Financial Instruments
Practical Insights
IAS 32/39 - 1
Components of financial statements – IAS 1
Statement of financial position
Statement of comprehensive income
Statement of changes in equity
Most financial
assets measured
Complete
set of
at fair value
Financial statements
(effective 01 January 2009)
Statement of cash flows
Notes including accounting policies
IAS 32/39 - 2
Statement of Comprehensive Income
Most financial
assets measured
at fair value
Items recognised in
Profit and loss
+
Items recognised in
equity
IAS 32/39 - 3
Items of income and expense recognised in
Equity
Effects of cash flow
hedges
Immediate recognition of
Actuarial gains/losses
Effect of translation of
foreign operations
Re measurement of AFS
Most financial
assets measured
at fair value
Revaluation of PPE and
Intangibles
IAS 32/39 - 4
Market trends as reflected in IAS 32 and 39
Key principles of the Standard
Harmonisation of markets
Increased complexity
Detailed disclosures
All derivatives are
Most financial
recognised on the assets measured
balance sheet
at fair value
Use of fair values
Reduction of options
Measurement of the hedging
instrument is the basis for
hedge accounting
IAS 32/39 - 5
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 6
Scope exclusions - Extract
IAS 32
IAS 39
IFRS 7
Applicable
Standard
Interests in subsidiaries
X
X
X
IAS 27
Interests in associates
X
X
X
IAS 28
Interests in joint ventures
X
X
X
IAS 31
Employers' right and obligations under employee benefit
plans
X
X
X
IAS 19
Financial instruments, contracts and obligations under
share-based payment transactions
X
X
X
IFRS 2
Rights and obligations under insurance contracts
(except embedded derivatives and certain financial
guarantees)
X
X
X
IFRS 4
Rights and obligations under leases
-
X
-
IAS 17
Contracts for contingent considerations in a business
combination (for the acquirer)
X
X
X
IFRS 3
Loan commitment that cannot be settled net in cash or
another financial instrument
-
X
-
IAS 37
IAS 32/39 - 7
Scope inclusion - Commodity contracts
IAS 39 applies to contracts to buy or sell a nonfinancial item that can be settled net in cash (…)
unless the contract was entered into (and continues
to be held) for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements
IAS 32/39 - 8
Definition of financial instruments
A financial instrument is a contract that gives rise to:
• a financial asset of one entity and
• a financial liability or equity instrument of another entity
Financial
asset
Cash
Equity instrument of
another entity
Contractual right to
receive cash or another
financial asset or to
exchange financial assets
or liabilities under
potentially favourable
conditions
Certain contracts settled
in the entity’s own equity
Financial
liability
Contractual obligation to
deliver cash or another
financial asset or to exchange financial asset or
liabilities under potentially
unfavourable conditions
Certain contracts settled
in the entity’s own equity
Equity instrument
Contract evidencing
a residual interest in the
assets of an entity after
deducting all of its
liabilities
IAS 32/39 - 9
Examples of Financial Assets and Liabilities
Equity Share Capital
8% Preference Share Capital
Non Convertible debentures
Convertible bonds paying 5% interest which converts into fixed
number of shares
Convertible bonds paying 5% interest which converts into
shares to the value of the liability
Share warrants to subscribe for a fixed number of shares for a
fixed amount
Derivatives-swaps, options,futures,forwards
IAS 32/39 - 10
Examples of Financial Assets and Liabilities
(contd.)
Plant Property & Equipment
Investments
Inventories
Sundry Debtors
Prepaid expenses
Security deposits
Loans and advances
Fixed deposits
Finance leases
Operating leases
Income Tax Assets/Liabilities
IAS 32/39 - 11
Categories of financial instruments
4 categories of financial instruments:
A financial asset or financial liability at fair value
through profit or loss
Held-to-maturity investments
Loans and receivables
Available-for-sale financial assets
IAS 32/39 - 12
Categories of financial assets
Category
Definition
Financial assets at
fair value through
profit or loss
• Financial assets held for trading
• Derivatives, unless accounted for as hedges
• Financial asset designated to this category under the
fair value option
Loans and
receivables
Non-derivative financial assets with fixed or
determinable payments that are not quoted in an active
market
Held-to-maturity
investments
Non-derivative financial assets with fixed or
determinable payments and fixed maturity that the
entity has the positive intent and ability to hold to
maturity
Available-for-sale
financial assets
• All financial assets that are not classified in another
category are classified as available-for-sale
• Any financial asset designated to this category on
initial recognition
IAS 32/39 - 13
Categories of financial liabilities
Category
Definition
Financial liabilities at
fair value through
profit or loss
• Financial liabilities held for trading
• Financial liability designated as at fair value through
profit or loss on initial recognition (fair value option)
Other financial
liabilities – at
amortised cost
All financial liabilities that are not classified at fair value
through profit or loss
IAS 32/39 - 14
Categories of financial assets/liabilitiesExamples
Financial assets/liabilities principally for the purpose
of selling or repurchasing in near term.
