Learning Unit 8:
Financial instuments
8.1 BACKGROUND AND CURRENT ACCOUNTING POSITION:
Study par 1 and 2 of the prescribed textbook
Financial markets use a variety of financial instruments ranging from:
traditional primary instruments (ie debtors, creditors, equity) to
derivative instruments (ie financial options, futures and forwards, interest
rate swaps and currency swaps).
The standards IFRS 9, IAS 32, IAS 39 (relevant sections) and IFRS 7 deal with:
- the disclosure,
- presentation,
- recognition and
- measurement of financial instruments.
IFRS 9:
- was issued in November 2009 and
- replaces certain sections of IAS 39.
- IFRS 9 currently does not deal with impairment of financial assets and
hedge accounting which is still included in IAS 39.
The objective of IAS 32 Financial Instruments:
= Presentation is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and financial liabilities.
IAS 32 prescribes requirements for:
1
, presentation of financial instruments as liabilities or equity
offsetting financial assets and liabilities
classification of financial instruments into financial assets, financial
liabilities and equity instruments;
classification of related interest, dividends, losses and gains; and
circumstances in which financial assets and financial liabilities should be
offset.
The objective of IFRS 7 is to require entities to provide disclosures in their annual
financial statements that enable users to evaluate:
the significance of financial instruments for the entity's financial position
and performance; and
the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the reporting date, and how
the entity manages those risks
The objective of IFRS 9:
= is to establish principles for the financial reporting of financial assets and
financial liabilities that will
- present relevant and useful information to users of annual financial
statements for
- their assessment of the amounts, timing and uncertainty of the entity’s
future cash flows.
Large parts of IAS 39 will no longer be relevant as a result of the issue of IFRS 9.
IFRS 9 will eventually replace IAS 39 in total. Impairment and hedge accounting
are still dealt with in IAS 39 (not dealt with in this module).
EXCHANGE TRADING
TRADING OF INSTRUMENTS LISTED ON A FORMAL EXCHANGE (South
African Futures Exchange SAFEX)
Instruments standardised in respect of transaction values, maturity dates
& other contracted terms
OVER-THE-COUNTER TRADING (OTC)
Transactions takingplace in instruments that are not listed on an exchange
Highly customised with individuals’ needs
Concluded with banks
There is no single institution gauranteeing the settlement of transactions
in the over-counter-market
2
, The results in credit risk of such transactions that is significantly higher
than exchanged-traded markets
SCOPE EXCLUSIONS
All 3 standards should be applied by all entities to all fin instruments except for:
interests in subsidiaries, associates & jointly controlled entities that are
consolidated or equity accounted
rights & obligations under leases in terms of IFRS 16 – except with regard
to:
- finance lease receivables & operating lease receivables subject to
derecognition & impairment provisions of IFRS 9
- lease liabilities subject to derecognition provisions of IFRS 9
- derivatives that are embedded in lease
employers ’rights & obligations under employee benefit plans in terms of
IAS 129
equity instruments classified as shareholders’ equity by issuer in terms of
IAS32 &
rights & obligations within the scope of IFRS 15 that are fin instruments
8.2 Definitions:
8.2.1 Terminology:
CLEARING HOUSE
= characteristic of most exchanges is the existence of a clearing house, which
provides clearing & settlement facilities to participants in market
all contracts on the exchange are guaranteed by clearing house, resulting in
low risk of default (credit risk) on a transaction
fees levied from participants for each transaction cleared by clearing house
LOAN
= grant of temporary use of a sum of money on condition that the principle
amount will be repaid with interest
issuer of loan might require security
3
Financial instuments
8.1 BACKGROUND AND CURRENT ACCOUNTING POSITION:
Study par 1 and 2 of the prescribed textbook
Financial markets use a variety of financial instruments ranging from:
traditional primary instruments (ie debtors, creditors, equity) to
derivative instruments (ie financial options, futures and forwards, interest
rate swaps and currency swaps).
The standards IFRS 9, IAS 32, IAS 39 (relevant sections) and IFRS 7 deal with:
- the disclosure,
- presentation,
- recognition and
- measurement of financial instruments.
IFRS 9:
- was issued in November 2009 and
- replaces certain sections of IAS 39.
- IFRS 9 currently does not deal with impairment of financial assets and
hedge accounting which is still included in IAS 39.
The objective of IAS 32 Financial Instruments:
= Presentation is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and financial liabilities.
IAS 32 prescribes requirements for:
1
, presentation of financial instruments as liabilities or equity
offsetting financial assets and liabilities
classification of financial instruments into financial assets, financial
liabilities and equity instruments;
classification of related interest, dividends, losses and gains; and
circumstances in which financial assets and financial liabilities should be
offset.
The objective of IFRS 7 is to require entities to provide disclosures in their annual
financial statements that enable users to evaluate:
the significance of financial instruments for the entity's financial position
and performance; and
the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the reporting date, and how
the entity manages those risks
The objective of IFRS 9:
= is to establish principles for the financial reporting of financial assets and
financial liabilities that will
- present relevant and useful information to users of annual financial
statements for
- their assessment of the amounts, timing and uncertainty of the entity’s
future cash flows.
Large parts of IAS 39 will no longer be relevant as a result of the issue of IFRS 9.
IFRS 9 will eventually replace IAS 39 in total. Impairment and hedge accounting
are still dealt with in IAS 39 (not dealt with in this module).
EXCHANGE TRADING
TRADING OF INSTRUMENTS LISTED ON A FORMAL EXCHANGE (South
African Futures Exchange SAFEX)
Instruments standardised in respect of transaction values, maturity dates
& other contracted terms
OVER-THE-COUNTER TRADING (OTC)
Transactions takingplace in instruments that are not listed on an exchange
Highly customised with individuals’ needs
Concluded with banks
There is no single institution gauranteeing the settlement of transactions
in the over-counter-market
2
, The results in credit risk of such transactions that is significantly higher
than exchanged-traded markets
SCOPE EXCLUSIONS
All 3 standards should be applied by all entities to all fin instruments except for:
interests in subsidiaries, associates & jointly controlled entities that are
consolidated or equity accounted
rights & obligations under leases in terms of IFRS 16 – except with regard
to:
- finance lease receivables & operating lease receivables subject to
derecognition & impairment provisions of IFRS 9
- lease liabilities subject to derecognition provisions of IFRS 9
- derivatives that are embedded in lease
employers ’rights & obligations under employee benefit plans in terms of
IAS 129
equity instruments classified as shareholders’ equity by issuer in terms of
IAS32 &
rights & obligations within the scope of IFRS 15 that are fin instruments
8.2 Definitions:
8.2.1 Terminology:
CLEARING HOUSE
= characteristic of most exchanges is the existence of a clearing house, which
provides clearing & settlement facilities to participants in market
all contracts on the exchange are guaranteed by clearing house, resulting in
low risk of default (credit risk) on a transaction
fees levied from participants for each transaction cleared by clearing house
LOAN
= grant of temporary use of a sum of money on condition that the principle
amount will be repaid with interest
issuer of loan might require security
3
