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Non-Current Assets
Assets: An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. (Framework) The definition has three important characteristics: Future economic benefits Control (Ownership) The transaction to acquire the control has already taken place.

Accounting standards relevant to NCA: IAS 16 (PPE) IAS 20 (Accounting for Government Grants and disclosure of government assistance) IAS 23 (Borrowing Costs)

Definition of PPE: PPE are tangible assets held by the entity for use in the production and supply of goods or services, for rental to other, or for administration purposes. They are expected to be used during more than one accounting period. Definition of Faire Value: Fair value is the amount at which an asset is exchanged between knowledgeable parties during an arms length transaction. Recognition Criteria: It is probable that future economic benefits associated with the item will flow to the entity. The cost of the item can be measured reliably.

Once recognised as an asset, items should initially be measured at cost. Purchase Price, less trade discount/rebate Directly attributable cost of bringing the asset to working conditions for use intended by management. Initial estimate of the costs of dismantling and removing the item and restoring the site on which it was located. (Testing costs included).

Exchanges of items of property, plant and equipment, regardless of whether the assets are similar, are measure at fair value, unless the exchange transaction lacks commercial substance, or the fair value of neither of the assets exchanged can be measured reliably. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Measurement subsequent to initial recognition: Cost Model: Carry asset at cost less depreciation and any accumulated impairment losses. Revaluation model: carry asset at revalued amount, ie fair value less subsequent accumulated depreciation and any accumulated impairment losses. Note: The revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably.

Page |2 Rules for revaluation: Carried out regularly Fair value is usually market value If one asset it revalued, the whole class of asset to which it belongs should be revalued at the same time. Increase in value is credited to the Revaluation Surplus. (Owners Equity) Decrease in value is an expense in Profit and Loss after cancelling a previous revaluation surplus. Additional disclosure required.

Depreciation and revaluations: Based on carrying value in the Financial Statements Must be determined separately for each significant part of the item. Excess over historical cost depreciation can be transferred to realised earnings through reserves. The residual value and useful life of an asset, as well as the depreciation method must be reviewed at least at each financial year end, rather than periodically.

Impairment loss: Should be treated in the same way as a revaluation decrease, ie the decrease should be recognised as a decrease/expense. However, a revaluation decrease (or impairment loss) should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus account in respect of the same asset.

Note: All the items within a class should be revalued at the same time to prevent selective revaluation of certain assets and to avoid disclosing a mixture of costs and values from different dates in the FS. An upward revaluation means that the depreciation charge will increase. Normally a revaluation surplus is realised only when the asset is sold, but when it is being depreciated, part of that surplus is being realised as the asset is used. The amount of the surplus realised is the difference between depreciation charged on the revalued amount and the (lower) depreciation which would have been charged on the assets original cost. This amount is credited to Retained Earnings but not through the P&L. (dr Rev.Surplus/ cr Retained Earnings) This is a movement in owners equity only, not through P&L)

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IAS 20: Government Assistance

Government Grants: Definition Assistance by Government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. Grants related to assets: Definition Government grants whose primary condition is that the entity qualifying for the grant should purchase, construct or otherwise acquire long term assets. Accounting treatment: Recognise government grants and forgivable loans once conditions complied with and receipt/waiver is assured. Grants are recognised under the income approach: recognise grants as income to match them with the related costs that they have been received to compensate. Grants for depreciable assets should be recognised on the same basis that the asset is depreciated. Grants for non-depreciable assets should be recognised as income over the periods in which the cost of meeting the obligation is incurred. Where related costs have already been incurred, the grant may be recognised as income in full immediately. A grant in the form of a non-monetary asset may be valued at fair value or at nominal value. Grants related to assets may be presented in the SFP either as a deferred income or deducted in arriving at the carrying value of the asset. Grants related to income may be presented in profit or loss either as a separate credit or deducted from the related expenses. Repayment of Government grants should be treated as a revision of an accounting estimate.

Disclosure: Accounting policy note Nature and extent of government grants and other forms of assistance. Unfulfilled conditions and other contingencies attached to recognised government assistance.

IAS 20 gives the following arguments in support of each method: Capital Approach: The grants are received as a financing device, so should go through the statement of financial position. In the statement of comprehensive income they would simply offset expenses which they are financing. No repayment is expected by the Government, so the grants should be credited directly to shareholders interest. Grants are not earned, they are incentives without related costs so it would be wrong to take them through the income statement.

Income Approach The grants are not received from shareholders so should not be credited directly to shareholders assets.

