NonCurrent Assets

7/28/2019 NonCurrent Assets

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Non-Current Assets

Assets: An asset is a resource controlled by an entity as a result of past events and from which future

economic benefits are expected to flow to the entity. (Framework)

The definition has three important characteristics:

Future economic benefits Control (Ownership) The transaction to acquire the control has already taken place.

Accounting standards relevant to NCA:

IAS 16 (PPE) IAS 20 (Accounting for Government Grants and disclosure of government assistance) IAS 23 (Borrowing Costs)

Definition of PPE:

PPE are tangible assets held by the entity for use in the production and supply of goods or services,

for rental to other, or for administration purposes. They are expected to be used during more than

one accounting period.

Definition of Faire Value:

Fair value is the amount at which an asset is exchanged between knowledgeable parties during an

arms length transaction.

Recognition Criteria:

It is probable that future economic benefits associated with the item will flow to the entity. The cost of the item can be measured reliably.

Once recognised as an asset, items should initially be measured at cost.

Purchase Price, less trade discount/rebate Directly attributable cost of bringing the asset to working conditions for use intended by

management.

Initial estimate of the costs of dismantling and removing the item and restoring the siteon which it was located. (Testing costs included).

Exchanges of items of property, plant and equipment, regardless of whether the assets are similar,

are measure at fair value, unless the exchange transaction lacks commercial substance, or the fair

value of neither of the assets exchanged can be measured reliably. If the acquired item is not

measured at fair value, its cost is measured at the carrying amount of the asset given up.

Measurement subsequent to initial recognition:

Cost Model: Carry asset at cost less depreciation and any accumulated impairment losses. Revaluation model: carry asset at revalued amount, ie fair value less subsequent

accumulated depreciation and any accumulated impairment losses.

Note: The revised IAS 16 makes clear that the revaluation model is available only if the fair

value of the item can be measured reliably.


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IAS 20: Government Assistance

Government Grants: Definition

Assistance by Government in the form of transfers of resources to an entity in return for past or

future compliance with certain conditions relating to the operating activities of the entity.

Grants related to assets: Definition

Government grants whose primary condition is that the entity qualifying for the grant should

purchase, construct or otherwise acquire long term assets.

Accounting treatment:

Recognise government grants and forgivable loans once conditions complied with andreceipt/waiver is assured.

Grants are recognised under the income approach: recognise grants as income to matchthem with the related costs that they have been received to compensate.

Grants for depreciable assets should be recognised on the same basis that the asset isdepreciated.

Grants for non-depreciable assets should be recognised as income over the periods in whichthe cost of meeting the obligation is incurred.

Where related costs have already been incurred, the grant may be recognised as income infull immediately.

A grant in the form of a non-monetary asset may be valued at fair value or at nominal value. Grants related to assets may be presented in the SFP either as a deferred income or

deducted in arriving at the carrying value of the asset.

Grants related to income may be presented in profit or loss either as a separate credit ordeducted from the related expenses.

Repayment of Government grants should be treated as a revision of an accounting estimate.Disclosure:

Accounting policy note Nature and extent of government grants and other forms of assistance. Unfulfilled conditions and other contingencies attached to recognised government

assistance.

IAS 20 gives the following arguments in support of each method:

Capital Approach:

The grants are received as a financing device, so should go through the statement offinancial position. In the statement of comprehensive income they would simply offset

expenses which they are financing. No repayment is expected by the Government, so the

grants should be credited directly to shareholders interest.

Grants are not earned, they are incentives without related costs so it would be wrong totake them through the income statement.

Income Approach

The grants are not received from shareholders so should not be credited directly toshareholders assets.


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Grants are not received or given for nothing. They are earned by compliance with conditionsand related expenses. There are therefore associated costs with which the grant can be

matched.


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IAS 23: Borrowing Costs

Often associated with the construction of self-constructed assets, but which can also be applied to

an asset purchased that takes time to get ready for use/sale.

Qualifying asset:

An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Accounting treatment:

Borrowing costs must be capitalised as part of the cost of the asset if they are directlyattributable to the acquisition/construction, /production. Other borrowing costs should be

expensed.