Venture capital organization/mutual fund that invests
in financial assets with the object of profiting from
their total return in form of interest, dividend and
changes in fair value.
Fixed maturity debts that bears interest at a fixed or
variable rate
Derivatives with negative fair value
IAS 32/39 - 15
Fair value option
Designation of financial instruments as at fair value
through profit or loss is permitted, when
The designation eliminates or significantly reduces
“accounting mismatches”
A group of financial assets and/or liabilities is managed on a
fair value basis
An embedded derivative that meets particular conditions
Only available at initial recognition
Designation is irrevocable
No requirement for consistency, meaning that an
entity can choose which, if any, of its financial
instruments are to be designated
IAS 32/39 - 16
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 17
Definition - Derivative
Three characteristics
Fair value changes in
response to the change
in underlying
Interest rate,
Security price,
Commodity price,
Foreign exchange rate,
Credit rating, or
Other index
No or little initial
net investment
Settled
at a future date
IAS 32/39 - 18
Examples of derivatives and underlyings
Type of contract
Interest rate swap
Currency futures
Commodity forward
Credit swap
Purchased or written stock
option (call or put)
Main pricing-settlement
variable (underlying variable)
Interest rate
Currency rates
Commodity prices
Credit ranking, credit index
or credit price
Equity prices (equity of
another entity)
IAS 32/39 - 19
Embedded derivatives - Identification
What are they? / How to identify?
An implicit or explicit term in a contract that makes
it behave like a derivative
Instruments
with
conversion
features
Index linked
payments
Transactions
in “third
currency”
Instruments with
option to extend
the term of debt
IAS 32/39 - 20
Embedded derivatives - Separation
When to separate?
The economic characteristics and risks of the
embedded derivative are not closely related to
economic characteristics and risks of the host contract,
and
A separate instrument with the same terms as the
embedded derivative would meet the definition of a
derivative, and
The hybrid contract is not carried at fair value through
profit or loss (i.e. a derivative imbedded in a financial
asset or financial liability measured at fair value
through profit or loss is not separated
IAS 32/39 - 21
Embedded derivatives - Accounting
Accounting following separation:
Apply rules of IAS 32/39 (or other applicable IAS if host is
not a financial instrument) to the host contract
Measure the separated derivative at fair value through P&L
Accounting when separation is difficult:
If it is difficult to separate the embedded derivative, may
choose to fair value through profit or loss for the entire
combined contract. However, the host contract must be a
financial instrument
Accounting when impossible to separate:
If the embedded derivative cannot be reliably identified and
measured, the entire combined contract is accounted for as
a financial instrument at fair value
IAS 32/39 - 22
Embedded derivatives – Example
Australian company leases an aircraft from a UK
company for 2 years. Monthly rentals of Euro 20,000
are payable at the beginning of each month.
What is the host contract?
Are there any derivatives embedded in it?
Do the derivatives need to be separated?
IAS 32/39 - 23
Embedded derivatives – Example (solution)
What is the host contract?
Lease contract (not carried at fair value)
Are there any derivatives embedded in it?
Yes, there are implied forward contracts to exchange
Euro (which are within the scope of IAS 39)
Do the derivatives need to be separated in year 1?
Yes, there are 23 embedded forward contracts to
exchange Euro 20,000 for Australian dollars (each of
these embedded forward contracts is a derivative that
is within the scope of IAS 39 and the host contract is
not carried at fair value.)
