financial instruments version
TRANSCRIPT
-
8/12/2019 Financial Instruments Version
1/71
2011 IFRS Foundation
1The IFRS fo r SMEs
Topic 2.1
Section 11 Basic Financial Ins truments
Section 12 Other Fin . Inst . IssuesSection 22Liabi l i ties and Equ ity
-
8/12/2019 Financial Instruments Version
2/71
2011 IFRS Foundation
2
This PowerPoint presentation was prepared by IFRS Foundation educationstaff as a convenience for others. It has not been approved by the IASB.
The IFRS Foundation allows individuals and organisations to use thispresentation to conduct training on the IFRS for SMEs. However, if youmake any changes to the PowerPoint presentation, your changes should beclearly identifiable as not part of the presentation prepared by the IFRSFoundation education staff and the copyright notice must be removed fromevery amended page .
This presentation may be modified from time to time. The latest versionmay be downloaded from:http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm
The accounting requirements applicable to small and medium-sized entities(SMEs) are set out in the Intern ational Financ ial Repor ting Standard (IFRS)for SMEs, which was issued by the IASB in July 2009.
The IFRS Foundation, the authors, the presenters and the publishers do notaccept responsibility for loss caused to any person who acts or refrainsfrom acting in reliance on the material in this PowerPoint presentation,whether such loss is caused by negligence or otherwise.
http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htmhttp://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm -
8/12/2019 Financial Instruments Version
3/71
2011 IFRS Foundation
3Sections 11-12Introduction
Financial instruments split into twosections:
Sec. 11 Basic Financial Instruments
Sec. 12 Other Financial InstrumentsIssues
Together the two sections cover
recognising, derecognising, measuring,
and disclosing financial assets andfinancial liabilities
-
8/12/2019 Financial Instruments Version
4/71
2011 IFRS Foundation
4Sections 11-12Introduction
Section 11 is relevant to all SMEs Section 12 is relevant If:
SME owns or issues exotic financial
instrumentsinstruments that impose
risks or rewards that are not typical of
basic financial instruments
SME wants to do hedge accounting
-
8/12/2019 Financial Instruments Version
5/71
2011 IFRS Foundation
5Sections 11-12Accounting choice
Entity may choose to apply either: Sections 11 and 12 in full, or
Recognition and measurement provisions
of IAS 39 and the disclosure requirements
in Sec 11 & 12
No option to use IFRS 9
The option chosen applies to all financial
instruments (not individually) To change option, follow Section 10
-
8/12/2019 Financial Instruments Version
6/71
2011 IFRS Foundation
6Sections 11-12Basic principles
Basic principle of Section 11:
Amortised cost model for all basic FI
except investments in ordinary or
preference shares that are publicly traded
or whose fair value can be measuredreliablythese are fair value through
profit or loss (FVTPL).
