Financial Instruments: PAS 32 and PFRS 9

IAS 32 Presentation of Financial
Statements;
Disclosures IFRS 9 Financial
Instruments
What is the objective of IAS 32?
International Accounting Standard 32, or IAS 32, establishes principles for

presenting the financial instruments and especially:
 It provides definitions of financial instruments,
 It shows us how to distinguish equity from liabilities,
 It contains the guidance for compound financial instruments,
 It prescribes the rules for presenting the treasury shares
 It states conditions when you can offset a financial asset and a financial
liability in your statement of financial position,
What is a financial instrument?
 A financial instrument is any contract that gives rise to

a financial asset of one entity and a financial liability or
equity instrument of another entity. (IAS 32.11)
What is a financial instrument?
THREE MAIN TYPES OF FINANCIAL
INSTRUMENTS
 Financial asset;
 Financial liability; and
 Equity instrument
FINANCIAL ASSET
Any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions
that are potentially favorable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments that is:
(i) a non-derivative for which the entity is or may be obliged to receive a variable number
of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity instruments. For
this purpose the entity’s own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity’s own equity instruments.
FINANCIAL ASSET
EXAMPLES OF FINANCIAL ASSETS:
1. Cash
2. Investment in shares or other equity instrument issued by
other entities
3. Accounts receivable
4. Notes receivable
5. Loans receivable
6. Investment in bonds and other debt instruments issued by
other entities
7. Derivatives with potentially favorable exchange conditions
DEFINITION OF A FINANCIAL LIABILITY
Under IAS 32.11, a financial liability is any liability that is:

 A contractual obligation to:
 Deliver cash or another financial asset from another entity.
Example: trade payables, taken loans, issued bonds. Or,
 To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity.
Example: written call options, written put options.
 A contract that will or may be settled in the entity’s own equity

instruments and is:
 a non-derivative for which the entity is or may be obliged to deliver a variable a
number of the entity’s own equity instruments, or
 a derivative that will or may be settled other than by the exchange of a fixed amount
of cash or another financial asset for a fixed number of the entity’s own equity
instruments.
 Examples: Share Warrants Outstanding, Share Options Outstanding
CONTRACT
What does the “contract” in the definition refer to?
The “contract” in the definition refers to an agreement

between two parties that the parties have little, if any,
discretion to avoid, usually because the agreement is
enforceable by law.
DEFINITION OF A FINANCIAL LIABILITY
EXAMPLES OF FINANCIAL LIABILITIES:
1. Bank overdraft
2. Accounts payable
3. Notes payable
4. Loans payable
5. Derivatives with potentially unfavorable exchange
conditions
6. Certain preference shares
DEFINITION OF AN EQUITY INSTRUMENT
 An equity instrument is any contract that evidences a

residual interest in the assets of an entity after
deducting all of its liabilities.
EXAMPLES OF EQUITY INSTRUMENTS:
1. Ordinary shares
2. Certain preference shares
3. Warrants or written call options
HOW TO PRESENT FINANCIAL INSTRUMENTS?
Classify the financial instruments on initial

recognition as a financial liability, a financial asset or an
equity instrument in accordance with:
 The substance of the contract, and
 The definitions of a financial asset, financial liability
and an equity instrument.
EQUITY OR LIABILITY?
TRANSACTIONS IN OWN EQUITY
Transactions in own equity

An equity instrument is:
 A non-derivative that includes no contractual obligation to deliver
a variable number of own equity instruments, or
 A derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed amount of its own
equity instruments.
Two most important things to watch out are:
 Are equity instruments own or issued by somebody else?
 Is the amount to deliver or exchange fixed or variable?
TRANSACTIONS IN OWN EQUITY
ILLUSTRATIONS:
 You sell an option to deliver 100 shares of Apple to your friend.
This is a financial liability, because the shares are NOT YOUR OWN shares.
They are shares of somebody else (Apple in this case).
 You sell an option to deliver your own shares in total value of CU 100 to your
friend.
This is a financial liability, too, because although the shares are yours, their
number is variable. Why?
Because, the exact number of shares will depend on the current price of the
share at the delivery.
You will calculate it as 100 divided by the market price of one share.
 You sell an option to deliver 100 pieces of your own shares to your friend.
This is an equity instrument, because the shares are yours and their amount is
fixed – 100.
COMPOUND FINANCIAL INSTRUMENTS
Financial instruments w/c have both liability and

equity component.
 For example, a convertible bond where an issuer issues
a bond to a holder and the holder has an option to get
the bond repaid by some number of the ordinary shares
of issuer instead of taking cash.
There are two components:

1. A financial liability: a loan, because the issuer has a liability to
settle the loan with transfer of cash; and
2. An equity instrument: a call option written to the holder to
deliver some number of ordinary shares.
In this case, an issuer needs to classify and present these two
elements separately:
1. The loan element is presented as a financial liability, and
2. The call option element is presented as an equity instrument.
Examples of Compound Financial Instruments
 Convertible bonds
 Debt issued with detachable share purchase warrants
Split Accounting for Compound Financial Instruments
 The component parts be accounted for and presented separately according to their
substance based on the definitions of liability and equity.
 The split is made at issuance and not revised for subsequent changes in market
interest rates, share prices, or other event that changes the likelihood that the
conversion option will be exercised.
 When the initial carrying amount of a compound financial instrument is required to
be allocated to its equity and liability components, the equity component is
assigned the residual amount after deducting from the fair value of the instrument
as a whole the amount separately determined for the liability component.
TREASURY SHARES
 The cost of an entity's own equity instruments that it

has reacquired ('treasury shares') is deducted from
equity.
 Gain or loss is not recognized on the purchase, sale,
issue, or cancellation of treasury shares.
 Treasury shares may be acquired and held by the entity
or by other members of the consolidated group.
 Consideration paid or received is recognized directly in
equity.
OFFSETTING A FINANCIAL ASSET AND A
FINANCIAL LIABILITY
 Offsetting means presenting a financial asset and a financial
liability as one single net amount in the statement of financial
position.
 IAS 32.42 sets the following rules when you must offset a financial
asset with a financial liability:
 When you have a legally enforceable right to set off the recognized
amounts, and
 When you intend to settle on a net basis, or realize the asset and
the liability simultaneously.
OFFSETTING A FINANCIAL ASSET AND A
FINANCIAL LIABILITY
SMALL ILLUSTRATION:
Imagine you run a supermarket and you buy goods from a local
producer.
You purchased some goods and you have a liability of CU 1 000.
But, you charged promotion fees amounting to CU 50 to your supplier,
because you issue a leaflet and include his products there.
So, at the same time, you have a receivable of CU 50.
You can present these two items as a net financial liability of CU 950,
if there are no legal restrictions to do so and if you agreed with the
supplier somewhere in the contract that you would make net
payments.
IFRS 9
 IFRS 9 is effective for annual periods beginning on or
after 1 January 2018 with early application
permitted.
 IFRS 9 specifies how an entity should classify and

measure financial assets, financial liabilities, and
some contracts to buy or sell non-financial items.
IFRS 9
 IFRS 9 requires an entity to recognize a financial asset or a
financial liability in its statement of financial position when it
becomes party to the contractual provisions of the instrument.
 At initial recognition, an entity measures a financial asset or a

financial liability at its fair value plus or minus, in the case of a
financial asset or a financial liability not at fair value through
profit or loss, transaction costs that are directly attributable to
the acquisition or issue of the financial asset or the financial
liability.
FINANCIAL ASSETS
 When an entity first recognises a financial asset, it
classifies it based on the entity’s business model for
managing the asset and the asset’s contractual cash flow
characteristics, as follows:
 Amortised cost—a financial asset is measured at amortised
cost if both of the following conditions are met:
1. the asset is held within a business model whose objective is to
hold assets in order to collect contractual cash flows; and
2. the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest (SPPI) on the principal amount outstanding.
FINANCIAL ASSETS
 Fair value through other comprehensive income

(FVTOCI) —financial assets are classified and
measured at fair value through other
comprehensive income if they are held in a
business model whose objective is achieved by
both collecting contractual cash flows and selling
financial assets.
FINANCIAL ASSETS
 Fair value through profit or loss (FVTPL) —any

financial assets that are not held in one of the two
business models mentioned are measured at fair
value through profit or loss.
 When, and only when, an entity changes its business
model for managing financial assets it must reclassify
all affected financial assets.
FINANCIAL LIABILITIES
 All financial liabilities are measured at amortised cost (at AC),

except for financial liabilities at fair value through profit or loss
(FVTPL) .
 Such liabilities include derivatives (other than derivatives that are
financial guarantee contracts or are designated and effective
hedging instruments), other liabilities held for trading, and
liabilities that an entity designates to be measured at fair value
through profit or loss (see ‘fair value option’ below).
 After initial recognition, an entity cannot reclassify any
financial liability.
FINANCIAL LIABILITIES
 Fair value option

