Financial Instruments Version

2011 IFRS Foundation
1
The IFRS for SMEs

Topic 2.1
Section 11 Basic Financial Instruments
Section 12 Other Fin. Inst. Issues
Section 22 Liabilities and Equity
2

This PowerPoint presentation was prepared by IFRS Foundation education
staff as a convenience for others. It has not been approved by the IASB.
The IFRS Foundation allows individuals and organisations to use this
presentation to conduct training on the IFRS for SMEs. However, if you
make any changes to the PowerPoint presentation, your changes should be
clearly identifiable as not part of the presentation prepared by the IFRS
Foundation education staff and the copyright notice must be removed from
every amended page .

This presentation may be modified from time to time. The latest version
may be downloaded from:
http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm

The accounting requirements applicable to small and medium-sized entities
(SMEs) are set out in the International Financial Reporting Standard (IFRS)
for SMEs, which was issued by the IASB in July 2009.
The IFRS Foundation, the authors, the presenters and the publishers do not
accept responsibility for loss caused to any person who acts or refrains
from acting in reliance on the material in this PowerPoint presentation,
whether such loss is caused by negligence or otherwise.
3 Sections 11-12 Introduction
Financial instruments split into two
sections:
Sec. 11 Basic Financial Instruments
Sec. 12 Other Financial Instruments
Issues
Together the two sections cover
recognising, derecognising, measuring,
and disclosing financial assets and
financial liabilities
4 Sections 11-12 Introduction
Section 11 is relevant to all SMEs
Section 12 is relevant If:
SME owns or issues exotic financial
instruments instruments that impose
risks or rewards that are not typical of
basic financial instruments
SME wants to do hedge accounting
5 Sections 11-12 Accounting choice
Entity may choose to apply either:
Sections 11 and 12 in full, or
Recognition and measurement provisions
of IAS 39 and the disclosure requirements
in Sec 11 & 12
No option to use IFRS 9
The option chosen applies to all financial
instruments (not individually)
To change option, follow Section 10
6 Sections 11-12 Basic principles
Basic principle of Section 11:
Amortised cost model for all basic FI
except investments in ordinary or
preference shares that are publicly traded
or whose fair value can be measured
reliably these are fair value through
profit or loss (FVTPL).
Basic principle of Section 12:
FI not covered by Section 11 are at
FVTPL
7 Section 11 Scope
All basic financial instruments except
those covered by other sections of IFRS
for SMEs:
Investments in sub, associate, JV (see
Sections 9, 14, 15)
Entitys own equity (see Sec 22, 26)
Leases (see Section 20)
Employee benefit assets and liabilities
(see Section 28)
8 Sections 11-12 Definitions
Financial instrument
Contract that gives rise to a financial
asset of one entity and a financial liability
or equity instrument of another entity
Includes cash
But commodities that are near cash like
gold are not financial instruments
9 Sections 11-12 Definitions
Basic financial instrument*
Cash
Debt instrument (accounts, notes, and
loans receivable and payable) that meet
conditions on next slide
Ordinary and preference shares that are
not convertible and not puttable

*These notes do not discuss loan commitments
10 Section 11 Basic debt instruments
Debt instruments are in Section 11 if:
Returns to holder are fixed, variable
referenced to an observable rate, or
combination of fixed and variable
No special provision could cause holder
to lose principal
Prepayment conditions are not contingent
on a future event
No special conditional returns
Examples of basic debt instruments:
Trade accounts and notes receivable and
payable
Loans from banks and other 3rd parties
Accounts payable in foreign currency
Loans to/from subsidiaries or associates
that are due on demand
Debt instrument that becomes
immediately due if issuer defaults
All of these measured at amortised cost
Examples of NOT basic debt instruments:
Investment in convertible or puttable
shares or debt
Swaps, forwards, futures, options, rights,
and other derivatives
Loans with unusual prepayment
conditions (based on tax change,
accounting change, linked to company
performance)
All of these are FVTPL under Section 12
13 Section 11 Recognition and measurement
Initial recognition:
When entity becomes a party to the
contractual provisions of the instrument
IFRS for SMEs allows judgement
regarding trade date vs settlement date
accounting, but be consistent

