Lesson 8.2.pptx - Financial Instruments Recognition and...

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Financial Instruments: Recognition and Measurement 1
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Initial Recognition An entity should recognize a financial asset or a financial liability in its statement of financial position when and only when, it becomes a party to the contractual provisions of the instrument. (39.14/ 9.3.1.1 ) 2
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Examples Situation Date of Recognition Depositing money in a fixed deposit Date of the Deposit Selling goods on credit Date of the transaction (point at which risks and rewards are transferred) Purchase of shares in initial public offer Date of allotment of shares Purchase of shares traded in the market Trade date Purchase of a debentures in a public offer Date of allotment Purchase of a share option Date of the option contract 3
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Regular way transactions The regular way purchase or sale - purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned. These transactions are recognized in the financial statements under trade date accounting or settlement date accounting . 4
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Activity 8.4 William PLC buying shares Trade date Settlement date Trade date accounting Shares Dr 8,000,000 Payable Cr 8,000,000 Payable Dr 8,000,000 Cash Cr 8,000,000 Settlement date accounting No entry Shares Dr 8,000,000 Cash Cr 8,000,000 5 Trade date – the date to commit to purchase or sale of a financial asset Settlement date –the date on which the financial asset is delivered to the entity.
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Activity 8.4 (Contd.) Rodney PLC selling shares Trade date Settlement date Trade date accounting Receivable Dr 8,000,000 Shares Cr 5,000,000 Gain Cr 3,000,000 Cash Dr 8,000,000 Receivable Cr 8,000,000 Settlement date accounting No entry Cash Dr 8,000,000 Shares Cr 5,000,000 Gain Cr 3,000,000 6
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Derecognition of a Financial Asset (39.17/ 9.3.2.3 ) An entity shall derecognize a financial asset when and only when : a) the contractual rights to the cash flows from the financial asset expire (i.e. sale, cancellation or discharge of an obligation by the issuer) ; or b) it transfers the financial assets as set out in paragraphs 18 (9.3.2.4) and 19 (9.3.2.5) and the transfer qualifies for derecognition in accordance with paragraph 20 (9.3.2.6) . 7
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Activity 8.1 (Contd.) Purchase of a share option Recognition - date of the option contract Derecognition - when exercise the option or expiration of the option period 8
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Transfer of a Financial Asset (39.18/ 9.3.2.4 ) An entity transfers a financial asset if and only if, it either: a) transfers the contractual rights to receive the cash flows of the financial asset; or b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 19/ 9.3.2.5 . 9
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Transfer of a Financial Asset (Contd.) - (39.19/ 9.3.2.5 ) In relation to paragraph 18 (b)/ 9.3.2.4 (b) , the entity treats the transaction as a transfer of asset only if all of the following conditions are met by it.
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