Clase 5.5 - 21 de Agosto

Advance Accounting Financial Instruments

Elizabeth Gutirrez

Overview of Financial Instruments Standards

1995 IAS 32

Financial Instrument: Presentation and Disclosure

1999 IAS 39

Financial Instrument: Recognition and Measurement

2005 IFRS 7

Financial Instrument: Disclosures

2011 IFRS 13

Fair Valuation

2014 IFRS 9

Financial Instrument: Derivatives and embedded

derivatives Classification of financial

assets and financial liabilities Recognition and

derecognition Measurement Impairment Hedge Accounting Transition

2009

2005 IAS 32

Financial Instrument: Presentation Equity and financial

liabilities Offsetting a financial

asset and a financial liability

2014 IAS 39

Financial Instrument: Hedge. IFRS 9 permits to

choose, as an accounting policy choice, to continue to apply hedge accounting requirements of IAS 39 instead of requirements of IFRS 9


November 1990: approval of Draft Statement of Principle (DSOP) advocating fair value measurement for financial assets and liabilities held for trading but not for others

June 1991: ED 40 consisting of fair value for trading items and cost for others and an allowed alternative of fair value for all items

1994; Revised exposure draft 1995: IAS 32 1999: IAS 39 2000: Revision of IAS 39


2003 2005: Improvement project of IAS 32 and IAS 39: fair value is an option under IAS 39

2004: Carve-out version of IAS 39 adopted by EU: the use of fair value option for financial liabilities is prohibited

2005: IFRS 7 on Disclosures

2008: Discussion Paper: Reducing the complexity in Reporting Financial Instruments


2009: IFRS 9 phase 1 of revision to IAS 39 Classification and Measurement (with several amendments)

2009 - 2013: EDs Phase 2 Impairment

2010 2012: EDs Phase 3 Hedge Accounting

2014: Fourth and final Version IFRS 9


IAS 32

Establish principles for presenting financial instruments as financial liabilities or equity and for offsetting financial assets and financial liabilities.

It applies to the classification of financial instruments from the perspective of the issuer (asset, liability or equity).

It deals with the classification of related interests, dividends, losses and gains.


IFRS 7

Requires entities to provide disclosures that enables users to evaluate:

The significance of financial instruments for the entitys financial position and performance

The nature and extent of risks arising from financial instruments to which the entity is exposed during the period at the reporting date and how the entity manages these risks.


IFRS 9

Recognition and measurement requirements for financial assets and financial liabilities

The standard applies to annual periods on or after January 1, 2018, although early application is permitted.

Retrospective application is required however, transition relief is provided (including no restatement of comparative period information)

Entities will only be permitted to early adopt a previous version of IFRS 9 if their date of initial application is before February 1, 2015

However, if an entity has early adopted a previous version of IFRS 9 before February 1, 2015, the entity is permitted to continue to apply that version until IFRS 9 becomes mandatorily effective on January 1, 2018.


IFRS 9

Main differences with IAS 39

Financial asset classification: Amortised Cost, FVOCI and FVTPL

Removes the requirement to separate embedded derivatives from financial asset host

Specific guidance for instruments that creates concentrations of credit risks


Scope not identical for the three standards and are subject to different exclusions.

Generally speaking:

IAS 32 applies to all financial instruments, including equity issued.

IFRS 9 applies to only financial assets and financial liabilities.

IFRS 7 applies to all financial instruments, although most of its disclosure requirement relate to financial assets and financial liabilities.

Definitions

Financial Instrument

Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity

Definitions

A financial asset, per IAS 32, paragraph 11) is any asset that is:

a)Cash

b)An equity instrument of another entity;

c)A contractual right:

i. to receive cash or another financial asset from another entity; or

ii.to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity.

Definitions

d) A contract that will or may be settled in the entitys own equity instruments and is

i. a non-derivative for which the entity is or may be obliged to receive a variable number of the entitys own equity instruments; or

ii.a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entitys own equity instruments. For this purpose, the entitys own equity instruments do not include puttable financial instruments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity on liquidation and are classified as equity instrument, or instruments that are contracts for the future receipt or delivery of the entitys own equity instruments.