 An entity may, at initial recognition, irrevocably designate a
financial asset or liability that would otherwise have to be
measured at amortised cost or fair value through other
comprehensive income to be measured at fair value through
profit or loss (FVTPL) if doing so would eliminate or
significantly reduce a measurement or recognition inconsistency
(sometimes referred to as an ‘accounting mismatch’) or otherwise
results in more relevant information.
Impairment
Impairment of financial assets is recognised in stages:
 Stage 1—as soon as a financial instrument is originated or purchased, 12-
month expected credit losses are recognised in profit or loss and a loss
allowance is established. This serves as a proxy for the initial expectations
of credit losses. For financial assets, interest revenue is calculated on the
gross carrying amount (ie without deduction for expected credit losses).
 Stage 2—if the credit risk increases significantly and is not considered low,
full lifetime expected credit losses are recognised in profit or loss. The
calculation of interest revenue is the same as for Stage 1.
 Stage 3—if the credit risk of a financial asset increases to the point that it
is considered credit-impaired, interest revenue is calculated based on the
amortised cost (ie the gross carrying amount less the loss allowance).
Financial assets in this stage will generally be assessed individually.
Lifetime expected credit losses are recognised on these financial assets.
Impairment
Hedge accounting
The objective of hedge accounting is to represent, in the

financial statements, the effect of an entity’s risk management
activities that use financial instruments to manage exposures
arising from particular risks that could affect profit or loss or
other comprehensive income.
Hedge accounting is optional. An entity applying hedge
accounting designates a hedging relationship between a
hedging instrument and a hedged item. For hedging
relationships that meet the qualifying criteria in IFRS 9, an
entity accounts for the gain or loss on the hedging instrument
and the hedged item in accordance with the special hedge
accounting provisions of IFRS 9.
THREE TYPES OF HEDGING
RELATIONSHIPS
 Fair Value Hedge: a hedge of the exposure to changes in fair value
of a recognised asset or liability or an unrecognised firm
commitment, or a component of any such item, that is attributable
to a particular risk and could affect profit or loss.
 Cash Flow Hedge: a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all, or
a component of, a recognised asset or liability (such as all or some
future interest payments on variable-rate debt) or a highly
probable forecast transaction, and could affect profit or loss.
 Hedge of A net investment in A foreign operation as defined in IAS
21.
IFRS 9 (RECOGNITION & MEASUREMENT OF
FINANCIAL INSTRUMENT)
 IFRS 9 does NOT define financial instruments. You can find the definitions of
financial instruments in IAS 32 Financial Instruments: Presentation.
 IFRS 9 does NOT deal with your own (issued) equity instruments like your
own shares, issued warrants, written options for equity, etc.
 IFRS 9 DOES deal with the equity instruments of someone else, because they
are financial assets from your point of view.
 IFRS 9 does NOT deal with your investments in subsidiaries, associates and
joint ventures (look to IFRS 10, IAS 28 and related).
WHEN TO RECOGNIZE A FINANCIAL
INSTRUMENT?
 You should recognize a financial asset or a financial

liability in the statement of financial position when the
entity becomes a party to the contractual provisions of
the instrument (please refer to IFRS 9 par. 3.1.1).
 Unlike in other IFRS standards that put emphasis on the
future economic benefits, IFRS 9 is more about the
contract.
WHEN TO DERECOGNIZE A FINANCIAL
INSTRUMENT?
Derecognition of financial assets
Before you decide whether to derecognize or not, you need to determine WHAT
you’re dealing with (IFRS 9 par. 3.2.2):
1. A financial asset (or a group of similar financial assets) in its entirety, or
2. A part of a financial asset (or a part of a group of similar financial assets)
meeting specified conditions.
After you determine WHAT you derecognize, then you need derecognize the
asset when (IFRS 9 par. 3.2.3):
1. The contractual rights to the cash flows from the financial asset expire; or
2. An entity transfers the financial asset and the transfer qualifies for the
derecognition.
WHEN TO DERECOGNIZE A FINANCIAL
INSTRUMENT?
TRANSFERS OF FINANCIAL ASSETS
STEPS:
1. Decide whether the asset (or its part) was transferred or
not,
2. Determine whether also risks and rewards from the financial
asset were transferred.
3. If you have neither retained nor transferred substantially all
of the risks and rewards of the asset, then you need to
assess whether you have retained control of the asset or
not.
DERECOGNITION OF A FINANCIAL LIABILITY
 An entity shall derecognize a financial liability when it is