IAS 32/39 - 24
Embedded derivatives - Re-assessment
Assessment of separation when entity first becomes
party to a contract
Re-assessment of embedded derivatives (IFRIC 9)
Reassessment is prohibited unless there is a change
in the terms of the contract that significantly modifies
the cash flows
First-time adopter assesses on the conditions when
first becoming party to the contract
Purchaser of hybrid contract assesses based on the
conditions at that date
IAS 32/39 - 25
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 26
Recognition
All financial assets and financial liabilities, including derivatives,
should be recognised on the balance sheet when the entity
becomes party to the contractual provisions of the instrument
Financial assets
@
“fair value of
consideration
given”
Financial liabilities
@
“fair value of
consideration
received”
IAS 32/39 - 27
Initial measurement
Measured at fair value on initial recognition
Transaction costs are included in the initial
measurement of financial instruments that are not
measured at fair value through profit or loss.
Applies to all financial instruments – whether or not
negotiated on an arm’s length basis (e.g., interest-free
loans by a shareholder or government)
IAS 32/39 - 28
Fair Value Concepts
Fair value is defined as the amount for which an
asset could be exchanged or a liability settled
between knowlegeable and willing parties in an arm’s
length transaction.
Fair value does not take into consideration
transaction costs expected to be incurred on transfer
or disposal of a financial instrument.
Fair value of a financial instrument on initial
recognition is normally the transaction price( i.e. fair
value of consideration given or consideration
received)
IAS 32/39 - 29
Guidance on fair values
Active market: unadjusted published price quotations
No active market: valuation techniques using maximum market
input and minimum entity specific input
Fair values of equity instruments: in the absence of market
quotation are to be based on estimates or cost less impairment
(as a last resort and only if impossible to make reliable estimates)
IAS 32/39 - 30
Case study – Inter-company loans
Fair value of below market loans- is the present value
of the expected future cash flows using a market –
related rate
If the loan is from a shareholder acting in the
capacity of a shareholder, then the resulting credit
should be reflected in equity as contribution from
shareholder- loans by parent to subsidiary
Fair value of an interest free loan repayable on
demand is not less than its face value and hence
should not be discounted
Long term interest free/low interest advances for
purchases in nature of loans given should be
discounted to its present value
IAS 32/39 - 31
Subsequent measurement of financial
instruments
Instrument
Financial assets at fair value
through profit or loss
Measurement
Value changes
Fair value
P&L
Held-to-maturity
investments
Amortised cost
(effective interest rate)
Not relevant
(unless impaired)
Loans and receivables
Amortised cost
(effective interest rate)
Not relevant
(unless impaired)
Available-for-sale
Fair value
Equity
(unless impaired)
Financial liabilities at fair
value through profit or loss
or designated as such
Fair value
P&L
Amortised cost
Not relevant
Fair value
P&L
Other liabilities
Derivatives
IAS 32/39 - 32
Amortised cost and effective interest method
Amortised
cost
=
Initial
recognition
amount
-
Principal
repayments
-/+
Accumulated
interest
-
Impairment
reduction
Amortisation is calculated using the effective interest rate method
At each reporting date apply the effective interest rate to carrying
amount to determine interest income and interest expense
IAS 32/39 - 33
Case study- Measurement and disclosure of
investments
An entity receives $100m equity in cash on 1 July 2005.
It invests in a bond of $100m par at a clean price of 97 with a 5%
fixed coupon on 1 July 2005.
Coupons are paid annually and the bond has a maturity date of
30 June 2007.
The yield to maturity is calculated as 6.6513%.
On 30 June 2006 the entity receives the first coupon payment of
$5m.
The clean market value of the security has increased to 99 at 30
June 2006.
The security has not been impaired and no principal has been
repaid.
Using the effective interest method, the $3m discount is
amortized 1.45 in year 1 and 1.55 in year 2.
IAS 32/39 - 34
Solution- Measurement and disclosure of
investments
IAS 32/39 - 35
Case study-Subsequent measurement at
ammortised cost
Company A has obtained a loan of INR 2202.70
million as at 31 December 2006 repayable on 31
December 2013. Interest rate for the borrowing is
1.75 %( considered to be at market rate).
In addition ,processing fee paid upfront aggregates
INR 13.86 million.
