BLOCK 3
, 08
Financial Instruments
Section 11 & 12
, SECTION 12 Scope (s12.3): GENERAL
Section 12 applies to all financial instruments except for the
Initial Recognition & Measurement (s 12.6 - 12.7): following: Accounting Policy Choice (s11.2):
INITIAL RECOGNITION: • instruments covered by Section 11 To account for all of its financial instruments, an entity shall choose to apply
• investments in other entities: Subsidiaries, associates, either:
An entity shall recognise a FA/FL only when the entity becomes a party to the contractual and joint ventures handled by Sections 9, 14, and 15 are • the requirements of both Sections 11 and Section 12 in full, OR
provisions of the instrument excluded • the recognition and measurement requirements of IAS 39 (full IFRS) and the
• employee benefits disclosure requirements of Sections 11 and 12
INITIAL MEASUREMENT:
• most rights under insurance contracts
When a FA/FL is recognised initially, an entity shall measure it at its FV, which is normally • own equity instruments
the transaction price • most leases under Section 20 are excluded, except for Financial Asset vs. Financial Liability:
leases that could lead to losses from contract terms not
related to the asset price, exchange rates, interest
FINANCIAL ASSET: FINANCIAL LIABILITY:
Subsequent Measurement (s 12.8): •
rates, or counterparty defaults
contingent consideration in business combinations
• cash • a contractual obligation:
• an equity instrument of another - to deliver cash/another FA to
• share-based payments
At the end of each reporting period, an entity shall measure all financial instruments at FV, entity (eg. investment in a portfolio another entity (eg. accounts
• reimbursement assets
with all changes in FV recognised in P/L except for the following: of shares) payable), OR
• FV changes recognised in OCI under hedge accounting, AND • a contractual right: - to exchange financial As/Ls with
• equity instruments that are not publically traded and whose FV cannot be determined - to receive cash/another FA another entity under conditions
reliability with undue cost or effort shall be measured at cost less impairment from another entity, OR that are potentially
- to exchange FA/FL with another unfavourable to the entity
NOTE: entity under conditions that are • a contract that will/may be settled
• an entity shall NOT include transaction costs in the initial measurement of FA/FL that potentially favourable to the in entity’s own equity instruments
will be measured subsequently at FV through P/L entity and under which the entity is/may be
• if payment for an asset is deferred or is financed at a rate of interest that is not a • a contract that will/may be settled obliged to deliver a variable number
market rate, the entity shall initially measure the asset at the present value of the in entity’s own equity instruments of their own equity instruments
future payments discounted at a market rate of interest and under which entity is/may be
PART 1 obliged to receive a variable number
of their own equity instruments
Complex Financial Instruments:
DERIVATIVES = a contract that derives its value from the performance of an underlying item, including
Financial Instruments Disclosure (s11.40 - 11.48)
(s11 & s12)
forward and futures contracts
• In accordance with paragraph 8.5, an entity shall disclose, in the summary of
FORWARD CONTRACT: a contract between two parties to buy or sell an asset for a price agreed upon significant accounting policies, the measurement basis (or bases) used for
today with delivery and payment occurring at a future point, the delivery date financial instruments and the other accounting policies used for financial
instruments that are relevant to an understanding of the FS
• contract could be to deliver the actual asset or to be settled net in cash • A company needs to disclose the CAs of each of the following categories of FA/
• Entity shall disclose information that enables users of its FS to
• buyer and seller have entered into contract, thus each party is obligated to perform FL at the reporting date, in total, either in the SOFP or in the notes:
evaluate the significance of financial instruments for its financial
• both parties are locked in to perform once the terms have been agreed on at inception
position and performance
• forward contracts = traded over the counter, thus NOT traded on an exchange CATEGORIES TYPES OF INSTRUMENTS CONDITIONS
• For all FA/FL measured at FV, entity shall disclose the basis for
• highly customisable but more counterparty risk
determining FV A Financial assets Non-convertible That are publicly traded or
• party agreeing to buy the underlying asset = a long position
• If a reliable measure of FV is no longer available, or is not available measured at FV through preference shares and FV can be measured
• party agreeing to sell the asset = a short position P/L non-puttable ordinary/ without undue cost or
without undue cost/effort when such an exemption is provided, for
• initially recognised at FV, being the present value of future cash flows discounted at a market preference shares effort
any financial instruments that would otherwise be required to be
related rate BUT the future value is the price that both buyer and seller expect the item to be at
measured at FV through P/L, entity shall disclose that fact, the CA of B Financial assets that are Debt instruments Meet the conditions per
the future point, and based on expectations now, it is an amount that will result in neither party
those financial instruments and, if an undue cost/effort exemption debt instruments S11.9
