On initial recognition, IFRS 9.5 requires the entity to measure financial instruments at fair value. When fair value is different to transaction price, a day one gain or loss needs to be recognised. This document provides guidance on how to deal with this day 1 gain or loss.
Measuring financial instruments
When an entity has acquired or issued a financial instrument , IFRS 9 par 5.1.1 requires the entity to recognise the instrument at its fair value, determined in accordance with IFRS 13. This includes issuing instruments at no or below-market rates.
This situation may arise either when an entity acquires or issues a new financial instrument, or where a modification of the terms and conditions of the existing financial instrument, results in derecognition of the original instrument and recognition of the new financial instrument.
Where the fair value of the financial instrument is different to the transaction price [consideration received/given or carrying amount (in the case of a modification)] at initial recognition, a day 1 gain or loss arises.
How to deal with this “day 1” gain or loss?
Day 1 gains or losses are recognised differently based on how the fair value was determined.
- Level 1 inputs:
If the fair value is determined based on the quoted prices from an active market for an identical asset or liability (observable inputs) or only from observable markets, the gain or loss is recognised immediately in profit or loss. - Level 2 and 3 inputs:
If the fair value is not based on level 1 inputs, including observable and unobservable inputs, the gain or loss is deferred. The gain or loss is then recognised over the instrument’s life using the effective interest method, or upon a change in inputs that affects the instrument’s fair value.
These rule are equally applicable to financial assets and liabilities measured at a price different from the transaction price.
Decision tree:
Financial instruments day one gains/losses
