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  • IAS 32 — Financial Instruments: Presentation
    or sell a non financial item that can be settled net in cash or another financial instrument except for contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non financial item in accordance with the entity s expected purchase sale or usage requirements IAS 32 8 Key definitions IAS 32 11 Financial instrument a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity Financial asset any asset that is cash an equity instrument of another entity a contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity or 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 receive a variable number of the entity s own equity instruments 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 puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments Financial liability any liability that is a contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity or 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 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 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 puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments Equity instrument Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities Fair value the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm s length transaction The definition of financial instrument used in IAS 32 is the same as that in IAS 39 Puttable instrument a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder Classification as liability or equity The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract not its legal form and the definitions of financial liability and equity instrument Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation see below The entity must make the decision at the time the instrument is initially recognised The classification is not subsequently changed based on changed circumstances IAS 32 15 A financial instrument is an equity instrument only if a the instrument includes no contractual obligation to deliver cash or another financial asset to another entity and b if the instrument will or may be settled in the issuer s own equity instruments it is either a non derivative that includes no contractual obligation for the issuer to deliver a variable number of its 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 number of its own equity instruments IAS 32 16 Illustration preference shares If an entity issues preference preferred shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future date the substance is that they are a contractual obligation to deliver cash and therefore should be recognised as a liability IAS 32 18 a In contrast preference shares that do not have a fixed maturity and where the issuer does not have a contractual obligation to make any payment are equity In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity Illustration issuance of fixed monetary amount of equity instruments A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity s own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability IAS 32 20 Illustration one party has a choice over how an instrument is settled When a derivative financial instrument gives one party a choice over how it is settled for instance the issuer or the holder can choose settlement net in cash or by exchanging shares for cash it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument IAS 32 26 Contingent settlement provisions If as a result of contingent settlement provisions the issuer does not have an unconditional right to avoid settlement by delivery of cash or other financial

    Original URL path: http://www.iasplus.com/en/standards/ias/ias32 (2016-02-10)
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  • IAS 33 — Earnings Per Share
    earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted that options or warrants are exercised or that ordinary shares are issued upon the satisfaction of specified conditions Requirement to present EPS An entity whose securities are publicly traded or that is in process of public issuance must present on the face of the statement of comprehensive income basic and diluted EPS for IAS 33 66 profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity and profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period If an entity presents the components of profit or loss in a separate income statement it presents EPS only in that separate statement IAS 33 4A Basic and diluted EPS must be presented with equal prominence for all periods presented IAS 33 66 Basic and diluted EPS must be presented even if the amounts are negative that is a loss per share IAS 33 69 If an entity reports a discontinued operation basic and diluted amounts per share must be disclosed for the discontinued operation either on the face of the of comprehensive income or separate income statement if presented or in the notes to the financial statements IAS 33 68 and 68A Basic EPS Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity the numerator by the weighted average number of ordinary shares outstanding the denominator during the period IAS 33 10 The earnings numerators profit or loss from continuing operations and net profit or loss used for the calculation should be after deducting all expenses including taxes minority interests and preference dividends IAS 33 12 The denominator number of shares is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period multiplied by a time weighting factor IAS 33 includes guidance on appropriate recognition dates for shares issued in various circumstances IAS 33 20 21 Contingently issuable shares are included in the basic EPS denominator when the contingency has been met IAS 33 24 Diluted EPS Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential ordinary shares IAS 33 31 The effects of anti dilutive potential ordinary shares are ignored in calculating diluted EPS IAS 33 41 Guidance on calculating dilution Convertible securities The numerator should be adjusted for the after tax effects of dividends and interest charged in relation to dilutive potential ordinary shares and for any other changes in income that would result from the conversion of the potential ordinary shares IAS 33 33 The denominator should include shares that would be issued on the conversion IAS 33 36 Options and warrants In

