Financial Assets and Liabilities Flashcards
Recognition of Financial Liabilities
Recorded at Fair Value: Net proceeds of cash received less issue costs and adiscount
Measurement of Financial Liabilities
Loan Notes (Deep discount bonds)
Amortised cost: Initial value + effective interest paid
Loan notes issued means:
Debt is taken on to be repaid
Preference Shares
Redeemable: treat as financial liability at amortised cost. Effective interest also goes to finance costs
Irredeemable: treat as equity
Compound Instruments (Convertible loan notes/bonds)
Repayable at lender’s option
Number of shares fixed at inception
Lender accepts a rate of interest higher for convertible because of the ability to gain on transfer to shares
How to: Convertible Loan notes
Effective/market rate is the discount rate. Calculate the cashflow and multiply by discount factor (repayment in last year). Then add that up to get the PV of the debt. This is the O/B
Convertible Loan notes recognition
Dr Bank: Cash
Cr Fin Liability
Cr Equity
Convertible Loan notes subsequent measurement
Finance costs as per usual
Equity option remains across all years
REMEMBER: if 3 years, 2 years NCL, 1 year CL
Financial Instruments (Assets) Valuation recognition
FV through P&L
Amortised cost
FV through OCI
Financial Instruments recognition criteria
Standard: FV through P&L
If the instrument meets: business model test AND contractual cash flow test, it can be recognised as:
Amortised Cost
FV through OCI
Contractual Cashflow characteristics test:
Contractual terms of the asset give rise to cash flows solely from principal and interest
Business model test
Entity must hold the investment until maturity
If holding the bond until maturity
Ignore any revaluation, calculate as normal
If planning to sell
Revalue the C/B to the FV and calculate the gain or loss
REMEMBER: Effective interest is on the amortised O/B.
Gains/Losses go to OCI - Gain/(Loss) on investment
