected credit losses of accounts receivable and advance payment.

The maturity ratio shows the number of days overdue for debt repayment in relation to the total number of days for deferred payment provided to the counterparty under the contract.

In the standard solution, this ratio can have following values:

• "Group 1". From 0 to 0.05.
• "Group 2". From 0.05 to 0.1.
• "Group 3". From 0.1 to 0.5.
• "Group 4". From 0.5 to 1.
• "Group 5". 1 and more.

So, for undue debt whose value of the ratio of delayed payment to deferred payment is 0, impairment is not created, since when calculating the impairment, the counterparty debt amount is multiplied by a factor of 0, which is automatically specified for "Group 1".

To automatically calculate the maturity ratio in the Maturity ratio catalog item, specify a calculated value as follows:

РасчетноеЗначение = ПолучитьДолюПросрочки(СтрокаДокументаРезерв).

To calculate a ratio value, the standard solution uses a data row in the Allowances for expected credit losses of accounts receivable and advance payment document table. For this row, select the Overdue, days column value. The value is divided into the payment period under the contract in days. If the contract does not have the set grace period in days but the payment date, to determine the formula denominator, the standard solution takes the date the debt arose according to the payment document and counts the number of days up to the date of AR/AP accounting under the contract.

The result obtained by dividing the delay days into the grace days will be automatically mapped to the corresponding group of maturity ratio values. As a result, the application will determine the values of the maturity ratio under this contract. The maturity value is required to calculate the allowances for expected credit losses of accounts receivable and advance payment.

Allowances for expected credit losses of accounts receivable and advance payment document

You can use the Allowances for expected credit losses of accounts receivable and advance payment document to calculate and record the amounts of allowances for expected credit losses of accounts receivable and advance payment.

The document has the IFRS accrual and NAS accrual tabs.

The IFRS accrual tab displays the initial data and IFRS accrual amounts. All fields on the tab are filled automatically.

The calculation is performed broken down by counterparty contracts based on the parameters for the counterparty and contract specified in the Provision calculation parameters and Provision calculation parameter groups catalogs.

The document generates the following types of entries:

• Accrual of the balance of allowances for expected credit losses of accounts receivable and advance payment at the reporting date.
• Reversing entry at the first date of the next reporting period of the impairment balance accrued in the previous period under IFRS.
• Reclassification of debt with signs of impairment to a separate account.
• Reclassification reversing entry of impaired accounts receivable at the first date of the next reporting period.

To fill the document table, click Fill in and calculate or fill it manually.

The data source for automatic table filling is the accounting register.

The document table displays a list of amounts of accounts receivable broken down by counterparties and contracts based on the results of calculating the amount of the impairment. The following informationis displayed for each debt:

• Debt date.
• Debt repayment date in accordance with the contract terms.
• Probability of debt default.
• Impairment amount.

All indicators are calculated by the application based on the catalog data and accounting data.

The following algorithm of automatic impairment calculation is set up in the standard solution:

1. Outstanding balances for all counterparties and contracts at the reporting date are determined.
2. Debt repayment date under the contract terms and the delay payment period are calculated.
3. Debt adjustment coefficient values for each impairment calculation parameter are determined.
4. The Probability of debt default in percent indicator is calculated based on values of all applicable coefficients using the following formula:

1 - ((1 - Coefficient 1) * (1 - Coefficient 2) * (1 - Coefficient n)).

1. Calculation result is displayed in the "Probability of debt default, %" field.
2. The "IFRS accrual in currency" column calculates an amount of allowances for expected credit losses of accounts receivable and advance payment in a contract currency for each counterparty and contract using the following formula:

Remaining debt (NAS) * Probability of debt default, %.

1. The "IFRS reserve in the currency, closing balance" field displays the calculated impairment amount under IFRS in a currency at the reporting date for each counterparty and contract.

To automatically display information for each document table row, click More on the command bar:

• Coefficient values for all applicable impairment calculation parameters.
• Amounts of debt balance and calculated impairment in the company currency.
• GL accounts from the GL accounts of debt and provisions information register.

The impairment is not calculated for accounts receivable and advance payments issued under contracts where the Manual calculation of allowances for expected credit losses of accounts receivable and advance payment check box is selected. To select such contracts, click Only contracts with manual calculation and manually fill the impairment amount at the reporting date for them.

The NAS accrual tab displays information on how to create and recover impaired receivables under NAS. This information is used to reverse provisions amounts. NAS data is imported from the accounting system. To ensure correct data import, check whether the mapping of inventory and impairment GL accounts is correct in the translation template.

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