13- Financial Instruments Flashcards
IFRS 9 Financial instrument (Recognition and Measurement )
what is a financial instrument
REMEMBER
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A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
The definition of a financial liability under IAS 32 is a liability which a contractual obligation: ?
The definition of a financial liability under IAS 32 is a liability which a contractual obligation:
To deliver cash or another financial asset to another entity e.g. payables
To exchange financial assets or liabilities with another entity under conditions which are potentially unfavourable
That will or may be settled in entity’s own equity instruments e.g. pref shares / compound instruments
Financial liabilities
what is the initial measurement?
Fair Value
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Proceeds received - ISSUE COST (Reduce the fin liability)
Financial liabilities
what is the subsequent measurement?
Amortised cost using effective interest rate method
Bfwd + Finance cost (effective %) - Interest Payment (Nominal %) = Cfwd
.Financial liabilities
what is the measurement for Redeemable preference shares?
Use the amortised cost table to calculate the carrying amount for SOFP and finance cost for SOPL
Dividends paid are recorded as finance costs
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The definition of a financial asset under IAS 32 is an asset which is: ?
The definition of a financial asset under IAS 32 is an asset which is: ?
Cash
A contractual right to receive cash or a financial asset from another entity
A contractual right to exchange financial assets or liabilities with another entity under conditions which are potentially favourable
An equity instrument of another entity
Financial assets
what is the initial measurement?
Fair Value- how much we paid for it + transations costs e.g. broker costs (directly attributable to the asset)
(would include transaction cost unless it is subsequently measured at Fair Value through P/L
Financial assets
what is the subsequent measurement?
Subsequent Measurement depends upon whether the Financial asset is an investment in debt instrument or an equity instrument
Financial assets
what are the subsequent measurements available for equity instruments
and the default if no other information is given
Measurement can be
FVPL (Default for Equity investment
FVOCI
Financial assets
how are equity instruments measured under the Fair value through Profit and loss method
Transation costs aren’t capitalised- expensed to P/L
->Any transaction costs associated with the purchase of these investments are expensed to profit or loss, and are not included within the initial value of the asset.
Financial assets
how are equity instruments measured under the Fair value through OCI
If shares are not held for trading (I.e. long term investment)
Transaction costs ARE capitalised
This method must be elected on ACQUISITION. CANNOT change the measurement method FVOCI once chosen
Gain or Looses taken to OCI (as part of investment reserve shown in Equity section)
**Normally, revalulation reserve cannot be negative but for equity instrument measured using FVOCI, it is POSSIBLE to have a negative investment reserve
Financial assets
Under the FVOCI method of subsequently measuring equity instruments, what is a odd quirk
**Normally, revalulation reserve cannot be negative but for equity instrument measured using FVOCI, it is POSSIBLE to have a negative investment reserve
Financial assets
Under the FVOCI method of subsequently measuring equity instruments, for irredeemable preference how are the dividends treated
Dividends paid are recorded as reductions in Retained Earning
+ Disclosed in the SOCIE
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Financial assets
what are the subsequent measurements available for debt instruments
and the default if no other information is given
Measurement can be
1) FVPL (Default for Debt investment (similar to equity investment))
2) FVOCI
3) Amortised Cost
Financial assets
how are debt instruments subsequently measured under the Fair value through Profit and loss method
exactly the same as equity instrument
Transation costs aren’t capitalised- expensed to P/L
->Any transaction costs associated with the purchase of these investments are expensed to profit or loss, and are not included within the initial value of the asset.
Financial assets
what criteria must be met for debt instruments to be subsequently measured under the FVOCI and Amortised cost
If two tests are passed
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1) Business model test (Entity’s purpose–Hold to collect till maturity / + sell if they can realise higher returns )
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2) Contractual cash flow characteristics (solely principle repayments and interests)
Financial assets
what criteria must be met for debt instruments to be subsequently measured under Amortised cost
1) the investment needs to be held until the end of it’s life (maturity) (satisfying the business model test)
2) and the cashflows arising relate only to principle repayments and interests received (satisfying the contractual cash flow characteristics test).
Financial assets
after meeting the two criteria for debt instruments to be subsequently measured under Amortised cost
how is this actually measured under amortised cost
Bfwd + Finance cost (effective %) - Payment (Nominal %) = Cfwd
This gives ye year end asset value
Financial assets
what is the difference in the criteria that must be met for debt instruments to be subsequently measured under FVOCI or amortised
For amortised the business model test must be to hold till maturity AND the contractual CF must solely be repayments and interest
whereas for FVOCI, the contractual CF is the same BUT for the business model test it can be sold if higher returns can be realised
Financial assets
what criteria must be met for debt instruments to be subsequently measured under FVOCI
the investment needs to be held until maturity but could be sold if it is being replaced by an investment which will give higher returns than the current one (satisfying the business model test).
The contractual cash flow characteristics test is the same
Financial assets
after meeting the two criteria for debt instruments to be subsequently measured under FVOCI
how is this actually measured under FVOCI
FVTOCI instruments are initially measured at fair value less any costs in relation to issuing the instrument.
Interest income is calculated using the effective rate of interest, in the same way as the amounts that would have been recognised in profit or loss if using amortised cost. The interest income will also get allocated to the profit or loss
At the reporting date, the asset will be revalued to fair value with the gain or loss recognised in other comprehensive income. This will be reclassified to profit or loss on disposal of the asset.
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Compound Instruments (Equity + Liability component)
what is the initial measurement
1) Value debt at inception
- >Fair Value
FV= PV of future cash flows (Interest + Capital repayment) discounted using the market rate of interest available for non-convertible debt instrument
2) Find the equity option
This is the residual amount between cash received & value of the liability at inception
- Equity option should be recorded under Equity (SOFP)
- Disclosed in SOCIE
Compound Instruments (Equity + Liability component)
what is the subsequent measurement
1) Value debt
- > Amortised cost using effective interest rate method
2) equity
* The equity is NOT re-measured and remains at the same value on the SOFP until the debt is redeemed.
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IFRS 7 Disclosures
what are the Disclosures required for financial instruments
Carrying amount of each financial instrument
When revaluing to Fair value - Any income, expenditure, gains or losses within the statement of P/L or OCI
Any risk associated with the financial instruments, and steps management are taking to mitigate the risks.
