IFRS 9 and IAS 32 - Financial Instruments Flashcards
What does IFRS 9 replace:
IAS 39
What do IFRS 9 and IAS 32 cover:
IFRS 9:
Recognition and measurement of Financial Instruments
IAS 32: Classification of Financial Instruments and their presentation in the financial statements.
What is a financial instrument?
It’s a contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.
What does IFRS 9 cover: (4 areas of financial instruments)
It’s a contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.
Examples of financial instruments and financial assets:
- Trade Receivables
- Bonds
- Ordinary shares
- Derivative financial assets
What is a financial asset:
- Cash
- An equity instrument of another entity
- A contractual right to receive cash or another financial asset from another entity
- A contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable to the entity.
This is an instrument that is purchased.
What is a financial liability?
- Cash
- An equity instrument of another entity
- A contractual right to receive cash or another financial asset from another entity
- A contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable to the entity.
This is an instrument that is purchased.
Examples of financial liabilities:
- Accounts Payables
- loans
- bonds issued by an entity
- derivative financial liabilities
What is an Equity Instrument:
This is a contract that evidences a residual interest in the assets of any entity after deducting all of its liabilities.
For example, investment in ordinary shares of another entity that does NOT result in consolidation.
IFRS9:
Initial recognition of a financial instrument:
At Fair Value
Types of Financial Instruments: 3
- Financial Assets
- Financial Liabilities
- Equity instruments
How are interest and dividend relating to Financial Instruments classified
They follow the financial instrument:
- Interest on a liability is a finance cost in the statement of profit and loss
- Dividends paid on preference shares are also a liability. (Preference shares are like a loan)
- Dividends paid on Equity is reported as a change in equity.
Initial recognition and measurement: Financial liabilities
+
Subsequent measurement
They are recognised at Fair Value.
Costs are dealt with based on their classification.
Subsequent measurement:
Measured at amortised cost, unless Held for Trading. In that case at Fair Value through Profit and Loss.
How to account for initial recognition of a financial liability
Dr. Cash £1m
Cr. Financial liability £1m
When fall in fair value due to a rise in interest rates:
Dr. Financial Liability £200k
Cr. Profit or loss £200k
Option 2: if Fair Value, we need to calculate the PV.
The recognition is the same, but thr calculation of the Fair Value is different (complicated - TO LOOK AT AGAIN)
Option 3:
If fair value has fallen due to interest rate and credit risk:
Dr, Financial liability
Cr. Other comprehensive income (credit risk component)
Cr. Profit or Loss due to change in interest rate
Recognition of a financial liability:
Initial recognition at Fair Value.
Subsequent recognition at Amortised cost using and effective interest method.
How to work out subsequent recognition of a financial liability:
Net proceeeds = the total consideration (proceeds/value) of the issue less transactions costs.
Subsequent recognition =
Net Proceeds or Opening liability
+ Finance Cost
-/- Nominal value x coupon rate
Recognition of a Financial Asset (IFRS 9)
- An entity has a financial asset, when it provides finance to another entity.
- the financial asset is initially recognised at fair value
- the financial asset needs to be recognised from the moment the entity becomes party to the contractual provision of the instrument.
Subsequent measurement of a financial asset:
1) Amortised cost
2) Fair value through profit or loss
3) Fair value through Other Comprehensive Income
How are equity instruments measured:
Either through:
- Fair value through profit and loss - this means valued at the reporting date and profit or loss recognised in the Statement of Profit or Loss
This is used when the investment is held for trading.
- Fair Vakue through OCI (loss or gain recognised in OCI).
OCI consists of items not reported on the entity’s statement of profit or loss, but have an effect on the balance sheet.
Examples of OCI:
- A bond portfolio
- Held Investments classified as available for sale (not intended to be held until maturity, not loans, not receivables)
- Gains and losses from foreign currencies held
- pensions plans: difference in value between old value and new value
- gains and losses on derivatives
Recognition of debt instruments:
There are 3 options, but innmost cases these are recognised at Amortised Cost.
(Not at one of the Fair Value methods)
Measurement of derivatives:
Initial recognition:
Recognised at fair value with transaction costs charged to profit or loss.
Subsequent measurement:
At fair value at the reporting date. Any losses or profits recognised in profit or loss.
