Part 7: Chapter 1 – Introduction to financial instruments I NTRODUCTION TO ACCOUNTING FOR FINANCIAL INSTRUMENTS A PPLICABLE STANDARDS - IAS 32 – Financial instruments: Presentation - IFRS 7 – Financial instruments: Disclosures - IFRS 9 – Financial instruments D EFINITIONS A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset is any asset that is a. Cash; b. An equity instrument of another entity c. A contractual right a. To receive cash or another financial asset from another entity; or b. To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or d. Certain contracts that will or may be settled in the entity’s own equity instruments. A financial liability is a. A contractual obligation a. To deliver cash or another financial asset from another entity; or b. To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or b. Certain contracts that will or may be settled in the entity’s own equity instruments. M EASUREMENT Financial instruments are either measured at - Amortised cost or - Fair value The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. The effective interest rate method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13 – Fair Value Measurement ). 1
Part 7: Chapter 1 – Introduction to financial instruments F INANCIAL ASSETS C LASSIFICATION OF FINANCIAL ASSETS There are 3 categories of financial assets: financial assets that are subsequently measured 1. At amortised cost 2. At fair value through other comprehensive income; or 3. At fair value through profit or loss.
You've reached the end of your free preview.
Want to read all 23 pages?
- Summer '17
- K B
- Balance Sheet, Generally Accepted Accounting Principles, SOFP