Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information 3. Summary of Significant Accounting Policies continued Financial assets and liabilities continued Changes to classification and measurement IFRS 9 requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the Group’s business model for managing the assets and the instruments’ contractual cash flow characteristics. The IAS 39 measurement categories are replaced by: •fair value through profit or loss (FVPL); •fair value through other comprehensive income (FVOCI) with recycling to profit or loss upon disposal for debt instruments; •fair value through other comprehensive income (FVOCI) without recycling to profit or loss for equit instruments; andy •amortised cost. The accounting treatment for financial liabilities is largely the same as the requirements of IAS 39. Under IFRS 9, embedded derivatives are no longer separated from a host financial asset. Instead, financial assets are classified based on the business model and their contractual terms as explained below. The accounting for derivatives embedded in financial liabilities and in non-financial host contracts has not changed. Classification and measurement implementation From 1 January 2018, the Group classifies all of its financial assets based on the business model for managing the assets and the assets’ contractual terms. Measurement of financial instruments at initial recognition When financial instruments are recognised initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Group determines that the fair value at initial recognition differs from the transaction price, then: •if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the Group recognises the difference between the fair value at initial recognition and the transaction price as a gain or loss; and •in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the Group recognises that deferred difference as a gain or loss only when the inputs become observable, or when the instrument is derecognised. Subsequent measurement of financial instruments Financial instruments measured at amortised cost From 1 January 2018 the Group measures due from credit institutions, loans to customers and other financial assets at amortised cost if both of the following conditions are met: •The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and •The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payment of principal and interest (SPPI) on the principal amount outstanding. The details of these conditions are outlined below. Business model There are three business models available under IFRS 9: •Held to collect: it is intended to hold the asset to maturity to earn interest, collecting repayments of principal and interest form the counterparty. •Hold to collect and sell: this model is similar to the hold to collect model, except that the entity may elect to sell some or all of the assets before maturity as circumstances change or to hold the assets for liquidity purposes. •Other: all those models that do not meet the ‘hold to collect’ or ‘hold to collect and sell’ qualifying criteria. Annual Report 2018Bank of Georgia Group PLC 189