IFRS Chapter 14 Financial Assets and Liabilities

8/13/2019 IFRS Chapter 14 Financial Assets and Liabilities

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Chapter 14

Financial assets and liabilitieswww.xisu.edu.cn
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Contents

1. Financial instruments

2. Presentation of financial instruments

3. Disclosure of financial instruments

4. Recognition of financial instruments

5.Measurement of financial instruments


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Accounting standards

IAS 32

IAS 39

IFRS 7


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Financial instrument

What is financial instrument?

Any contact that gives rise to both afinancial asset of one entity and afinancial liability or equity instrumentof another entity.


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Options

Shares

Trade

receivablesText

Financial

assets

Examples of financial assets



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What is financial liability?

Any liability that is (a) a contractual obligation

(i) to deliver cash or another financial

asset to another entity,(ii) to exchange financial instruments

with another entity under conditions that

are potentially unfavorable


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Examples of financial liability


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Equity instrumentAny contact that evidences a residual interest inthe assets of an entity after deducting all of itsliability

Fair value: is the amount for which asset could be

exchanged ,or a liability settled ,between

knowledgeable, willing parties in an arms length

transaction

Market value:is the amount obtainable from the sale,or payable on the acquisition, of a financial instrument

in an active market.


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Presentation of financial instrument

Liabilities and equityThe main thrust of IAS 32 is financialinstruments should be presented according totheir substance, not merely their legal form.

The classification of a financial instrumentdepends on the following:

The substance of the contractualarrangementon initial recognition

The definitions of a financial liabilityand an

equity instrument


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Presentation of financial instrument

Examplethe issuer of $1,000 10% bondis contractually committed to paying $100interest pa the delivery of cash, sothis is liability

Examplethe issuer of $1,000 ordinaryshares is not committed to paying anydividend, so this is equity


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Presentation of financial instruments

Compound financial instrument

those with both liability and equity componentsshould be shown in the balance sheet with theliability and equity elements separated

Example a convertible bond.

IAS requires the following methods:(a) calculate the value for the liability component

(b) deduct this from the instrument as a whole to

leave a residual value for the equity component


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ExampleA liability component bond

An equity component the value of the right toconvert in due course to equity

The economic effect of issuing convertiblebonds is substantially the same as thesimultaneous issue of a debt instrument with anearly settlement provision and warrants topurchase shares.

All such compound instruments must beshown in the balance sheet with the liability andequity elements separated.


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Offsetting of a financial asset and afinancial liabilityIn common with all IFRS rules on offsetting, afinancial asset and a financial liability may onlybe offset in very limited circumstances. The net

amount may only be reported when theenterprise:

Only allowed where an enterprise has alegally enforceable right to set off the amounts

and intends either to settle on a net basis, or torealize the asset and settle the liabilitysimultaneously


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Disclosure of financial instruments

The purpose of the disclosuresrequired by IAS32 is

to provide information that will enhanceunderstanding of the significance of on-balance-sheet and off-balance-sheet financial instruments toan enterprises financial position, performance and

cash flows and assist in assessing the amounts,timing and certainty of future cash flows associatedwith those instruments.


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Recognition of financial instruments

Initial recognition

An enterprise should recognize a financialasset or financial liability on its balance

sheet when, and only when, it becomes aparty to the contractual provisions of theinstrument


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Example:A. an unconditional receivable should berecognized as an asset when theenterprise becomes a party to the contractso that it has a legal right to receive cash

B. a forward contract is recognized as anasset or liability on the commitment date,rather than waiting until the closing datewhen the exchange actually takes place


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De-recognition

A financial asset should be de-recognized when, and only when, theenterprise loses control of the contractualrights that comprise the financial asset.

A financial liability should be de-recognized when, and only when, theobligation specified in the contract is

discharged, cancelled or expires.

The principal here is that of substance over form.


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Notes:On de-recognition, the difference

between the carrying amount of the assetor liability, and the amount received or

paid for it, should be included in the netprofit or loss for the period.


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Measurement of financial instruments

Initial measurement

Financial instruments are initiallymeasured at the fair valueof the

consideration given or received ( ie. cost)plus (in most cases) transaction coststhatare directly attributeto the acquisition orissue of the financial instrument


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Measurement of financial instruments

1

Measurement

of financial

assets

2

Measurementof financialliabilities

3

Re-

measurementof gains andlosses


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Measurement of financial assets

Four categories of financial assets

A financial

asset

or liability at

a fair valuethrough

profit or loss

Held-to-

maturity

investmen

ts

According to IAS39

Loans andreceivables

Available-

for-sale

financial

assets


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Subsequent measurementA.A financial asset at fair value through profit or

lossis either held for trading, or is specifically designatedto be at fair value through profit or loss. IAS39 permitsany financial asset to be so designated, as long as the fairvalue can be reliably measured;

B. Held-to-maturity investmentsare financial assetswith fixed or determinable payments and fixed maturitythat an enterprise has the positive intent and ability to holdto maturity;

C. Loans and receivablesoriginated by the enterpriseare financial assets that are created by the enterprise byproviding money, goods or services directly to a debtor,other than those that are originated with the intent to besold immediately or in the short term, which should beclassified as held for trading;


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D. Available-for-sale financial assetsare any

remaining financial assets that do not fall intoany of the three categories above.

After initial recognition, all financial assetsshould be measured at fair value, except for:

Loans and receivables originated by theenterpriseHeld-to-maturity investmentsInvestments in equity instruments that do

not have a quoted market price in an active

market and where fair value cannot be reliablymeasured;


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Measurement of financial liabilities

Subsequent measurementAfter initial recognition, an enterprise shouldmeasure all financial liabilities, other thanliabilities held for trading and derivatives that areliabilities, at amortized cost using the effectiveinterest rate method. Liabilities held for trading

and derivatives that are liabilities shouldgenerally be measured at fair value. The effective interest rate method calculates

annual amortization using the effective interestratei.e. the internal rate of returnof a

financial asset or financial liability. It is similar tothe actuarial method used in lease accounting tovalue finance leases.


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Re-measurement of gains and losses

Two types

To fair

value

Not to

fair value


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Gains/losses on re-measurement to fair

valueA gain or loss on a financial asset or financial liabilityclassified as at fair value through profit or loss must berecognized in profit or loss.

For other items:

Dividends receivable from an available-for-sale equityinstrument are recognized in profit or loss;

Interest charged or credited using the effective interestrate method is a fianc cost recognized in profit or loss

A gain or loss on an available-for-sale financial asset isrecognized directly in equity i.e. taken to a reserve,until the asset is derecognized, when the cumulative gainor loss previously recognized in equity is not recognized inprofit or loss.


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Gains and losses on instruments not

re-measured to fair value

For those financial assets and liabilities

carried at amortized cost, a gain or loss isrecognized in net profit or losswhen thefinancial asset or liability is derecognizedor impaired, as well as through the

amortization process.


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IFRS Chapter 14 Financial Assets and Liabilities

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