comparison of ifrs for smes and full ifrs on financial instruments

Comparison of IFRS for SMEs and Full IFRSon Financial Instruments WHITE ROCK

I n v e s t m e n t s

Financial Instruments: Summary

IFRS for SMEsFull IFRS: IAS 39

4 Measurement Categories:

FVTPL

2 Measurement Categories:

Fair Value

AFS Fair Value

L&R Amortized Cost

HTM Amortized Cost

Basic Amortized Cost

Complex Fair Value

More restrictive (i.e. Limited no. of risks and hedging instruments permitted)

No quantitative hedgingeffectiveness test required

Less restrictive

Hedging effectiveness test required

WHITE ROCKI n v e s t m e n t s

Financial Instruments: General Information

Accounting policy option

Definition, scope and examples

Initial recognition


Outline of Discussion

Definition, scope and examples Initial recognitionAccounting policy

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Full IFRSIFRS for SMEs

Accounting policy option Not applicable


Reference IFRS for SMEs 11.2, 12.2


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ENTITY

FullIFRS for SMEsSec 11 and 12

Recognition and measurement

(IAS 39)

Disclosure(IFRS for SMEs Sec 11 and 12)



Definition of a financial instrument Same as IFRS for SMEs

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


Reference IAS 32.11IFRS for SMEs 11.3


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Categories

4 Measurement Categories:1. FVTPL2. AFS3. HTM4. L&R

2 Measurement Categories:1. Basic2. Complex

Reference IAS 39.9IFRS for SMEs 11.1, 12.1



Scope

Similar to IFRS for SMEs

But also scopes out contracts between an acquirer and a

vendor in a business combination and certain loan

commitments

Exceptions to application:1. Interests in subsidiaries,

associates and joint ventures2. Financial instruments that meet

the definition of an entity’s own equity

3. Leases4. Employee benefits5. Insurance contracts6. Contracts for contingent

consideration in a business combination



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Reference IAS 32.4, IAS 39.2, IFRS 7.3IFRS for SMEs 11.7, 12.3



Examples of basic financial

instrumentsNot applicable

1. Cash2. AR, AP, NR, NP3. Loans from banks or other third

parties4. Commercial paper and

commercial bills held5. Bonds and similar debt

instruments



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Reference IFRS for SMEs 11.5 – 11.6



Examples of more complex financial

instrumentsNot applicable

1. Asset-backed securities and repurchase agreements

2. Options, rights, warrants, futures, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instruments

3. Hedging instruments4. Commitments to make a loan to another

entity5. Investments in another entity’s equity

instruments other than non-convertible and non-puttable ordinary shares and preference shares

6. Investments in convertible debt



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Initial recognition Similar to IFRS for SMEsA financial instrument is recognized

only when the entity becomes a party to its contractual provision

Initial recognition


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Reference IAS 39.14IFRS for SMEs 11.12 – 12.6




Initial recognition



Section 11: Basic Financial Instruments

Definition

Measurement

Impairment



DerecognitionMeasurement DerecognitionDefinition WHITE ROCK

I n v e s t m e n t sImpairment



Basic financial instruments Not applicable

1. Cash2. Debt instruments that provide fixed

unconditional returns to the holder and do not contain provisions that could result in the holder losing principal, interest, pre-payment or put provisions contingent on future events

3. A commitment to receive a loan that cannot be settled in cash, and when executed, meet criteria of a basic instrument

4. Investments in non-convertible preference shares and non-puttable ordinary shares or preference shares

Definition

Measurement DerecognitionDefinition WHITE ROCKI n v e s t m e n t s


Impairment



Initial measurement

Fair value plus transaction costs

Exceptions:1.Instrument at FVTPL

Note:- Fair value = normally the transaction price, unless part of the consideration is for something other than a financial instrument or the instrument bears an off-market interest rate

Transaction price (including transaction costs)

