Financial Instruments, Share Based Payments, Flashcards
Financial Instrument Definition & IAS
IAS 32 - “Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”
Recognising Financial Instrument Liability
SoFP: Liability, Remeasure at reporting
date
IS: Expense
Recognising Equity Instruments
SoFP: Equity, Not remeasured
Not in Income Statement
Record as a deduction in Retained Earnings
3 requirements to be classed as a Derivative & corresponding IAS
IAS32:
* whose value changes in response to an underlying variable (such as changes in
prices of shares or commodities, changes in foreign exchange rates or interest rates) AND
* requires little/no initial net investment AND
* is settled at a future date
Thinking Critically:
Critique of instrument measurement
Business model approach is inconsistent with other IFRS areas
e.g. Identical instrument could be accounted for differently depending on management intentions.
This could be beneficial however as makes the info more useful about timing of future cash flows
IFRS 9 Measurement model and why
Mixed measurement model depending on business model of holder, investments either held at amortised cost or fair value through OCI.
Same instrument could be held for different reasons e.g. hold bond long term until receipt, or hold speculatively for short term gain
Timing & cash flows would be v different, thus business model gives better info to stakeholders
If intends to hold until redemption then fair value doesn’t give any valuable info
Vice versa, if they might sell them then it does
Share Appreciation Rights
Employer pays out cash value rather than shares as they don’t want to dilute
Fair value is remeasured at each reporting date (it isn’t for standard share payment). Consistent with other standards liabilities.
Changes in FV recognised in IS
Liability set up rather than equity
Amortised Bond example:
Maggie plc purchase a bond for cash consideration of £195,000 on the 1 January 20X6. Maggie plc intends to hold the bond to earn contractual cashflows until it matures in 3 years time for £205,000. Each year on 31 December, the bond pays the holder a coupon of 5% on its par value which is £200,000. The effective rate of interest on the bond is 6.73%.
Show the accounting for the 3 years until maturity
Table:
Year | Balance b/f (e.g. £195,000)| Effective interest income (£195k x 6.73%| Interest received (£200k x 5%, make sure it’s NEGATIVE)| Carrying Amount | Dr & Cr (Debit Cash 10k, Dr Financial Asset 3,124, Cr Interest Income 13,124
Then continue on for each year.
Last year Carrying Amount needs to be redemption value (£205k)
A speculative forward contract arranged during the year to sell 2 metric tonnes of tin (a metal commodity) at a price of £25,000 per metric tonne. The 3 month forward price to sell tin at 30 September 20X3 was £18,000 per metric tonne. The contract will be settled net in cash on 31 December 20X3.
What financial isntrument is it?
How to account in statements?
Derivative: Value depends on price of tin, no intitial investment, settled in future
In the money, thus profit = £7k (25-18) x 2 = £14k
Dr Financial Asset £14k, Cr IS Other Income £14k
EPS Formula
Earnings - Preference Shares / Weighted Average Shares
Diluted EPS:
A company, T plc has 2 million ordinary shares in issue in 20X1. They have a convertible loan of £500,000 with a coupon interest rate of 10%. The terms of the loan state the lender can be repaid in cash or can instead choose to be issued with T plc ordinary shares between 20X3 and 20X6 at a rate of one ordinary
share for every £2 of loan. The corporation tax rate is 40%. The income statement for the year 20X1 shows profit before tax of £1 million and taxation of £400,000. T plc incurred preference dividends of £50,000 and ordinary dividends of £100,000 in the same period.
What is Basic EPS & Diluted EPS?
Basic EPS = Earnings-Preference shares/Weighted Avg. Shares
600k-50k/2m = 27.5p
Diluted EPS
Interest on loan: 500k x 10% = 50k
Tax Saving = 50k x 40% = 20k
Earnings increase = 50k - 20k = 30k
Shares if loan converts = 250k Extra
600k - 50k (Pref. Div) + 30k / 2m + 250k
= 25.77p
On 1 January 2021, Beacon issued 100,000 5% £100 bonds at par. Beacon will pay interest
on 31 December each year. The bonds mature 3 years from issue and can either be
redeemed at par or converted into 50 ordinary shares per bond at the same date. Similar bonds without conversion rights carry an equivalent effective interest rate of 8%.
Show Accounting Entries for this converible bond
Cash Flow (annual interest at par) | Discount Factor | Discounted cash flow
Interest | 500 [100kx100x5%] | (n=3, r=8%,) 2.577 (Always use Annuity for interest) | 1,288
Principal | 10,000 (100k x 100) | 0.794 (standard DF, not annuity for principle) | 7,940
Liability component of convertible bond: 9,228
Equity component (balancing figure): 772
Proceeds from bond issue at par: 10,000
9,228
Unwind discount @ 8% = 738
Less interest paid (500)
Non-current liability of Bond: = (sum of above) 9,466
,’, Accounting Entries:
Dr Interest expense: 738
Dr Cash: 9,500 (10,000 - 500)
Cr NCL: 9,466
Cr Equity component of convertible bond: 772