IAS 32/39 - 36
Solution-Measurement of loans at
ammortised cost
Accounting adjustments would be required to state the loan at ammortised cost after considering the
upfront fee / transaction cost payment made amounting to INR 13.86 million. Bank Loan will initially
be recognized at fair value and interest will be accounted under effective interest rate method as
denoted below:
Sr. No. Date
Interest (1.75%)
(A)
1
2
3
4
5
6
7
8
38,547,425
38,547,425
38,547,425
38,547,425
38,547,425
38,547,425
38,547,425
31 Dec 06
31 Dec 07
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 11
31 Dec 12
31 Dec 13
269,831,975
Interest
1.846% (B)
40,421,259
40,455,863
40,491,105
40,526,999
40,563,556
40,600,787
40,638,706
283,698,278
Amortization of
Amortized costs
discount .(B)-(A)
(Amt.in Rs.)
2,188,843,697
1,873,834
2,190,730,147
1,908,438
2,192,638,585
1,943,680
2,194,582,266
1,979,574
2,196,561,840
2,016,131
2,198,577,972
2,053,362
2,200,631,334
2,078,665
2,202,700,000
13,866,303
IAS 32/39 - 37
Reclassifications from held-to-maturity
category
Sales before maturity
reclassify ALL instruments
Change of intent or
ability
reclassify ALL instruments
“Tainting” leads to measurement at fair value
And classification as AFS assets for two years
IAS 32/39 - 38
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 39
Impairment requirements
A financial asset or a group of financial assets is impaired if,
and only if,
there is objective evidence of impairment as a result of one or
more events that occurred after initial recognition; and
the loss event has an impact on estimated future cash flows
An impairment loss is measured as the difference between:
the asset’s carrying amount and the present value of estimated
future cash flows - for loans and receivables or held-to-maturity
investments; and
the acquisition cost (net of any principal repayment and
amortisation) and current fair value, less any impairment losses
previously recognised– for available-for-sale financial assets
IAS 32/39 - 40
Loans and receivables - Objective evidence
of impairment
At each balance sheet date, the entity should assess whether
there is objective evidence of impairment for an asset or group of
financial assets
Significant financial difficulty of the issuer/obligor
Default or breach of contract
Granting of a concession by the lender
Bankruptcy or financial reorganisation of the
borrower
Disappearance of an active market for the assets
concerned
Measurable decrease in the estimated future
cash flows
IAS 32/39 - 41
Loans and receivables - Impairment
assessment
Objective evidence of impairment of
individually significant assets, and
individually or collectively for assets
that are not individually significant?
Ye
s
Assess impairment
Ye
s
Assess impairment collectively
N
o
Credit risk characteristics similar
to portfolio of assets?
N
o
Continue to assess individually
IAS 32/39 - 42
Loans and receivables - Evaluation of
impairment on a portfolio basis
Future cash flows
Estimated cash flows
Historic loss experience
Changes in related
observable data
Discount rate
Original effective interest
rate
Losses incurred but not reported
At each year end the present value of the estimated cash flows is
re-calculated and impairment loss recognised for the difference
between this amount and the carrying value of the portfolio. The
estimated cash flows take into account incurred losses, not
expected future losses
When loans are identified as individually impaired they are
removed from the portfolio
IAS 32/39 - 43
Loans and receivables - Measurement of
incurred losses on a portfolio basis
Incurred
loss
=
Historic
loss
rate
x
Loss
confirmation
period
x
Loan’s
balance of
portfolio
Incurred loss defines impairment loss
Historic loss rate is determined using historical data adjusted
for economic conditions existing at the balance sheet date
Loss confirmation period (‘emergence period’) is the average lag
between incurrence of loss and confirmation of loss dates
Incurrence loss date is the date on which objective evidence of
impairment occurs on an individual asset basis
Confirmation loss date is the date on which objective evidence
of impairment is identified on an individual asset basis
IAS 32/39 - 44
Impairment of available-for-sale equity
securities
Additional indicators of impairment for equity
securities
Adverse effects of changes in technological, market,
economic or legal environment, in which the entity
operates
Significant or prolonged decline in the fair value of an
investment in the equity instrument
Equity
instruments
Impairment loss can not be reversed
through profit or loss as long as the
asset continues to be recognised
IAS 32/39 - 45
Impairment of available-for-sale debt
securities
Indicators of impairment for debt securities (similar to
those for loans and receivables)
Significant financial difficulty of the issuer
Bankruptcy or financial reorganisation of the issuer
Disappearance of an active market for the bonds
concerned
Measurable decrease in the estimated future cash flows
Debt instruments
Impairment loss can be reversed
through profit or loss if the increase can
be objectively related to an event
occurring after the loss was recognised
IAS 32/39 - 46
Case study- Impairment
Company B has $1 million of auto loans granted to
individual borrowers outstanding at the end of the
reporting period. Based on examination of past
losses the Company determined that it has a loss
rate of 2%, which has been derived through dividing
annual credit losses by the average loan balance
each year for the applicable historical period. The
Company determines also that the deterioration in
the financial condition of its auto loans granted to
individual borrowers occurs, on average, six months
before the individual loans are identified as impaired
(loss confirmation period is 0.5).