Exceptions:1. Instrument at FVTPL – transaction

costs expensed2. Arrangement constituting a

financing transaction – PV of future payments if payment is deferred or is financed at an interest rate that is not a market rate

Measurement


Reference IFRS 39.43, IAS 39, AG 64-65IFRS for SMEs 11.13

Impairment



Subsequent measurement

1. Held for trading and designated as at FVTPL: FVTPL

2. HTM investments and L&R: Amortized cost

3. AFS investments:Fair value with changes in fair value recorded in equity

4. Investments in equity securities whose fair value cannot be measured reliably:Cost less impairment

Basic debt instruments:Amortized cost usingeffective interest method

Commitments to receive a loan:Cost less impairment

Investments in non-convertible and non-puttable C/S or P/S:If FV measurable reliably – FVTPLIf FV not measurable reliably – Cost less impairment

Measurement


Reference IFRS 39.46-47, 39.66IFRS for SMEs 11.14

Impairment



Amortized cost Same as IFRS for SMEs

Amortized cost is the net of:

1. Measurement at initial recognition, less principal repayments

2. Plus/minus cumulative amortization using effective interest method of initial recognition and maturity amount difference

3. Less reduction for impairment or uncollectibility(for financial assets)

Measurement


Reference IFRS 39.9IFRS for SMEs 11.15

Impairment



Fair value – investments in C/S

or P/SSame as IFRS for SMEs.

Best evidence:Quoted price in an active market

If not available:Price of most recent transaction for an identical asset

If market for a financial instrument not active and recent transactions of an identical asset are not a good estimate:Management estimates of the fair value by using a valuation technique

Measurement


Reference IFRS 39.48IFRS for SMEs 11.27

Impairment



Fair value – valuation technique

Similar to IFRS for SMEs, but more guidance provided around

valuation

Objective:Establish what the transaction price would have been on measurement date in an arm’s length transaction

Examples:1. Using recent market transactions2. Reference to the current fair value

of identical or similar instrument3. DCF analysis4. Option pricing models

Measurement


Reference IAS 39.48, IAS 39 AG 69-79IFRS for SMEs 11.28-29

Impairment



Fair value – no active market

Similar to IFRS for SMEs, but more guidance provided around

valuation

When fair value of equity instruments reliably measurable:

• If the variability in the range of various estimates = not significant• If the probabilities of the various estimates can be reasonably assessed

If these conditions are not met:• Entity is precluded from measuring the asset at fair value• Asset is carried at cost (less impairment) defined as carrying amount at the last day when the asset was reliably measurable

Measurement


Reference IAS 39, AG 80-81IFRS for SMEs 11.30-32

Impairment



General

Similar to IFRS for SMEs except for the following:

1. Impairment review for AFS financial assets carried at fair value through equity as well

2. Impairment losses on equity investments carried at cost and AFS equity investments cannot be reversed

Financial assets at amortized cost:Reviewed for objective evidence of impairment at the end of each reporting period

Impairment losses:Recognized in P&L immediately

If objective evidence reverses in subsequent period:Impairment losses are reversed in P&L of subsequent periods

Impairment


Reference IAS 39.58, 39.66, 39.69IFRS for SMEs 11.21, 11.26

Impairment



Assets measured at amortized cost Similar to IFRS for SMEs

Example: Trade accounts, Notes receivable, Loans from banks

Impairment loss = Carrying amount of asset – present value of estimated

future cash flows discounted at original effective interest rate

Impairment


Reference IAS 39.63IFRS for SMEs 11.25 (a)

Impairment



Assets measured at cost less impairment

Impairment loss = Asset’s carrying amount – present value of estimated future cash flows discounted at the

current market rate of return for a similar financial asset

Impairment loss = Asset’s carrying amount – best estimate of the

amount that the entity would receive for the asset if it were to be sold

Impairment


Reference IAS 39.66IFRS for SMEs 11.25 (b)

Impairment



Financial assets

Similar to IFRS for SMEs; however, IFRS includes additional guidance on

pass-through arrangements, continuing involvement and some other relevant aspects relating to

transfer of a financial asset

1. Rights to cash flows from the assets have expired or are settled

2. Entity has transferred substantially all the risks and rewards of ownership of the financial asset

3. Entity has retained some significant risks and rewards but has transferred control of the asset to another party. In this case, the asset is derecognized, and any rights and obligation created or retained are recognized.