Borrowing costs eligible for capitalisation are those that would have been avoidedotherwise.

Amount of borrowing costs available for capitalisation is actual borrowing costs incurredless any investment income from temporary investment of those borrowings.

Capitalisation is suspended if active development is interrupted for extended periods.(Temporary delays or technical/administrative work will not cause suspension)

Capitalisation ceases when physical construction of the asset is completed, capitalisationshould cease when each stage or part is completed.

Where the carrying amount of the asset falls below cost, it must be written down/off.Disclosure:

Accounting policy note Amount of borrowing costs capitalised during the period. Capitalisation rate used to determine borrowing cots eligible for capitalisation.


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IAS 36: Impairment of assets

There is an established accounting principle hat assets should not be carried at above their

recoverable amount. An entity should write down the carrying value of an asset to its recoverable

amount if the carrying value of asset is not recoverable in full.

If an assets value in the accounts is higher than its realistic value, measured as its recoverable

amount, the asset is judged to have suffered an impairment loss. It should be reduced in value, by

the amount of the impairment loss. The amount of the impairment loss should be written off against

profit immediately.

An entity should carry out a review of its assets at each year end, to assess whether there are any

indications of impairment to any assets.

If there are indications of possible impairment, the entity is required to make a formal estimate of

the recoverable amount of the assets concerned.

Indicators of impairment:

1. External Source of information A fall in the assets market value that is more significant than would be expected

from passage of time over normal use.

A significant change in the technological, market, legal, or economic environment ofthe business in which assets are employed.

An increase in the interest rates or market rates of return on investments likely toaffect the discount rate used in calculating the value in use of the asset.

The carrying amount of the asset being more than its market capitalisation.2. Internal sources of information.

Obsolescence Physical damage Adverse changes in the use to which the asset is put. Assets economic performance decline.

Note:

Even if there are no indicators of impairment, the following assets must always be tested for

impairment annually:

An intangible asset with indefinite useful life. Goodwill acquired in a business combination.

Impairment is determined by comparing the carrying amount of the asset with its recoverable

amount.

The recoverable amount of the asset should be measured at the higher value of:

The assets fair value less costs to sell; and Its value in use.


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An assets fair value less costs to sell is the amount net of selling costs that could be obtained from

the sale of the asset. Selling costs included transaction costs, such as legal expenses.

If there is an active market in the asset, the net selling price should be based on the marketvalue or on the price of recent transactions in similar assets.

If there is no active market in the assets it might be possible to estimate a net selling priceusing the best estimates of what knowledgeable, willing parties might pay in an armslength transaction.

Value in Use:

The value in use of an asset is measured as the present value of estimated future cash flows

(inflows minus outflows) generated by the asset, including its estimated net disposal value (if any)

at the end of its expected useful life.

Calculating a value in use therefore calls for estimates of future cash flows, and the possibility exists

that an entity might be over-optimistic. The IAS therefore states that:

Should be based on reasonable and supportable assumptions Projections should be based on the most recent budgets or financial forecasts. Should normally cover up to a maximum of 5 years.


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IAS 40: Investment Property

IAS 40 defines investment property as property held to earn rentals or for capital appreciation or

both, rather than for:

Use in the production/supply of goods or services. Sale in the ordinary course of business.

Investment property is property (land or a building- or part of a building or both) held by the owner

or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than

for:

Use in the production or supply of goods or services or for administrative purposes, or Sale in the ordinary course of business.

Owner-occupied property is property held by the owner or the lessee in a finance lease for use in

the production or supply of goods and services or for administrative purposes. (Relevant IAS 16)

Note:

If an entity has not determined that it will use the land either as an owner-occupied property or

for short-term sale in the ordinary course of business, the land is considered to be held for capital

appreciation.

Recognition

Investment property should be recognised as an asset when two conditions are met.

It is probable that the future economic benefits that are associated with the investmentproperty will flow to the entity.

The cost of the investment property can be reliably measured.Initial Recognition

An investment property should initially be measured at its cost, including transaction costs.

A property interest held under a lease and classified as an investment property shall be accounted

for as if it were a finance lease. The asset is recognised at the lower of the fair value of the property

and the present value of the minimum lease payments. An equivalent amount is recognised as a

liability.