IAS 32/39 - 47
Solution to case study-Impairment
Given the facts, the Company’s allowance for credit losses
incurred but not reported for a portfolio of auto loans granted to
individual borrowers would approximate six months’ worth of
allowances. Thus the Company should estimate the incurred
but not yet confirmed credit losses in a pool by estimating the
loss confirmation period, computing a historical loss rate, and
then multiplying the historical loss rate times the loss
confirmation period times the pool’s loan balance.
The portfolio based component of Company B’s allowance for
credit losses would be
$1,000,000 x 2% x 0.5 = $10,000
The calculated figures represent an estimate of losses incurred
on loans in the pool to borrowers whose financial condition has
deteriorated sufficiently to impair their loans, even though the
Company has not yet identified the deterioration.
IAS 32/39 - 48
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 49
Derecognition of a financial asset
First, consolidate all subsidiaries (including all SPEs)
Derecognition provisions are applied on a consolidated level
Then, consider the subject of the derecognition provisions
(financial asset, group of similar financial assets or a portion of a
financial instruments or a group of similar financial instruments)
Then, apply derecognition rules:
Derecognise when contractual rights to cash flows expire or
There is a “transfer of a financial asset” and
That transfer qualifies for derecognition
IAS 32/39 - 50
Derecognition of a financial asset (contd.)
“Transfer of a financial asset” requires
A transfer of the contractual rights to receive the Cash Flows;
or
Meeting the “pass-through requirements” in IAS 39.19
If financial asset has been transferred, then assess whether
transfer qualifies for derecognition
If substantially all risks and rewards are retained
If substantially all risks and rewards are transferred
If some but not substantially all risks and rewards have been
transferred:
Control -> Continuing involvement
A very mixed model !
IAS 32/39 - 51
Derecognition of a financial liability
Financial liability (or part thereof) is removed from
the balance sheet when it is extinguished, i.e. when
the obligation is discharged or cancelled or expires
IAS 32/39 - 52
Derecognition principles may have a big
impact on…
Securitisations
Securities lending
Repurchase agreements
Partial transfers of assets/liabilities
Transfers involving special purpose entities
Derecognition coupled with a new asset or liability
Derecognition rules are strict
IAS 32/39 - 53
Case study 1 -Derecognition
Company A is a manufacturing entity that has several
arrangements whereby it sells trade receivables to
financial institutions for cash with no conditions
attached. The Company favors these arrangements
as it receives cash more quickly than waiting for
customers to pay their outstanding in the normal 30
or 60 day terms. The customers are notified of the
sale and pay directly to the bank. There is no
recourse for the bank and Company A only
guarantees the existence of the trade receivables,
but not creditworthiness of the customers etc.
Does the described transaction qualify for
derecognition?
IAS 32/39 - 54
Solution –Case Study 1
Company A would de-recognise the transferred
receivables
IAS 32/39 - 55
Case study 2 -Derecognition
Company B sells 100 of short-term receivables to a
Bank for cash by guaranteeing to buy back first 20%
of defaulted receivables, while the historic default
rates on such receivables are up to 5%. The
customers are notified of the sale and pay directly to
the bank.
Does the described transaction qualify for
derecognition?
IAS 32/39 - 56
Solution – Case study 2
Even though a financial asset has been
transferred, receivables cannot be derecognised
from Company B’s financial statements because it
has retained substantially all risks and rewards of
ownership.
IAS 32/39 - 57
Case study 3 -Derecognition
Company C sells 100 of short-term receivables to a
Bank for 98 and at the same time C guarantees to
buy back first 5% of defaulted receivables. The credit
losses on the portfolio of receivables range between
3% to 7% with a confidence interval of 99% and an
expected loss of 5%.
The fair value of the guarantee at the date of
transaction is 4. The customers are notified of the
sale and pay directly to the bank. According to the
terms of the sale, the Bank cannot sell or pledge the
purchased receivables.