Example of Financial Assets

Example of c):

Trade accounts receivable

Note receivables

Loan receivables

Bonds receivables

Example of d.ii): Written option to buy gold that, if exercised, is settled net in the entitys own instrument by the entity delivering as many of those instruments as are equal to the value of the option contract.

Definitions

A financial liability, per IAS 32, paragraph 11, is any liability that is:

(a) A contractual obligation

(i) To deliver cash or another financial asset to another entity, or

(ii) To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or

Definitions

(b) A contract that will or may be settled in the entitys own equity instruments and is

(i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entitys own instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entitys own equity instruments. For this purpose, the entitys own equity instruments do not include puttable financial instruments that are classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are themselves contracts for the future receipt or delivery of the entitys own equity instruments.

Example of Financial Liabilities

Example of a.i):

Trade accounts payables

Note payables

Loan payables

Bonds payables

Definitions

Financial instrument is the contract, NOT the asset or liability

Contract or contractual refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any chance of avoiding, because generally the agreement is enforceable in law .

Activity

Assets and Liabilities Financial Instruments?

Cash

Gold bullion (gold bars or ingots)

Debtors

Creditors

Loans

Bank deposits

Debentures (deb security medium or long

term)

A promissory note payable in government

bonds

Ordinary shares

Preference shares

Plant and equipment previously bought

Pre-payments of goods or services

Example of Financial Instruments

Derivatives such as : financial options futures forwards interest rate swaps currency swaps

Example of Financial Instruments

Derivatives as defined in the standards are financial instruments:

whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or similar variable (underlying)

that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions

that is settled at a future date

Specific exemptions from Financial Instruments Standards

IAS 32 IFRS9 IFRS7 Applicable Standard

Interests in subsidiaries. However, in some cases IFRS 10 or IAS 27 require or permit an entity to account for an interests in a subsidiary in accordance with some or all of the requirements of IFRS 9 (in which case IAS 32 and IFRS 7 also apply). An entity applies IAS 32 to derivatives linked to interests in subsidiaries. An entity also applies IFRS 9 and IFRS 7 to such derivatives, unless the derivative meet the definition of an equity instrument in IAS 32.

NA NA NA IFRS 10 IAS 27

Interest in associated and joint ventures. However, in some cases IAS 27 or IAS 28 require or permit an entity to account for an interests in associate or joint venture in accordance with some or all of the requirements of IFRS 9 (in which case IAS 32 and IFRS 7 also apply). An entity applies IAS 32 to derivatives linked to interests in associates or joint ventures. An entity also applies IFRS 9 and IFRS 7 to such derivatives, unless the derivative meet the definition of an equity instrument in IAS 32.

NA NA NA IAS 28 IAS 27



Employers rights and obligations under employee benefit plans

NA NA NA IAS 19

Financial instruments, contracts and obligations under share-based payment transactions

NA NA NA IFRS 2

Rights and obligations under insurance contracts (except embedded derivatives and certain financial guarantees). IFRS 9 applies to an insurance contract that is a financial guarantee entered into, or retained, on transferring to another party financial assets or financial liabilities in the scope of IFRS 9 and to issued financial guarantees contracts not accounted for under IFRS 4. Financial guarantee held are not in the scope of IFRS 9.

NA NA NA IFRS 4

Financial Instruments with a discretionary participation feature (except embedded derivatives)

NA NA IFRS 4



Rights and obligations under lease. However, the following are subject to the specified provisions of IFRS 9 and to the requirements of IFRS 7: (1) lease receivables recognized by a lessor - derecognition an impairment provisions; (2) finance lease payable recognized by a lessee derecognition provisions, and (3) derivatives embedded in leases embedded derivatives provisions.