Page |4 Grants are not received or given for nothing. They are earned by compliance with conditions and related expenses. There are therefore associated costs with which the grant can be matched.

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IAS 23: Borrowing Costs

Often associated with the construction of self-constructed assets, but which can also be applied to an asset purchased that takes time to get ready for use/sale. Qualifying asset: An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Accounting treatment: Borrowing costs must be capitalised as part of the cost of the asset if they are directly attributable to the acquisition/construction, /production. Other borrowing costs should be expensed. Borrowing costs eligible for capitalisation are those that would have been avoided otherwise. Amount of borrowing costs available for capitalisation is actual borrowing costs incurred less any investment income from temporary investment of those borrowings. Capitalisation is suspended if active development is interrupted for extended periods. (Temporary delays or technical/administrative work will not cause suspension) Capitalisation ceases when physical construction of the asset is completed, capitalisation should cease when each stage or part is completed. Where the carrying amount of the asset falls below cost, it must be written down/off.

Disclosure: Accounting policy note Amount of borrowing costs capitalised during the period. Capitalisation rate used to determine borrowing cots eligible for capitalisation.

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IAS 36: Impairment of assets

There is an established accounting principle hat assets should not be carried at above their recoverable amount. An entity should write down the carrying value of an asset to its recoverable amount if the carrying value of asset is not recoverable in full. If an assets value in the accounts is higher than its realistic value, measured as its recoverable amount, the asset is judged to have suffered an impairment loss. It should be reduced in value, by the amount of the impairment loss. The amount of the impairment loss should be written off against profit immediately. An entity should carry out a review of its assets at each year end, to assess whether there are any indications of impairment to any assets. If there are indications of possible impairment, the entity is required to make a formal estimate of the recoverable amount of the assets concerned. Indicators of impairment: 1. External Source of information A fall in the assets market value that is more significant than would be expected from passage of time over normal use. A significant change in the technological, market, legal, or economic environment of the business in which assets are employed. An increase in the interest rates or market rates of return on investments likely to affect the discount rate used in calculating the value in use of the asset. The carrying amount of the asset being more than its market capitalisation. 2. Internal sources of information. Obsolescence Physical damage Adverse changes in the use to which the asset is put. Assets economic performance decline. Note: Even if there are no indicators of impairment, the following assets must always be tested for impairment annually: An intangible asset with indefinite useful life. Goodwill acquired in a business combination.

Impairment is determined by comparing the carrying amount of the asset with its recoverable amount. The recoverable amount of the asset should be measured at the higher value of: The assets fair value less costs to sell; and Its value in use.

Page |7 An assets fair value less costs to sell is the amount net of selling costs that could be obtained from the sale of the asset. Selling costs included transaction costs, such as legal expenses. If there is an active market in the asset, the net selling price should be based on the market value or on the price of recent transactions in similar assets. If there is no active market in the assets it might be possible to estimate a net selling price using the best estimates of what knowledgeable, willing parties might pay in an arms length transaction.

Value in Use: The value in use of an asset is measured as the present value of estimated future cash flows (inflows minus outflows) generated by the asset, including its estimated net disposal value (if any) at the end of its expected useful life. Calculating a value in use therefore calls for estimates of future cash flows, and the possibility exists that an entity might be over-optimistic. The IAS therefore states that: Should be based on reasonable and supportable assumptions Projections should be based on the most recent budgets or financial forecasts. Should normally cover up to a maximum of 5 years.

Page |8 IAS 40: Investment Property IAS 40 defines investment property as property held to earn rentals or for capital appreciation or both, rather than for: Use in the production/supply of goods or services. Sale in the ordinary course of business.

Investment property is property (land or a building- or part of a building or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for: Use in the production or supply of goods or services or for administrative purposes, or Sale in the ordinary course of business.

Owner-occupied property is property held by the owner or the lessee in a finance lease for use in the production or supply of goods and services or for administrative purposes. (Relevant IAS 16) Note: If an entity has not determined that it will use the land either as an owner-occupied property or for short-term sale in the ordinary course of business, the land is considered to be held for capital appreciation. Recognition Investment property should be recognised as an asset when two conditions are met. It is probable that the future economic benefits that are associated with the investment property will flow to the entity. The cost of the investment property can be reliably measured.