Initial measurement:
At transaction price
Include transaction costs except for FI
that will be measured at FVTPL
Impute interest if payment is deferred
beyond normal terms or below-market
interest
Initial recognition-measurement examples:
Loan made to another entity: Measure
at PV of interest and principal payments
Goods sold to customer (purchased
from supplier) on normal credit terms:
Measure receivable (payable) at
undiscounted invoice price
Initial recognition-measurement examples:
Goods sold (purchased) on 2-year interest free
credit: Measure at current cash sale price or PV
of receivable or payable
Example: We sell goods for 1,000, payment due
2 years, interest-free. Cash price = 857. IRR =
8%.
Journal entries Debit Credit
At time of sale Receivable 857
Sales Revenue 857
End of year 1 Receivable 69
8% x 857 = 69 Interest Revenue 69
Subsequent measurement:
Debt instruments in the scope of Section
11 (even if publicly traded):
Amortised cost using the effective
interest method
Equity instruments in scope of Section 11:
If publicly traded or FV can be
measured reliably: FVTPL
All others: cost less impairment
What is amortised cost?
Amount measured at initial recognition
Minus repayments of principal
Plus or minus cumulative amortisation of
any difference between initial
measurement and maturity amount (using
effective interest method)
Minus (for assets) reduction for impairment
or uncollectibility
What is effective interest method?
Effective interest is rate that exactly
discounts future cash payments (receipts) to
the carrying amount
Also called Internal Rate of Return
Amortised cost = PV of future cash receipts
(payments) discounted at effective interest
rate
Interest expense (income) = carrying amount
at beginning of period x effective interest rate
20 Section 11 Effective interest example
1/1/X0 buy 5-year bond for 900, transaction cost =
50, cash interest = 40/year, mandatory redemption
at 1,100 at 31/12/X4.
Year Carrying amount
beginning
Int. income
at 6.9583%*
Cash
inflow
Carrying amt
ending
X0 950.00 66.10 (40) 976.11
X1 976.11 67.92 (40) 1,004.03
X2 1,004.03 69.86 (40) 1,033.89
X3 1,033.89 71.94 (40) 1,065.83
X4 1,065.83 74.16 (40) 1,100.00
*6.9583% is the rate that exactly discounts the cash flows to 950.00
What is fair value?
Amount for which FI could be sold or
settled in an arms length transaction
Best: Quoted market price in an active
market (bid price)
Next: Price in a recent transaction for
identical asset (unless circumstances have
changed)
Estimate using a valuation technique (a
model)
22 Section 11 Impairment
Impairment only applies to FI measured at
cost or amortised cost
At each reporting date, look for evidence
that FV is below carrying amount
Significant financial difficulty of issuer
Default or delinquency
Abnormal concession granted to debtor by
creditor
Probable debtor bankruptcy or reorg.
Impairment assessment:
Individually for all equity instruments
Individually for debt instruments that are
individually significant
For other debt instruments, either
individually or grouped based on similar risk
characteristics
Impairment recognition:
Write-down is recognised in P&L
Measurement of the impairment loss:
Debt instruments: Difference between
carrying amount and current PV of estimated
cash flows discounted at assets original
effective interest rate. (Use current rate if
variable.)
Equity instruments: Difference between
carrying amount and best estimate
(approximation) of the amount (might be zero)
that entity would receive if asset were sold at
reporting date.
Reversal of an impairment loss:
Required if the problem causing the original
impairment reduces
Write up but not to more than what carrying
amount would have been had no
impairment been recognised (ie not to FV
but to new amortised cost)
Reversal recognised in P&L

26 Section 11 Derecognition
Derecognition of a financial asset:
Derecognition = remove from balance sheet
Only when:
a. Rights to cash flows expire or settled
b. Substantially all risks and rewards (cash
flows) transferred to other entity
c. Transferred some but not substantially all
risks and rewards, and physical control of
asset transferred to another party who has
the right to sell the asset to an unrelated
third party.
Derecognition of a financial asset:
In case (c) above:
Derecognise old asset entirely, and
Recognise separately any rights and
obligations retained or created in the transfer
(measure at fair value)
If transfer does not result in derecognition, keep
transferred asset on books and recognise
financial liability for the consideration received
Do not offset