Measurement Subsequent to initial recognition

Entities can choose between:

Fair value model Cost model

Note:

When an entity choose to classify a property held under an operating lease as an investment

property, there is no choice. The fair value model mist be used for all the entitys investment

property, regardless of whether it is owned or leased.


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Fair value model

After initial recognition, an entity that chooses the fair value model should measure all of its

investment property at fair value, except in the extremely rare cases where this cannot be measured

reliably. IAS 16-Cost model.

Note:

A gain or loss from a change in the fair value of an investment property should be recognised in

net profit or loss for the period in which it arises.

Under the fair value model all changes in the fair value of the investment property is recognised

through the Profit and Loss.

A willing buyer is motivated but not compelled to buy.

In those rare cases where the entity cannot determine the fair value of an investment propertyreliably, the cost model in IAS 16 must be applied until the investment property is disposed of.

The residual value must be assumed to be zero.

Once an entity has chosen the fair value or the cost model, it should apply it to all its investment

property. It should not change from one model to another unless the change will result in a more

appropriate presentation.

Cost Model

Investment property should be measured at cost less accumulated impairment losses. An entity that

chooses the cost model should disclose the fair value of tits investment property.

Transfers

Transfers to or from investment property should only be made when there is a change in use. For

example, owner occupation commences so the investment property will be treated under IAS 16 as

an owner-occupied property.

When there is a transfer from investment property carried at fair value to owner occupied property

or inventories, the propertys cost for subsequent accounting under IAS 16 or IAS 2 should be at its

fair value at the date of change in use.

Conversely, an owner occupied property may become an investment property and need to be

carried at fair value. An entity should apply IAS 16 up to the date of change of use. It should treatany difference at that date between the carrying value of the property under IAS 16 and its fair value

as a revaluation under IAS 16.

Disposals

Derecognise an investment property on disposal or when it is permanently withdrawn from use and

no future economic benefits are expected from its disposal.

Disclosure requirements:

Cost model/fair value model Criteria for classification as investment property Assumptions in determining fair value


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Use of independent professional value Rental income/expenses

Decision tree


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IAS 38 Intangible assets

Intangible assets are defined by IAS 38 as non-monetary assets without physical substance. They

must be:

Identifiable Controlled as a result of past event Able to provide future economic benefits

Examples

Computer software Patents Copyrights Motion picture films Customer lists

Identifiability Criteria

If an intangible asset is acquired separately through purchase, there may be a transfer of a legal right

that would help to make an asset identifiable.

An asset could be identifiable if could be sold/rented separately.

Internally generated goodwill

IGG may not be recognised as an asset.

Research and development costs

Research activities do not by definition meet the criteria for recognition under IAS 38. This isbecause, at the research stage of a project, it cannot be certain that future economic benefits will

flow to the entity. There is too much uncertainty about the likely success or otherwise of the project,

Research costs should therefore be written off as an expenses as they are incurred.

Examples:

Activities aimed at gaining new knowledge. The search for alternatives for materials, devices, products, processes, systems or services.

Development

Development costs may qualify as intangible asset provided that the following strict criteria are met.

The technical feasibility of completing the intangible asset so that it will be available for useor sale.

Its intention to complete the intangible asset and use or sell it. Ability to use/sell the product. Ability to measure the development costs to be capitalised to the intangible asset during the

development phase.

Other internally generated intangible assets:

The standard prohibits the recognition of internally generated brands, mastheads, publishing titlesand customer lists and similar items as intangible assets.


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All expenditures to an intangible asset which does not meet the criteria for recognition either as an

identifiable asset or as goodwill arising on an acquisition should be expensed as incurred.

Examples:

Start-up costs Training costs Advertising costs Business relocation costs

Measurement of intangible assets:

Cost model Fair value model

Applying the cost model, the asset is measured at cost less accumulated depreciation and any

subsequent impairment losses.

The revaluation model allows an intangible asset to be carried at a revalued amount, which is its fair

value at the date of revaluation, less any subsequent accumulated depreciation and any subsequent

impairment losses.