extinguished.
 It happens when the obligation specified in the contract is
discharged, cancelled or expires.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
How to classify the financial assets?

IFRS 9 classifies financial assets based on two characteristics:
Business model test
What is the objective of holding financial assets? Collecting the contractual
cash flows? Selling?
Contractual cash flows’ characteristics test
Are the cash flows from the financial assets on the specified dates solely
payments of principal and interest on the principal outstanding? Or, is there
something else?
HOW TO CLASSIFY THE FINANCIAL
ASSETS
1. At amortized cost
A financial asset falls into this category if BOTH of the following
conditions are met:
 Business model test is met, i.e. you hold the financial assets only to
collect contractual cash flows (not to sell them), and
 Contractual cash flows’ characteristics test is met, i.e. the cash flows
from the asset are only the payments of principal and interest.
 Examples: debt securities, receivables, loans.
ASSETS
 At fair value through other comprehensive income
(FVOCI)
Here, there are 2 subcategories:
 2a. If a financial asset meets contractual cash flows
characteristics test (i.e. debt assets only) and the business
model is to collect contractual cash flows AND SELL financial
assets, then such an asset mandatorily falls into this category
(unless FVTPL option is chosen; see below)
 2b. You can voluntarily choose to measure some equity
instruments at FVOCI. This is an irrevocable election at initial
recognition.
ASSETS
 At fair value through profit or loss (FVTPL)
All other financial assets fall in this category.

Derivative financial assets are automatically classified at FVTPL.
Moreover, regardless above 2 categories, you may decide to designate
the financial asset at fair value through profit or loss at its initial
recognition.
ASSETS
HOW TO CLASSIFY FINANCIAL LIABILITIES?
 Financial liabilities at fair value through profit or loss:

these financial liabilities are subsequently measured at
fair value and here, all derivatives belong.
 Other financial liabilities measured at amortized
cost using the effective interest method.
How to measure financial instruments?
Initial measurement
Financial asset or financial liability shall be initially
measured at:
1. Fair value: all financial instruments at fair value
through profit or loss;
2. Fair value plus transaction cost: all other financial
instruments (at amortized cost or fair value through
other comprehensive income).
How to measure financial instruments?
Subsequent measurement
 Subsequent measurement depends on the category of a
financial instrument:
1. Financial assets shall be subsequently measured either at
fair value or at amortized cost;
2. Financial liabilities are measured at amortized cost
unless the fair value option is applied.
HOW TO MEASURE FINANCIAL
INSTRUMENTS?
IMPAIRMENT OF FINANCIAL ASSETS
 Using the IFRS 9 terminology, “bad debt provision” =

impairment of financial assets, or a loss allowance.
 It does NOT affect all financial assets. For example, shares
and other equity instruments are excluded, because their
potential impairment is taken into account when re-
measuring these investments to their fair value.
 IFRS 9 requires entities to estimate and account for expected
credit losses for all relevant financial assets (mostly debt
securities, receivables including lease receivables, contract
assets under IFRS 15, loans), starting from when they first
acquire a financial instrument.
IMPAIRMENT OF FINANCIAL ASSETS
 General model for measuring a loss allowance:
This model recognizes loss allowance depending on the stage in which
the financial asset is. There are 3 stages:
 Stage 1 – Performing assets: Loss allowance is recognized in the amount
of 12-month expected credit loss;
 Stage 2 – Financial assets with significantly increased credit risk: Loss
allowance is recognized in the amount of lifetime expected credit loss, and
 Stage 3 – Credit-impaired financial assets: Loss allowance is recognized
in the amount of lifetime expected credit loss and interest revenue is
recognized based on amortized cost.
 Simplified model:
You don’t need to determine the stage of a financial asset, because a
loss allowance is recognized always at a lifetime expected credit loss.
GENERAL MODEL FOR MEASURING A
LOSS ALLOWANCE
EMBEDDED DERIVATIVES
 An embedded derivative is simply a component of a