Initial Recognition An investment property should initially be measured at its cost, including transaction costs. A property interest held under a lease and classified as an investment property shall be accounted for as if it were a finance lease. The asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount is recognised as a liability. Measurement Subsequent to initial recognition Entities can choose between: Note: When an entity choose to classify a property held under an operating lease as an investment property, there is no choice. The fair value model mist be used for all the entitys investment property, regardless of whether it is owned or leased. Fair value model Cost model

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Fair value model After initial recognition, an entity that chooses the fair value model should measure all of its investment property at fair value, except in the extremely rare cases where this cannot be measured reliably. IAS 16-Cost model. Note: A gain or loss from a change in the fair value of an investment property should be recognised in net profit or loss for the period in which it arises. Under the fair value model all changes in the fair value of the investment property is recognised through the Profit and Loss. A willing buyer is motivated but not compelled to buy. In those rare cases where the entity cannot determine the fair value of an investment property reliably, the cost model in IAS 16 must be applied until the investment property is disposed of. The residual value must be assumed to be zero. Once an entity has chosen the fair value or the cost model, it should apply it to all its investment property. It should not change from one model to another unless the change will result in a more appropriate presentation. Cost Model Investment property should be measured at cost less accumulated impairment losses. An entity that chooses the cost model should disclose the fair value of tits investment property. Transfers Transfers to or from investment property should only be made when there is a change in use. For example, owner occupation commences so the investment property will be treated under IAS 16 as an owner-occupied property. When there is a transfer from investment property carried at fair value to owner occupied property or inventories, the propertys cost for subsequent accounting under IAS 16 or IAS 2 should be at its fair value at the date of change in use. Conversely, an owner occupied property may become an investment property and need to be carried at fair value. An entity should apply IAS 16 up to the date of change of use. It should treat any difference at that date between the carrying value of the property under IAS 16 and its fair value as a revaluation under IAS 16. Disposals Derecognise an investment property on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. Disclosure requirements: Cost model/fair value model Criteria for classification as investment property Assumptions in determining fair value

P a g e | 10 Use of independent professional value Rental income/expenses Decision tree

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IAS 38 Intangible assets

Intangible assets are defined by IAS 38 as non-monetary assets without physical substance. They must be: Identifiable Controlled as a result of past event Able to provide future economic benefits

Examples Computer software Patents Copyrights Motion picture films Customer lists

Identifiability Criteria If an intangible asset is acquired separately through purchase, there may be a transfer of a legal right that would help to make an asset identifiable. An asset could be identifiable if could be sold/rented separately. Internally generated goodwill IGG may not be recognised as an asset. Research and development costs Research activities do not by definition meet the criteria for recognition under IAS 38. This is because, at the research stage of a project, it cannot be certain that future economic benefits will flow to the entity. There is too much uncertainty about the likely success or otherwise of the project, Research costs should therefore be written off as an expenses as they are incurred. Examples: Activities aimed at gaining new knowledge. The search for alternatives for materials, devices, products, processes, systems or services.

Development Development costs may qualify as intangible asset provided that the following strict criteria are met. The technical feasibility of completing the intangible asset so that it will be available for use or sale. Its intention to complete the intangible asset and use or sell it. Ability to use/sell the product. Ability to measure the development costs to be capitalised to the intangible asset during the development phase.

Other internally generated intangible assets: The standard prohibits the recognition of internally generated brands, mastheads, publishing titles and customer lists and similar items as intangible assets.

P a g e | 12 All expenditures to an intangible asset which does not meet the criteria for recognition either as an identifiable asset or as goodwill arising on an acquisition should be expensed as incurred. Examples: Start-up costs Training costs Advertising costs Business relocation costs

Measurement of intangible assets: Cost model Fair value model

Applying the cost model, the asset is measured at cost less accumulated depreciation and any subsequent impairment losses. The revaluation model allows an intangible asset to be carried at a revalued amount, which is its fair value at the date of revaluation, less any subsequent accumulated depreciation and any subsequent impairment losses. Conditions: The fair value must be able to be measured reliably with reference to an active market in that type of asset. The entire class of intangible assets to which it belongs must be revalued at the same time (to prevent selective revaluations) If an intangible asset in a class of revalued intangibles cannot be revalued because there is no active market for this asset, the asset should be carried at its cost less ant accumulated amortisation and impairment losses. Revaluations should be made with such regularity that the carrying amount does not differ from that which would be determined using fair value at the year end.

When an intangible asset is revalued upwards to a fair value, the amount of the revaluation should be credited directly to equity under the heading of Revaluation Surplus. Useful life An entity should assess the useful life of an intangible asset, which may be finite or infinite. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. Amortisation period and amortisation method An intangible asset with a finite useful life should be amortised over its expected useful life. Amortisation should start when the asset is available for use. Amortisation should cease at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 NCA Held for Sale and discontinued Operations and at the date the asset is derecognised.

