Basic Financial Instruments IAS 32, IAS 39 and IFR

BasicFinancialInstruments:IAS32,IAS39andIFRS7WiecekandYoungIFRSPrimerChapter172BasicFinancialInstrumentsRelatedstandardsIAS32,IAS39andIFRS7CurrentGAAPcomparisonsIFRSfinancialstatementdisclosuresLookingaheadEnd-of-chapterpractice3RelatedStandardsFAS115AccountingforCertainInvestmentsinDebtandEquitySecuritiesFAS130ReportingComprehensiveIncomeFAS133and138AccountingforDerivativeInstrumentsandHedgingActivitiesFAS140and156AccountingfortheTransferandServicingofFinancialAssetsandExtinguishmentofFinancialLiabilitiesFAS150AccountingforCertainFinancialInstrumentswithCharacteristicsofBothLiabilitiesandEquityFAS155AccountingforCertainHybridFinancialInstrumentsFAS157FairValueMeasurementsFAS159TheFairValueOptionforFinancialAssetsandFinancialLiabilities4RelatedStandardsIAS1PresentationofFinancialStatements5IAS32,IAS39andIFRS7–OverviewObjectiveandscopeRecognitionandderecognitionMeasurementPresentationDisclosures6ObjectiveandScopeTheframeworkforaccountingforfinancialinstrumentsislaidoutinthreestandardsasfollows:•IAS32,whichdealswithpresentationfromtheperspectiveoftheissuer(only)•IAS39,whichdealswithmeasurementandrecognitionoffinancialassetsandfinancialliabilities•IFRS7,whichdealswithdisclosuresIAS1dealswithfinancialstatementpresentation(includingcomprehensiveincome)7ObjectiveandScopeAccordingtoIAS32.11,“Afinancialinstrumentisanycontractthatgivesrisetoafinancialassetofoneentityandafinancialliabilityorequityinstrumentofanotherentity”ThemajorityofitemsonthebalancesheetsofmanycompaniesarefinancialinstrumentsSomeexceptionsare:–Inventories–Prepaids–Property,plant,andequipmentObjectiveandScope89ObjectiveandScopeFinancialassets,liabilities,andequityinstrumentsaredefinedinIAS32Afinancialassetis(a)cash(b)anequityinstrument(ofanotherentity)or(c)acontractualrighttoreceivecash(oranotherfinancialasset)ortoexchangefinancialassetsorfinancialliabilitiesunderconditionsthatarepotentiallyfavorableAnequityinstrumentisacontractthatrepresentsaresidualinterestinthenetassetsofthecompanyAfinancialliabilityisbasicallyacontractualobligationtodelivercash(oranotherfinancialasset)ortoexchangefinancialassetsorfinancialliabilitiesunderconditionsthatarepotentiallyunfavorable10ObjectiveandScopeThefinancialinstrumentsthatareeithercompletelyorpartiallyscopedoutofthestandardsareasfollows:–IAS32:Investmentsthatareconsolidatedorequityaccountedforunder:IAS27,28,31Rightsandobligationsunderemployeebenefitplans(IAS19)andinsurancecontracts(IFRS4)Share-basedpayments(IFRS2)–IAS39:Thosenotedaboveaswellas:–RightsandobligationsunderleasescoveredunderIAS17–Equityinstrumentsoftheentity(issuer)thatareclassifiedasequity(IAS32)–Contractstobuy/sellanacquireeatafuturedate–Someloancommitments(IAS37)–Rightstopaymentstoreimbursetheentityforexpenditurestosettlealiability11RecognitionandDerecognitionINITIALRECOGNITIONFinancialinstrumentsshouldberecognizedwhentheentitybecomesapartytothecontractWhenfinancialinstrumentsareinitiallyrecognized,theymustbeclassifiedasoneofthefollowing(whicharedefinedinIAS39.9):1.Financialassetsatfairvaluethroughprofitorloss(FVTPL)2.Heldtomaturityinvestments(HTM)3.Loansandreceivables4.Availableforsalefinancialassets(AFS)Theclassificationisimportantbecauseitdictateshowtheasset/liabilitywillbemeasuredgoingforwardandwheretheprofitsandlosseswillbebooked12RecognitionandDerecognitionFinancialAssetsatFairValuethroughProfitorLoss(FVTPL)UnderIAS39.9,FVTPLassets/liabilitiesareeitherheldfortrading(HFT)ordesignatedasFVTPLbytheentityInstrumentsmaybeclassifiedasHFTifthey:•Areacquiredwiththeintenttosellorrepurchaseinthenearterm,•Arepartofaportfolioofinstrumentsthataremanagedtogethertomaximizeprofits,or•Arederivatives(otherthanfinancialguaranteecontractsordesignatedandeffectivehedginginstruments)Inotherwords,theinstrumentsaretradedforprofit(“activeandfrequentbuyingandselling”)13RecognitionandDerecognitionFinancialAssetsatFairValuethroughProfitorLoss(FVTPL)Anentitymay,asanaccountingpolicychoice,designateassetsasFVTPLifcertaincriteriaaremetThisoptionisavailabletoencouragetheuseoffairvalueandtoreducetheneedforhavingtousehedgeaccountingUnderthestandard,entitiesareallowedtousethisoptionwhendoingsoresultsinmorerelevantinformationWherethereisnomarketvalueandfairvalueisnotreliablymeasurable,equityinstrumentsmaynotbeclassifiedasFVTPLOnceanitemisclassifiedasFVTPL,itmaynotbereclassifiedtoanothercategory14RecognitionandDerecognitionHeldtoMaturityInvestments(HTM)HTMinvestmentshavethefollowingcharacteristics:•Theyarenotderivatives•TheyhavefixedanddeterminablepaymentsandfixedmaturitydatesHTMinvestmentsaremeanttobeheldtomaturityandtheentitymustdemonstratepositiveintentandabilitytodosoTheseinvestmentsmaybedisposedoforreclassifiedpriortomaturityonlyinverylimitedcircumstancesIftheentitydisposesoforreclassifiesmorethananinsignificantamountofinvestmentspriortomaturityinthecurrentyearorintheprevioustwoyears,itwillnotbeallowedtousetheHTMcategorygoingforward15RecognitionandDerecognitionHeldtoMaturityInvestments(HTM)Itisacceptable,underthestandard,todis