Basic principle of Section 12:
FI not covered by Section 11 are at
FVTPL
-
8/12/2019 Financial Instruments Version
7/71
2011 IFRS Foundation
7Section 11Scope
All basic financial instruments exceptthose covered by other sections of IFRS
for SMEs:
Investments in sub, associate, JV (see
Sections 9, 14, 15) Entitys own equity (see Sec 22, 26)
Leases (see Section 20)
Employee benefit assets and liabilities(see Section 28)
-
8/12/2019 Financial Instruments Version
8/71
2011 IFRS Foundation
8Sections 11-12Definitions
Financial instrument
Contract that gives rise to a financial
asset of one entity and a financial liability
or equity instrument of another entity
Includes cash But commodities that are near cash like
gold are not financial instruments
-
8/12/2019 Financial Instruments Version
9/71
2011 IFRS Foundation
9Sections 11-12Definitions
Basic financial instrument*
Cash
Debt instrument (accounts, notes, and
loans receivable and payable) that meet
conditions on next slide Ordinary and preference shares that are
not convertible and not puttable
*These notes do not discuss loan commitments
-
8/12/2019 Financial Instruments Version
10/71
2011 IFRS Foundation
10Section 11Basic debt instruments
Debt instruments are in Section 11 if:
Returns to holder are fixed, variable
referenced to an observable rate, or
combination of fixed and variable
No special provision could cause holderto lose principal
Prepayment conditions are not contingent
on a future event No special conditional returns
-
8/12/2019 Financial Instruments Version
11/71
2011 IFRS Foundation
11Section 11Basic debt instruments
Examples of basic debt instruments:
Trade accounts and notes receivable and
payable
Loans from banks and other 3rd parties
Accounts payable in foreign currency Loans to/from subsidiaries or associates
that are due on demand
Debt instrument that becomes
immediately due if issuer defaults All of these measured at amortised cost
-
8/12/2019 Financial Instruments Version
12/71
2011 IFRS Foundation
12Section 11Basic debt instruments
Examples of NOT basic debt instruments:
Investment in convertible or puttable
shares or debt
Swaps, forwards, futures, options, rights,
and other derivatives Loans with unusual prepayment
conditions (based on tax change,
accounting change, linked to company
performance) All of these are FVTPL under Section 12
-
8/12/2019 Financial Instruments Version
13/71
2011 IFRS Foundation
13Section 11Recognition and measurement
Initial recognition:
When entity becomes a party to the
contractual provisions of the instrument
IFRS for SMEsallows judgement
regarding trade date vs settlement dateaccounting, but be consistent
-
8/12/2019 Financial Instruments Version
14/71
2011 IFRS Foundation
14Section 11Recognition and measurement
Initial measurement:
At transaction price
Include transaction costs except for FI
that will be measured at FVTPL
Impute interest if payment is deferred
beyond normal terms or below-market
interest
-
8/12/2019 Financial Instruments Version
15/71
2011 IFRS Foundation
15Section 11Recognition and measurement
Initial recognition-measurement examples:
Loan made to another entity: Measure
at PV of interest and principal payments
Goods sold to customer (purchased
from supplier) on normal credit terms:Measure receivable (payable) at
undiscounted invoice price
-
8/12/2019 Financial Instruments Version
16/71
2011 IFRS Foundation
16Section 11Recognition and measurement
Initial recognition-measurement examples:
Goods sold (purchased) on 2-year interest freecredit: Measure at current cash sale price or PV
of receivable or payable
Example: We sell goods for 1,000, payment due
2 years, interest-free. Cash price = 857. IRR =8%.
Journal entries Debit Credit
At time of sale Receivable 857
Sales Revenue 857
End of year 1 Receivable 69
8% x 857 = 69 Interest Revenue 69
-
8/12/2019 Financial Instruments Version
17/71
2011 IFRS Foundation
17Section 11Recognition and measurement
Subsequent measurement:
Debt instruments in the scope of Section
11 (even if publicly traded):
Amortised cost using the effective
interest method Equity instruments in scope of Section 11:
If publicly traded or FV can be
measured reliably: FVTPLAll others: cost less impairment
-
8/12/2019 Financial Instruments Version
18/71
2011 IFRS Foundation
18Section 11Recognition and measurement
What is amortised cost?
Amount measured at initial recognition
Minus repayments of principal
Plus or minus cumulative amortisation of
any difference between initial
measurement and maturity amount (using
effective interest method)
Minus (for assets) reduction for impairmentor uncollectibility
-
8/12/2019 Financial Instruments Version
19/71
2011 IFRS Foundation
19Section 11Recognition and measurement
What is effective interest method?
Effective interest is rate that exactlydiscounts future cash payments (receipts) to
the carrying amount Also called Internal Rate of Return
Amortised cost = PV of future cash receipts
(payments) discounted at effective interest
rate
Interest expense (income) = carrying amountat beginning of period x effective interest rate
-
8/12/2019 Financial Instruments Version
20/71
2011 IFRS Foundation
20Section 11Effective interest example
1/1/X0 buy 5-year bond for 900, transaction cost =
50, cash interest = 40/year, mandatory redemptionat 1,100 at 31/12/X4.
