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8- Financial Instrument - Coggle Diagram

- - - - Neither recognised nor disclosed in the FS while still exposing the shareholders to significant risks
- - - - 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
      - A contract that may be settled in the entity's own equity instrument
    - - Financial liabilities
        
        A contractual obligation
        
        To deliver cash or another financial asset to another entity
        
        To exchange financial assets or liabilities with another entity under conditions that are potentially unfavourable to the entity
      - Equity instrument
        
        A contract that evidences a residual interest in the assets of an entity after deducting all its liabilities
  - - - Unavoidable contractual obligation to deliver cash or another financial asset at a specified time other than at liquidation
      - Unavoidable contractual obligation for an amount independent of the entity's available economic resources
        
        Fixed contractual amounts, or an amount based on an interest rate rather than financial variable
      - Example
        
        Financial liability
        
        Shares redeemable at FV
        
        Obligation to transfer
        
        No obligation for an amount independent of the economic resources
        
        Bonds with an obligation to deliver a variable number of the entity's own shares with a total value equal to a fixed amount of cash
        
        No obligation to transfer
        
        Obligation for an amount independent of economic resources
        
        Simple bonds
        
        Obligation for an amount independent of economic resources
        
        Obligation to transfer
    - - Neither of the two are met
      - Example
        
        Ordinary shares
    - - The proposals do not fully address the conceptual basis for the classification of claims against the entity
        
        Claims such as debts and equity
      - The proposals are highly complex
        
        Particularly for derivative instruments
      - The proposals are driven by individual assessments of what is debt and what is equity
        
        This would lead to preparers. regulators, and analysts defining equity inconsistently
      - From practical point of view, the proposals would result in 120 euro billion of hybrid financial instrument currently classified as equity being classified as debt
        
        Would have a considerable market impact
  - - - Determine the CA of liability component
        
        By measuring FV of similar liability that does not have an associated equity component
      - Assign the residual amount to the equity component
    - - PV of principal payable at the end of the period
      - PV of interest annuity payable annually in arrears
  - - - When an entity invest in itself, by acquiring its own shares, cannot be shown as an asset
- - - - Example: Forward contract
      - Are recognised in the FS at inception even though there may have been no cash flows, and disclosures about them are made in accordance with IFRS 7
      - 3 Characteristics
        
        Its value changes in response to an underlying variables such as share price, commodity price, foreign exchange rate and interest rate
        
        It requires no or smaller initial net investment that would be required for other types of contracts that would be expected to have a similar response to changes in market factors
        
        It is settled at a future date
      - In the scope of IFRS 9, where it involves the buying and selling non-financial items which are settled net in cash.
        
        however, non-financial item which are for the own use of the entity is exempted from the requirement of IFRS 9
    - - Within the scope of IFRS 9
        
        Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments
        
        Financial contracts
      - Outside the scope of IFRS 9
        
        Contracts that were entered into and held for the entity's expected purchase, sale or usage requirements of non-financial items
        
        Executory contracts
        
        Contracts under which neither party has performed any of its obligations (or both parties have partially performed their obligations to equal extent)
        
        For example, an unfulfilled order for the purchase of goods, where at the end of the reporting period, the goods have neither been delivered nor paid for.
        
        Qualify as own use because the entity always takes delivery of the good
        
        not initially recognised in the financial statements unless it falls under onerous contract
  - - - When the contractual rights to the cash flows expire, or
        
        Example due to a customer has paid their debt or an option has expired worthless
      - The financial asset is transferred. This is based on whether the entity has transferred substantially all the risks and rewards of ownership of the financial asset
        
        Example due to the financial assets being sold
    - - When it is extinguished, that is the obligation is discharged, cancelled or expires
        
        For example, the financial liabilities are paid off
    - - For example, for a bond, there are two separate sets of cash inflows, those relating to the principal and interest. An entity could sell the right to receive interest to another party while retaining the right to receive the principal
- - - - Business model approach
        
        Held to collect contractual cash flows, and cash flows are solely principal and interest
        
        Initial measurement
        
        FV + Transaction costs
        
        Subsequent measurement
        
        Amortised cost
        
        Held to collect contractual cash flows and to sell, cash flows are solely principal and interest
        
        Initial measurement
        
        FV + Transaction cost
        
        Subsequent measurement
        
        FVTOCI
        
        Reclassification to P/L on derecognition
        
        Interest revenue calculated on amortised cost basis recognised in P/L
    - - Optional irrevocable election on initial recognition
        
        Initial measurement
        
        FV + Transaction cost
        
        Subsequent measurement
        
        FVTOCI
        
        No reclassification to P/L on derecognition
        
        Dividend income recognised in P/L
    - - Include any financial assets that would eliminate or significantly reduce an accounting mismatch (measurement or recognition consistency)
        
        Initial measurement
        
        FV
        
        Transaction costs are expensed in P/L
        
        Subsequent measurement
        
        FVTPL
      - Accounting mismatch arise from
        
        Measuring assets and liabilities on different bases
        
        Recognising gains and losses on them using different bases
    - - When and only when an entity changes its business model for managing financial assets
      - The reclassification should be applied prospectively from the reclassification date
      - This rule is not applied to investment in equity instrument because they are always held at FV and any election to measure them at FVTOCI is an irrevocable one
    - - Gains or losses are recognised in the P/L
      - Investment in equity instruments not held for trading where irrevocable election has been made to report changes in FVTOCI
        
        All changes in FV up to the point of derecognition are reported in OCI
        
        Therefore, gains or losses in P/L will only arise if
        
        The investments in equity instrument are not sold at their FV, and
        
        For any transaction costs on derecognition
        
        Gains and losses previously reported in OCI are not reclassified to P/L on derecognition
      - Investment in debt held at FVTOCI
        
        On derecognition, the cumulative revaluation gain or loss previously recognised in OCI is reclassified to P/L
- - - - Loan, trade payable. preference shares
    - - FV - Transaction cost
    - - Amortised cost
  - - - Held for trading (short term trading)
      - Derivatives that are liability
      - To reduce accounting mismatch
      - A group of financial liabilities (or financial assets or liabilities) managed and performance evaluated on a FV basis in accordance with a documented risk management or investment strategy
    - - FV
      - Transaction cost expensed to P/L
    - - FVTPL
      - Changes in FV due to changes in the liability's credit risk are separately recognised in the OCI unless would create accounting mismatch
  - - - Consideration received
    - - Measure financial liability on same basis as transferred asset (amortised cost or FV)
  - - - FV - Transaction cost
    - - Higher of
        
        Impairment loss allowance
        
        Amount initially recognised less amounts amortised to P/L