Classification of Financial Instruments

From Open Risk Manual


The classification of financial instruments in the accounting context of an Asset Quality Review concerns the identification of any misclassifications may have a material impact on the Balance Sheet or P&L of the firm (For more general classification see Financial Products).

Focus Areas for Review

If any assets are incorrectly held at HTM, but identified as being required to be accounted for at Fair Value then this may result in a misstatement of the CET1%. In the main, this section references IAS 39 accounting criteria for recognition and measurement of financial instruments and IAS 28 guidelines for investments in associates. [1]

Areas for investigation are detailed below:

  • Policy for classifying financial assets as per IAS 39 financial instrument classifications and resulting measurement (e.g. Fair Value vs. Amortised Cost);
  • Within Fair Value, policy for classifying assets as AFS (rather than held-to-maturity or loans and receivables) , in particular regarding:
  • Any announcements/commitments to the market or to third parties around sale of assets (note that tainting is not an issue for assets classified as loans and receivables);
  • Any assets where there is an internal strategy to sell run down or sell assets over time (e.g. classified as “legacy”, “non-core” or similar);
  • The liquidity portfolio as defined by assets held by the bank for the purposes of liquidity metrics (with exception of assets that cannot be sold according to contractual terms e.g. SAREB bonds).
  • Treatment of derivatives (including embedded derivatives) at Fair Value in the banking book
  • Bank designation of assets for hedging purposes and associated hedge accounting policies and procedures
  • Treatment of material equity positions entered into as a result of debt restructuring;
  • Use of the “equity method” for valuing any material equity positions, and any policies in place for identifying whether the bank has “significant influence” ((See IAS 28(2011).6))
  • Bank practices for valuation of central bank equity positions
  • Example and accompanying rationale for recent examples of derecognition of financial assets

Credit Default Swaps

Within the scope of this section is also the review of accounting for Credit Default Swaps. Under IFRS, Credit Default Swaps (CDS) meet the definition of a financial derivative, and unless designated in an effective hedging relationship (what is under IAS 39 extremely difficult for an instrument like CDS), need to be accounted at fair value through profit or loss. Normally, under IFRS a CDS does not meet the definition of a financial guarantee contract in paragraph 9 of IAS 39 as in a standardised CDS contract the credit events triggering the payout may not directly relate to the failure to pay on that particular debt instrument (e.g. an entity can hold a naked position and the definition of credit events in a standardised CDS is broader than a failure to pay).

See Also


  1. ECB, Asset Quality Review - Phase 2 Manual