    Original URL path: http://www.iasplus.com/en/standards/ias/ias33 (2016-02-10)
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  • IAS 34 — Interim Financial Reporting
    the Standard encourages publicly traded entities to provide interim financial reports that conform to the recognition measurement and disclosure principles set out in IAS 34 at least as of the end of the first half of their financial year such reports to be made available not later than 60 days after the end of the interim period IAS 34 1 Minimum content of an interim financial report The minimum components specified for an interim financial report are IAS 34 8 a condensed balance sheet statement of financial position either a a condensed statement of comprehensive income or b a condensed statement of comprehensive income and a condensed income statement a condensed statement of changes in equity a condensed statement of cash flows selected explanatory notes If a complete set of financial statements is published in the interim report those financial statements should be in full compliance with IFRSs IAS 34 9 If the financial statements are condensed they should include at a minimum each of the headings and sub totals included in the most recent annual financial statements and the explanatory notes required by IAS 34 Additional line items or notes should be included if their omission would make the interim financial information misleading IAS 34 10 If the annual financial statements were consolidated group statements the interim statements should be group statements as well IAS 34 14 The periods to be covered by the interim financial statements are as follows IAS 34 20 balance sheet statement of financial position as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year statement of comprehensive income and income statement if presented for the current interim period and cumulatively for the current financial year to date with comparative statements for the comparable interim periods current and year to date of the immediately preceding financial year statement of changes in equity cumulatively for the current financial year to date with a comparative statement for the comparable year to date period of the immediately preceding financial year statement of cash flows cumulatively for the current financial year to date with a comparative statement for the comparable year to date period of the immediately preceding financial year If the company s business is highly seasonal IAS 34 encourages disclosure of financial information for the latest 12 months and comparative information for the prior 12 month period in addition to the interim period financial statements IAS 34 21 Note disclosures The explanatory notes required are designed to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting date IAS 34 states a presumption that anyone who reads an entity s interim report will also have access to its most recent annual report Consequently IAS 34 avoids repeating annual disclosures in interim condensed reports IAS 34 15 Examples of specific disclosure requirements of IAS 34

    Original URL path: http://www.iasplus.com/en/standards/ias/ias34 (2016-02-10)
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  • IAS 35 — Discontinuing Operations (Superseded)
    Summary of IAS 35 Objective of IAS 35 The objective of IAS 35 is to establish principles for reporting information about discontinuing activities as defined thereby enhancing the ability of users of financial statements to make projections of an enterprise s cash flows earnings generating capacity and financial position by segregating information about discontinuing activities from information about continuing operations The Standard does not establish any recognition or measurement principles in relation to discontinuing operations these are dealt with under other IAS In particular IAS 35 provides guidance on how to apply IAS 36 Impairment of Assets and IAS 37 Provisions Contingent Liabilities and Contingent Assets to a discontinuing operation IAS 35 17 19 Discontinuing operation defined Discontinuing operation A relatively large component of a business enterprise such as a business or geographical segment under IAS 14 Segment Reporting that the enterprise pursuant to a single plan either is disposing of substantially in its entirety or is terminating through abandonment or piecemeal sale IAS 35 2 A restructuring transaction or event that does not meet the definition of a discontinuing operation should not be called a discontinuing operation IAS 35 43 When to disclose Disclosures begin after the earlier of the following the company has entered into an agreement to sell substantially all of the assets of the discontinuing operation or its board of directors or other similar governing body has both approved and announced the planned discontinuance IAS 35 16 The disclosures are required if a plan for disposal is both approved and publicly announced after the end of the financial reporting period but before the financial statements for that period are approved A board decision after year end by itself is not enough IAS 35 29 What to disclose The following must be disclosed IAS 35 27 and IAS 35 31 a description of the discontinuing operation the business or geographical segment s in which it is reported in accordance with IAS 14 the date that the plan for discontinuance was announced the timing of expected completion if known or determinable the carrying amounts of the total assets and the total liabilities to be disposed of the amounts of revenue expenses and pre tax operating profit or loss attributable to the discontinuing operation and separately related income tax expense the amount of gain or loss recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation and related income tax expense the net cash flows attributable to the operating investing and financing activities of the discontinuing operation and the net selling prices received or expected from the sale of those net assets for which the enterprise has entered into one or more binding sale agreements and the expected timing thereof and the carrying amounts of those net assets How to disclose The disclosures may be but need not be shown on the face of the financial statements Only the gain or loss on actual disposal of assets and settlement of liabilities must be on

