Financial Reporting Requirements for
Queensland Government Agencies
APG 12
Financial Instruments
Introduction
The accounting standards listed below set out extensive requirements for, and include
comprehensive guidance on:
•
identification and classification of financial assets and financial liabilities;
•
recognition, de-recognition and measurement of financial assets and financial liabilities,
including derivatives and embedded derivatives; and
•
disclosures to be made in financial statements in respect of financial assets and
financial liabilities and associated risks.
Applicable requirements/guidance
AASB 7 Financial Instruments: Disclosures
AASB 13 Fair Value Measurement
AASB 101 Presentation of Financial Statements
AASB 132 Financial Instruments: Presentation
AASB 139 Financial Instruments: Recognition and Measurement
Interpretation 9 Reassessment of Embedded Derivatives
Interpretation 16 Hedges of a Net Investment in a Foreign Operation
Minimum Reporting Requirements (Part B) Section FRR 9 Notes to the Financial
Statements (Financial Instruments)
Reference should be made to AASB 132 and AASB 139 for definitions of all key financial
instruments concepts.
If future economic benefit
is the receipt of
goods/services it is not
considered to be a
financial asset – likewise
for liabilities
Agencies should note that a contractual obligation to receive or pay cash or another
financial asset must exist to be classified as a financial asset or financial liability.
Therefore, assets (such as prepaid expenses) for which the future economic benefit is the
receipt of goods or services, rather than the right to receive cash or another financial asset,
are not financial assets for the purpose of AASB 139. Similarly, items such as deferred
revenue and most warranty obligations are not financial liabilities because the outflow of
economic benefits associated with them is the delivery of goods and services rather than a
contractual obligation to pay cash or another financial asset.
AASB 7, AASB 132 and AASB 139 each exclude from their scope a wide range of
transactions.
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Financial Instruments
Financial
Manage ment Framework
Scope
the purposes of AASB 7, 132 and 139, a financial instrument includes:
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Financial Assets
Financial Liabilities
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Cash
Advances
Receivables
Bills of exchange held
Promissory notes held
Debentures
Shares (not issued by the holder)
Bonds
Loans to other entities
Purchased options
Swap contracts
Forward exchange contracts
Forward rate agreements
Overdrafts
Payables
Loans from other entities
Financial guarantees
Bills of exchange issued
Promissory notes issued
Debentures
Preference shares (depending on
terms and conditions)
Convertible notes
Swap contracts
Forward exchange contracts
Options sold
Forward rate agreements
Recognition and Measurement
AASB 139 contains comprehensive requirements for the initial and subsequent recognition
and measurement of each category of financial instruments. AASB 13’s application
guidance for measuring fair values applies to financial assets and financial liabilities. AASB
139 limits the circumstances in which financial instruments may be reclassified between
categories, and sets out the accounting requirements where a reclassification is possible.
Need to establish
whether fair value on
initial recognition is
materially same as
transaction price
Transaction prices are generally presumed as the best evidence of fair value of an asset or
liability at initial recognition. However, there might be situations where this presumption
can’t be supported, and such circumstances include where:
•
•
•
•
the transaction was not entered into on commercial or arm’s length terms;
no or nominal consideration was provided by the recipient;
there is evidence that the transaction price does not materially reflect the
underlying value of the asset/liability;
the situations detailed in AASB 13 paragraph B4 exist.
Where the transaction price is not considered to reflect fair value, agencies are required (by
AASB 7) to disclose in the financial instruments note to the financial statements why this is
the case, and describe the evidence that supports the fair value recognised.
A summary of the basic recognition and measurement requirements for each category of
financial instruments is set out below.
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On Initial Recognition
Initial recognition and
measurement - refer
AASB 139, para 43.
Reference as
per below
table “After
Initial
Recognition”
Category
Measurement Basis
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Difference between
nominal transaction price
and fair value - refer
AASB 139, para AG76
Financial assets or
financial liabilities at fair
value through profit or
loss
1
2-5
Other financial
instruments
Fair value.
• Material differences between transaction
price and fair value should be accounted for
according to paragraph AG76 of AASB 139
Fair value plus transaction costs directly attributable
to the acquisition or issue of the financial asset or
financial liability.
• Material differences between transaction
price and fair value should be accounted for
according to paragraph AG76 of AASB 139
Subsequent
measurement of
financial assets and
financial liabilities,
refer AASB 139 paras
45-47
After Initial Recognition
1
Category
Financial assets or financial
liabilities at fair value through
profit or loss.
Exceptions
A derivative liability
(categorised at fair value
through profit or loss) that is
linked to and must be settled
by delivery of an unquoted
equity instrument whose fair
value cannot be reliably
measured
2
Held-to-maturity investments
Measurement Basis
Fair value without any
deduction for expected
transaction costs on
disposal
Accounting Treatment
Change in fair value is
recognised in the
operating result
Cost
Interest costs recognised
in the operating result
Amortised cost using the
effective interest
method*
Interest and impairment
costs recognised in the
operating result
Interest should be at
same discount rate used
for initial measurement
at fair value. Therefore,
no difference between
initial fair value and
starting amortised cost.