Year Carrying amount
beginning
Int. income
at 6.9583%*
Cash
inflow
Carrying amt
ending
X0 950.00 66.10 (40) 976.11X1 976.11 67.92 (40) 1,004.03
X2 1,004.03 69.86 (40) 1,033.89
X3 1,033.89 71.94 (40) 1,065.83
X4 1,065.83 74.16 (40) 1,100.00
*6.9583% is the rate that exactly discounts the cash flows to 950.00
-
8/12/2019 Financial Instruments Version
21/71
2011 IFRS Foundation
21Section 11Recognition and measurement
What is fair value?
Amount for which FI could be sold or
settled in an arms length transaction
Best: Quoted market price in an active
market (bid price) Next: Price in a recent transaction for
identical asset (unless circumstances have
changed)
Estimate using a valuation technique (amodel)
-
8/12/2019 Financial Instruments Version
22/71
2011 IFRS Foundation
22Section 11Impairment
Impairment only applies to FI measured at
cost or amortised cost
At each reporting date, look for evidence
that FV is below carrying amount
Significant financial difficulty of issuer
Default or delinquency
Abnormal concession granted to debtor by
creditor Probable debtor bankruptcy or reorg.
-
8/12/2019 Financial Instruments Version
23/71
2011 IFRS Foundation
23Section 11Impairment
Impairment assessment:
Individually for all equity instruments
Individually for debt instruments that are
individually significant
For other debt instruments, eitherindividually or grouped based on similar risk
characteristics
Impairment recognition: Write-down is recognised in P&L
-
8/12/2019 Financial Instruments Version
24/71
2011 IFRS Foundation
24Section 11Impairment
Measurement of the impairment loss:
Debt instruments: Difference betweencarrying amount and current PV of estimated
cash flows discounted at assets original
effective interest rate. (Use current rate if
variable.)
Equity instruments: Difference between
carrying amount and best estimate
(approximation) of the amount (might be zero)that entity would receive if asset were sold at
reporting date.
-
8/12/2019 Financial Instruments Version
25/71
2011 IFRS Foundation
25Section 11Impairment
Reversal of an impairment loss:
Required if the problem causing the original
impairment reduces
Write up but not to more than what carrying
amount would have been had noimpairment been recognised (ie not to FV
but to new amortised cost)
Reversal recognised in P&L
-
8/12/2019 Financial Instruments Version
26/71
2011 IFRS Foundation
26Section 11Derecognition
Derecognition of a financial asset:
Derecognition = remove from balance sheet
Only when:a. Rights to cash flows expire or settled
b. Substantially all risks and rewards (cashflows) transferred to other entity
c. Transferred some but not substantially all
risks and rewards, and physical control of
asset transferred to another party who hasthe right to sell the asset to an unrelated
third party.
-
8/12/2019 Financial Instruments Version
27/71
2011 IFRS Foundation
27Section 11Derecognition
Derecognition of a financial asset:
In case (c) above:
Derecognise old asset entirely, and
Recognise separately any rights and
obligations retained or created in the transfer(measure at fair value)
If transfer does not result in derecognition, keep
transferred asset on books and recognise
financial liability for the consideration received Do not offset
-
8/12/2019 Financial Instruments Version
28/71
2011 IFRS Foundation
28Section 11Derecognition
Derecog. of financial assetexamples:
Must derecognise: Sell receivables to bank
but we continue to collect and remit, for a
handling fee. Bank assumes credit risk.
May not derecognise: Same facts exceptentity agrees to buy back any receivables in
arrears for more than 120 days. Entity
continues to recognise the receivables until
collected or writeoff as uncollectible.