Derecog. of financial asset examples:
Must derecognise: Sell receivables to bank
but we continue to collect and remit, for a
handling fee. Bank assumes credit risk.
May not derecognise: Same facts except
entity agrees to buy back any receivables in
arrears for more than 120 days. Entity
continues to recognise the receivables until
collected or writeoff as uncollectible.
Derecognition of a financial liability:
Only when extinguished, that is:
a. Discharged
b. Cancelled
c. Expired
If existing debt is replaced with new one
with substantially different terms (or
there is a significant modification of
terms):
Treat as new liability and extinguishment of
original liability
30
Section 11 Disclosure
Disclose accounting policies for FI
Disclose financial assets and liabilities by
categories in the balance sheet:
Equity or debt at FVTPL
Debt at amortised cost
Equity measured at cost less impairment
Liabilities at FVTPL
Liabilities at amortised cost

31 Section 11 Disclosure
Terms, conditions, and restrictions of
financial assets and liability
For those at FVTPL, details of how FV was
determined
Details of transfer of financial asset that
did not qualify for derecognition
Details of financial assets pledged as
collateral
Details of defaults and breaches on loans
payable continued next slide...
32 Section 11 Disclosure
Items of income, expense, gains and
losses:
Changes in FV for instruments measured at
FVTPL
Total interest income and total interest
expense on FI not measured at FVTPL
Impairment loss by class of financial asset

Initial recognition:
When entity becomes a party to the
contractual provisions of the instrument
Initial measurement:
At FV (normally the transaction price)
Transaction costs are charged to expense
Subsequent measurement:
At FVTPL except:
Equity instrument that is not publicly
traded and cannot get FV reliably, then
measure at cost less impairment
Also measure a contract linked to such
equity instrument at cost less impairment
If previously at FVTPL, but now a reliable FV
measure is no longer available, treat most
recent FV measure as cost going forward.
35 Section 12 Hedge accounting
Hedging and hedge accounting are two
different things
What is hedging?
Managing risks by using one financial
instrument (hedging instrument) purposely
to offset the variability in FV or cash flows
of a recognised asset or liability, firm
commitment, or future cash flows (hedged
item)
What is hedge accounting?
Matching the change in FV of the hedging
instrument and the hedged item in the
same income statement
Hedge accounting is only an issue when
normal accounting would put the two FV
changes in different periods sometimes
referred to as an accounting mismatch
The hedgers accounting dilemma:
I have a risk in an asset or liability measured at
amortised cost
Any change in FV or cash flows from that
asset or liability is recognised only when
realised in cash (asset is sold, liability is
settled, cash flows occur)
To hedge, I buy a derivative, which is measured
at FVTPL at each reporting date
I need special hedge accounting to fix
this mismatch
The hedgers accounting dilemma an
illustration:
Entity has note payable at a fixed rate of interest
due in 3 years. Note measured at amortised cost.
Buys swap to convert receive fixed interest to pay
variable. Swap is measured at FVTPL.
End of year 1, interest rate declines. Therefore
loss on derivative immediately recognised but
an offsetting gain (not yet recognised) because
we will be paying the lower variable rate of
interest in future.
Hedge accounting matching the gain (loss)
on the derivative with the loss (gain) on the
hedged item.
Hedge accounting is optional.
To qualify for hedge accounting:
Designate and document hedging
relationship up front
Clearly identify the hedged risk
Hedged risk is listed in 12.17
Hedging instrument is listed in 12.18
Entity expects hedging instrument to be
highly effective in offsetting the designated
hedged risk.
Hedged risk must be (12.17):
Interest rate risk in debt measured at cost
FX or interest rate risk in firm commitment
or highly probable forecast transaction
Price risk in a commodity owned or to be
acquired in a firm commitment or highly
probable forecast transaction
FX risk in a net investment in a foreign
operation
Hedged risk must be (12.17):
FX risk in debt instrument measured at cost is not
in this list. Why?
Under 30.10 (FX) the debt is translated at
spot rate and FX gain or loss is recognised in
profit or loss
Change in FV of the swap (hedging
instrument) is also recognised in profit or loss
(measured using forward rate)
Natural hedge