hybrid instrument that also includes a non-derivative host
contract.
 Accounting of embedded derivatives depends on WHAT the

host contract is:
 If host = financial asset within the scope of IFRS 9, then the
whole hybrid contract shall be measured as one and not
separated.
 If host = financial liability within the scope of IFRS 9 OR a
contract outside the scope of IFRS 9 (e.g. service contract,
lease contract…), then you should separate when the
conditions are met.
Hedge accounting
Hedge accounting is designating one or more hedging instruments so

that their change in fair value is an offset to the change in fair value
or cash flows of a hedged item.
3 types of hedges:
1. Cash flow hedge,
2. Fair value hedge, and
3. Hedge of the net investment in the foreign operation.
HEDGE ACCOUNTING
LO2
Classification of Financial Assets
Classifications of Debt Securities
Exhibit 13.4
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
LO2
Amortized Cost (AC) Financial Assets

 Debt Securities for which the investors holds primarily to collect the interest
and principal and is measured at amortized cost.
FVTOCI Financial Assets–Debt
 Debt Securities that are held to collect interest and to sell before maturity,
measured as fair value.
LO2
Classifications of Equity Securities
Exhibit 13.5
LO2
Investments in Associates (Using the Equity Method)

 When an investor has significant influence but not control over an investee,
the investee is an associate.
 IAS 28 require the use of the equity method in accounting for the investment.
 Significant influence is presumed with a shareholding of between 20% and 50%
of the voting rights.
 IAS 28 has suggested that companies look beyond ownership percentage and
examine other factors that indicate influence.
LO2
Investments Requiring Preparation of Consolidated
Statements
 A controlling interest is presumed to exist when the
ownership exceeds 50%, or other factors that may indicate
control exist, including:
 Ownership of a large minority voting interest
(approximately 40%) with no other group owning a
significant interest.
 A company’s domination of the process for electing the
investee’s board of directors.
 In cases where control exists, the parent company (the
acquiring company) and the subsidiary company (the
acquired company) are required to combine their financial
statements into one set of statements.
LO3 The Amortized Cost Financial Assets at Par
Accounting for Securities Investments
Timeline of Business Issues Associated with Buying and

Selling Investment Securities
Exhibit 13.6
LO3
Accounting for Securities Investments
Business Model of Debt Investments
Exhibit 13.7
Debt Investment: Fair Value through Other Comprehensive Income (FVTOCI)
LO4 Financial Assets—Debt
Purchase of FVTOCI Financial Assets — Debt
 FVTOCIs are initially measured at cost, which is the fair value of whatever was
paid to buy the financial assets.
 Transaction costs directly attributable to the purchase of financial assets should
be included as investment costs.
LO4
Purchase of FVTOCI Financial Assets — Debt
Illustration
► On January 2, 2018, Oriental Co. purchased one bond issued by WMD Inc.
► The initial entry to record the investments is as follows:
Jan. 2, FVTOCI Financial Assets—Debt 17,000

2018 Cash 17,000
LO4
Investment Revenue
Interest Incomes
► For FVTOCI financial assets—debt, cash interest received periodically are
recognized as interest revenue.
LO4
Investment Revenue
Illustration
► Assume that WMD Inc. paid interest of £850 on July 1, 2018 to Oriental Co.
► The appropriate journal entries to record the receipt of interest is:
July. 1, Cash 850

2018 Interest Revenue 850
LO4
Adjustment of FVTOCI Financial Assets Debt
to Fair Values
Valuation
► Changes in value are not included in net income but are
recognized as an equity
► Unrealized Gains or Losses on FVTOCI Financial
Assets
An other comprehensive income (OCI)
The balance should be carried forward from

period to period until the financial assets are sold.
LO4
Adjustment of FVTOCI Financial Assets to Fair
Value
Illustration
► At the end of 2018, Oriental computed the market value of its available-for-
sale financial assets and compared the market value to the historical cost.
LO4
Adjustment of FVTOCI Financial Assets to Fair
Value
Illustration
► The journal entries to record the changes in fair value:
Dec. 31, Valuation Adjustment for FVTOCI Financial

