AC2101 – Accounting Recognition

and Measurement

Seminar 7
Lease Accounting IV

An Introduction to Financial
Instruments – Financial Assets

Semester 1, AY2017/2018

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 Group Presentations

- Team 2

- Team 3

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Next…

• An Introduction to Financial
Instruments
– Financial assets

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What is a financial instrument?
Any contract that gives rise to both a financial asset of one
enterprise and a financial liability or equity instrument of
another enterprise

– Primary instruments: receivables, payables, loans, equity

and debt investments, etc.

– Derivative instruments: forward/future, options, swap,

etc.
(FRS 32:11)

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Why do firms hold financial instruments?
1. Financing purposes
2. Trading purposes
▪ Part of normal business activities, including hedging
3. Investing purposes
▪ Applicable FRS depends on the form of investments
➢ Bonds (FRS 109)
➢ Shares
• Control (subsidiaries: FRS 27; FRS 110,112)
• Significant influence (associates: FRS 28; FRS 112) AC3102
• Joint control (joint ventures: FRS 111; FRS 112)
• Other share investments (FRS 109)

Focus of our coverage: FRS 109

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 FRS 109

• Complete FRS 109 issued by ASC in December

2014
• Will replace existing standard on financial
instruments FRS 39
• Effective 1 January 2018
• Although convergence was the initial aim,
convergence was not achieved with the US-based
FASB for IFRS 9 (upon which FRS 109 is based)

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 Financial Instruments:
Recognition

An entity shall recognize a financial asset or a

financial liability in its statement of financial
position when, and only when, the entity
becomes a party to the contractual provisions
of the instrument.
(FRS 109: 3.1.1)

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 Financial Instruments:
Recognition

In accordance with the recognition criteria,

all primary financial instruments and
derivatives have to be recognized on the
statement of financial position.

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 What is a financial asset?
Any asset that is
a. Cash
b. An equity instrument of another entity
c. A contractual right to
▪ Receive cash or another financial asset from another entity
▪ Potentially favorably exchange financial assets/liabilities with another
entity
d. A contract to be settled in the entity’s own equity instruments
(e.g., based on a variable number of equity instruments)

(FRS 32:11)
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 Financial Assets
Classification and Measurement

Classification of financial assets based on an

entity’s
- business model of how the financial assets are
managed, and
- the cash flow characteristics of the financial
asset.
(FRS 109: 4.1.1)

No reclassification unless business model changes

(expected to be infrequent).
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 Financial Assets
Classification and Measurement
▪ Amortized cost (AC)
• Debt securities held to collect contractual cash flows
that are solely payments of principal and interest
▪ Fair Value through other comprehensive income (FVOCI)
• Debt securities held to collect contractual cash flows
that are solely payments of principal and interest, and to
sell
• Equity securities irrevocably elected to be classified as
FVOCI
▪ Fair Value through profit or loss (FVPL)
• Debt securities that fail to meet AC and FVOCI criteria
• Equity securities, except those irrevocably elected to be
classified as FVOCI
• Derivatives
• Financial assets (debt or equity securities) designated
as FVPL because of an “accounting mismatch”
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An important type of financial assets:
Debt Securities (Bond)
(Review of Terminology)

– Coupon versus effective interest rate

– Bond issued at par, discount or premium

– Present value computation

– Quoted prices of bonds

– Effective interest rate method

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