IFRS 9: Financials Instrument

 IFRS 9: Financials Instrument

Financial Instrument

  • A contract
  • Gives rise to a financial asset of 1 entity
  • Financial liability/ equity of another entity

FINANCIAL ASSETS

TYPES:

  1. @ fv through P/L (DEFAULT)
    1. INITIAL: FV
    2. SUBSQUENT: FV EXCL TC with fv changes recognised through P/L
  • Held for trading
  1. If Equity & Debt criteria fail
  2. OR Derivatives
    1. Value changes in response to specific underlying items
    2. Financial e.g. interest rate, commodity price, exchange rate, share price
  • Non-financial, not specific to any part of contract
  1. Doesn’t require initial investment or little
  2. Settled at a future date
  1. Movements through P/L
  1. Equity Instrument @ fv through OCI
    1. Entity Elects to classify instrument
  • NOT held for trading (note can sell some BUT not trade)
    1. INITIAL: @ fv & transaction cost
  • SUBSQUENT: FV excl transaction cost
  1. Measure movements through OCI (can end up with a DR bal for equity)
  1. Debt Instrument @ fv through OCI (Debenture that earns interest & sold before maturity date)
    1. Objective: BOTH collect contractual cfs & selling FA
    2. Contractual Terms FA:
  • On specified dates
  • Cfs that are solely payments of Principal & Interest on P amt outstanding
    • INITIAL: @ fv & transaction cost
  1. SUBSQUENT: FV excl transaction cost
  2. Measured @ fv with movements through OCI
  1. @ amortised cost (eg. Debenture earns interest & held to maturity date)
    1. Objective: HOLD FA to collect contractual cfs
    2. Contractual Terms FA:
  • On specified dates
  • Cfs that are solely payments of Principal & Interest on P amt outstanding
    • INITIAL: @ fv & transaction cost
  1. SUBSEQUENT: Amortised Cost
  2. Measured at effective interest rate method

DERECOGNITION ASSETS

Asset no longer on SPF eg reached maturity date/ sold

RULE: when contractual right to cash flows expire

(Proceeds received + Cash + other financial assets received) – (Carrying Amount of A (@disposal date)) = Profit or loss on disposal recognised in P/L

If sold at fv—no profit cause was recognised at that price

FINANCIAL LIABILITIES

TYPES:

  1. At amortised cost (DEFAULT)
  2. @ fv through P/L
    1. Held for trading
    2. Designated
      1. Initial: irrecoverable
      2. Conditions: eliminate/ significantly

reduce acc mismatch

  • FL evaluated on fv
  1. Financial Liabilities from derecognition
  2. Financial Guarantee
  3. Loan commitments
  4. Contingent consideration in a business combination

DERECOGNITION LIABILITIES

Remove from SPF

Liability satisfied, cancelled, expired

Settlement paid – Carrying amount FL = P/L

Capitalisation Issue:

  • General Purpose: Increase the liquidity of company
  • HOW? Increase the no of shares in circulation, thus decreasing share price
  • Theses issue of shares are to existing shareholders Proportionately to shares they have and paid out of reserves
  • INVESTOR:
    • Receive shares no compensation
    • No shares increase but the value of the investment remains the same
  • ISSUER:
    • Reserves become share capital
    • No inflow of capital/resources

DR Reserve

CR Share Capital

RIGHTS Issue:  

  • Advantage to existing shareholders: can take up shares at less than FV

HOW TO APPROACH:

  1. BEFORE rights issue do a fair value adjustment
  2. What if Calc:
    1. Valuation Method to Cal Value of Rights (experiment assumption: all rights were exercised)

Shares             R/s                   Value

Balance (CUM R)         2000                2.40                 4800                after fv adj

Rights                          400                  1.92                 768                  1.92 is exercise right price

Ex Rights                      2400                2.32                 5568                5568/2400 = 2.32

  1. Value regarding existing shares

CUM R val: 2.40 – Ex Rights v: 2.32 = 0.08

0.08 is change in existing rights value

0.08 x 2000 shares = R160