P a g e | 13 The amortisation method should reflect the pattern in which the assets future economic benefits are consumed. If such a pattern cannot be predicted reliably, the straight-line method should be used. The amortisation charge should be charged to P&L. The residual value of an intangible asset with a finite life is assumed to be zero.

Intangible asset with indefinite useful lives An intangible with an indefinite useful life should not be amortised. (IAS 36 requires that such an asset is tested for impairment at least annually. The useful life of an intangible asset that is not being amortised should be reviewed each year to determine whether it is still appropriate to assess its useful life as indefinite. Reassessing the useful life of an intangible asset as finite rather than indefinite is an indicator that the asset may be impaired and therefore it should be tested for impairment. Disclosure requirements For each class of intangible assets, disclosure is required of the following: The method of amortisation used Useful life of assets Amortisation rate used Effective date of revaluation Carrying amount of revalued intangible assets Development Evaluation of product or process alternatives Design, construction and testing of prototypes Design of tools

Research Activities aimed at gaining new knowledge Search for applications of research findings Search for product or process alternatives Formulation and design of possible new or improved product or process alternatives.

P a g e | 14 IAS 19 Employee Benefits Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. Interest cost is the increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer to settlement. Actuarial gains and losses comprise: Experience adjustments ( the effects of differences between the previous actuarial assumptions and what has actually occurred ) The effects of changes in assumptions.

Past service cost is the change in the present value of the defined benefit obligation for employee service in prior-periods, resulting in the current period from the introduction, changes to, postemployment benefits or other long-term employee benefits. Defined contribution plans The employer (and possibly current employees too) pay regular contributions into the plan of a given or defined amount each year. The contributions are invested, and the size of the postemployment benefits paid to former employees depends on how well or how badly the plans investments perform. If the investments perform well, the plan will be able to afford higher benefits that if the investments fail. Defined benefit plans. With these plans, the size of the post-employment benefits is determined in advance, ie the benefits are defined. The employer (and possibly current employees too) pay contributions into the plan, and the contributions are invested. The size of the contributions is set at an amount that is deemed to earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional contributions into the plan to make up the expected shortfall. If on the other hand, the assets appear to be larger than they need to be, in excess of what is required to pay the post-employment benefits, the employer may be allowed to take a contribution holiday. Accounting for Defined Contribution plans Accounting for payments in the Defined Contribution Plans is straightforward. The obligation is determined by the amount paid into the plan in each period. There are no actuarial assumptions to make.

IAS 19 requires the following for defined contribution plans: Contributions should be recognised as an expense in the period they are payable. Any liability for unpaid contributions that are due as at the end of the period should be recognised as a liability. Any excess contributions should be recognised as a prepaid expense (an asset), but only you the extent that the prepayment will lead to a reduction on the future payments or cash refunds.

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Disclosure requirements: A description of the plan The amount recognised as an expense in the period.

Defined benefit plans To estimate future obligations, it is necessary to use actuarial assumptions. Obligations should be discounted to their present value. If actuarial assumptions change, the amount of required contributions to the fund will change, resulting in actuarial gains or losses.

Outlining the method Step 1: Actuarial assumptions to make a reliable estimate of the amount of future benefits employees have earned from service in relation in current and prior periods. Assumptions include, for example, assumptions about employee turnover, mortality rates, future increases in salaries. Step 2: Fair value of any planned assets should be measured. Step 3: The size of any actuarial gains and losses should be determined, and the amount of these that will be recognised. Step 4: If the benefits payable under the plan have been improved, the extra cost arising from past service should be determined.

Note:

The interest cost in the statement of comprehensive income is the present value of the defined benefit obligation as at the start of the year multiplied by the discount rate. Presentation in the Statements SFP: The amount of recognised as a defined benefit liability (which may be a negative amount, ie an asset) should be the total of the following: The present value of the defined obligation at the year end Any actuarial gains minus any actuarial losses that have not been recognised yet, minus (similar to SOCI) Any past service cost not yet recognised, minus (similar to SOCI) The fair value if the assets of the plan as at the yearend out of which the future obligations to current and past employees will be settled.

