1. International Financial Reporting Standards1
IFRS for SMEs IFRS Foundation-World Bank
18–20 October Sarajevo, Bosnia and Herzegovina
Copyright © 2010 IFRS Foundation.
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2. Topic 2.1(a) Pascal Frerejacque
The IFRS for SMEs
Topic 2.1(a)
Section 11 Basic Financial Instruments
Pascal Frerejacque
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

3. Sections 11 & 12 – Introduction
Financial instruments split into two sections:
Sec. 11 Basic Financial Instruments
Sec. 12 Other Financial Instruments Issues
Together the two sections cover recognising, derecognising, measuring, and disclosing financial assets and financial liabilities
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

4. Sections 11 & 12 – Introduction
Section 11 is relevant to all SMEs
Section 12 is relevant If:
SME owns or issues ‘exotic’ financial instruments – instruments that impose risks or rewards that are not typical of basic financial instruments
SME wants to do hedge accounting
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

5. Sections 11 & 12 – Accounting choice
Entity may choose to apply either:
Sections 11 and 12 in full, or
Recognition and measurement provisions of IAS 39 and the disclosure requirements in Sec 11 & 12
No option to use IFRS 9
The option chosen applies to all financial instruments (not individually)
To change option, follow Section 10
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

6. Sections 11 & 12 – Basic principles
Basic principle of Section 11:
Amortised cost model for all basic FI except investments in ordinary or preference shares that are publicly traded or whose fair value can be measured reliably – these are fair value through profit or loss (FVTPL).
Basic principle of Section 12:
FI not covered by Section 11 are at FVTPL
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

7. Investments in sub, associate, JV (see Sections 9, 14, 15)
Section 11 – Scope
All basic financial instruments except those covered by other sections of IFRS for SMEs:
Investments in sub, associate, JV (see Sections 9, 14, 15)
Entity’s own equity (see Sec 22, 26)
Leases (see Section 20)
Employee benefit assets and liabilities (see Section 28)
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

8. Sections 11 & 12 – Definitions
Financial instrument
Contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
Includes cash
But commodities that are ‘near cash’ like gold are not financial instruments
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

9. Sections 11 & 12 – Definitions
Basic financial instrument*
Cash
Debt instrument (accounts, notes, and loans receivable and payable) that meet conditions on next slide
Ordinary and preference shares that are not convertible and not puttable
*These notes do not discuss loan commitments
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

10. Section 11 – Basic debt instruments
Debt instruments are in Section 11 if:
Returns to holder are fixed, variable referenced to an observable rate, or combination of fixed and variable
No special provision could cause holder to lose principal
Prepayment conditions are not contingent on a future event
No special conditional returns
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

11. Section 11 – Basic debt instruments
Examples of basic debt instruments:
Trade accounts and notes receivable and payable
Loans from banks and other 3rd parties
Accounts payable in foreign currency
Loans to/from subsidiaries or associates that are due on demand
Debt instrument that becomes immediately due if issuer defaults
All of these measured at amortised cost
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

12. Section 11 – Basic debt instruments
Examples of NOT basic debt instruments:
Investment in convertible or puttable shares or debt
Swaps, forwards, futures, options, rights, and other derivatives
Loans with unusual prepayment conditions (based on tax change, accounting change, linked to company performance)
All of these are FVTPL under Section 12
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

13. Section 11 – Recognition and measurement
Initial recognition:
When entity becomes a party to the contractual provisions of the instrument
IFRS for SMEs allows judgement regarding ‘trade date’ vs ‘settlement date’ accounting, but be consistent
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

14. Section 11 – Recognition and measurement
Initial measurement:
At transaction price
Include transaction costs except for FI that will be measured at FVTPL
‘Impute interest’ if payment is deferred beyond normal terms or below-market interest
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

15. Section 11 – Recognition and measurement
Initial recognition-measurement examples:
Loan made to another entity: Measure at PV of interest and principal payments
Goods sold to customer (purchased from supplier) on normal credit terms: Measure receivable (payable) at undiscounted invoice price
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

16. Section 11 – Recognition and measurement
Initial recognition-measurement examples:
Goods sold (purchased) on 2-year interest free credit: Measure at current cash sale price or PV of receivable or payable
Example: We sell goods for 1,000, payment due 2 years, interest-free. Cash price = IRR = 8%.
Journal entries
Debit
Credit
At time of sale
Receivable
857
Sales Revenue
End of year 1 69
8% x 857 = 69
Interest Revenue

17. Section 11 – Recognition and measurement
Subsequent measurement:
Debt instruments in the scope of Section 11 (even if publicly traded):
Amortised cost using the effective interest method
Equity instruments in scope of Section 11:
If publicly traded or FV can be measured reliably: FVTPL
All others: cost less impairment
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

18. Section 11 – Recognition and measurement
What is ‘amortised cost’?
Amount measured at initial recognition
Minus repayments of principal
Plus or minus cumulative amortisation of any difference between initial measurement and maturity amount (using effective interest method)
Minus (for assets) reduction for impairment or uncollectibility
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

