Financial Instruments Flashcards
What is a Financial Asset and Liability
Asset:
Cash, Receivables, Equity instrument of another entity, Favourable exchange of assets/liabilities
Liability:
Payables, unfavourable exchange of assets/liabilities, settlement of equity instruments (pref shares/compound instruments)
Asset Recognition
Usually FV - Transaction costs included unless measured thorough FVTPL.
Subsequent measurement - Debt Instruments
Is a type of fixed income asset.
FVTPL - FV cost not included
Amortised cost - held to end of life, principle payments and interest. (Bal b/f + interest income - payment received - Bal c/f)
FVTOCI - Valued at FV less any costs, interest income allocated to PL
Tested under:
Business model test - purpose of investment
Contractual cash flow characteristics test - cash received due to the investment
Equity Instruments
When and entity purchases shares in another entity.
Measure
FVTPL; Default, transaction costs not capitalised, but expensed. Revalued gain or loss goes to PL.
FVTOCI; Decided at acquisition and not reversed. Transaction costs can be capitalised. Revalue is shown in the OCI
FOR FVTOIC the revaluation reserve can go below nil. Never in FVTPL
Financial Liabilities
Initially measure at FV. FV = Proceeds less issue costs.
Subsequent measurement:
Held at amortised cost
Loan + Interest - paid out = Bal on SFP
*final year it is yearly payment +Principle
Preference Shares
Accounting treatment depends on if it is an obligation to pay or not.
Irredeemable:
that the obligations only exists on the winding up of the company. Classified as within equity.
Redeemable:
There is an obligation as this are fixed interest/dividends due over a period of time. Classified as a liability.
Compound Instruments
Made up of tow or more separate instruments.
Normally a debt and equity element. E.g Convertible Loan note.
Need to account for debt component and the equity component called split accounting.
Initial and Subsequent Recognition of compound instruments.
Debt = measured at FV which is the PV of future cashflows.
Equity = the difference between the loan proceeds and the financial liability calculated.
Subsequent:
The equity element is never remeasured.
The Debt element = Initial Recognition + market rate interest - interest paid.
Example: 20mil convertible loan notes
Coupon rate 6%
Market rate 8%
Discount Factors
Year - 6% - 8%
1 - .95 -.93
2 - .91 - .86
3 - .86 - .79
YEAR - Cash Flow (6%) - Discount F (8%0 - PV
Y1 - 1200 - 0.93. - 1,116
Y2. - 1,200 - 0.86 - 1,032
Y3. - 1,200+20,000 - .79 - 16,748
Total Debt = (1116+1032+16748) = 18,896
Proceeds 20,000
Equity = 20,00 - 18,896 = 1,104
Factoring in receivables
Sale with Recourse = Selling company retains the risk. Treated as a Loan rather than a sale.
Sale without Recourse = Selling company has no risk. De recognise the receivables and considered a sale.
