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8/13/2019 IFRS Chapter 14 Financial Assets and Liabilities
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Chapter 14
Financial assets and liabilitieswww.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/8/13/2019 IFRS Chapter 14 Financial Assets and Liabilities
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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
Financial instrument
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Financial instrument
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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Financial instrument
Examples of financial liability
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Financial instrument
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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Presentation of financial instruments
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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Presentation of financial instruments
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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Recognition of financial instruments
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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Recognition of financial instruments
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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Recognition of financial instruments
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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Measurement of financial assets
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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Measurement of financial assets
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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Re-measurement of gains and losses
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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Re-measurement of gains and losses
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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