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Topic 2.1
Section 11 Basic Financial Instruments
Section 12 Other Fin. Inst. Issues
Section 22 Liabilities and Equity
Section 11 Scope
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
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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
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Debit
Credit
857
857
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Subsequent measurement:
Debt instruments in the scope of Section
11 (even if publicly traded):
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950.00
976.11
1,004.03
66.10
67.92
69.86
(40)
(40)
(40)
976.11
1,004.03
1,033.89
X3
X4
1,033.89
1,065.83
71.94
74.16
(40)
(40)
1,065.83
1,100.00
*6.9583% is the rate that exactly discounts the cash flows to 950.00
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Section 11 Impairment
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Section 11 Impairment
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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
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Section 11 Impairment
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Section 11 Impairment
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Section 11 Derecognition
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Section 11 Derecognition
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Section 11 Derecognition
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Section 11 Derecognition
Derecognition of a financial liability:
Only when extinguished, that is:
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a. Discharged
b. Cancelled
c. Expired
Section 11 Disclosure
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Section 11 Disclosure
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Section 11 Disclosure
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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.
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Section 12 Hedge accounting
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.
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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
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Section 12 Hedge accounting
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.
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Example Assumptions:
Entity sells goods for 1,000 floating rate 3year 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
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1,000
1,000
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Receivable
1,000
Equity (OCI)*
100*
Derivative (Liability)
105
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
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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...
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Otherwise liability
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1/1/X1
31/12/X1 2,000
31/12/X2 2,000
31/12/X3 2,000
31/12/X4 2,000
31/12/X5 2,000
2,747
2,792
2,840
2,890
2,943
747
792
840
890
943
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Bond
discount
Net bond
liability
4,212
3,465
2,673
1,833
943
0
45,788
46,535
47,327
48,167
49,057
50,000
2,747
747
2,000
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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
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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
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