    Original URL path: http://www.iasplus.com/en/standards/ias/ias35 (2016-02-10)
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  • IAS 36 — Impairment of Assets
    each reporting period an entity is required to assess whether there is any indication that an asset may be impaired i e its carrying amount may be higher than its recoverable amount IAS 36 has a list of external and internal indicators of impairment If there is an indication that an asset may be impaired then the asset s recoverable amount must be calculated IAS 36 9 The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired In some cases the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period IAS 36 10 an intangible asset with an indefinite useful life an intangible asset not yet available for use goodwill acquired in a business combination Indications of impairment IAS 36 12 External sources market value declines negative changes in technology markets economy or laws increases in market interest rates net assets of the company higher than market capitalisation Internal sources obsolescence or physical damage asset is idle part of a restructuring or held for disposal worse economic performance than expected for investments in subsidiaries joint ventures or associates the carrying amount is higher than the carrying amount of the investee s assets or a dividend exceeds the total comprehensive income of the investee These lists are not intended to be exhaustive IAS 36 13 Further an indication that an asset may be impaired may indicate that the asset s useful life depreciation method or residual value may need to be reviewed and adjusted IAS 36 17 Determining recoverable amount If fair value less costs of disposal or value in use is more than carrying amount it is not necessary to calculate the other amount The asset is not impaired IAS 36 19 If fair value less costs of disposal cannot be determined then recoverable amount is value in use IAS 36 20 For assets to be disposed of recoverable amount is fair value less costs of disposal IAS 36 21 Fair value less costs of disposal Fair value is determined in accordance with IFRS 13 Fair Value Measurement Costs of disposal are the direct added costs only not existing costs or overhead IAS 36 28 Value in use The calculation of value in use should reflect the following elements IAS 36 30 an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money represented by the current market risk free rate of interest the price for bearing the uncertainty inherent in the asset other factors such as illiquidity that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset Cash flow projections should be based on reasonable and supportable assumptions the most recent budgets and forecasts and extrapolation for periods beyond budgeted projections IAS 36 33 IAS 36 presumes that budgets and forecasts should not go beyond five years for periods after five years extrapolate from the earlier budgets IAS 36 35 Management should assess the reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows IAS 36 34 Cash flow projections should relate to the asset in its current condition future restructurings to which the entity is not committed and expenditures to improve or enhance the asset s performance should not be anticipated IAS 36 44 Estimates of future cash flows should not include cash inflows or outflows from financing activities or income tax receipts or payments IAS 36 50 Discount rate In measuring value in use the discount rate used should be the pre tax rate that reflects current market assessments of the time value of money and the risks specific to the asset IAS 36 55 The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset IAS 36 56 For impairment of an individual asset or portfolio of assets the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio If a market determined asset specific rate is not available a surrogate must be used that reflects the time value of money over the asset s life as well as country risk currency risk price risk and cash flow risk The following would normally be considered IAS 36 57 the entity s own weighted average cost of capital the entity s incremental borrowing rate other market borrowing rates Recognition of an impairment loss An impairment loss is recognised whenever recoverable amount is below carrying amount IAS 36 59 The impairment loss is recognised as an expense unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease IAS 36 60 Adjust depreciation for future periods IAS 36 63 Cash generating units Recoverable amount should be determined for the individual asset if possible IAS 36 66 If it is not possible to determine the recoverable amount fair value less costs of disposal and value in use for the individual asset then determine recoverable amount for the asset s cash generating unit CGU IAS 36 66 The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets IAS 36 6 Impairment of goodwill Goodwill should be tested for impairment annually IAS 36 96 To test for impairment goodwill must be allocated to each of the acquirer s cash generating units or groups of cash generating units that are expected to benefit from the synergies of

    Original URL path: http://www.iasplus.com/en/standards/ias/ias36 (2016-02-10)
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  • IAS 37 — Provisions, Contingent Liabilities and Contingent Assets