-
8/12/2019 Financial Instruments Version
29/71
2011 IFRS Foundation
29Section 11Derecognition
Derecognition of a financial liability:
Only when extinguished, that is:a. Discharged
b. Cancelled
c. Expired
If existing debt is replaced with new onewith substantially different terms (or
there is a significant modification of
terms): Treat as new liability and extinguishment of
original liability
-
8/12/2019 Financial Instruments Version
30/71
2011 IFRS Foundation
30Section 11Disclosure
Disclose accounting policies for FI
Disclose financial assets and liabilities bycategories in the balance sheet:
Equity or debt at FVTPL
Debt at amortised cost Equity measured at cost less impairment
Liabilities at FVTPL
Liabilities at amortised cost
-
8/12/2019 Financial Instruments Version
31/71
2011 IFRS Foundation
31Section 11Disclosure
Terms, conditions, and restrictions of
financial assets and liability For those at FVTPL, details of how FV was
determined
Details of transfer of financial asset thatdid not qualify for derecognition
Details of financial assets pledged as
collateral
Details of defaults and breaches on loanspayable continued next slide...
-
8/12/2019 Financial Instruments Version
32/71
2011 IFRS Foundation
32Section 11Disclosure
Items of income, expense, gains and
losses:
Changes in FV for instruments measured at
FVTPL
Total interest income and total interestexpense on FI not measured at FVTPL
Impairment loss by class of financial asset
-
8/12/2019 Financial Instruments Version
33/71
2011 IFRS Foundation
33Section 12Recognition and measurement
Initial recognition:
When entity becomes a party to thecontractual provisions of the instrument
Initial measurement:
At FV (normally the transaction price) Transaction costs are charged to expense
-
8/12/2019 Financial Instruments Version
34/71
2011 IFRS Foundation
34Section 12Recognition and measurement
Subsequent measurement:
At FVTPL except: Equity instrument that is not publicly
traded and cannot get FV reliably, then
measure at cost less impairmentAlso measure a contract linked to such
equity instrument at cost less impairment
If previously at FVTPL, but now a reliable FV
measure is no longer available, treat mostrecent FV measure as cost going forward.
-
8/12/2019 Financial Instruments Version
35/71
2011 IFRS Foundation
35Section 12Hedge accounting
Hedging and hedge accounting are two
different things
What is hedging?
Managing risks by using one financial
instrument (hedging instrument) purposelyto offset the variability in FV or cash flows
of a recognised asset or liability, firm
commitment, or future cash flows (hedged
item)
-
8/12/2019 Financial Instruments Version
36/71
2011 IFRS Foundation
36Section 12Hedge accounting
What is hedge accounting?
Matching the change in FV of the hedging
instrument and the hedged item in the
same income statement
Hedge accounting is only an issue whennormal accounting would put the two FV
changes in different periodssometimes
referred to as an accounting mismatch
-
8/12/2019 Financial Instruments Version
37/71
2011 IFRS Foundation
37Section 12Hedge accounting
The hedgers accounting dilemma:
I have a risk in an asset or liability measured atamortised cost
Any change in FV or cash flows from that
asset or liability is recognised only when
realised in cash (asset is sold, liability issettled, cash flows occur)
To hedge, I buy a derivative, which is measured
at FVTPL at each reporting date
I need special hedge accounting to fix
this mismatch
S i 12 H d i
-
8/12/2019 Financial Instruments Version
38/71
2011 IFRS Foundation
38Section 12Hedge accounting
The hedgers accounting dilemma an
illustration: Entity has note payable at a fixed rate of interest
due in 3 years. Note measured at amortised cost.
Buys swap to convert receive fixed interest to pay
variable. Swap is measured at FVTPL.
End of year 1, interest rate declines. Therefore
loss on derivative immediately recognisedbut
an offsetting gain (not yet recognised) because
we will be paying the lower variable rate of
interest in future.