SOCI: The expense that should be recognised in the statement of comprehensive income (In profit or loss for the year) for post-employment benefits in a defined benefit plan is the total of the following: The current service cost Interest Expected return on plan assets Actuarial gains and losses to the extent they are recognised Past service cost to the extent they are recognised

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Past Service Cost A past service cost arises when an entity introduces a defined benefit plan or improves the benefits payable under an existing plan. The entity has, as a result, taken on additional obligations that it has not hitherto provided for. A past service cost may be in respect of current employees, or past employees. Current employees: Past service cost should be recognised as part of the defined benefit obligation in the SFP. For the SOCI, the past service cost should be amortised on a straight-line basis over the average period until the benefits become vested. Past employees: The past service cost should be recognised in full immediately the plan is introduced because they are immediately vested, as part of the defined benefit liability and as an expense (in full) to the financial period. Example: Attributes of the pension plan: 2% of final salary for every year of service. Vested after five years service Pension improved to 2.5% of final salary. At the date of improvement, the present value of additional benefits for service from 1 January 20X2 to 1 January 20X6 is as follows: o Employees more than 5 years- $300M o Employees with less than 5 years- $240M (average period until vesting-3years)

Answer: $300m should be recognised in full immediately, because these benefits are already vested. $240m should be recognised on a straight-line basis over three years from 1 January 2OX6.

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Summary sheet IAS 19 Record opening figures Asset Obligation Any unrecognised gains and losses Based on discount rate and PV of obligation @ start Should also reflect any changes in obligation during period.

Interest Cost: Dr Interest Cost (P/L) (X%* bd obligation) Cr PV Defined benefit obligation (SOFP)

Current service cost: Increase in the PV of obligation resulting from employee service in the current period DR current Service cost ( P/L ) CR PV Defined benefit obligation (SOFP)

Contributions Benefits: Actual pension payments made

Dr Plan assets (SOFP) Cr Company Cash Dr PV of defined benefit obligation Cr Plan assets

Past service cost: Increase in PV obligation as a result of introduction or improvement if benefits plan Past service cost is vested when any minimum employment period has been completed.

Vested benefits: DR Past Service Cost (P/L) CR PV Defined Benefit Obligation (SOFP) Non-Vested Benefits: DR Unrecognised Past Service Cost (SOFP) CR PV Defined Benefit Obligation (SOFP) The unrecognised past service cost is amortised through profit and loss straight line method over the average period until the minimum employment period is

P a g e | 18 completed. Income taxes Deferred tax is an accounting measure, used to match the tax effects of transactions with their accounting impact. Definitions: Tax base: The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Temporary differences Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences can be either: 1. Taxable, which are temporary differences that will result in taxable amounts in determining taxable profit (Tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. 2. Deductible temporary differences which are temporary differences that will result in amounts that are deductible in determining taxable profit (Tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Deferred tax asset are the amounts of income taxes recoverable in future periods in respect of: 1. Deductible temporary differences 2. Carry forward of unused tax losses 3. Carry forward of unused tax credits. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

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Financial instruments

1) Financial instrument: Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. 2) Financial asset: Any asset that is 1. Cash 2. An equity instrument of another entity 3. A contractual right to receive cash or another financial asset from another entity; or to exchange financial instruments with another entity under conditions that are potentially favourable to the entity; or 4. A contract that will or may be settled in the entitys own equity instrument and is: a. A non-derivative for which the entity is or may be obliged to receive a variable number of the entitys own equity instrument. Examples of financial assets Trade receivables Options Shares ( when used as an investment )

3) Financial liability: Any liability that is: 1. A contractual obligation: a. To deliver cash or another financial asset to another entity, or b. To exchange financial instruments with another entity under conditions that are potentially unfavourable; or 2. A contract that will or may be settled in the entitys own equity instruments and is a. A non-derivative for which the entity is or may be obliged to deliver a variable number of entitys own equity instrument; or b. A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entitys own equity instruments. Examples of financial liabilities Trade payables Debenture loans payable Redeemable preference shares Forward contracts standing at loss

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4) Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. 5) Derivative A financial instrument or other contract with all three of the following characteristics: 1. Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable. 2. It is settled at a future date. 3. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. Note: IAS 32 makes it clear that the following items are not financial instruments: 1. Physical assets: Inventories, PPE, leased assets and intangible assets (patents, trademarks) 2. Prepaid expenses:, deferred revenue and most warranty obligations 3. Liabilities or assets that are not contractual in nature.