Conditions:

The fair value must be able to be measured reliably with reference to an active market inthat type of asset.

The entire class of intangible assets to which it belongs must be revalued at the same time(to prevent selective revaluations)

If an intangible asset in a class of revalued intangibles cannot be revalued because there isno active market for this asset, the asset should be carried at its cost less ant accumulated

amortisation and impairment losses.

Revaluations should be made with such regularity that the carrying amount does not differfrom that which would be determined using fair value at the year end.

When an intangible asset is revalued upwards to a fair value, the amount of the revaluation should

be credited directly to equity under the heading of Revaluation Surplus.

Useful life

An entity should assess the useful life of an intangible asset, which may be finite or infinite. An

intangible asset has an indefinite useful life when there is no foreseeable limit to the period overwhich the asset is expected to generate net cash inflows for the entity.

Amortisation period and amortisation method

An intangible asset with a finite useful life should be amortised over its expected useful life.

Amortisation should start when the asset is available for use. Amortisation should cease at the earlier of the date that the asset is classified as held for

sale in accordance with IFRS 5 NCA Held for Sale and discontinued Operations and at the

date the asset is derecognised.


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The amortisation method should reflect the pattern in which the assets future economicbenefits are consumed. If such a pattern cannot be predicted reliably, the straight-line

method should be used.

The amortisation charge should be charged to P&L. The residual value of an intangible asset with a finite life is assumed to be zero.

Intangible asset with indefinite useful lives

An intangible with an indefinite useful life should not be amortised. (IAS 36 requires that such an

asset is tested for impairment at least annually.

The useful life of an intangible asset that is not being amortised should be reviewed each year to

determine whether it is still appropriate to assess its useful life as indefinite. Reassessing the

useful life of an intangible asset as finite rather than indefinite is an indicator that the asset may be

impaired and therefore it should be tested for impairment.

Disclosure requirements

For each class of intangible assets, disclosure is required of the following:

The method of amortisation used Useful life of assets Amortisation rate used Effective date of revaluation Carrying amount of revalued intangible assets

Research Development

Activities aimed at gaining new knowledge Evaluation of product or process alternatives

Search for applications of research findings Design, construction and testing of prototypesSearch for product or process alternatives Design of tools

Formulation and design of possible new or

improved product or process alternatives.


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IAS 19 Employee Benefits

Current service cost is the increase in the present value of the defined benefit obligation resulting

from employee service in the current period.

Interest cost is the increase during a period in the present value of a defined benefit obligation

which arises because the benefits are one period closer to settlement.

Actuarial gains and losses comprise:

Experience adjustments ( the effects of differences between the previous actuarialassumptions and what has actually occurred )

The effects of changes in assumptions.Past service cost is the change in the present value of the defined benefit obligation for employee

service in prior-periods, resulting in the current period from the introduction, changes to, post-

employment benefits or other long-term employee benefits.

Defined contribution plans

The employer (and possibly current employees too) pay regular contributions into the plan of a

given or defined amount each year. The contributions are invested, and the size of the post-

employment benefits paid to former employees depends on how well or how badly the plans

investments perform. If the investments perform well, the plan will be able to afford higher benefits

that if the investments fail.

Defined benefit plans.

With these plans, the size of the post-employment benefits is determined in advance, ie the benefits

are defined. The employer (and possibly current employees too) pay contributions into the plan, andthe contributions are invested. The size of the contributions is set at an amount that is deemed to

earn enough investment returns to meet the obligation to pay the post-employment benefits. If,

however, it becomes apparent that the assets in the fund are insufficient, the employer will be

required to make additional contributions into the plan to make up the expected shortfall.

If on the other hand, the assets appear to be larger than they need to be, in excess of what is

required to pay the post-employment benefits, the employer may be allowed to take a contribution

holiday.

Accounting for Defined Contribution plans

Accounting for payments in the Defined Contribution Plans is straightforward.

The obligation is determined by the amount paid into the plan in each period. There are no actuarial assumptions to make.

IAS 19 requires the following for defined contribution plans:

Contributions should be recognised as an expense in the period they are payable. Any liability for unpaid contributions that are due as at the end of the period should be

recognised as a liability.

