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financial instruments

financial instruments - BASIC FINANCIAL INSTRUMENTS IAS 32...

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BASIC FINANCIAL INSTRUMENTS IAS 32, IAS 39 and IFRS 7
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2 Objective and Scope The framework for accounting for financial instruments is laid out in three standards as follows: IAS 32 , which deals with presentation from the perspective of the issuer (only) IAS 39 , which deals with measurement and recognition of financial assets and financial liabilities and IFRS 7 , which deals with disclosures IAS 1 deals with financial statement presentation (including comprehensive income)
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3 Objective and Scope According to IAS 32.11, “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” The majority of items on the balance sheets of many companies are financial instruments Some exceptions are: Inventories Prepaids Property, plant, and equipment
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4 Objective and Scope Financial assets, liabilities, and equity instruments are defined in IAS 32 A financial asset is (a) cash (b) an equity instrument (of another entity) or (c) a contractual right to receive cash (or another financial asset) or to exchange financial assets or financial liabilities under conditions that are potentially favourable An equity instrument is a contract that represents a residual interest in the net assets of the company A financial liability is basically a contractual obligation to deliver cash (or another financial asset) or to exchange financial assets or financial liabilities under conditions that are potentially unfavourable
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5 Recognition and Derecognition INITIAL RECOGNITION Measured at fair value at date of acquisition Financial instruments should be recognized when the entity becomes a party to the contract When financial instruments are initially recognized, they must be classified as one of the following (which are defined in IAS 39.9): 1. Financial assets at fair value through profit or loss (FVTPL) 2. Held to maturity investments (HTM) 3. Loans and receivables 4. Available for sale financial assets (AFS) The classification is important because it dictates how the asset/liability will be measured going forward and where the profits and losses will be booked and the designation in many cases is IRREVOCABLE
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6 Recognition and Derecognition Financial Assets at Fair Value through Profit or Loss (FVTPL) Under IAS 39.9, FVTPL assets/liabilities are either held for trading (HFT) or designated as FVTPL by the entity Instruments may be classified as HFT if they: -Are acquired with the intent to sell or repurchase in the near term, -Are part of a portfolio of instruments that are managed together to maximize profits, or - Are derivatives (other than financial guarantee contracts or designated and effective hedging instruments) In other words, the instruments are traded for profit (“active and frequent buying and selling”)
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Accounting and Reporting for Equity Investments Line-by-line consolidation Not recognized Consolidation 3. Control: Subsidiary Investment income
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