Financial Instrument:IAS 32, 39 & IFRS 7

‘Financial Instrument’

• IAS 39: Recognition and Measurement
• IAS 32 Presentation-discussed in another post
• IFRS 7: Disclosure- discussed in another post

IAS 39: Financial Instruments: Recognition and Measurement

Application

1. Recognition, derecognition and classification of financial assets and financial liabilities.
2. Initial measurement and subsequent measurement of financial assets and financial liabilities.
3. Definition of hedge accounting.
4. criteria and rules for hedge accounting.

Scope

1. This standard should be applied by all entities to the recognition and measurement of all financial instruments except for financial instruments that are dealt with by other standards, i.e.

a. interests in subsidiaries, associates, and joint ventures that are accounted for under IAS 27, IAS 28 and IAS 31 respectively;

This standard does not change the requirements relating to accounting by a parent for investments in subsidiaries, associates or joint ventures in the parent’s separate financial statements as set out in IAS 27, 28 and 31.

o Rights and obligations under leases, to which IAS 17 applies;

o Employers’ assets and liabilities under employee benefit plans, to which IAS 19 applies;

o Financial instruments issued by the entity that meet the definition of an equity instrument (IAS 32) including options and warrant;

However, the holder of such equity instruments applies IAS 39 to those instruments, unless they meet the exception relating to IAS 27, IAS 28 or IAS 31.

• Contracts for contingent consideration in a business combination under IFRS 3 (only applies to acquirer);
• Contracts between an acquirer and a vendor in a business combination to buy or sell an acquire at a future date; and
• Financial instruments, contracts and obligation under share-based payment transaction to which IFRS 2 applies.

Definition

Derivatives

A derivative is a financial instrument:

· Whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices, or rates, credit rating or credit index, or other variable (sometimes called the “underlying”);

· That requires little or no initial investment relative to other types of contracts that would be expected to have a similar response to changes in market conditions and

· that is settled at a future date.

Categories of financial assets

1) A financial asset or financial liability at “fair value through profit or loss” is a financial asset or financial liability that is either:

a) Classified as held for trading: or

b) Designed initially at fair value through profit or loss.

2) Held-to maturity investments are non derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intent and ability to hold to maturity other than those:

a) Designed as at fair value through profit or loss on initial recognition:

b) Designed as available for sale; or

c) Meeting the definition of loans and receivables.

3) Loans and Receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those:

a) Intended for immediate sale (classified as held for trading);

b) Designed initially as fair value through profit or loss or available for sale; or

c) Where repayment of the initial loan is in doubt (other than where there is a fall in credit rating), in which case they will be classed as available for sale.

d) Available-for-sale financial assets are those non-derivative financial assets that are designed available-for-sale or are not classified as:

i) Loans and receivables;

ii) Held to maturity investments; or

iii) Financial assets at fair value through profit or loss.

Recognition and measurement

• Amortized cost of financial assets or financial liability is:
• The amount at which it was measured at initial recognition;

Minus

• Principal repayments

Plus or minus

• The cumulative amortization of any difference between that initial amount and the maturity amount; and

Minus

• Any write down (directly or through the use of an allowance account) for impairment or uncollectability.
• The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability, using the effective interest rate and of allocating the interest.
• The effective interest rate that exactly discounts estimated future cash payments or receipts through the expected useful life of the financial instrument to the net carrying amount of the asset (or financial liability). The computation includes all cash flows ( e.g. fees, transactions cost, premiums or discounts) between the parties to the contract.
• Transaction costs are incremental costs that are directly attributable to the acquisition, issue of disposal of a financial asset (or financial liability).