Flashcards
6. Financial Instruments
Cards in this deck (34)
- 1Financial Instrument DefinitionAny contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise.
- 2Financial Asset Any asset that is;a) Cash; or
b) An equity instrument of another entity or;
c) Contractual right to receive cash/financial asset from another enterprise OR contractual right to exchange financial instruments with another enterprise under potentially favourable conditions; or
d) Contract that will be settled in the entity's own equity instruments - 3Financial Liability Any liability that is a contractual obligation:a) To deliver cash or another financial asset to another entity, or to exchange financial instruments with another enterprise under conditions that are potentially unfavourable; or
b) A contract that will be settled in the equity instruments - 4Equity Instruments (Contrast to financial asset)Any contract that evidences a residual interest in the assets of an enterprise after deducting all of its liabilities
- 5DerivativesA financial instrument:
a) whose value changes in response to a change in the underlying
b) The requires no/little initial investment
c) That is settled as a future date - 6Derivatives Examples- Futures
- Forwards
- Options
- Swaps - 7IAS 32 Financial Instruments: PresentationMain presentation issues:
a) The distinction between liabilities and equity
b) The treatment of compound instruments - 8Liabilities and EquityKey distinction - whether a contractual obligation exists to transfer financial asset to redeem the obligation
- If it does = a liability
- If not = equity
(Consider substance over form) - 9Example 1 Hollybush plc has the following items in issue - 2 million £1 4% bonds 2018 - 5 million 50p ordinary sharesBond are financial liability as there is an obligation to pay interest and bonds
Share are equity as there is no obligation - 10Redeemable SharesA liability and can be preference or ordinary
- 11Preference SharesDistributions
- Fixed is liability
- Discretionary is equity
Accounting for preference shares
- Present substance in BS
- Dividends - like finance cost of debt - 12Interest and dividends-Classification as liability or equity impacts on income statement
- Finance cost of liabilities - income statement
- Dividends etc on equity - Statement of Changes in Equity - 13Categories of Financial Instruments IFRS 9 Newest StandardAssets
- Subsequently measured at Amortised Cost
- Subsequently measured at Fair Value - 14Financial Assets - Amortised Cost- Intention of business to collect contractual cash flows
- Payments receivable are solely of principal and interest
- Initial measurement (FV)
- Subsequent measurement (Am Cost) - 15Financial Assets - Fair Value- Any other financial assets not in the Amortised Cost category
- Initial measurement (FV)
- Subsequent measurement (FV) (P&L)
- FVTPL
- All derivatives - 16Financial Assets - Exceptions1. Investment in Debt
- Classify as FVTPL on initial recognition
- Only to reduce an accounting mismatch
2. Equity Instruments
- Elect to take changes to OCI - FTVOCI
- Not derivatives or "held for trading"
- Dividend still income in IS - 17Summary of Financial Asset CategoriesDebt
Amortised cost - usually
FVTPL - Possible
FVTOCI - No
Equities
Amortised cost - no
FVTPL - Usually
FVTOCI - Possible - 18Financial Liabilities IFRS 9- Subsequently measured at Amortised Cost
- Subsequently measured at Fair Value
- Initial measurement (FV)
- Subsequent measurement (Am Cost) - 19Summary of Financial Liability CategoriesDebt
Amortised cost - usually
FVTPL - Possible
Derivatives
Amortised cost - no
FVTPL - Always - 20Accounting mismatch- If there is a recognition or measurement inconsistency
- Eg investment in fixed rate bonds (FV) and fixed rate borrowings (Am cost) - 21Recognition of Financial Instruments- Contractual provisions of the instruments
- Derivatives - date of commitment not settlement - 22Measurement of Financial Instruments- 2 stages - initial measurement and subsequent re-measurement
- Initial Measurement: measure at fair value including transaction costs
(Except FVTPL = transaction costs written off to IS) - 23Initial Measurement- Fair value (cost)
- Transaction costs:
- Incremental, specific
- No internal costs
- Journal
Dr Financial Instrument (AmCo) or
Dr Income Statement (FVTPL)
Cr Bank - 24IAS 39 Amendments- IASB undertook project to improve IAS 39
- Revised standard issues December 2003
- Discussions continues
- December 2004 - further limited amendment
- Amended June 2005 (Fair Value Option)
- Valuation change Oct 2008
- IFRS 9 Jan 2013 not Jan 2015 - 25Financial Instruments - problems- IAS 39 was sticking point for smooth transition is IAS
- IAS 39 has attracted strong opposition (various controversial points)
- European Commission only partially endorsed IAS 39 - 26Banking Crisis- Political intervention
- Revaluation (fair value to amortised cost)
- ALFV - LR
- No due process
- Global pressure - 27Subsequent Measurement of Financial Instruments Financial AssetsShould be measured at fair value at each balance sheet date except:
- Am costs assets (amortised costs) - 28Subsequent Measurement of Financial Instruments Financial LiabilitiesShould be measures at amortised cost except;
- Financial liabilities at fair value through profit and loss
- Derivatives (fair value) - 29Gains or Losses on Re-measurementFVTPL - include in income statement (A&L)
FVTOCI - taken to reserves (A only)
Am Cost - include in income statement (A&L) - 30De recognition Assets- De recognise when he risk and rewards have been transferred
- Record gain or loss in income statement
- Transfer any gains/losses previously recognised in reserves to Distributable profits - 31De recognition Liabilities- Recognised when extinguished, ie when obligation is discharged
- Difference between carrying value and amount paid should be taken to income statement - 32IAS 32 Compound Instruments- Have characteristics of debt and equity eg convertible debt
- IAS 32 requires separate presentation - 33Convertible debt- Record conversion
- De recognise liability
- Transfer balance on equity reserve
Dr Equity reserve
Cr Share premium (converting)
Cr Retained earnings (repaid) - 34IFRS 7 - Financial Instruments: DisclosuresRequires disclosure of:
- Significance of financial instruments for an entity's financial position and performance
- Qualitative and Quantitative information about exposure to risks arising from financial instruments
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- Degree Financial Reporting Issues and Applications Flashcards on 6. Financial Instruments , created by Kirsty Henderson on 07/01/2016.
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- Kirsty Henderson
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