    within say a 30 day period IAS 37 10 A possible obligation a contingent liability is disclosed but not accrued However disclosure is not required if payment is remote IAS 37 86 In rare cases for example in a lawsuit it may not be clear whether an entity has a present obligation In those cases a past event is deemed to give rise to a present obligation if taking account of all available evidence it is more likely than not that a present obligation exists at the balance sheet date A provision should be recognised for that present obligation if the other recognition criteria described above are met If it is more likely than not that no present obligation exists the entity should disclose a contingent liability unless the possibility of an outflow of resources is remote IAS 37 15 Measurement of provisions The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date that is the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party IAS 37 36 This means Provisions for one off events restructuring environmental clean up settlement of a lawsuit are measured at the most likely amount IAS 37 40 Provisions for large populations of events warranties customer refunds are measured at a probability weighted expected value IAS 37 39 Both measurements are at discounted present value using a pre tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability IAS 37 45 and 37 47 In reaching its best estimate the entity should take into account the risks and uncertainties that surround the underlying events IAS 37 42 If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party the reimbursement should be recognised as a separate asset and not as a reduction of the required provision when and only when it is virtually certain that reimbursement will be received if the entity settles the obligation The amount recognised should not exceed the amount of the provision IAS 37 53 In measuring a provision consider future events as follows forecast reasonable changes in applying existing technology IAS 37 49 ignore possible gains on sale of assets IAS 37 51 consider changes in legislation only if virtually certain to be enacted IAS 37 50 Remeasurement of provisions IAS 37 59 Review and adjust provisions at each balance sheet date If an outflow no longer probable provision is reversed Some examples of provisions Circumstance Recognise a provision Restructuring by sale of an operation Only when the entity is committed to a sale i e there is a binding sale agreement IAS 37 78 Restructuring by closure or reorganisation Only when a detailed form plan is in place and the entity has started to implement the plan or

    Original URL path: http://www.iasplus.com/en/standards/ias/ias37 (2016-02-10)
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  • IAS 38 — Intangible Assets
    to obtain benefits from the asset future economic benefits such as revenues or reduced future costs Identifiability an intangible asset is identifiable when it IAS 38 12 is separable capable of being separated and sold transferred licensed rented or exchanged either individually or together with a related contract or arises from contractual or other legal rights regardless of whether those rights are transferable or separable from the entity or from other rights and obligations Examples of intangible assets patented technology computer software databases and trade secrets trademarks trade dress newspaper mastheads internet domains video and audiovisual material e g motion pictures television programmes customer lists mortgage servicing rights licensing royalty and standstill agreements import quotas franchise agreements customer and supplier relationships including customer lists marketing rights Intangibles can be acquired by separate purchase as part of a business combination by a government grant by exchange of assets by self creation internal generation Recognition Recognition criteria IAS 38 requires an entity to recognise an intangible asset whether purchased or self created at cost if and only if IAS 38 21 it is probable that the future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably This requirement applies whether an intangible asset is acquired externally or generated internally IAS 38 includes additional recognition criteria for internally generated intangible assets see below The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset IAS 38 22 The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination IAS 38 33 If recognition criteria not met If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred IAS 38 68 Business combinations There is a presumption that the fair value and therefore the cost of an intangible asset acquired in a business combination can be measured reliably IAS 38 35 An expenditure included in the cost of acquisition on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date Reinstatement The Standard also prohibits an entity from subsequently reinstating as an intangible asset at a later date an expenditure that was originally charged to expense IAS 38 71 Initial recognition research and development costs Charge all research cost to expense IAS 38 54 Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits IAS 38 57 If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase the entity treats the expenditure for that project as if it were incurred in the research phase only Initial recognition in process research and development acquired in a business combination A research and development project acquired in a business combination is recognised as an asset at cost even if a component is research Subsequent expenditure on that project is accounted for as any other research and development cost expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset IAS 38 34 Initial recognition internally generated brands mastheads titles lists Brands mastheads publishing titles customer lists and items similar in substance that are internally generated should not be recognised as assets IAS 38 63 Initial recognition computer software Purchased capitalise Operating system for hardware include in hardware cost Internally developed whether for use or sale charge to expense until technological feasibility probable future benefits intent and ability to use or sell the software resources to complete the software and ability to measure cost Amortisation over useful life based on pattern of benefits straight line is the default Initial recognition certain other defined types of costs The following items must be charged to expense when incurred internally generated goodwill IAS 38 48 start up pre opening and pre operating costs IAS 38 69 training cost