Updated Conceptual Framework and Financial Instruments

IAS 39 in Transition

Conceptual framework
User

orientation: consider objective of financial reporting: The whys of accounting

Useful information for investment and credit

decisions: resource allocation decisions An Asset/Liability approach

Fundamental

Relevance and Faithful Representation

characteristics

Contd

Enhancing Characteristics:
Comparability Verifiability Timeliness Understandability

Note all of the above are part of the Revised

Conceptual Framework on which future standards will be based

Elements of Financial Statements

Assets Liabilities Equity Revenues/gains Expenses/losses Other

comprehensive Income

Foundation principles
Economic

Entity Monetary unit Periodicity Revenue recognition/New Standards expected in 2011 Full disclosure Consider cost/benefit and materiality

Financial Instruments
Contract

that creates a financial asset for one party and a financial liability or equity instrument for the other party Financial means that the asset will settle for cash either directly or indirectly

Financial instruments
Include

Cash Trade receivables and payables Loans and notes receivable and payable Investment in equities Investment in debt instruments Investment in derivative contracts, e.g. forward contracts, swaps options

Excluded Financial Instruments

Interests

in subsidiaries Joint ventures Significant influence over investees Leases Stock based payments Insurance contracts, certain guarantees Employee benefits, loan commitments

Recognition and Measurement

When

should an entity recognize a financial instrument on its Balance sheet? How should it measure the financial instrument? IAS 39 and IFRS 9(Financial Assets) More disclosures required about fair value measurements and liquidity risks

Basic Principles
Financial

instruments and non financial derivatives represent rights and obligations that meet the definitions of assets or liabilities and should be reported in financial statements

Avoids possibility of off balance sheet

transactions as was common in the past for derivatives

Basic Principles Contd

Fair

value is the most relevant measure for financial instruments and the only relevant measure for derivative financial instruments

Ability to assess impact of current economic

events on liquidity and solvency Greater transparency in reporting performance of portfolios

Financial Assets/categories
Loans and receivables Held to maturity investments Available for sale financial assets Held for trading (IFRS: or called Fair value through profit and loss (FVTPL) Longer term trend: reduce complexity and reduce valuation models to fair value and amortized cost

Subsequent measurement
Held

Any instruments you buy and sell for profit

for trading

taking, almost all derivatives You may designate any financial instrument in this category when first recognized Report at fair value, Gains/losses recognized in income immediately

Reclassification

rarely possible

Available for Sale financial Assets(Current IAS 39)

Captures

all financial assets that are not held for trading, held to maturity (most debt instruments) or loans and receivables All equity instruments must be classified as Available for Sale or Held for Trading

Available for Sale Contd

Equity

instruments reported at fair value Gains and losses recognized in other comprehensive income (equity section) Impairment loss reclassified from OCI to Income statement If no quoted marked price in an active market equity instruments, cost may best represent fair value