M5: Financial Instruments (Financial Assets 5,6,7) Flashcards
(28 cards)
What are financial instruments?
IAS 32 defines a financial instrument as follows:
Any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.
What are primary and derivative financial instruments?
Primary financial instruments - Instruments whose price is based directly on market value e.g. Loans, trade payables, investment in shares
Derivative financial instruments - Instruments whose value changes in response to an underlying item and that have little or no cost and that will be settled in the future
e.g. forward contract to buy foreign currency at a
fixed exchange rate at a future date. Here the value
of the contract depends on the spot exchange rate
on a given day
What are financial assets, financial liabilities and equity instruments?
GET THIS FROM OTHER MODULE
What items are not financial instruments?
There are better IFRS standards for the following:
- Employee benefit plans (IAS 19 Employee Benefits)
- Share-based payments (IFRS 2 Share-based Payment)
- Investments in subsidiaries - joint ventures and associates and other than investment entities in consolidated financial statements (IAS 27 Separate Financial Statement)
- Insurance Contracts (IFRS 17 Insurance Contracts)
When are financial assets recognised?
IFRS 9 requires that a financial asset or financial liability is recognised when, and only when, a company becomes party to the contractual provisions of the instrument.
e.g. when a GDN is done this starts upload process
How are financial assets classified?
1) Fair value through profit or loss (FVTPL) - Short-term holding to trade
2) Fair value through other comprehensive income (FVTOCI) - medium term to collect interest and sell before maturity
3) Amortised cost - Long term - intends to collect interest and principal on redemption
What is the initial measurement of a financial asset?
FVTPL - Initial measurement is Fair value
FVTOCI and Amortised cost - Initial measurement is Fair value + Transaction costs
What is the journal for the initial measurement of financial assets through the 3 different ways they are classified?
FVTPL:
DR Financial asset Consideration paid
DR SPL Transaction costs
CR Bank Consideration paid + transaction costs
Being the initial recognition of financial assets at FVTPL and associated transaction costs.
FVTOCI/Amortised cost:
DR Financial asset Consideration paid + transaction costs
CR Bank Consideration paid + transaction costs
Being the initial recognition of financial assets at FVTOCI/amortised cost and associated transaction
costs.
How are changes in the fair value of financial assets classified as FVTPL recognised?
Changes in value, measured through SPL.
How is fair value determined?
You will be given the fair value. If you are given Bid-Ask price, you always use the bid price which is the lower.
How are changes in the fair value of equity investments classified as FVTOCI recognised?
- We remeasure to FV at reporting date
- We recognise any change in FV in OCI part
- OCI Accumulate in equity until we get rid of this. Then we need to clear.
How is a financial asset measured at amortised cost subsequently accounted for?
We do Brought forward amount + Finance Income - Interest = Value at end of the year.
What is the method to de-recognise financial assets?
If measured at FVTPL & FVTOCI:
Step 1: Remeasure immediately prior to derecognising. FVTPL: gain/loss through SPL, FVTOCI: Gain/loss through OCI
Step 2: Derecognise and recognise proceeds. Any loss at this stage is equal to selling costs.
Step 3: for those FVTOCI, transfer re-measurement reserve to retained earnings
If measured at amortised cost:
Account for finance income up to date of disposal. The difference between carrying amount and proceeds (net of transaction costs) is a gain or loss through SPL.
What 1 type of financial assets does IFRS 9 credit losses guidance apply to?
It is most relevant to financial assets at amortised cost, since assets within the other two categories are remeasured to fair value at each reporting date anyway.
What is the IFRS 9 general approach to expected credit losses?
& journal entry
At initial recognition, recognise 12 month expected credit losses
At subsequent reporting dates, recognise lifetime expected credit losses
Dr SPL - Impairment loss
CR Loss allowance
Being the recognition of the initial loss allowance on the investment in bonds
How are expected credit losses calculated?
12 month ECL: Expected credit losses over the lifetime of the financial asset arising from the customer defaulting within 12 months of the reporting date.
Lifetime ECL: Expected credit losses over the lifetime of the financial asset arising from the customer defaulting at any time over the lifetime of the financial asset.
After initial recognition of the loss allowance on a financial asset, what do we record subsequently? & what journals for inc/dec?
We record journals for any movement each year.
Dr SPL - Impairment loss
Cr Loss allowance
Being the recognition of a increase in the allowance
Cr Loss Allowance
Dr SPL - Impairment loss
Being the recognition of a decrease in the allowance.
When are financial liabilities recognised?
A company should recognise a financial asset or liability when it is party to a financial instrument
contract. The exception is a contract for the future delivery of goods or services.
In this case, the customer should only recognise a payable amount when the selling company meets the criteria to recognise revenue in accordance with IFRS 15.
How are financial liabilities classified?
Financial liabilities measured at FVTPL include:
Any financial liabilities held in the short term, for trading purposes
Derivatives
Financial liabilities that are specifically designated as FVTPL
Financial liabilities measured at Amortised Cost include:
Any financial liability that is not measured at FVTPL is measured at amortised cost, including loans,
issued bonds and issued redeemable preference shares.
What is the initial measurement of a financial liability?
& what’s the journal?
FVTPL: Initially measured at FV. Transaction costs recognised in SPL.
Dr Bank (Consideration - Transaction Costs)
Dr SPL (Transaction costs)
Cr Financial liability
Amortised Cost: Initially measured at FV less transactions costs
Dr Bank (Consideration - Transaction Costs)
Cr Financial Liability
How is a financial liability measured at amortised cost or FVTPL subsequently accounted for?
FVTPL: Changes in value through SPL
Amortised Cost: Brought forward balance + Finance costs - Interest payment = End of year balance
What is the journal entry to de-recognise a financial asset?
DR Financial liability X
CR Bank X
DR/CR SPL X
To derecognise a financial liability and record the resulting gain/loss.
When are financial assets de-recognised?
Financial liabilities are derecognised when they are settled, transferred to another party, cancelled or
expire.
What are the IFRS 7 disclosure requirements in relation to financial Instruments?
SOFP: Carrying amount of financial instruments per classification
SPL:
Financial assets:
Net gains and losses on financial assets at amortised cost, FVTOCI, FVTPL
Total finance income on financial assets at amortised cost
Impairment losses on financial assets at amortised cost and FVTOCI
Financial liabilities:
Net gains and losses on financial liabilities at amortised cost, FVTPL
Total finance cost on financial liabilities at amortised cost