NA IAS 17

Equity instruments issued by the entity, including warrant and option that meet the definition of an equity instrument (for the issuer)

NA IAS 32

Financial instruments issued by the entity that are classified as equity instruments in accordance with paragraph 16A and 16B or paragraphs 16C and 16D of IAS 32(for the issuer)

NA NA IAS 32



Forward contracts between an acquirer and a selling shareholder for the sale/acquisition of an acquiree that will result in a business combination at a future date of acquisition.

NA IFRS 3

Loan commitments that cannot be settled net in cash or another financial instrument (except for those loan commitments that are designated as at FVTPL or are to provide loans at below-market interest). However: Impairment requirements of IFRS 9 apply to

such loan commitments issued, and Loan commitments are subject to the

derecognition provisions of IFRS 9

NA



Rights to reimbursement payments in relation to provisions

NA IAS 37

Financial instruments that are right and obligations within the scope of IFRS 15 Revenue from Contracts with Customers, except for those that IFRS 15 specifies are accounted for in accordance with IFRS 9 e.g receivables

NA IFRS 15

Financial Assets

IFRS 9 considers three categories of financial assets:

At amortized costs

At fair value through other comprehensive income (FVOCI)

At fair value through profit or loss (FVTPL)

The classification of an instrument is determined on initial recognition.

Reclassifications are made only upon a change in an entitys business model.

No other reclassifications are permitted.

Financial Assets

The classification and measurement depends on two assessments:

the financial assets contractual cash flows and

the entitys business model for managing financial assets

Financial Assets

Is the business models objective achieved both by

collecting contractual cash flows and by

selling financial assets?

Financial Asset in the scope of IFRS 9

Is the asset and equity investment?

Are the assets contractual cash

flows solely principal and

interest?

Is the business models objective to hold to collect contractual

cash flows?

Is held for trading?

Has the entity elected the OCI option (irrevocable)?

FVOCI (Equity

Instruments) FVTPL

FVOCI (Debt Instruments)

Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

At amortized costs: A financial asset is measured at amortized cost only if it meets both of the following conditions:

The asset is held within a business model whose objective is to hold assets to collect contractual cash flow (the held-to-collect business model); and

The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criterion).

Financial Assets

At fair value through other comprehensive income (FVOCI): A debt instrument is measured at FVOCI only if it meets both the following conditions:

The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

The contractual terms of the financial asset meet the SPPI criterion.

Financial Assets

At fair value through other comprehensive income (FVOCI). Investment in equity instruments fail the SPPI criterion and are therefore measured at FVPL. However, on initial recognition an entity may make an irrevocable election to present in OCI the changes in the fair value of an investment in an equity instrument that is not held for trading.

Financial Assets


Financial assets that are neither measured at amortized cost nor at FVOCI.

In addition, an entity has the option on initial recognition to irrevocably designate a financial asset as a FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing the gains and losses on them, on different bases.

Financial Assets

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

The SPPI criterion:

Are the assets contractual cash flows solely principal and interest on specified dates?

Principal is the fair value of the financial asset at initial recognition (from the view of the current holder).

Interest is consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time. This may include considerations for other basic lending risks and costs and profit margin.

Financial Assets

The SPPI criterion:

Some considerations:

Basic lending arrangement time value money and credit risk

Currency in which the financial asset is denominated

An equity investment does not give rise to cash flow that are solely principal and interest

An entity does not separate embedded derivatives from host contracts that are financial assets in the scope of IFRS 9.

Financial Assets

The SPPI criterion:

Modify time value of money

The relationship between the interest rate and the period for which the rate is set is imperfect between the passage of time and the interest rate my be imperfect.

Financial Assets

The SPPI criterion:

Modify time value of money

Perfect benchmark: the cash flows that would arise if the time value of money element was not modified.

Qualitatively or Quantitative

Quantitative: Comparison of undiscounted cash flows

Same credit quality and contract terms

Actual or hypothetical

More than one scenario needs to be evaluated

Financial Assets

The SPPI criterion:

Modify time value of money - Example

Bond matures in ten years containing a constant maturity reset feature where the interest rate resets annually to a ten-year rate of interest. The interest is linked to the bonds original maturity.