Hedging instrument must be (12.18):
Interest rate swap, FX swap, FX forward,
commodity forward
Entered into with external party
Notional amount = principal or notional
amount of hedged item
Specified maturity not later than maturity or
settlement of hedged item
Cannot be prepaid or terminated early
Hedge of fixed interest rate risk or
commodity price risk of commodity held
Recognise hedging instrument as asset or
liability
Change in FV of hedging instrument in P&L
Change in FV of hedged item in P&L and
adjustment of carrying amount of hedged
item even though hedged item is
otherwise measured at cost
This is called Fair Value Hedge in IAS 39.
Hedge of fixed interest rate risk or
commodity price risk of commodity held
(continued)
If hedged risk was fixed interest in debt
measured at cost, recognise in P&L the
periodic net settlements from the derivative
(interest rate swap) in the period in which
the net settlements occur.

Example Assumptions:
Entity borrows 1,000, 3 years, 5% fixed rate,
payable measured at amortised cost
Hedged with a derivative whose value is linked to
an interest rate index
End of year 1, market rate = 6%. FV of 1,000
payable 2 years 6% = 1,000 x .889996 = 890, but
this 110 gain is not recognised
Value of the derivative declines to -112
Note there is small ineffectiveness = 2
Balance sheet at time loan is made:
Cash 1,000
Loan payable 1,000
Adjust loan end of year 1 to reflect rate change:
Loan payable 110
P&L 2
Derivative (Liability) 112
Balance sheet end of year 1:
Cash 1,000
Loan payable 890
Equity (2)
Conceptual question regarding the
previous example:
Does the 890 carrying amount of the loan
payable at end of year 1 represent the Fair
Value of the loan?
Hint: Does the 890 reflect change in credit
risk or prepayment risk?
If 890 is not Fair Value, what is it?
Hedge of fixed interest rate risk and
commodity price risk (continued)
Discontinue hedge accounting when:
Hedging instrument expires
Hedge no longer meets conditions
Entity revokes designation
Any gain or loss that was included in the
carrying amount of the hedged item is
amortised to P&L over remaining life of
hedged item.
Hedge of variable interest rate risk, FX or
commodity price risk of commodity held,
highly probable forecast transaction, or net
investment in foreign operation
Recognise change in FV of hedging
instrument in OCI (assuming it was
effective; ineffectiveness reported in P&L)
'Recycle' amount recognised in OCI when
hedged item hits P&L or hedging
relationship ends.
Hedge of variable interest rate risk, FX or
commodity price risk of commodity held,
highly probable forecast transaction, or net
investment in foreign operation (continued)
If hedged risk was variable interest in debt
measured at cost, recognise in P&L the
periodic net settlements from the interest
rate swap in the period in which the net
settlements occur.
This is called Cash Flow Hedge in IAS 39.

Example Assumptions:
Entity sells goods for 1,000 floating rate 3-
year note receivable
Interest rate risk managed with a derivative
(interest rate swap)
End of year 1 interest rates increase PV
of cumulative cash flows increase by 100
But FV of swap decreases by 105
Note: Some hedge ineffectiveness
Opening balance sheet:
Receivable 1,000
Equity 1,000
Ineffective portion of hedge:
P&L* 5*
OCI (Equity) 100
*Ineffective portion of hedge
example continued next slide...
Closing balance sheet:
Receivable 1,000
Equity (OCI)* 100*
Equity 995
*Effective portion of the hedge (loss on
derivative), which will be amortised to P&L as
the higher floating rate interest payments are
earned and recognised in P&L in years 2 & 3

Hedge of variable interest rate risk etc...
Discontinue hedge accounting when:
Hedging instrument expires
Hedge no longer meets conditions
Forecast transaction no longer probable
Entity revokes designation
Any prior gain or loss on forecast
transaction that was recognised in OCI is
recycled to P&L
Disclosures relating to hedge accounting
For each type of hedge: Description of hedge
(risk, hedged item, instrument)
Special disclosures for hedge of fixed interest
rate risk and commodity price risk of commodity
held
Special disclosures for hedge of variable interest
rate risk, FX or commodity price risk of
commodity held, highly probable forecast
transaction, or net investment in foreign operation