Any excess contributions should be recognised as a prepaid expense (an asset), but onlyyou the extent that the prepayment will lead to a reduction on the future payments or cashrefunds.


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Disclosure requirements:

A description of the plan The amount recognised as an expense in the period.

Defined benefit plans

To estimate future obligations, it is necessary to use actuarial assumptions. Obligations should be discounted to their present value. If actuarial assumptions change, the amount of required contributions to the fund will

change, resulting in actuarial gains or losses.

Outlining the method

Step 1: Actuarial assumptions to make a reliable estimate of the amount of future benefitsemployees have earned from service in relation in current and prior periods. Assumptions

include, for example, assumptions about employee turnover, mortality rates, future

increases in salaries.

Step 2: Fair value of any planned assets should be measured. Step 3: The size of any actuarial gains and losses should be determined, and the amount of

these that will be recognised.

Step 4: If the benefits payable under the plan have been improved, the extra cost arisingfrom past service should be determined.

Note:

The interest cost in the statement of comprehensive income is the present value of the defined

benefit obligation as at the start of the year multiplied by the discount rate.

Presentation in the Statements

SFP: The amount of recognised as a defined benefit liability (which may be a negative amount, ie an

asset) should be the total of the following:

The present value of the defined obligation at the year end Any actuarial gains minus any actuarial losses that have not been recognised yet, minus

(similar to SOCI)

Any past service cost not yet recognised, minus (similar to SOCI) The fair value if the assets of the plan as at the yearend out of which the future obligations

to current and past employees will be settled.

SOCI: The expense that should be recognised in the statement of comprehensive income (In profit or

loss for the year) for post-employment benefits in a defined benefit plan is the total of the following:

The current service cost Interest Expected return on plan assets Actuarial gains and losses to the extent they are recognised Past service cost to the extent they are recognised


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Past Service Cost

A past service cost arises when an entity introduces a defined benefit plan or improves the benefitspayable under an existing plan. The entity has, as a result, taken on additional obligations that it has

not hitherto provided for.

A past service cost may be in respect of current employees, or past employees.

Current employees:

Past service cost should be recognised as part of the defined benefit obligation in the SFP. For the

SOCI, the past service cost should be amortised on a straight-line basis over the average period until

the benefits become vested.

Past employees:

The past service cost should be recognised in full immediately the plan is introduced because they

are immediately vested, as part of the defined benefit liability and as an expense (in full) to the

financial period.

Example:

Attributes of the pension plan:

2% of final salary for every year of service. Vested after five years service Pension improved to 2.5% of final salary. At the date of improvement, the present value of additional benefits for service from 1

January 20X2 to 1 January 20X6 is as follows:

o Employees more than 5 years- $300Mo Employees with less than 5 years- $240M (average period until vesting-3years)

Answer:

$300m should be recognised in full immediately, because these benefits are already vested.

$240m should be recognised on a straight-line basis over three years from 1 January 2OX6.


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Summary sheet IAS 19

Record opening figures

Asset Obligation Any unrecognised

gains and losses

Interest Cost:

Based on discount rateand PV of obligation @

start Should also reflect any

changes in obligation

during period.

Dr Interest Cost (P/L)(X%* bd obligation)

Cr PV Defined benefitobligation (SOFP)

Current service cost:

Increase in the PV ofobligation resulting

from employee service

in the current period

DR current Servicecost ( P/L )

CR PV Defined benefitobligation (SOFP)

Contributions Dr Plan assets (SOFP) Cr Company Cash

Benefits:

Actual pensionpayments made

Dr PV of definedbenefit obligation

Cr Plan assets

Past service cost:

Increase in PVobligation as a resultof introduction or

improvement if

benefits plan

Past service cost isvested when any

minimum employment

period has been

completed.

Vested benefits:

DR Past Service Cost(P/L)

CR PV Defined BenefitObligation (SOFP)

Non-Vested Benefits:

DR Unrecognised PastService Cost (SOFP)

CR PV Defined BenefitObligation (SOFP)

The unrecognised past service

cost is amortised through

profit and loss straight line

method over the average

period until the minimum

employment period is


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completed.