making a gain or loss, thus the present value, and therefore the fair value, of this amount is zero
has been used, the reasons why a reliable FV measurement would measured at amortised
• expectations of the amount in future may have changed as settlement date approaches and these
involve undue cost/effort cost
movements now mean that one party is expected to make a gain on settlement date and the other
• When an entity has pledged FAs as collateral for liabilities/contingent
party will make a loss, thus the instrument now has a fair value C Financial assets that are Non-convertible Not publicly traded nor can
liabilities, it shall disclose the following: equity instruments preference shares and the FV be measured without
• fair value amount at this point in time is the difference between forward rate agreed on at the
a) CA of the FAs pledged as collateral, and measured at cost less non-puttable ordinary/ undue cost or effort
start of the contract and the current forward rate for the time period remaining
b) T&Cs relating to its pledge impairment preference shares
FUTURES CONTRACT: a contract to buy or sell an asset at a predetermined price at a specified time in • An entity shall disclose the following items of income, expense, gains/
losses: D Financial liabilities Debt instruments Do NOT meet the conditions
the future measured at FV through per S11.9 thus need to be
a) income, expense, gains/losses, including changes in FV, recognised
P/L accounted for per S12
• futures contracts = traded on an exchange on:
• less counterparty risk as the exchange guarantees settlement - FAs measured at FV through P/L E Financial liabilities Debt instruments Meet the conditions per
• settled on a daily basis - FLs measured at FV through P/L measured at S11.9
- FAs measured at amortised cost amortised cost
OPTIONS CONTRACT: a contract which gives the buyer (owner/holder) the right, but NOT the obligation, - FLs measured at amortised cost F Loan commitments Commitment to receive a Cannot be settled net in
to buy or sell an underlying asset or instrument at a specified strike price on or before a specified b) total interest income and total interest expense for FA/FL that measured at cost less loan cash and if executed, the
date are not measured at FV through P/L impairment loan must meet the
c) the amount of any impairment loss for each class of FA conditions per S11.9
• party has the right to buy an asset at the strike price = call option
• party has the right to sell the asset at the strike price = put option
• in order to have the right to exercise an option, entity pays a premium upfront
• premium paid for = fair value of the option at transaction date
• as contract gets closer to expiration date, the variables used top measure FV will change and thus
the FV of the option will change
• option needs to be fair valued at year end
, 08
Financial Instruments
Section 11 & 12
, SECTION 12 Scope (s12.3): GENERAL
Section 12 applies to all financial instruments except for the
Initial Recognition & Measurement (s 12.6 - 12.7): following: Accounting Policy Choice (s11.2):
INITIAL RECOGNITION: • instruments covered by Section 11 To account for all of its financial instruments, an entity shall choose to apply
• investments in other entities: Subsidiaries, associates, either:
An entity shall recognise a FA/FL only when the entity becomes a party to the contractual and joint ventures handled by Sections 9, 14, and 15 are • the requirements of both Sections 11 and Section 12 in full, OR
provisions of the instrument excluded • the recognition and measurement requirements of IAS 39 (full IFRS) and the
• employee benefits disclosure requirements of Sections 11 and 12
INITIAL MEASUREMENT:
• most rights under insurance contracts
When a FA/FL is recognised initially, an entity shall measure it at its FV, which is normally • own equity instruments
the transaction price • most leases under Section 20 are excluded, except for Financial Asset vs. Financial Liability:
leases that could lead to losses from contract terms not
related to the asset price, exchange rates, interest
FINANCIAL ASSET: FINANCIAL LIABILITY:
Subsequent Measurement (s 12.8): •
rates, or counterparty defaults
contingent consideration in business combinations
• cash • a contractual obligation:
• an equity instrument of another - to deliver cash/another FA to
• share-based payments
At the end of each reporting period, an entity shall measure all financial instruments at FV, entity (eg. investment in a portfolio another entity (eg. accounts
• reimbursement assets
with all changes in FV recognised in P/L except for the following: of shares) payable), OR
• FV changes recognised in OCI under hedge accounting, AND • a contractual right: - to exchange financial As/Ls with
• equity instruments that are not publically traded and whose FV cannot be determined - to receive cash/another FA another entity under conditions
reliability with undue cost or effort shall be measured at cost less impairment from another entity, OR that are potentially
- to exchange FA/FL with another unfavourable to the entity
NOTE: entity under conditions that are • a contract that will/may be settled
• an entity shall NOT include transaction costs in the initial measurement of FA/FL that potentially favourable to the in entity’s own equity instruments
will be measured subsequently at FV through P/L entity and under which the entity is/may be
• if payment for an asset is deferred or is financed at a rate of interest that is not a • a contract that will/may be settled obliged to deliver a variable number
market rate, the entity shall initially measure the asset at the present value of the in entity’s own equity instruments of their own equity instruments