2018 Assets—Debt 1,000
Unrealized Gains or Losses on FVTOCI
Financial Assets—Debt 1,000
LO4
Financial Statement Presentation
Statement of Comprehensive Income
LO4
Balance Sheet
LO4
Illustration
► To further illustrate, assume that Oriental still held the bonds and the stock at
the end of 2019, at which the market value of bonds increased from
£18,000 to £18,250. There were no additional security investments in 2019.
► The other comprehensive income for 2019 is £250.
► But the accumulated other comprehensive income becomes £1,250 (£1000
+ £250 = £1,250).
LO4
LO4
Balance Sheet
LO4
Sale of FVTOCI Financial Assets—Debt
Illustration
► Suppose that Oriental sold all WMD bonds for £18,000 on February 1, 2020.
Feb. 1, Unrealized Gains or Losses on FVTOCI Financial

2020 Assets—Debt 250
Valuation Adjustment for FVTOCI Financial Assets—
Debt 250
200
LO4
Sale of FVTOCI Financial Assets—Debt
Illustration
Feb. 1, Cash 18,000
2020
Valuation Adjustment for FVTOCI Financial Assets—Debt 1,000
FVTOCI Financial Assets—Debt 17,000
► Since the company has disposed all WMD stock, we

need to close the unrealized gains or losses on FVTOCI
financial assets–Debt in the equity section by
reclassifying £1,000 under net income.
Feb. 1, Unrealized Gains or Losses on FVTOCI Financial
2020 Assets—Debt 1,000
Gain From Sale of FVTOCI Financial Assets—Debt 1,000

Fair Value through Profit or Loss (FVTPL) Financial Assets
LO5
Purchase of FVTPL Financial Assets
 FVTPLs are initially measured at cost, which is the fair value of whatever was
paid to buy the financial assets.
► Transaction costs directly attributable to the purchase of FVTPLs can be
included as investment costs, or recognized as expenses as incurred.
► In this chapter, we expense transaction costs for FVTPL financial assets.
LO5
Illustration
► On January 2, 2018, Westhood purchased one bond of ABM Inc. and 1,000
shares of Jaquar stock:
LO5
Illustration
► The initial entry to record the investments is as follows:
Jan. 2, FVTPL Financial Assets—Debt 5,000

2018 FVTPL Financial Assets—Equity
27,500
Brokerage Fees 600
Cash 33,100
LO5
Investment Revenue
Dividend (Equity) and Interest (Debt) Incomes

► For FVTPL financial assets—equity, cash dividends received during the
investment periods are recognized as dividend revenue.
► For FVTPL financial assets—debt, cash interest received periodically are
recognized as interest revenue.
LO5
Investment Revenue
Illustration
► Assume that ABM Inc. paid interest of £225 on July 1, 2018 to Westhood and
Jaquar paid dividends of £825 to Westhood on November 11, 2018.
► The appropriate journal entries to record the receipt of interest and dividends
are:
July. 1, Cash 225

2018 Interest Revenue 225
Nov. 11, Cash 825

2018 Dividend Revenue 825
LO5
Adjustment of FVTPL Financial Assets
to Fair Values
Valuation
► FVTPLs are remeasured at fair value, subsequently with changes in fair
value recognized in profit or loss.
► Valuation Adjustment for FVTPL Financial Assets.
LO5
to Fair Values
Illustration
► At the end of 2018, Westhood computed the market value of its FVTPL
financial assets and compared the market value to the historical cost.
LO5
to Fair Values
Illustration
Dec. 31, Losses on FVTPL Financial Assets—Debt 200

2018 Valuation Adjustment for FVTPL Financial
200
Assets—Debt
Dec. 31, Valuation Adjustment for FVTPL Financial

2018 Assets—Equity 2,000
Gains on FVTPL Financial Assets—Equity 2,000
LO5
LO5
Balance Sheet
LO5
Sale of FVTPL Financial Assets
Illustration
► Suppose that Westhood sold all of its investment in debts for £5,200 on
March 15, 2019.
Mar. 15, Valuation Adjustment for FVTPL Financial Assets—Debt 400
2019
Gains on FVTPL Financial Assets—Debt 400
Mar. 15, Cash 5,200