IAS 38 69 advertising and promotional cost including mail order catalogues IAS 38 69 relocation costs IAS 38 69 For this purpose when incurred means when the entity receives the related goods or services If the entity has made a prepayment for the above items that prepayment is recognised as an asset until the entity receives the related goods or services IAS 38 70 Initial measurement Intangible assets are initially measured at cost IAS 38 24 Measurement subsequent to acquisition cost model and revaluation models allowed An entity must choose either the cost model or the revaluation model for each class of intangible asset IAS 38 72 Cost model After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses IAS 38 74 Revaluation model Intangible assets may be carried at a revalued amount based on fair value less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market IAS 38 75 Such active markets are expected to be uncommon for intangible assets IAS 38 78 Examples where they might exist production quotas fishing licences taxi licences Under the revaluation model revaluation increases are recognised in other comprehensive income and accumulated in the revaluation surplus within equity except to the extent that it reverses a revaluation decrease previously recognised in profit and loss If the revalued intangible has a finite life and is therefore being amortised see below the revalued amount is amortised

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  • IAS 39 — Financial Instruments: Recognition and Measurement
    joint ventures asset backed securities such as collateralised mortgage obligations repurchase agreements and securitised packages of receivables derivatives including options rights warrants futures contracts forward contracts and swaps A derivative is a financial instrument Whose value changes in response to the change in an underlying variable such as an interest rate commodity or security price or index That requires no initial investment or one that is smaller than would be required for a contract with similar response to changes in market factors and That is settled at a future date IAS 39 9 Examples of derivatives Forwards Contracts to purchase or sell a specific quantity of a financial instrument a commodity or a foreign currency at a specified price determined at the outset with delivery or settlement at a specified future date Settlement is at maturity by actual delivery of the item specified in the contract or by a net cash settlement Interest rate swaps and forward rate agreements Contracts to exchange cash flows as of a specified date or a series of specified dates based on a notional amount and fixed and floating rates Futures Contracts similar to forwards but with the following differences futures are generic exchange traded whereas forwards are individually tailored Futures are generally settled through an offsetting reversing trade whereas forwards are generally settled by delivery of the underlying item or cash settlement Options Contracts that give the purchaser the right but not the obligation to buy call option or sell put option a specified quantity of a particular financial instrument commodity or foreign currency at a specified price strike price during or at a specified period of time These can be individually written or exchange traded The purchaser of the option pays the seller writer of the option a fee premium to compensate the seller for the risk of payments under the option Caps and floors These are contracts sometimes referred to as interest rate options An interest rate cap will compensate the purchaser of the cap if interest rates rise above a predetermined rate strike rate while an interest rate floor will compensate the purchaser if rates fall below a predetermined rate Embedded derivatives Some contracts that themselves are not financial instruments may nonetheless have financial instruments embedded in them For example a contract to purchase a commodity at a fixed price for delivery at a future date has embedded in it a derivative that is indexed to the price of the commodity An embedded derivative is a feature within a contract such that the cash flows associated with that feature behave in a similar fashion to a stand alone derivative In the same way that derivatives must be accounted for at fair value on the balance sheet with changes recognised in the income statement so must some embedded derivatives IAS 39 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when IAS 39 11 the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and the entire instrument is not measured at fair value with changes in fair value recognised in the income statement If an embedded derivative is separated the host contract is accounted for under the appropriate standard for instance under IAS 39 if the host is a financial instrument Appendix A to IAS 39 provides examples of embedded derivatives that are closely related to their hosts and of those that are not Examples of embedded derivatives that are not closely related to their hosts and therefore must be separately accounted for include the equity conversion option in debt convertible to ordinary shares from the perspective of the holder only IAS 39 AG30 f commodity indexed interest or principal payments in host debt contracts IAS 39 AG30 e cap and floor options in host debt contracts that are in the money when the instrument was issued IAS 39 AG33 b leveraged inflation adjustments to lease payments IAS 39 AG33 f currency derivatives in purchase or sale contracts for non financial items where the foreign currency is not that of either counterparty to the contract is not the currency in which the related good or service is routinely denominated in commercial transactions around the world and is not the currency that is commonly used in such contracts in the economic environment in which the transaction takes place IAS 39 AG33 d If IAS 39 requires that an embedded derivative be separated from its host contract but the entity is unable to measure the embedded derivative separately the entire combined contract must be designated as a financial asset as at fair value through profit or loss