FINANCIAL 20INSTRUMENTS[1]

FINANCIAL 20INSTRUMENTS[1] - PRACTICAL ACCOUNTING 1...

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PRACTICAL ACCOUNTING 1 FINANCIAL INSTRUMENTS – Investment in Trading Security(Equity) Classification of investments Investment in equity security – representing ownership interest in an equity (e.g. ordinary share or preference share) or the right to acquire ownership interest(e.g. share options, share warrants, etc). This term however does not encompass callable or redeemable preference share, treasury share and convertible bonds. Classification of Equity Securities Investment in subsidiary - when ownership is more than 50% Investment in associate – when the investor has significant influenceover the investee. In the absence of evidenct to the contrary, significant influence should be presumed when the investor holds 20% or more of the investee’s voting stock Other equity securities (small investments) – are investments in the investee’s equity without controlling interest or significant influence. They are normally classified as: 1. marketable- equity securities with readily determinable market value (e.g. trading securities and available for sale securities) 2. non-marketable-equity securities without readily determinable market value Categories of investment in Equity Securities (Small Investments) Trading securities(marketable) – acquired principally for the purpose if generating a profit from short-term fluctuations in price or dealer’s margin Available for sale Equity Securities (marketable or non-marketable) – are those financial assets that are not (a) loans and receivables originated by the principal, (b) financial assets for trading. Initial Measurement of Trading Securities At the point of acquisition, financial instruments classified as investment assets under the category “held for trading” are initially recorded at their acquisition cost. The acquisition cost is the fair value of the securities acquired which is equal to the fair value of the consideration given up to acquire the instrument. Any transaction costs incurred related to the acquisition of the instrument shall be recognized outright as expense. Measure Subsequent to Acquisition Subsequent to acquisition, financial instruments classified as investment assets under the category “held for trading” are measured at fair market value. Changes in the fair market value subsequent to the acquisition are reported in the profit or loss of the period. Reclassification of Trading Securities An entity shall not reclassify a financial instrument into or out of the fair value through the profit or loss category (trading security category) while it is held or issued (PAS 39, par. 50) Disposal of Trading Securities When a financial instrument, classified as as trading security , is to be totally derecognized because of disposal, the carrying value of the instrument should be eliminated from the accounting records. The carrying value of the instrument is its recorded fair market value. Any difference of the disposal price/selling price and the carrying value of the security is realized gain or loss to be reported in the current year income statement.
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This note was uploaded on 11/30/2011 for the course ECON 310 taught by Professor Johnsmith during the Spring '11 term at Kentucky.

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FINANCIAL 20INSTRUMENTS[1] - PRACTICAL ACCOUNTING 1...

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