Derivative A derivative is a financial instrument that derives its value from the price or rate of an underlying item. Common examples of derivatives are: 1. Forward contracts: agreements to sell or buy an asset at a fixed price at a fixed future date. 2. Futures contracts: similar to forward contracts except that contracts are standardised and traded on an exchange. 3. Options: rights (but not obligation) for the option holder to exercise at a pre-determined price; the option writer loses out if the option is exercised. 4. Swaps: agreements to swap one set of cash flows for another ( normally interest rate or currency swaps)

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Compound financial instruments: Compound instruments are split into equity and liability components and presented accordingly in the SFP. IAS 32 requires the component parts of the instrument to be classified separately, according to the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. One of the most common type of compound instrument is convertible debt. This creates a primary financial liability of the issuer and grants an option to the holder of the instrument to convert it into an equity instrument (usually ordinary shares) of the issuer. The following method is recommended: 1. Calculate the value of the liability component. 2. Deduct this from the instrument as a whole to leave a residual value for the equity component. Note: The sum of the carrying amounts assigned to the liability and equity will always be equal to the carrying value that would be ascribed to the instrument as a whole. IAS 39: (Financial instruments: Recognition and measurement) A financial instrument should be recognised in the SFP when the entity becomes a party to contractual provisions of the instrument. Initial recognition: An entity has entered into two separate contracts. Contract A: A firm commitment (an order) to buy a specific quantity of iron. Contract B: A forward contract to buy a specific quantity of iron at a specified price on a specified date provided delivery of the iron is not taken. Contract A is a normal trading contract. The entity does not recognise a liability for the iron until the goods have actually been delivered. (This contract does not constitute a financial instrument because it involves a physical asset, rather than a financial asset) Contract B is a financial instrument. Under IAS 39 the entity recognises a financial liability or obligation to deliver cash on the commitment date, rather than waiting for the closing date on which the exchange tales place.

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Derecognition: Derecognition is the removal of a previously recognised financial instrument from the SFP. An entity should derecognise a financial asset when: a. The contractual rights to the cash flows from the financial instruments have expired.

b. The entity transfers substantially all the risks and rewards of ownership to another party. An entity should derecognise a financial liability when it is extinguished-ie, when the obligation specified in the contract is discharged or cancelled or expires.

P a g e | 23 Measurement of financial instruments Financial assets should initially be measured at cost=fair value. Subsequently they should be remeasured to fair value except for: a. Loans and receivables not held for trading. b. Other held to maturity investments. c. Financial assets whose value cannot be reliably measured. Initial measurement: Financial instruments should initially be measured at the fair value of the consideration given or received (cost + transaction costs that are directly attributable to the acquisition or issue of the financial instrument.) Note: The exception to this is where a financial instrument is designated as at fair value through profit or loss. In this case transaction costs are not added to fair value at initial recognition. A financial asset or liability at fair value through profit or loss meets either of the following: i. It is classified as held for trading. A financial instrument is classified as held for trading if it is: a. Acquired or incurred principally for the purpose of selling or repurchasing it in the near term. b. Part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking, or c. A derivative. Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may only use this designation in severely restricted circumstances. a. It eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise. b. A group of financial assets/liabilities is managed and its performance is evaluated on a fair value basis.

ii.

Under the IFRS 9, financial assets are measured at amortised cost, using the effective interest method, or at fair value. Amortised cost of a financial asset/liability is the amount at which the financial asset/liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation of ant indifference between that initial amount and the maturity amount, and minus any write-down for impairment and uncollectability. The effective interest method is a method of calculating the amortised cost of a financial instrument and of allocation the interest income or interest expenses over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows to the net carrying amount of the financial asset or liability.

P a g e | 24 Example: Amortised Cost On 01.01x4, Aco purchases a debt instrument for its fair value of $1000. The debt instrument is due to mature on 31.12.x5. The instrument has a principal amount of $1250 and the instrument carries fixed interest rate at 4.27% that is paid annually. Effective interest=10%. How should Aco account for the debt instrument over its 5 year term? Solution: Annual interest receive: 1,250 x 4.72%= $59 When maturity reached will receive: $1,250 The following table shows the allocation over the years: Year Amortised cost at beginning of year P&L: interest income for year (@10%)effective interest rate 100 1041*10=104 1,086*10=109 1,136*10%=113 1,190*10%=119 Interest received during the year (cash inflow)fixed interest rate (59) (59) (59) (59) (1250+59) Amortised cost at end of the year

20x1 20x2 20x3 20x4 20x5

1,000 1,041 1,086 1,136 1,190

1,041 1,086 1,136 1,190 -

Note: Each year the carrying amount if the financial asset is increased by the interest income for the year (effective rate) and reduced by the interest rate actually received during the year.

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