IAS 39 12 Classification as liability or equity Since IAS 39 does not address accounting for equity instruments issued by the reporting enterprise but it does deal with accounting for financial liabilities classification of an instrument as liability or as equity is critical IAS 32 Financial Instruments Presentation addresses the classification question Classification of financial assets IAS 39 requires financial assets to be classified in one of the following categories IAS 39 45 Financial assets at fair value through profit or loss Available for sale financial assets Loans and receivables Held to maturity investments Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements Financial assets at fair value through profit or loss This category has two subcategories Designated The first includes any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss Held for trading The second category includes financial assets that are held for trading All derivatives except those designated hedging instruments and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short term profit taking are held for trading IAS 39 9 Available for sale financial assets AFS are any non derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as as a loans and receivables b held to maturity investments or c financial assets at fair value through profit or loss IAS 39 9 AFS assets are measured at fair value in the balance sheet Fair value changes on AFS assets are recognised directly in equity through the statement of changes in equity except for interest on AFS assets which is recognised in income on an effective yield basis impairment losses and for interest bearing AFS debt instruments foreign exchange gains or losses The cumulative gain or loss that was recognised in equity is recognised in profit or loss when an available for sale financial asset is derecognised IAS 39 55 b Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market other than held for trading or designated on initial recognition as assets at fair value through profit or loss or as available for sale Loans and receivables for which the holder may not recover substantially all of its initial investment other than because of credit deterioration should be classified as available for sale IAS 39 9 Loans and receivables are measured at amortised cost IAS 39 46 a Held to maturity investments are non derivative financial assets with fixed or determinable payments that an entity intends and is able to hold to maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or loss or as available for sale Held to maturity investments are measured at amortised cost If an entity sells a held to maturity investment other than in insignificant amounts or as a consequence of a non recurring isolated event beyond its control that could not be reasonably anticipated all of its other held to maturity investments must be reclassified as available for sale for the current and next two financial reporting years IAS 39 9 Held to maturity investments are measured at amortised cost IAS 39 46 b Classification of financial liabilities IAS 39 recognises two classes of financial liabilities IAS 39 47 Financial liabilities at fair value through profit or loss Other financial liabilities measured at amortised cost using the effective interest method The category of financial liability at fair value through profit or loss has two subcategories Designated a financial liability that is designated by the entity as a liability at fair value through profit or loss upon initial recognition Held for trading a financial liability classified as held for trading such as an obligation for securities borrowed in a short sale which have to be returned in the future Initial recognition IAS 39 requires recognition of a financial asset or a financial liability when and only when the entity becomes a party to the contractual provisions of the instrument subject to the following provisions in respect of regular way purchases IAS 39 14 Regular way purchases or sales of a financial asset A regular way purchase or sale of financial assets is recognised and derecognised using either trade date or settlement date accounting IAS 39 38 The method used is to be applied consistently for all purchases and sales of financial assets that belong to the same category of financial asset as defined in IAS 39 note that for this purpose assets held for trading form a different category from assets designated at fair value through profit or loss The choice of method is an accounting policy IAS 39 38 IAS 39 requires that all financial assets and all financial liabilities be recognised on the balance sheet That includes all derivatives Historically in many parts of the world derivatives have not been recognised on company balance sheets The argument has been that at the time the derivative contract was entered into there was no amount of cash or other assets paid Zero cost justified non recognition notwithstanding that as time passes and the value of the underlying variable rate price or index changes the derivative has a positive asset or negative liability value Initial measurement Initially financial assets and liabilities should be measured at fair value including transaction costs for assets and liabilities not measured at fair value through profit or loss IAS 39 43 Measurement subsequent to initial recognition Subsequently financial assets and liabilities including derivatives should be measured at fair value with the following exceptions IAS 39 46 47 Loans and receivables held to maturity investments and non derivative financial liabilities should be measured at amortised cost using the effective interest method Investments in equity instruments with no reliable fair value measurement and derivatives indexed to such equity instruments should be measured at cost Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to measurement under the hedge accounting requirements of the IAS 39 Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or that are accounted for using the continuing involvement method are subject to particular measurement requirements Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm s length