3
Loans (receivable)
Amortised cost using the
effective interest
method*
Interest and impairment
costs recognised in the
operating result
Interest should be at
same discount rate used
for initial measurement
at fair value.
Therefore, no difference
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Category
Measurement Basis
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Accounting Treatment
between initial fair value
and starting amortised
cost.
Accounts receivable (current)
Amortised cost (i.e.
generally nominal
amount)
No change in fair value
as representative of
short term transactions
4
Available-for-sale financial
assets
Fair value without any
deduction for expected
transaction costs on
disposal
Change in fair value is
recognised directly in
equity (except for an
impairment loss and a
foreign exchange gain or
loss) until the financial
asset is derecognised
when the cumulative
gain or loss previously
recognised in equity is
recognised in the
operating result.
5
Financial liabilities (not at fair
value through profit or loss)
Amortised cost using the
effective interest
method*
Interest costs recognised
in the operating result
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If an agency classifies its
borrowings from QTC in this
way, this should be the same
as the current book value
method.
Interest should be at
same discount rate used
for initial measurement
at fair value. Therefore,
no difference between
initial fair value and
starting amortised cost.
Accounts payable (Current)
Amortised cost (i.e.
generally nominal
amount)
No change in fair value
as representative of
short term transactions
Financial Guarantees
To be measured at the
higher of:
(i) The amount
calculated according to
provisions and
contingent liabilities; and
Where the amount is not
quantifiable and it is not
probable that a liability
will occur, it is
recognised as a
contingent liability
(ii) The amount initially
recognised less
cumulative amortisation
When it becomes
probable that the agency
will be liable for the
contract guarantee, it is
to be recorded as a
liability.
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Category
Measurement Basis
5
(cont)
Accounting Treatment
Exceptions
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Financial liabilities that arise
when a transfer of a financial
asset:
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-
does not qualify for derecognition; or
-
is accounted for using
the continuing
involvement approach
Continue to recognise
the transferred asset in
its entirety and recognise
a financial liability for the
consideration received.
In subsequent periods,
recognise any income on
the transferred asset and
any expenses incurred
on the financial liability.
The agency shall
continue to recognise
any income arising on
the transferred asset to
the extent of its
continuing involvement
and shall recognise any
expenses incurred on
the associated liability.
The associated liability is
measured such that the
net carrying amount of
the transferred asset and
the associated liability is:
For the purpose of
subsequent
measurement,
recognised changes in
the fair value of the
transferred asset and the
associated liability are
recognised in the
operating result and
accounted for
consistently with each
other and shall not be
offset.
(a) the amortised cost of
the rights and obligations
retained by the agency,
if the transferred asset is
measured at amortised
cost; or
(b) equal to the fair value
of the rights and
obligations retained by
the agency when
measured on a standalone basis, if the
transferred asset is
measured at fair value.
6
Other Exceptions
-
-
Investments (however
categorised) in equity
instruments that do not
have a quoted market
price in an active
market and whose fair
value cannot be
reliably measured, and
derivatives linked to
and settled by delivery
of such equity
instruments
Financial assets and
financial liabilities
designated as hedged
items
Cost subject to
measurement under the
hedge accounting
requirements
* For measurement at amortised cost using the effective interest method, the effective interest rate
is the rate that exactly discounts estimated future cash payments or receipts through the expected
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life ofManage
a financial instrument
(or, when
appropriate, a shorter period) to the net carrying amount of
that instrument. Refer to AASB 139 for further guidance.
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Diagram
dividends, losses and gains related to a financial instrument must be recognised in
a manner consistent with the classification of the associated financial instrument in the
Statement of Financial Position e.g. an entity classifying shares as a financial liability must
recognise any associated dividend payments as interest expense.
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All financial assets
(except for those
measured at fair value
through profit/loss) are
subject to impairment
testing
AASB 139 contains substantial requirements and application guidance to be complied with
in determining whether or not a financial instrument can be derecognised, and to the extent
that it can be derecognised, how to account for this.
All financial assets, apart from financial assets measured at fair value through profit or loss,
are to be subject to impairment testing in accordance with AASB 139. Substantial
requirements and application guidance exist in AASB 139 for the assessment of
impairment for financial assets.
AASB 139, Interpretation 9 and Interpretation 16 contain comprehensive requirements and
guidance for accounting for hedging transactions and embedded derivatives.
In relation to embedded derivatives, where a rental lease agreement for a public housing
tenant contains an option to purchase the dwelling at market value, the option is not an
embedded derivative. This is because the exercise of the option does not cause some or
all of the cash flows that otherwise would be required by the contract to be modified. The
lessor agency could still sell the dwelling at market value to another party and receive the
same cash flows.
However, if the purchase price under the option is fixed in absolute dollar terms or fixed by
reference to an index that does not closely match market value, the option is an embedded
derivative since the exercise of the option may cause some or all of the cash flows that
otherwise would be required by the contract to be modified.
Disclosure Requirements
All disclosure requirements in relation to financial instruments are contained in AASB 7 and
AASB 13.
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© The State of Queensland (Queensland Treasury) April 2015
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