IFRS-9 Financial Instruments Flashcards
Definition
Any contract that gives rise to a financial asset of one company and a financial liability of another.
Presentation (3)
- If a company issues a FI (e.g. loan or shares), should be classified as equity or liabilities.
- FI classified according to substance.
- If there is an obligation to repay cash, must be classified as liability.
Convirtable debt (definition and classification)
- Debt that can be converted to shares on maturity (rather than cash).
- Debatable whether is debt/equity.
- As we have to classify as substance, these must be split into debt and equity element.
1) Debt Element: Calculate PV of capital and interest payments using the market interest rate for debt without the conversion option.
2) Equity Element: Deduct debt element above from the proceeds of issue.
Other points (offsetting, preference shares)
- Cannot offset financial assets and financial liabilities.
- If preference shares are classified as a liability, dividend must be shown as interest in P/L.
Disclosure (both types and what they contain)
1) Information about significance of FI
2) Nature and extent of risks arising from the FI.
Qualitative:
- Risk type
- Safeguards to risk
- Changes from prior period
Quantitative:
- Exposure to each risk
- Credit, liquidity, market risk disclosure
- Concentrations of risk
Financial Liabilities (2). Initial recognition, subsequesnt measurement, P/L recog
1) FL through P/L
- Initial recog: FV
- Re-measure @ FV @ each reporting date
- SOCI: Changes in FV taken to P/L
2) Any other FL
- Initial recog: Amortised cost
- Re-measure @ amortised cost using original effective rate
- Finance cost based on effective rate of interest.
Impairment of FA
- FA @ FV through P&L/OCI are not subject to an impairment review.
- Any change in carrying value goes to P+L/OCI.
- Financial assets @ amortised cost require annual impairment assessments. Impairment taken to P/L.
Current issue: Three steps to accoutning for impt
1) When asset is first recognised, create an allowance equal to 12 months’ expected losses.
2) If the credit quiality of the asset deteriorates, create an allowance for the PV of expected lifetime losses.
3) When an actual loss occurs, the entity should recognise the interest income (in the P/L) on the net CV
of the FA.
Current issue: Ads and Disads
+Expected loss model is more prudent as assets are less likely to be overstated
+ Will provide timlier infomration to users of FS who will be warned about losses earlier.
-Requires more judgement that incurred los model so increaes chance of profit manipulation.
-Costs of implementeing new model may be high.
Current issue: Incurred and expected loss
Incurred loss: Impair FA only when evidence of impt
Expected loss: Account for expected losses from the date the asset is acquired rather than waiting for default.
Derivatives (characteristics (3), examples (4))
A derivative is a financial instrument with ALL three of the following characteristics:
1) It’s value changes in response to an external factor e.g. interest rates, exhange rates, comodity price etc.
2) Requires little or no initial investment
3) Settled at a future date
- Options
- Forward contracts
- Futures
- Swaps
Hedge accounting definition
Accoutning treatment where gains or losses on hedging instruments and hedged items are recognised in the same perfromance statements.
When does hedge relationship exist (3) i.e. which three items does the company have to be able to define?
1) Hedged item - A/L on which risks need to be reduced
2) Hedging instrument -instrument (usually a derivative) used to offset the risks on the hedged items
3) Hedged risks - the risk that is being hedged (e.g. interest rate/currency rates)
Hedge criteria (5)
1) Hedge must be documented and relationship defined
2) Hedge is expected to be highly effective
3) Effectiveness of hedge can be reliably measured
4) Effectiveness of hedge must be able to be assessed and measured on an ongoing basis.
5) Forecast transactions must be highly probably
Types of hedge (2) and their treatment
Fair value
- Is the hedge of a recognised A/L
- Recognise hedged item and hedging item @FV with gains and losses on both items to P/L.
Cash flow
- Is the hedge against changes in an expected cash flow
- Remeasure hedging instrument @fv @Reporting with ‘gain/loss on effective portion’ to equity and ‘gain/loss on ineffective portion’ to P/L.