Comparison of undiscounted cash flows on this bond to those on a bond that resets annually to a one-year rate.

The test should consider a number of different interest rates scenarios and how the relation between the one-year rate and a ten-year rate could change over the life of the instrument.

Financial Assets

The SPPI criterion:

Examples of contractual terms that change the timing or amount of contractual cash flows and MEET the SPPI criterion:

Variable Interest Rate Time value of money

Credit risk

Other basic lending risk and cost

Profit Margin

Financial Assets

The SPPI criterion:

Examples of contractual terms that change the timing or amount of contractual cash flows and MEET the SPPI criterion:

Prepayment feature To put the debt instrument back to the issuer before maturity;

and

Prepayment represent unpaid amount outstanding, which may include reasonable additional compensation for the early termination of the contract.

Term extension feature To extend the contractual term of a debt instrument; and

Result in contractual cash flow that are solely payment of principal and interest.

Financial Assets - Activity

The SPPI criterion:

1. Company B has an investment in a convertible bond. Under the terms of the bond, the holder has the option to convert it into fixed number of equity shares of the issuer.

2. Company X holds an asset with a variable interest rate that resets every month to a one-year rate.

3. Investor X places a deposits on special saving accounts. The interest rate is determined by the central bank and the government according to a formula that reflects protection against inflation.

Financial Assets - Activity

The SPPI criterion:

4. Company X issues a bond to company Y. It is mandatory for X to redeem the bond at par if a specified default event occurs. The default events relate to a credit downgrade or loan covenant violations. If a default event occurs, then the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding.

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

Business Model Assessment:

Is the business models objective to hold to collect contractual cash flows?

Business model is determined by the entitys key management personnel in the way that assets are managed and their performance is reported to them.

Not an instrument-by-instrument analysis

Financial Assets

Business Model Key Features Category

Held-to-Collect

The objective of the business model is to hold assets to collect contractual cash flows

Sales are incidental to the objective of the model.

This model typically involves the lowest level of sales in comparison with other business models (in frequency and volume).

The entity NOT hold all of these assets until maturity.

Amortized Cost

Both held to collect and for sale

Both collecting contractual cash flows and sales are integral to achieving the objective of the business model.

This model typically has more sales (in frequency and volume) than the held-to-collect business model

FVOCI

Financial Assets

Business Model Key Features Category

Other business models, including: Trading Managing assets on a

FV basis Maximizing cash flows

through sales

The business model is neither held-to-collect nor held to collect and for sale.

The collection of contractual cash flows is incidental to the objective of the model

FVTPL

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

At amortized costs:

Interest revenue, credit impairment and foreign exchange gain or loss recognized in Profit or Loss

On derecognition, gains or losses recognized in Profit or Loss

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

At fair value through other comprehensive income (FVOCI) Debt Instruments:

Interest revenue, credit impairment and foreign exchange gain or loss recognized in Profit or Loss.

Other gains and losses recognized in OCI

On derecognition, cumulative gains and losses in OCI reclassified to Profit or Loss.

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets

At fair value through other comprehensive income (FVOCI)- Equity Instruments:

Dividends generally recognized in Profit or Loss

Changes in Fair Value recognized in OCI

No reclassification of gains and losses to Profit or Loss on derecognition and no impairment recognized in Profit or Loss

Financial Assets








interest?


cash flows?



FVOCI (Equity

Instruments) FVTPL


Amortized cost

No Yes

Yes

Yes

Yes

Yes

Yes

No

No

No No

No

Financial Assets


Change in fair value recognized in Profit or Loss

References

International Financial Reporting and Analysis David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik (sixth Edition)

Manual of Accounting IFRS 2015 PWC

Insight into IFRS 2015 KPMG

Ernst&Young Foundation Academic Resource Center

Clase 5.5 - 21 de Agosto

Documents

Transcript of Clase 5.5 - 21 de Agosto