57 Section 22 Liabilities and equity
Scope of Section 22
Principles for classifying an instrument as
debt or equity
Original issuance of shares and other
equity instruments
Sale of options, rights, warrants
Bonus issues and share splits
Issuance of convertible debt
continues...
Scope of Section 22, continued
Treasury shares
Distributions to owners
Non-controlling interest and transactions in
shares of a consolidated subsidiary
Principles for classifying an instrument as
debt or equity
Equity = residual interest in assets minus
liabilities
Liability is a present obligation (entity does
not have a right to avoid paying cash)
The following are equity:
Puttable instrument that entitles holder to
pro rata share of net assets on liquidation
Instrument that is automatically redeemed if
an uncertain future event occurs or death or
retirement of holder
Subordinated instrument payable only on
liquidation
The following are liabilities:
Instrument is payable on liquidation, but
the amount is subject to a maximum
ceiling
Entity is obliged to make payments before
liquidation such as mandatory dividend
Mandatorily redeemable preference shares

Members shares in a cooperative are
equity only if:
Coop has unconditional right to refuse
redemption of members shares, or
Redemption is unconditionally prohibited
by law or entitys charter
Otherwise liability
Original issuance of shares and other equity
instruments
Recognise when equity is issued and subscriber
is obligated to invest
If equity is issued before the entity gets cash, the
receivable is an offset to equity (not an asset)
If entity gets (nonrefundable) cash before equity
is issued, equity is increased
No increase in equity is recognised for subscribed
shares that have not been issued and entity has
not received cash
Sale of options, rights, warrants
Same principles as for original issuance of
shares (previous slide)
Transaction costs in issuing equity
instruments
Accounted for as a reduction of equity (not
an expense)

Bonus issues (stock dividends) and share
splits
These do not change equity
Accounted for as reclassification of
amounts within equity (out of retained
earnings and into permanent capital)
Amounts reclassified should be based on
local laws

Issuance of convertible debt
Must account separately for debt component and
equity component (conversion right)
Debt proceeds = FV of similar risk debt without
conversion feature (PV calculation)
Equity proceeds are the residual
Recorded at issuance; not subsequently revised
Subsequently, debt discount = additional interest
expense (effective interest method)
Issuance of convertible debt - Example
1/1/X1 issue at par a 4% convertible bond, par and
maturity amount = 50,000, maturity in 5 years
If no conversion feature, would have paid 6%
Calculate present value of cash flows at 6%:
PV 50,000 due in 5 years @ 6% = 37,363
PV annuity 2,000/year 5 years @ 6% = 8,425
Total PV = 45,788
Debit cash 50,000
Credit financial liability 45,788
Credit equity (conversion right) 4,212
Date Inter-
est
paid
Interest
expense
@ 6%
Amort. of
discount
Bond
dis-
count
Net bond
liability
1/1/X1
4,212 45,788
31/12/X1
2,000 2,747 747 3,465 46,535
31/12/X2
2,000 2,792 792 2,673 47,327
31/12/X3
2,000 2,840 840 1,833 48,167
31/12/X4
2,000 2,890 890 943 49,057
31/12/X5
2,000 2,943 943 0 50,000
31/12/X1: Debit interest expense 2,747
Credit financial liability 747
Credit cash 2,000

Treasury shares
Equity instruments entity has issued and
later reacquired
Measure at cash paid or FV of other
consideration given to acquire \
Present as deduction from equity (not
asset)
No gain or loss recognised on purchase,
sale, or cancellation

Distributions to owners
If cash measurement = cash paid
If non-cash measurement = FV of assets
distributed
Amount reduces equity
If entity gets tax deduction for dividend, tax
benefit is adjustment of equity
Not reduction of income tax expense
If entity pays withholding tax on dividends
paid, tax reduces equity as part of dividend
Non-controlling interest (NCI) and
transactions in shares of a consolidated
subsidiary
In consolidated balance sheet NCI is part of
equity (not liability or in between)
Change in parents controlling interest that does
not result in loss of control is a transaction with
owners
Equity adjustment, not through P&L
No adjustment of carrying amounts of assets
or goodwill

Financial Instruments Version

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Financial Instruments Version

Încărcat de

Drepturi de autor:

Formate disponibile

2011 IFRS Foundation

S-ar putea să vă placă și