S ti 12 H d ti
-
8/12/2019 Financial Instruments Version
39/71
2011 IFRS Foundation
39Section 12Hedge accounting
Hedge accounting matching the gain (loss)
on the derivative with the loss (gain) on thehedged item.
Hedge accounting is optional.
S ti 12 H d ti
-
8/12/2019 Financial Instruments Version
40/71
2011 IFRS Foundation
40Section 12Hedge accounting
To qualify for hedge accounting:
Designate and document hedgingrelationship up front
Clearly identify the hedged risk
Hedged risk is listed in 12.17 Hedging instrument is listed in 12.18
Entity expects hedging instrument to be
highly effective in offsetting the designatedhedged risk.
S ti 12 H d ti
-
8/12/2019 Financial Instruments Version
41/71
2011 IFRS Foundation
41Section 12Hedge accounting
Hedged risk must be (12.17):
Interest rate risk in debt measured at cost
FX or interest rate risk in firm commitment
or highly probable forecast transaction
Price risk in a commodity owned or to beacquired in a firm commitment or highly
probable forecast transaction
FX risk in a net investment in a foreignoperation
S ti 12 H d ti
-
8/12/2019 Financial Instruments Version
42/71
2011 IFRS Foundation
42Section 12Hedge accounting
Hedged risk must be (12.17):
FX risk in debt instrument measured at cost is notin this list. Why?
Under 30.10 (FX) the debt is translated at
spot rate and FX gain or loss is recognised in
profit or loss
Change in FV of the swap (hedging
instrument) is also recognised in profit or loss
(measured using forward rate)
Natural hedge
Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
43/71
2011 IFRS Foundation
43Section 12Hedge accounting
Hedging instrument must be (12.18):
Interest rate swap, FX swap, FX forward,commodity forward
Entered into with external party
Notional amount = principal or notionalamount of hedged item
Specified maturity not later than maturity or
settlement of hedged item Cannot be prepaid or terminated early
Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
44/71
2011 IFRS Foundation
44Section 12Hedge accounting
Hedge of fixed interest rate risk or
commodity price risk of commodity held Recognise hedging instrument as asset or
liability
Change in FV of hedging instrument in P&L
Change in FV of hedged item in P&L and
adjustment of carrying amount of hedged
itemeven though hedged item is
otherwise measured at costThis is called Fair Value Hedge in IAS 39.
Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
45/71
2011 IFRS Foundation
45Section 12Hedge accounting
Hedge of fixed interest rate risk or
commodity price risk of commodity held(continued)
If hedged risk was fixed interest in debt
measured at cost, recognise in P&L theperiodic net settlements from the derivative
(interest rate swap) in the period in which
the net settlements occur.
46Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
46/71
2011 IFRS Foundation
46Section 12Hedge accounting
ExampleAssumptions:
Entity borrows 1,000, 3 years, 5% fixed rate,payable measured at amortised cost
Hedged with a derivative whose value is linked to
an interest rate index
End of year 1, market rate = 6%. FV of 1,000
payable 2 years 6% = 1,000 x .889996 = 890, but
this 110 gain is not recognised
Value of the derivative declines to -112 Note there is small ineffectiveness = 2
47Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
47/71
2011 IFRS Foundation
47Section 12Hedge accounting
Balance sheet at time loan is made:
Cash 1,000
Loan payable 1,000
Adjust loan end of year 1 to reflect rate change:
Loan payable 110
P&L 2
Derivative (Liability) 112
Balance sheet end of year 1:
Cash 1,000
Derivative (Liability) 112
Loan payable 890
Equity (2)
48Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
48/71
2011 IFRS Foundation
48Section 12Hedge accounting
Conceptual question regarding the
previous example: Does the 890 carrying amount of the loan
payable at end of year 1 represent the Fair
Value of the loan? Hint: Does the 890 reflect change in credit
risk or prepayment risk?
If 890 is not Fair Value, what is it?
49Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
49/71
2011 IFRS Foundation
49Section 12Hedge accounting
Hedge of fixed interest rate risk and
commodity price risk (continued) Discontinue hedge accounting when:
Hedging instrument expires
Hedge no longer meets conditions Entity revokes designation
Any gain or loss that was included in the
carrying amount of the hedged item is
amortised to P&L over remaining life ofhedged item.
50Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
50/71
2011 IFRS Foundation
50Section 12 Hedge accounting
Hedge of variable interest rate risk, FX or
commodity price risk of commodity held,highly probable forecast transaction, or net
investment in foreign operation
Recognise change in FV of hedginginstrument in OCI (assuming it was
effective; ineffectiveness reported in P&L)
'Recycle' amount recognised in OCI when
hedged item hits P&L or hedgingrelationship ends.
51Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
51/71
2011 IFRS Foundation
51Section 12 Hedge accounting
Hedge of variable interest rate risk, FX or
commodity price risk of commodity held,highly probable forecast transaction, or net
investment in foreign operation (continued)
If hedged risk was variable interest in debt
measured at cost, recognise in P&L theperiodic net settlements from the interest
rate swap in the period in which the net
settlements occur.This is called Cash Flow Hedge in IAS 39.
52Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
52/71
2011 IFRS Foundation
52Section 12 Hedge accounting
ExampleAssumptions:
Entity sells goods for 1,000 floating rate 3-year note receivable
Interest rate risk managed with a derivative
(interest rate swap) End of year 1 interest rates increasePV
of cumulative cash flows increase by 100
But FV of swap decreases by 105
Note: Some hedge ineffectiveness
53Section 12 Hedge accounting
-
8/12/2019 Financial Instruments Version
53/71
2011 IFRS Foundation
53Section 12 Hedge accounting
Opening balance sheet:
Receivable 1,000Equity 1,000
Ineffective portion of hedge:
P&L* 5*
OCI (Equity) 100
Derivative (Liability) 105
*Ineffective portion of hedge
example continued next slide...
-
8/12/2019 Financial Instruments Version
54/71
55Section 12Hedge accounting
-
8/12/2019 Financial Instruments Version
55/71
2011 IFRS Foundation
g g
Hedge of variable interest rate risk etc...
Discontinue hedge accounting when: Hedging instrument expires
Hedge no longer meets conditions
Forecast transaction no longer probable Entity revokes designation
Any prior gain or loss on forecast
transaction that was recognised in OCI is
recycled to P&L
56Section 12Hedge accounting
-
8/12/2019 Financial Instruments Version
56/71
2011 IFRS Foundation
g g
Disclosures relating to hedge accounting
For each type of hedge: Description of hedge(risk, hedged item, instrument)
Special disclosures for hedge of fixed interest
rate risk and commodity price risk of commodity
held
Special disclosures for hedge of variable interest
rate risk, FX or commodity price risk of
commodity held, highly probable forecast
transaction, or net investment in foreign operation
57Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
57/71
2011 IFRS Foundation
q y
Scope of Section 22
Principles for classifying an instrument asdebt or equity
Original issuance of shares and other
equity instruments Sale of options, rights, warrants
Bonus issues and share splits
Issuance of convertible debtcontinues...
58Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
58/71
2011 IFRS Foundation
q y
Scope of Section 22, continued
Treasury shares Distributions to owners
Non-controlling interest and transactions in
shares of a consolidated subsidiary
59Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
59/71
2011 IFRS Foundation
q y
Principles for classifying an instrument as
debt or equity Equity = residual interest in assets minus
liabilities
Liability is a present obligation (entity doesnot have a right to avoid paying cash)
60Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
60/71
2011 IFRS Foundation
The following are equity:
Puttable instrument that entitles holder topro rata share of net assets on liquidation
Instrument that is automatically redeemed if
an uncertain future event occurs or death orretirement of holder
Subordinated instrument payable only on
liquidation
61Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
61/71
2011 IFRS Foundation
The following are liabilities:
Instrument is payable on liquidation, butthe amount is subject to a maximum
ceiling
Entity is obliged to make payments beforeliquidationsuch as mandatory dividend
Mandatorily redeemable preference shares
62Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
62/71
2011 IFRS Foundation
Members shares in a cooperative are
equity only if: Coop has unconditional right to refuse
redemption of members shares, or
Redemption is unconditionally prohibitedby law or entitys charter
Otherwiseliability
63Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
63/71
2011 IFRS Foundation
Original issuance of shares and other equity
instruments Recognise when equity is issued and subscriber
is obligated to invest
If equity is issued before the entity gets cash, the
receivable is an offset to equity (not an asset) If entity gets (nonrefundable) cash before equity
is issued, equity is increased
No increase in equity is recognised for subscribed
shares that have not been issued and entity has
not received cash
64Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
64/71
2011 IFRS Foundation
Sale of options, rights, warrants
Same principles as for original issuance ofshares (previous slide)
Transaction costs in issuing equity
instrumentsAccounted for as a reduction of equity (not
an expense)
65Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
65/71
2011 IFRS Foundation
Bonus issues (stock dividends) and share
splits These do not change equity
Accounted for as reclassification of
amounts within equity (out of retainedearnings and into permanent capital)
Amounts reclassified should be based on
local laws
66Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
66/71
2011 IFRS Foundation
Issuance of convertible debt
Must account separately for debt component andequity component (conversion right)
Debt proceeds = FV of similar risk debt without
conversion feature (PV calculation)
Equity proceeds are the residual
Recorded at issuance; not subsequently revised
Subsequently, debt discount = additional interest
expense (effective interest method)
67Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
67/71
2011 IFRS Foundation
Issuance of convertible debt - Example
1/1/X1 issue at par a 4% convertible bond, par and
maturity amount = 50,000, maturity in 5 years
If no conversion feature, would have paid 6%
Calculate present value of cash flows at 6%:
PV 50,000 due in 5 years @ 6% = 37,363 PV annuity 2,000/year 5 years @ 6% = 8,425
Total PV = 45,788
Debit cash 50,000
Credit financial liability 45,788Credit equity (conversion right) 4,212
68Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
68/71
2011 IFRS Foundation
Date Inter-
est
paid
Interest
expense
@ 6%
Amort. of
discount
Bond
dis-
count
Net bond
liability
1/1/X1 4,212 45,788
31/12/X1 2,000 2,747 747 3,465 46,535
31/12/X2 2,000 2,792 792 2,673 47,32731/12/X3 2,000 2,840 840 1,833 48,167
31/12/X4 2,000 2,890 890 943 49,057
31/12/X5 2,000 2,943 943 0 50,000
31/12/X1: Debit interest expense 2,747
Credit financial liability 747
Credit cash 2,000
69Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
69/71
2011 IFRS Foundation
Treasury shares
Equity instruments entity has issued andlater reacquired
Measure at cash paid or FV of other
consideration given to acquire \ Present as deduction from equity (not
asset)
No gain or loss recognised on purchase,
sale, or cancellation
70Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
70/71
2011 IFRS Foundation
Distributions to owners
If cashmeasurement = cash paid If non-cashmeasurement = FV of assets
distributed
Amount reduces equity
If entity gets tax deduction for dividend, taxbenefit is adjustment of equity
Not reduction of income tax expense
If entity pays withholding tax on dividendspaid, tax reduces equity as part of dividend
71Section 22Liabilities and equity
-
8/12/2019 Financial Instruments Version
71/71
2011 IFRS Foundation
Non-controlling interest (NCI) and
transactions in shares of a consolidatedsubsidiary
In consolidated balance sheet NCI is part of
equity (not liability or in between)
Change in parents controlling interest that doesnot result in loss of control is a transaction with
owners
Equity adjustment, not through P&L
No adjustment of carrying amounts of assetsor goodwill