In accordance with the "Basic Standard of Enterprise Accounting Standards," the Ministry of Finance issued the revised "Enterprise Accounting Standard No. 22 — Recognition and Measurement of Financial Instruments" on 2017/3/31, effective as of 2018/1/1.
1. Overview of Guidelines
This standard specifies the recognition, measurement, and disclosure of financial instruments. The key changes in this revision include: reclassifying financial assets from four categories to three; and replacing the incurred loss model with the expected credit loss model for impairment.
Three Categories of Financial Assets
- Financial assets measured at amortized cost
- Financial assets measured at fair value with changes recognized in other comprehensive income
- Financial assets measured at fair value through profit or loss
II. Classification of Financial Assets
An enterprise shall classify financial assets into three categories based on its business model for managing financial assets and the contractual cash flow characteristics of the financial assets.
Business Model Test
An entity's business model for managing financial assets refers to how it manages those assets to generate cash flows. The business model determines whether the cash flows from the financial assets managed by the entity arise from collecting contractual cash flows, selling financial assets, or both.
Contract Cash Flow Characteristics Test (SPPI Test)
The contractual cash flow characteristics of a financial asset refer to the cash flow features specified in the contract for the financial instrument that reflect the economic benefits of the underlying asset. Specifically, these cash flows on specific dates consist solely of payments of principal and interest on the outstanding principal amount.
III. Expected Credit Loss Model
Three-Stage Model
- • Phase 1: Credit risk has not increased significantly since initial recognition; expected credit losses are measured over the next 12 months.
- • Stage 2: Credit risk has increased significantly since initial recognition but is not yet credit-impaired; measured using lifetime expected credit losses.
- • Stage 3: Credit-impaired after initial recognition; measured at lifetime expected credit losses, with interest income calculated on amortized cost.
IV. Classification and Measurement of Financial Liabilities
Main Categories
- • Financial liabilities measured at fair value through profit or loss
- Financial liabilities measured at amortized cost
- • Financial guarantee contracts and loan commitments below market interest rates
Regulatory Document Attachment
CAS 22 — Recognition and Measurement of Financial Instruments (Amended in 2017) (PDF)