Does the described transaction qualify for
derecognition?
IAS 32/39 - 58
Solution – Case study 3
The Company has neither transferred nor retained
substantially all of the risks and rewards and
retained control over the receivables. Consequently,
the receivables cannot be derecognised from
Company C’s financial statements to the extent of its
continuing involvement in the transferred
receivables.
IAS 32/39 - 59
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 60
ICAI Announcement-Accounting for
derivatives
The recent ICAI announcement (applicable to financial
statements for the period ending March 31, 2008 or after)
on accounting for derivatives lays down the following two
alternatives, out of which a company must select one.
(a) Follow Accounting Standard 30, Financial
Instruments: Recognition and Measurement
or
(b) Provide for losses in respect of all outstanding
derivative contracts at the balance sheet
date by marking them to market “keeping in view the
principle of prudence as enunciated in AS 1.”
IAS 32/39 - 61
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 62
IFRS 7- Financial Instruments :Disclosures
Overview
Effective for annual periods beginning on or after 1
January 2007 (earlier application is encouraged)
Supersedes IAS 30 and the disclosure requirements
in IAS 32 (the classification requirements remained
unchanged)
Shall be applied by all entities to all risks arising
from all financial instruments ( some exceptions
apply)
Applicable to recognised and unrecognised financial
instruments within the scope of IFRS 7, even when
outside the scope of IAS 39 (e.g., loan commitments)
IAS 32/39 - 63
Scope
IFRS 7 to be applied by all entities and to all types of
financial instruments except:
Interest in subsidiaries, associates and joint ventures if
accounted in accordance with IAS 27, IAS 28 or IAS 31
Employers’ rights and obligations from employee
benefit plans under IAS 19
Insurance contracts as defined in IFRS 4
An acquirer’s interest in contracts for contingent
consideration in a business combination
Financial Instruments, contracts and obligations under
IFRS 2
IAS 32/39 - 64
Key learning points
IFRS 7 to be applied by all entities and to all types of financial
instruments (some exceptions noted)
Supersedes IAS 30 and the disclosure requirements in IAS 32 (the
classification requirements remained unchanged)
Standard allows entity to determine classes of financial instruments
for certain disclosures
Disclose information to evaluate significance of financial instruments
for financial position and performance
Qualitative disclosures - for each type of risk arising from financial
instruments:
The exposures and how they were generated
Objectives, policies and processes for managing the risks and
methods to measure the risk
Any changes to the above from the previous period
IAS 32/39 - 65
Agenda
Scope, definitions and categories
Derivatives
Recognition and measurement
Impairment
Derecognition
ICAI Announcements –Derivatives
IFRS 7
Summary
IAS 32/39 - 66
Definition of financial instruments
A financial instrument is a contract that gives rise to:
• a financial asset of one entity and
• a financial liability or equity instrument of another entity
Financial
asset
Cash
Equity instrument of
another entity
Contractual right to
receive cash or another
financial asset or to
exchange financial assets
or liabilities under
potentially favourable
conditions
Certain contracts settled
in the entity’s own equity
Financial
liability
Contractual obligation to
deliver cash or another
financial asset or to exchange financial asset or
liabilities under potentially
unfavourable conditions
Certain contracts settled
in the entity’s own equity
Equity instrument
Contract evidencing
a residual interest in the
assets of an entity after
deducting all of its
liabilities
IAS 32/39 - 67
Subsequent measurement of financial
instruments
Instrument
Financial assets at fair value
through profit or loss
Measurement
Value changes
Fair value
P&L
Held-to-maturity
investments
Amortised cost
(effective interest rate)
Not relevant
(unless impaired)
Loans and receivables
Amortised cost
(effective interest rate)
Not relevant
(unless impaired)
Available-for-sale
Fair value
Equity
(unless impaired)
Financial liabilities at fair
value through profit or loss
or designated as such
Fair value
P&L
Amortised cost
Not relevant
Fair value
P&L
Other liabilities
Derivatives
IAS 32/39 - 68
Market trends as reflected in IAS 32 and 39
Key principles of the Standard
Harmonisation of markets
Increased complexity
Detailed disclosures
All derivatives are
Most financial
recognised on the assets measured
balance sheet
at fair value
Use of fair values
Reduction of options
Measurement of the hedging
instrument is the basis for
hedge accounting
IAS 32/39 - 69