Income taxes

Deferred tax is an accounting measure, used to match the tax effects of transactions with their

accounting impact.

Definitions:

Tax base: The tax base of an asset or liability is the amount attributed to that asset orliability for tax purposes.

Temporary differencesTemporary differences are differences between the carrying amount of an asset or liability in

the statement of financial position and its tax base. Temporary differences can be either:

1. Taxable, which are temporary differences that will result in taxable amounts indetermining taxable profit (Tax loss) of future periods when the carrying amount ofthe asset or liability is recovered or settled.

2. Deductible temporary differences which are temporary differences that will result inamounts that are deductible in determining taxable profit (Tax loss) of future

periods when the carrying amount of the asset or liability is recovered or settled.

Deferred tax asset are the amounts of income taxes recoverable in future periods in respectof:

1. Deductible temporary differences2. Carry forward of unused tax losses3. Carry forward of unused tax credits.

Deferred tax liabilities are the amounts of income taxes payable in future periods in respectof taxable temporary differences.


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Financial instruments

1) 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.

2) Financial asset:Any asset that is

1. Cash2. An equity instrument of another entity3. A contractual right to receive cash or another financial asset from another entity; or to

exchange financial instruments with another entity under conditions that are potentially

favourable to the entity; or

4. A contract that will or may be settled in the entitys own equity instrument and is:a. A non-derivative for which the entity is or may be obliged to receive a variable

number of the entitys own equity instrument.

Examples of financial assets

Trade receivables

Options

Shares ( when used as an investment )

3) Financial liability:Any liability that is:

1. A contractual obligation:a. To deliver cash or another financial asset to another entity, orb. To exchange financial instruments with another entity under conditions that are

potentially unfavourable; or

2. A contract that will or may be settled in the entitys own equity instruments and isa. A non-derivative for which the entity is or may be obliged to deliver a variable

number of entitys own equity instrument; or

b. A derivative that will or may be settled other than by the exchange of a fixedamount of cash or another financial asset for a fixed number of the entitys own

equity instruments.

Examples of financial liabilities

Trade payables

Debenture loans payable

Redeemable preference sharesForward contracts standing at loss


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4) Equity instrument:Any contract that evidences a residual interest in the assets of an entity after deducting all of

its liabilities.

5) DerivativeA financial instrument or other contract with all three of the following characteristics:

1. Its value changes in response to the change in a specified interest rate, financialinstrument price, commodity price, foreign exchange rate, index of prices or rates,

credit rating or credit index or other variable.

2. It is settled at a future date.3. It requires no initial net investment or an initial net investment that is smaller than

would be required for other types of contracts that would be expected to have asimilar response to changes in market factors.

Note:

IAS 32 makes it clear that the following items are not financial instruments:

1. Physical assets: Inventories, PPE, leased assets and intangible assets (patents, trademarks)2. Prepaid expenses:, deferred revenue and most warranty obligations3. Liabilities or assets that are not contractual in nature.

Derivative

A derivative is a financial instrument that derives its value from the price or rate of an underlying

item. Common examples of derivatives are:

1. Forward contracts: agreements to sell or buy an asset at a fixed price at a fixed futuredate.

2. Futures contracts: similar to forward contracts except that contracts are standardisedand traded on an exchange.

3. Options: rights (but not obligation) for the option holder to exercise at a pre-determinedprice; the option writer loses out if the option is exercised.

4. Swaps: agreements to swap one set of cash flows for another ( normally interest rate orcurrency swaps)


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Compound financial instruments:

Compound instruments are split into equity and liability components and presented accordingly in

the SFP.

IAS 32 requires the component parts of the instrument to be classified separately, according to the

substance of the contractual arrangement and the definitions of a financial liability and an equity

instrument.

One of the most common type of compound instrument is convertible debt. This creates a primary

financial liability of the issuer and grants an option to the holder of the instrument to convert it into

an equity instrument (usually ordinary shares) of the issuer.

The following method is recommended:

1. Calculate the value of the liability component.2. Deduct this from the instrument as a whole to leave a residual value for the equity

component.

Note: The sum of the carrying amounts assigned to the liability and equity will always be equal to

the carrying value that would be ascribed to the instrument as a whole.

