FAR Recap Flashcards
Financial asset
Contractual right to receive cash/equity instrument in another entity i.e. shares
Financial liability
Contractual obligation to deliver cash
Equity instrument
Residual interest in net assets without contractual obligations (shares issued etc)
Preference shares
Redeemable - obligation so liability
Irredeemable - equity unless dividend is mandatory, then liability
Convertible instruments
Liability component = PV of future cash flows then unwind each year
Equity component represents buyer’s right to convert debt into equity,
= consideration - liability
Convertible instruments: double entry
Initially:
Dr Cash
Cr Financial liability
Cr Equity
Each year end:
Dr Finance cost (interest)
Cr Financial liability
Dr Financial liability (cash paid)
Cr Cash
Treasury shares
Reacquire own shares:
Dr Treasury shares
Cr Cash
Release shares at a later date:
Dr Cash
Cr Treasury shares
Dr/Cr Retained earnings (B)
IFRS 9 Financial Assets: Equity
FVPL - default
FVOCI:
Not held for short term trading
Irrevocable designation made at beginning
IFRS 9 Financial Assets: Debt
Amortised cost:
Business model test - to hold to maturity
Contractual cash flow test - Cash is solely principal and interest
FVOCI:
Cash flow test but not business model
Would sell for returns when possible
FVPL:
Short term intention to trade/fails both tests
Classification of financial assets
Should be made when instrument is first recognised
Do based on process of elimination in exam
May need to discount if FA paying less than market value
IFRS 13 Fair value measurement: Introduction
Price to sell asset or transfer liability in orderly arm’s length transaction between market participants i.e. well-informed investors at the measurement date
IFRS 13 seeks to increase consistency and comparability in FV
IFRS 13 Fair value measurement: Hierarchy of inputs
Level 1 - unadjusted quoted price in active markets for identical instruments
Level 2 - other inputs observable either directly or indirectly in active market eg similar items (LIBOR rate etc)
Level 3 - unobservable inputs i.e. PV of CFs
IFRS 13 Fair value measurement: Bid/ask price
Bid price = FV, price dealer will buy for i.e lower price
Ask price = price dealer will sell for (high price)
Transaction costs = Bid - ask price + any other costs eg brokerage fees
BID PRICE FOR FV - IFRS 13 also permits use of mid market price
FVOCI/Amortised cost - transaction costs at acq
IFRS 13 Fair value measurement: Principal/most advantageous market
FV is based on assumptions in market place and not entity specific (FV = transaction costs ignored)
Assumes transaction to sell/transfer asset/liability takes place in:
Principal market = default (greatest volume of activity)
Most advantageous market (highest net amount received) = if no principal market exists
Decide based on net price received (including transaction and transport costs) but ignore transaction costs for FV as they are characteristic of the transaction not A/L
IFRS 13: Disclosures
Information about hierarchy level into which FV measurements fall
Transfers between level 1 and 2
If level 3 then effect on P/L/OCI in period
IFRS 9: Reclassify all affected assets when change business model
Begins or ceases to perform an activity that is significant to ops (rare event)
Reclass is applied prospectively from reclass date
Only apply to investments in debt instrument as investment in equity always held at FV
FA = amortised cost, does not mean entity can never sell the asset
Infrequent or insignificant sales are permitted, provided the business model to collect contractual cash flows remains unchanged.
IFRS 9: Impairment accounting
Must create loss allowance on recognition of financial asset
Allowance based on expected credit loss from a default
ECL = exposure x loss given default x probability of default
Objective evidence of impairment
Financial difficulty of issuer
Default in interest or principal payments
Granting a concession wouldn’t have otherwise i.e. amended Ts and Cs
Probably will enter bankruptcy
Disappearance of an active market
Purchase of FA at deep discount rate that reflects incurred credit losses
Trade receivables
No financing element (CF < 12 months from initial sale) - loss allowance = lifetime ECL
Other trade receivables (eg > 12m) - Choose 3 stage approach or lifetime ECL from recognition
FA derecognition
Derecognise when:
Transfers substantially all risks and rewards or
Contractual rights have expired
Gains/losses on derecognition recognised to PL or OCI
Common examples:
Repurchasing - examine terms to assess whether risks and rewards transferred
Factoring:
Without recourse - does not have to compensate factor, RR transferred
With recourse - Guarantees future performance, examine terms for RR transfer
Financial liabilities
EG issues (takes out) loan/bond
FVPL or AC
Credit risk - FVPL
Entity’s credit risk deteriorates
Reduce FV of FL creating a gain
IFRS 9: Anomalous to recognise a gain in PL so goes to OCI
Derecognition of FL
Only when obligation specified is discharged, cancelled or expires
Any difference arising taken to P/L
FL: Exchange or modification of debt
Existing loan exchanged for new loan with existing lender/terms changed
Accounting treatment depends if new terms substantially different
I.e. PV of CF of new loans including fees is 10% difference to PV of CF of old loan
If different - derecognise old liability, recognise new liability at FV, difference recognised in PL along with any fees
Not 10% different - do not derecognise old FL, restats liability to PV of new CFs and deduct fees paid, difference to P/L
Derivatives: definition
FA or FL whose value is derived from the value of an underlying item, requires no or small initial investment and settled at future date - usually FVPL
Non-financial asset derivative if:
Can be settled in cash or another financial instrument and not entered into for purpose of delivering for use within business
Derivatives: types
Forwards/futures - contract to transact in future
Options - right but not obligation to transact in future
Swaps - transfer of finance payments
Embedded derivatives
Non-derivative contract eg bond with derivative contract embedded eg option to convert to shares at later date
Bond is the host contract, derivative is an embedded derivative
Host is FA - do not separate out, full contract FVPL
Host is not FA, eg FL or lease - combine provided:
Not both FVPL
Separate instrument is derivative
Characteristics of ED not closely related to host
When combined, derivative = FVPL, Host - per appropriate IAS/FRS
Financial instruments: Disclosures
CV disclosed separately on face of SFP or in notes, As/Ls at FVPL/OCI/AC, other Ls
Qualitative - entities exposure to risk, how they arise, how it is managed
Quantitative - numerical disclosure of risk and its concentration
Types of risk:
Market - FV of future cash fluctuates due to changes in market prices
Credit - One party causes loss to another by failing to discharge obligations
Liquidity - Cannot meet financial obligations when they fall due