2019 FVTPL Financial Assets—Debt 5,000
Valuation Adjustment for FVTPL Financial Assets—Debt 200
200
400
200
Equity Investments: Fair Value through Other Comprehensive Income (FVTOCI)
Financial Assets — Equity
LO6
FVTOCI Financial Assets — Equity
 Unrealized gains or losses recognized in other comprehensive incomes are

never reclassified from equity to profit or losses.
 The mechanics of FVTOCI category for debt instruments (See LO4) is different
from FVTOCI category for equity instruments because the amounts recognized
in OCI for debt instruments can be reclassified to profit or losses.
 FVTOCI–Equity are initially recorded at cost, including transactions costs
directly attributable to the purchase of securities (e.g. brokerage fees)
LO6
Purchase of FVTOCI Financial Assets—Equity
Illustration
 On January 2, 2018, Oriental Co. purchased 1,000 shares of BGC stock
 The initial entry to record the investments is as follows:
Jan. 2, FVTOCI financial assets—Equity 9,200

2018 Cash 9,200
LO6
Investment Revenue
Dividend
 For FVTOCI financial assets—equity, cash dividends received during the
investment periods are recognized as dividend revenue.
LO6
Investment Revenue
Illustration
 Assume that. BGC paid dividends of £644 to Oriental Co. on November 15,
2018.
Nov. 15, Cash 644

2018 Dividend Revenue 644
LO6
Adjustment of FVTOCI Financial Assets —
Equity to Fair Values
Valuation
► Changes in value are not included in net income but are recognized as an
equity
► Unrealized Gains or Losses on Available-for-Sale Financial Assets
An other comprehensive income (OCI)
The balance should be carried forward from

period to period until the financial assets are sold.
LO6
Adjustment of FVTOCI Financial Assets–
Illustration
► At the end of 2018, Oriental computed the market value of its available-for-
sale financial assets and compared the market value to the historical cost.
LO6
Adjustment of FVTOCI Financial Assets–
Illustration
Dec. 31, Unrealized Gains or FVTOCI Financial

2018 Assets—Equity 900
Valuation Adjustment for FVTOCI
Financial Assets—Equity 900
LO6
LO6
Balance Sheet
LO6
Sale of FVTOCI Financial Assets—Equity
Illustration
► Suppose that Oriental sold 1,000 shares of BGC stock for £8,000 on
February 28, 2019.
Feb. 28, Unrealized Gains or FVTOCI Financial Assets—
2019 Equity 300
Valuation Adjustment for FVTOCI Financial Assets—
Equity 300
LO6
Illustration
Feb. 28,Cash 8,000
2019 Valuation Adjustment for FVTOCI
Financial Assets—Equity 1,200
FVTOCI Financial Assets—Equity 9,200
LO6
Illustration
 Since the company has disposed all BGC stock, we need
to close the unrealized gains or losses on FVTOCI
financial assets in the equity section and can not
reclassify £1,200 under net income. Instead, we need to
close unrealized gains on FVTOCI financial assets–equity
to Retained Earnings.
Feb. 28, Retained Earnings 1,200
2019
Unrealized Gains or Losses on FVTOCI Financial
Assets—Equity 1,200
LO6
A Comparison between IAS 39 and IFRS 9
Exhibit 13.9
LO6
A Comparison between IAS 39 and IFRS 9
Exhibit 13.9
LO7 Accounting for Investment in Associates Using the Equity Method
Illustrating the Equity Method
 Record purchase: Investments are initially recorded at cost.

 Record investment revenues: The investor includes in net income its
proportionate share of the investee’s net income.
 Record dividends: Dividend distribution is a reduction of the investor’s
investments.
 Record sales: To recognize gains/losses from the difference between the sale
proceeds and the carrying amount of investments.
LO7
Purchase of Investment Accounted for
Using the Equity Method
Illustration
► Assume that Kimball Inc. purchased 20% (2,000 shares) of Holland
Enterprises’ outstanding common stock (10,000 shares), paying €100 per
share on January 1, 2018.
Jan. 1, Investment Accounted for Using the

2018 Equity Method, Holland Enterprises 200,000
Cash 200,000
To record the purchase of 20% equity in Holland.
LO7
Investment Revenue
Illustration
► Holland Enterprises announces net income for 2018 of €50,000.
€50,000 × 20% = €10,000