19. Section 11 – Recognition and measurement
What is ‘effective interest method’?
Effective interest is rate that exactly discounts future cash payments (receipts) to the carrying amount
Also called ‘Internal Rate of Return’
Amortised cost = PV of future cash receipts (payments) discounted at effective interest rate
Interest expense (income) = carrying amount at beginning of period x effective interest rate
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

20. Section 11 – Effective interest example
1/1/X0 buy 5-year bond for 900, transaction cost = 50, cash interest = 40/year, mandatory redemption at 1,100 at 31/12/X4.
Year
Carrying amount beginning
Int. income at %*
Cash inflow
Carrying amt ending X0
950.00
66.10
(40)
976.11 X1
67.92
1,004.03 X2
69.86
1,033.89 X3
71.94
1,065.83 X4
74.16
1,100.00
*6.9583% is the rate that exactly discounts the cash flows to
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

21. Section 11 – Recognition and measurement
What is ‘fair value’?
Amount for which FI could be sold or settled in an arm’s length transaction
Best: Quoted market price in an active market (bid price)
Next: Price in a recent transaction for identical asset (unless circumstances have changed)
Estimate using a valuation technique (a model)
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

22. Impairment only applies to FI measured at cost or amortised cost
Section 11 – Impairment
Impairment only applies to FI measured at cost or amortised cost
At each reporting date, look for evidence that FV is below carrying amount
Significant financial difficulty of issuer
Default or delinquency
Abnormal concession granted to debtor by creditor
Probable debtor bankruptcy or reorg.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

23. Impairment assessment: Individually for all equity instruments
Section 11 – Impairment
Impairment assessment:
Individually for all equity instruments
Individually for debt instruments that are individually significant
For other debt instruments, either individually or grouped based on similar risk characteristics
Impairment recognition:
Write-down is recognised in P&L
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

24. Measurement of the impairment loss:
Section 11 – Impairment
Measurement of the impairment loss:
Debt instruments: Difference between carrying amount and current PV of estimated cash flows discounted at asset’s original effective interest rate. (Use current rate if variable.)
Equity instruments: Difference between carrying amount and best estimate (approximation) of the amount (might be zero) that entity would receive if asset were sold at reporting date.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

25. Reversal of an impairment loss:
Section 11 – Impairment
Reversal of an impairment loss:
Required if the problem causing the original impairment reduces
Write up but not to more than what carrying amount would have been had no impairment been recognised (ie not to FV but to new ‘amortised cost’)
Reversal recognised in P&L
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

26. Section 11 – Derecognition
Derecognition of a financial asset:
Derecognition = remove from statement of financial position
Only when:
Rights to cash flows expire or settled
Substantially all risks and rewards (cash flows) transferred to other entity
Transferred some but not substantially all risks and rewards, and physical control of asset transferred to another party who has the right to sell the asset to an unrelated third party.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

27. Section 11 – Derecognition
Derecognition of a financial asset:
In case (c) above:
Derecognise old asset entirely, and
Recognise separately any rights and obligations retained or created in the transfer (measure at fair value)
If transfer does not result in derecognition, keep transferred asset on books and recognise financial liability for the consideration received
Do not offset
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

28. Section 11 – Derecognition
Derecog. of financial asset – examples:
Must derecognise: Sell receivables to bank but we continue to collect and remit, for a handling fee. Bank assumes credit risk.
Does not derecognise: Same facts except entity agrees to buy back any receivables in arrears for more than 120 days. Entity continues to recognise the receivables until collected or writeoff as uncollectible.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

29. Section 11 – Derecognition
Derecognition of a financial liability:
Only when extinguished, that is:
Discharged
Cancelled
Expired
If existing debt is replaced with new one with substantially different terms (or there is a significant modification of terms):
Treat as new liability and extinguishment of original liability
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

30. Disclose accounting policies for FI
Section 11 –Disclosure
Disclose accounting policies for FI
Disclose financial assets and liabilities by categories in the statement of financial position:
Equity or debt at FVTPL
Debt at amortised cost
Equity measured at cost less impairment
Liabilities at FVTPL
Liabilities at amortised cost
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

31. Terms, conditions, and restrictions of financial assets and liability
Section 11 – Disclosure
Terms, conditions, and restrictions of financial assets and liability
For those at FVTPL, details of how FV was determined
Details of transfer of financial asset that did not qualify for derecognition
Details of financial assets pledged as collateral
Details of defaults and breaches on loans payable continued next slide...
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

32. Items of income, expense, gains and losses:
Section 11 – Disclosure
Items of income, expense, gains and losses:
Changes in FV for instruments measured at FVTPL
Total interest income and total interest expense on FI not measured at FVTPL
Impairment loss by class of financial asset
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

33. Questions or comments? 33
Expressions of individual views by members of the IASB and its staff are encouraged.
The views expressed in this presentation are those of the presenter.
Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
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34. 34
This presentation may be modified from time to time. The latest version may be downloaded from:
The accounting requirements applicable to small and medium‑sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.
The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 34