Derecognition


Reference IAS 39.17, 39.37IFRS for SMEs 11.33

Impairment


Impairment



Financial liabilities Similar to IFRS for SMEs

When extinguished:• When the obligation is discharged• When the obligation is cancelled• When the obligation expires

Derecognition



Impairment


Definition

Measurement

Impairment



Derecognition

Section 12: Additional Financial Instruments

Measurement

Impairment and Derecognition

Hedge Accounting



Impairment and Derecognition Hedge AccountingMeasurement WHITE ROCK




Initial recognition SameMeasure at transaction price

Measurement




Subsequent measurement

Held for Trading – measured at FVTPLAFS – recorded in equityHTM – amortized cost

All financial instruments are measured at FVTPL except for:• Equity instruments not publicly traded

and no reliable measure of FV• Contracts linked to such instruments

These are measured at cost less impairment. (cost is FV at last reliable measure date)

Reference IAS 39.46-47IFRS for SMEs 12.8-9



Measurement



Fair Value Same

Same as section 11

Financial liability payable on demand – not less than the amount payable on demand, discounted from the first date payment could be required to be paid.







General Equity investments for AFS and HTM – impairment cannot be reversed

Same as basic financial instrumentsImpairment loss is recognized in profit or loss

Can be reversed for all types of instruments only up to the amount as if no impairment loss has been recognized

Reference IAS 39.58, 39.66, 39.69IFRS for SMEs 12.14



Hedge accounting



Hedge accounting

• Cash flow Hedge• FV Hedge•Hedges of a net investment in a

foreign operation

Gains and losses of hedged item and hedged instrument can both be recognized in profit and loss at the same time

Hedge accounting allowed for:• Interest rate risk of debt instrument• Forex or IR risk in a firm commitment or

highly probable forecast transaction• Forex risk in a net investment in foreign

operation• Price risk of commodity

Reference IAS 39.86IFRS for SMEs 12.15 12.17



Hedge accounting



Hedging instruments permitted

More broad• Derivatives that are not net written

options• Non-derivative assets or liabilities used as

a hedge of forex risk

Does not require the notional amt to be equal

No requirement on maturity to correspond to hedged item as long as hedge is demonstrated to be highly effective

Does not restrict pre-payment, early termination or extension features

More specific:• Interest rate / Forex swap• Forex forward• Commodity forward

Notional amount = designated amt of principal or notional amt of the hedged item

Has specified maturity date no later than the maturity of hedged item

No pre-payment, early termination or extension features

Reference IAS 39.82-88IFRS for SMEs 12.18



Hedge accounting



Effectiveness testing

Required to perform quantitative retrospective and prospective

effectiveness tests at least once per reporting period

No quantitative requirements to prove hedge effectiveness

Reference IAS 39.88IFRS for SMEs 12.16 d



Hedge accounting



Subsequent Accounting(CF Hedge)

Cumulative changes in the fair value of hedging instrument and hedged risk are recognized in OCI.

Effective part is recognize in OCI

Ineffective part (changes in FV of hedging instrument) is recognized in profit and loss

Amount recognized in OCI is moved to P&L when hedged item affects P&L






Hedge accounting



Subsequent Accounting (FV Hedge)

SameChange in FV of hedged item and

hedging instrument are recognized in P&L



Measurement


Hedge Accounting



Comparison of IFRS for SMEs and Full IFRSon Financial Instruments WHITE ROCK


comparison of ifrs for smes and full ifrs on financial instruments

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