Dec. 31, Investment Accounted for Using the
2018 Equity Method, Holland Enterprises 10,000
Shares of Income from Associates 10,000
To record 20% equity in Holland’s 2018 net income.
► Under the equity method, revenue is recognized when the investee company
has earnings.
LO7
Dividends Received
Illustration
► Holland Enterprises paid €2.5 per dividend on December 31, 2018.
Dec. 31, Cash 5,000

2018 Investment Accounted for Using the
Equity Method, Holland Enterprises 5,000
To record dividend received.
► Under the equity method, dividend payments represent a return of

investment; they do not represent revenue.
LO7
No Adjustment to Fair Value
 Temporary changes in value of investments accounted for using the equity

method are not recorded.
LO7
LO7
Balance Sheet
► £205,000 = €200,000 + €10,000 − €5,000
LO7
Sale of the Investment Accounted for
Using the Equity Method
Illustration
► Assume that, on January 2, 2019, Kimball sells its 2,000 shares of Holland
stock for €225,000 shortly after the year-end recognition of its €10,000 share
of Holland’s earnings. The entry to record the sale is:
Jan. 2, Cash 225,000

2019 Investment Accounted for Using the
Equity Method, Holland Enterprises 205,000
Gains from Sale of Investments in Associates 20,000
LO7
Comparing Equity Method
with Fair Value Approach
Exhibit 13.10

Financial Instruments: PAS 32 and PFRS 9

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Financial Instruments: PAS 32 and PFRS 9

Загружено:

Авторское право:

Доступные форматы

IAS 32 Presentation of Financial

International Accounting Standard 32, or IAS 32, establishes principles for

 A financial instrument is any contract that gives rise to

Under IAS 32.11, a financial liability is any liability that is:

 A contract that will or may be settled in the entity’s own equity

What does the “contract” in the definition refer to?

The “contract” in the definition refers to an agreement

 An equity instrument is any contract that evidences a

Classify the financial instruments on initial

Transactions in own equity

Financial instruments w/c have both liability and

There are two components:

 The cost of an entity's own equity instruments that it

 IFRS 9 specifies how an entity should classify and

 At initial recognition, an entity measures a financial asset or a

 Fair value through other comprehensive income

 Fair value through profit or loss (FVTPL) —any

 All financial liabilities are measured at amortised cost (at AC),

 Fair value option

The objective of hedge accounting is to represent, in the

 You should recognize a financial asset or a financial

 An entity shall derecognize a financial liability when it is

How to classify the financial assets?

All other financial assets fall in this category.

 Financial liabilities at fair value through profit or loss:

 Using the IFRS 9 terminology, “bad debt provision” =

 An embedded derivative is simply a component of a

 Accounting of embedded derivatives depends on WHAT the

Hedge accounting is designating one or more hedging instruments so

Classifications of Debt Securities

Amortized Cost (AC) Financial Assets

Classifications of Equity Securities

Investments in Associates (Using the Equity Method)

Accounting for Securities Investments

Timeline of Business Issues Associated with Buying and

Business Model of Debt Investments

Purchase of FVTOCI Financial Assets — Debt

► The initial entry to record the investments is as follows:

Jan. 2, FVTOCI Financial Assets—Debt 17,000

July. 1, Cash 850

The balance should be carried forward from

Dec. 31, Valuation Adjustment for FVTOCI Financial

Statement of Comprehensive Income

Statement of Comprehensive Income

Feb. 1, Unrealized Gains or Losses on FVTOCI Financial

► Since the company has disposed all WMD stock, we

Gain From Sale of FVTOCI Financial Assets—Debt 1,000

Jan. 2, FVTPL Financial Assets—Debt 5,000

Dividend (Equity) and Interest (Debt) Incomes

July. 1, Cash 225

Nov. 11, Cash 825

Dec. 31, Losses on FVTPL Financial Assets—Debt 200

Dec. 31, Valuation Adjustment for FVTPL Financial

Statement of Comprehensive Income

Mar. 15, Cash 5,200

 Unrealized gains or losses recognized in other comprehensive incomes are

 The initial entry to record the investments is as follows:

Jan. 2, FVTOCI financial assets—Equity 9,200

Nov. 15, Cash 644

An other comprehensive income (OCI)

The balance should be carried forward from

Dec. 31, Unrealized Gains or FVTOCI Financial

Statement of Comprehensive Income