future payments discounted at a market rate of interest and under which entity is/may be
PART 1 obliged to receive a variable number
of their own equity instruments
Complex Financial Instruments:
DERIVATIVES = a contract that derives its value from the performance of an underlying item, including
Financial Instruments Disclosure (s11.40 - 11.48)
(s11 & s12)
forward and futures contracts
• In accordance with paragraph 8.5, an entity shall disclose, in the summary of
FORWARD CONTRACT: a contract between two parties to buy or sell an asset for a price agreed upon significant accounting policies, the measurement basis (or bases) used for
today with delivery and payment occurring at a future point, the delivery date financial instruments and the other accounting policies used for financial
instruments that are relevant to an understanding of the FS
• contract could be to deliver the actual asset or to be settled net in cash • A company needs to disclose the CAs of each of the following categories of FA/
• Entity shall disclose information that enables users of its FS to
• buyer and seller have entered into contract, thus each party is obligated to perform FL at the reporting date, in total, either in the SOFP or in the notes:
evaluate the significance of financial instruments for its financial
• both parties are locked in to perform once the terms have been agreed on at inception
position and performance
• forward contracts = traded over the counter, thus NOT traded on an exchange CATEGORIES TYPES OF INSTRUMENTS CONDITIONS
• For all FA/FL measured at FV, entity shall disclose the basis for
• highly customisable but more counterparty risk
determining FV A Financial assets Non-convertible That are publicly traded or
• party agreeing to buy the underlying asset = a long position
• If a reliable measure of FV is no longer available, or is not available measured at FV through preference shares and FV can be measured
• party agreeing to sell the asset = a short position P/L non-puttable ordinary/ without undue cost or
without undue cost/effort when such an exemption is provided, for
• initially recognised at FV, being the present value of future cash flows discounted at a market preference shares effort
any financial instruments that would otherwise be required to be
related rate BUT the future value is the price that both buyer and seller expect the item to be at
measured at FV through P/L, entity shall disclose that fact, the CA of B Financial assets that are Debt instruments Meet the conditions per
the future point, and based on expectations now, it is an amount that will result in neither party
those financial instruments and, if an undue cost/effort exemption debt instruments S11.9
making a gain or loss, thus the present value, and therefore the fair value, of this amount is zero
has been used, the reasons why a reliable FV measurement would measured at amortised
• expectations of the amount in future may have changed as settlement date approaches and these
involve undue cost/effort cost
movements now mean that one party is expected to make a gain on settlement date and the other
• When an entity has pledged FAs as collateral for liabilities/contingent
party will make a loss, thus the instrument now has a fair value C Financial assets that are Non-convertible Not publicly traded nor can
liabilities, it shall disclose the following: equity instruments preference shares and the FV be measured without
• fair value amount at this point in time is the difference between forward rate agreed on at the
a) CA of the FAs pledged as collateral, and measured at cost less non-puttable ordinary/ undue cost or effort
start of the contract and the current forward rate for the time period remaining
b) T&Cs relating to its pledge impairment preference shares
FUTURES CONTRACT: a contract to buy or sell an asset at a predetermined price at a specified time in • An entity shall disclose the following items of income, expense, gains/
losses: D Financial liabilities Debt instruments Do NOT meet the conditions
the future measured at FV through per S11.9 thus need to be
a) income, expense, gains/losses, including changes in FV, recognised
P/L accounted for per S12
• futures contracts = traded on an exchange on:
• less counterparty risk as the exchange guarantees settlement - FAs measured at FV through P/L E Financial liabilities Debt instruments Meet the conditions per
• settled on a daily basis - FLs measured at FV through P/L measured at S11.9
- FAs measured at amortised cost amortised cost
OPTIONS CONTRACT: a contract which gives the buyer (owner/holder) the right, but NOT the obligation, - FLs measured at amortised cost F Loan commitments Commitment to receive a Cannot be settled net in
to buy or sell an underlying asset or instrument at a specified strike price on or before a specified b) total interest income and total interest expense for FA/FL that measured at cost less loan cash and if executed, the
date are not measured at FV through P/L impairment loan must meet the
c) the amount of any impairment loss for each class of FA conditions per S11.9
• party has the right to buy an asset at the strike price = call option
• party has the right to sell the asset at the strike price = put option
• in order to have the right to exercise an option, entity pays a premium upfront
• premium paid for = fair value of the option at transaction date
• as contract gets closer to expiration date, the variables used top measure FV will change and thus
the FV of the option will change
• option needs to be fair valued at year end