IAS 39: (Financial instruments: Recognition and measurement)

A financial instrument should be recognised in the SFP when the entity becomes a party to

contractual provisions of the instrument.

Initial recognition:

An entity has entered into two separate contracts.

Contract A:

A firm commitment (an order) to buy a specific quantity of iron.

Contract B:

A forward contract to buy a specific quantity of iron at a specified price on a specified date provided

delivery of the iron is not taken.

Contract A is a normal trading contract. The entity does not recognise a liability for the iron until the

goods have actually been delivered. (This contract does not constitute a financial instrument

because it involves a physical asset, rather than a financial asset)

Contract B is a financial instrument. Under IAS 39 the entity recognises a financial liability or

obligation to deliver cash on the commitment date, rather than waiting for the closing date on

which the exchange tales place.


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Derecognition:

Derecognition is the removal of a previously recognised financial instrument from the SFP.

An entity should derecognise a financial asset when:

a. The contractual rights to the cash flows from the financial instruments have expired.

b. The entity transfers substantially all the risks and rewards of ownership to another party.An entity should derecognise a financial liability when it is extinguished-ie, when the obligation

specified in the contract is discharged or cancelled or expires.


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Measurement of financial instruments

Financial assets should initially be measured at cost=fair value.

Subsequently they should be remeasured to fair value except for:

a. Loans and receivables not held for trading.b. Other held to maturity investments.c. Financial assets whose value cannot be reliably measured.

Initial measurement:

Financial instruments should initially be measured at the fair value of the consideration given or

received (cost + transaction costs that are directly attributable to the acquisition or issue of the

financial instrument.)

Note: The exception to this is where a financial instrument is designated as at fair value through

profit or loss. In this case transaction costs are not added to fair value at initial recognition.

A financial asset or liability at fair value through profit or loss meets either of the following:i. It is classified as held for trading. A financial instrument is classified as held for

trading if it is:

a. Acquired or incurred principally for the purpose of selling or repurchasing itin the near term.

b. Part of a portfolio of identified financial instruments that are managedtogether and for which there is evidence of a recent actual pattern of short-

term profit taking, or

c. A derivative.ii. Upon initial recognition it is designated by the entity as at fair value through profit

or loss. An entity may only use this designation in severely restricted circumstances.

a. It eliminates or significantly reduces a measurement or recognitioninconsistency that would otherwise arise.

b. A group of financial assets/liabilities is managed and its performance isevaluated on a fair value basis.

Under the IFRS 9, financial assets are measured at amortised cost, using the effective interest

method, or at fair value.

Amortised cost of a financial asset/liability is the amount at which the financial asset/liability is

measured at initial recognition minus principal repayments, plus or minus the cumulative

amortisation of ant indifference between that initial amount and the maturity amount, and minus

any write-down for impairment and uncollectability.

The effective interest method is a method of calculating the amortised cost of a financial instrument

and of allocation the interest income or interest expenses over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash flows to the net

carrying amount of the financial asset or liability.


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Example: Amortised Cost

On 01.01x4, Aco purchases a debt instrument for its fair value of $1000. The debt instrument is due

to mature on 31.12.x5. The instrument has a principal amount of $1250 and the instrument carries

fixed interest rate at 4.27% that is paid annually. Effective interest=10%.

How should Aco account for the debt instrument over its 5 year term?

Solution:

Annual interest receive: 1,250 x 4.72%= $59

When maturity reached will receive: $1,250

The following table shows the allocation over the years:

Year Amortised cost

at beginning of

year

P&L: interest

income for year

(@10%)-effective interest

rate

Interest received

during the year

(cash inflow)-fixed interest

rate

Amortised cost

at end of the

year

20x1 1,000 100 (59) 1,041

20x2 1,041 1041*10=104 (59) 1,086

20x3 1,086 1,086*10=109 (59) 1,136

20x4 1,136 1,136*10%=113 (59) 1,190

20x5 1,190 1,190*10%=119 (1250+59) -

Note: Each year the carrying amount if the financial asset is increased by the interest income for

the year (effective rate) and reduced by the interest rate actually received during the year.


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