Chapter 23 - Financial Instruments 1 Flashcards
Financial Instrument
Any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another
Examples of Financial Instruments
Options, Forwards or Warrants
Accounting Standards
IAS 32»_space; presentations
IAS 39»_space; Recognition & Measurements
IFRS 7»_space; Disclosures
IAS 32 - Presentation
Financial Asset ^ ^ Contract ^ ^ Financial Liability or Equity instrument
Financial Asset (1)
Contractual Right to receive cash or another financial asset from another entity
Financial Asset (2)
A contractual right to exchange financial assets or financial liabilities under potentially favorable conditions
Financial Asset (3)
The right to an equity instrument of another entity
Financial asset example
> Cash
Derivatives (e.g share option)
Shares (as an investment)
Financial Liability (1)
An obligation to deliver cash or another financial asset to another entity
Financial Liability (2)
An obligation to exchange financial instruments with another entity under potentially unfavorable conditions
Financial Liability examples
> Trade Payables
Bank Loans
Debenture Loans (Payables)
Asset backed securities
Equity Instruments (1)
A contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
Equity Instruments examples
> Ordinary shares
Warrants (a right to shares in future normally attached to debt)
Preference shares (irredeemable)
Classifications under IAS 32
> Substance - rather than legal form (debt is debt)
Mandatory Redemption - instrument will be a financial liability
Contractual Responsibility to deliver cash - instrument will be financial liability
No Contractual Responsibility - instrument is equity
IAS 39 vs IAS 32
IAS 32 = How to classify financial instruments
IAS 39 = When to recognize financial instruments
IAS 39 - Initial Recognition
Recognized in the statement of financial position when the entity becomes party to the contractual provisions
When are financial instruments shown in the financial statements
As soon as the conditions of the contract are met by that entity
Categories of Financial Assets
> Held to Maturity
Loans & Receivables
Fair Value through P&L
Available for Sale
Category 1 - Held to Maturity
> Debt securities held to Maturity
> Fixed payments and Fixed Maturity
Category 2 - Loans & Receivables
> Not quoted on an active market
Non derivative asset
> Fixed, determinable payments
Category 3 - Fair value through P&L
> Debt and Equity securities held for trading (Short term)
> A derivative product (grouped product for risk management)
Category 4 - Available for Sale
> Catch-all category (all other financial assets)
Initial Measurements
Fair Value
Transaction Costs - included in the total cost of the instrument
Transaction Costs of Assets and Liabilities classified as Fair value through P&L
They are expensed via P&L
Financial Asset - Recording
Dr Loans and Receivable
Cr Bank
Financial Liability - Recording
Dr Bank
Cr Financial Liability
Financial Asset held at fair value through P&L
100,000 shares at 120c in 20x8
100,000 shares at 114c at year end
Subsequent measurements
Initial Measurement
Dr Financial Asset $120,000
Cr Bank $120,000
Subsequent Measurements
Dr Loss on Financial Asset $6,000
Cr Financial Asset $6,000
Available for sale asset
Initial recording
Initial recording includes transaction costs
Dr Financial Asset
Cr Bank
Available for sale asset
Subsequent measurement
After making a loss
Dr Other Reserves
Cr Financial Asset
Held to maturity assets and Loans & Receivables
Measurements
Measured at Amortized Cost
Financial Asset - Held to Maturity
Subsequent Measurement
Amortized cost using the effective interest method
Financial Asset - Loans & Receivables
Subsequent Measurement
Amortized Cost using the effective interest method
Financial Asset - Fair value through P&L
Subsequent Measurement
Fair Value
Financial Asset - Available for Sale
Subsequent Measurement
Fair Value
Financial Liability- Most Financial Liabilities
Subsequent Measurement
Amortized Cost using the effective interest method
Financial Liability- Fair value through P&L
Subsequent Measurement
Fair Value