transaction IAS 39 9 IAS 39 provides a hierarchy to be used in determining the fair value for a financial instrument IAS 39 Appendix A paragraphs AG69 82 Quoted market prices in an active market are the best evidence of fair value and should be used where they exist to measure the financial instrument If a market for a financial instrument is not active an entity establishes fair value by using a valuation technique that makes maximum use of market inputs and includes recent arm s length market transactions reference to the current fair value of another instrument that is substantially the same discounted cash flow analysis and option pricing models An acceptable valuation technique incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments If there is no active market for an equity instrument and the range of reasonable fair values is significant and these estimates cannot be made reliably then an entity must measure the equity instrument at cost less impairment Amortised cost is calculated using the effective interest method The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability Financial assets that are not carried at fair value though profit and loss are subject to an impairment test If expected life cannot be determined reliably then the contractual life is used IAS 39 fair value option IAS 39 permits entities to designate at the time of acquisition or issuance any financial asset or financial liability to be measured at fair value with value changes recognised in profit or loss This option is available even if the financial asset or financial liability would ordinarily by its nature be measured at amortised cost but only if fair value can be reliably measured In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair value through profit and loss the fair value option The revisions limit the use of the option to those financial instruments that meet certain conditions IAS 39 9 the fair value option designation eliminates or significantly reduces an accounting mismatch or a group of financial assets financial liabilities or both is managed and its performance is evaluated on a fair value basis by entity s management Once an instrument is put in the fair value through profit and loss category it cannot be reclassified out with some exceptions IAS 39 50 In October 2008 the IASB issued amendments to IAS 39 The amendments permit reclassification of some financial instruments out of the fair value through profit or loss category FVTPL and out of the available for sale category for more detail see IAS 39 50 c In the event of reclassification additional disclosures are required under IFRS 7 Financial Instruments Disclosures In March 2009 the IASB clarified that reclassifications of financial assets under the October 2008 amendments see above on reclassification of a financial asset out of the fair value through profit or loss category all embedded derivatives have to be re assessed and if necessary separately accounted for in financial statements IAS 39 available for sale option for loans and receivables IAS 39 permits entities to designate at the time of acquisition any loan or receivable as available for sale in which case it is measured at fair value with changes in fair value recognised in equity Impairment A financial asset or group of assets is impaired and impairment losses are recognised only if there is objective evidence as a result of one or more events that occurred after the initial recognition of the asset An entity is required to assess at each balance sheet date whether there is any objective evidence of impairment If any such evidence exists the entity is required to do a detailed impairment calculation to determine whether an impairment loss should be recognised IAS 39 58 The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated cash flows discounted at the financial asset s original effective interest rate IAS 39 63 Assets that are individually assessed and for which no impairment exists are grouped with financial assets with similar credit risk statistics and collectively assessed for impairment IAS 39 64 If in a subsequent period the amount of the impairment loss relating to a financial asset carried at amortised cost or a debt instrument carried as available for sale decreases due to an event occurring after the impairment was originally recognised the previously recognised impairment loss is reversed through profit or loss Impairments relating to investments in available for sale equity instruments are not reversed through profit or loss IAS 39 65 Financial guarantees A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due IAS 39 9 Under IAS 39 as amended financial guarantee contracts are recognised initially at fair value If the financial guarantee contract was issued in a stand alone arm s length transaction to an unrelated party its fair value at inception is likely to equal the consideration received unless there is evidence to the contrary subsequently at the higher of i the amount determined in accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets and ii the amount initially recognised less when appropriate cumulative amortisation recognised in accordance with IAS 18 Revenue If specified criteria are met the issuer may use the fair value option in IAS 39 Furthermore different requirements continue to apply in the specialised context of a failed derecognition transaction Some credit related guarantees do not as a precondition for payment require that the holder is exposed to and has incurred a loss on the failure of the debtor to make payments on the guaranteed asset when due An example of such a guarantee is a credit derivative that requires payments in response to changes in a specified credit rating or credit index These are derivatives and they must be measured at fair value under IAS 39 Derecognition of a financial asset The basic premise for the derecognition model in IAS 39 is to determine whether the asset under consideration for derecognition is IAS 39 16 an asset in its entirety or

    Original URL path: http://www.iasplus.com/en/standards/ias/ias39 (2016-02-10)
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