Accounting for Financial Instruments
Accounting Standards on Financial Instruments LKAS 32 Financial Instruments: Presentation LKAS 39 Financial Instruments: Recognition and Measurement SLFRS 9 Financial Instruments (Replacement of LKAS 39) SLFRS 7 Financial Instruments: Disclosures
Financial Instrument Any contract that gives rise to both a financial asset of one entity and financial liability or equity instrument of another entity.
Primary Derivative Compound Types of Financial Instruments e.g. deposits of cash, debt investments, equity investments, receivables/payables Derivative e.g. options, forwards/futures, swaps, caps and collars Compound e.g. convertible bonds, equity indexed notes, exchangeable debt
Financial Asset Is any asset that is: Cash; An equity instrument of another entity; A contractual right: to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity: or
Types of Financial Assets Financial assets at fair value through profit or loss - financial assets that are either classified as held for trading; or are designated as such on initial recognition. Held-to-maturity investments - financial assets with fixed or determinable payments and fixed maturity, other than loans and receivables, for which there is a positive intention and ability to hold to maturity and which have not been designated as ‘financial assets at fair value through profit or loss’ or as ‘available-for-sale.’ Loans and receivables – non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and do not qualify as ‘trading assets’ and have not designated as ‘financial assets at fair value through profit or loss’ or as ‘available-for-sale.’ Available-for-sale financial assets - non-derivative financial assets that are designated as ‘available-for-sale’ or are not classified as ‘loans and receivables’, held-to-maturity investments’, or ‘financial assets at fair value through profit or loss’.
Measurement of Financial Assets Category Basis for subsequent measurement Changes in carrying amount is recognized in : Financial assets at fair value through profit or loss Fair value Profit or Loss Available-for-sale financial assets Other comprehensive income Held-to-maturity investments Amortized cost Loans and receivables
Financial Liability Is any liability that is: a contractual obligation: to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
Equity Instrument Any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.
Presentation of Financial Instruments The issuer of a financial instrument should classify it or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and definitions of these instruments.
Contractual payment obligations Critical Features - Differentiating between Financial Liabilities and Equity Contractual payment obligations e.g. Interest payments, repayment of debt Contractual components of a financial instrument that creates a financial liability of the entity e.g. convertible bonds
Compound Financial Instruments Financial instruments that contain both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments. Amounts allocated to these debt and equity two components are based on their relative fair values at issuance.
Conversion of a Convertible Instrument at Maturity The entity derecognizes the liability component and recognizes it as equity. The original equity component remains as equity. There is no gain or loss on conversion on maturity.
Interest, Dividends, Losses and Gains If relating to a financial liability Recognized in income or expense in profit or loss net of any related income tax benefit. If relating to an equity instrument Debited directly to equity net of any related income tax benefit.
Derivative A financial instrument with all three of the following characteristics: Its value changes in response to the change in a specified rate or price (underlying instrument) It requires no initial investment or an initial net investment. It is settled at a future date.
Share Options Call Option Put Option Right to buy shares at a specified price (exercise/strike price) within a specified period (The option period). Put Option Right to sell shares at a specified price (exercise/strike price) within a specified period (The option period).
Embedded Derivative A component of a hybrid (combined) instrument that also includes a non-derivative host contract – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. It is a derivative embedded in a host contract. (e.g. put option in a debt instrument, interest rate swap embedded in a debt instrument )