Please enable JavaScript.

Coggle requires JavaScript to display documents.

MODULE 6 FINANCIAL INSTRUMENTS, TYPE OF DERIVATIVE CONTRACT &…

- - - - 4 TYPES OF FINANCIAL ASSET
        
        EQUITY INSTRUMENT OF ANOTHER ENTITY
        
        INVESTMENT IN SHARES OF ANOTHER ENTITY
        
        CASH
        
        PRESENT RIGHT TO RECEIVE CASH
        
        PPE IS NOT CLASSIFIED AS FINANCIAL ASSET
        
        CONTRACTUAL RIGHT TO RECEIVE
        
        EG : TRADE RECEIVABLE , LOAN RECEIVABLES , GOVERNMENT BONDS
        
        RECEIVE CASH /OTHER FA
        
        EXCHANGE FA/FL - FAVOURABLE TO ENTITY
        
        CONTRACT THAT WILL OR MAY BE SETTLED IN THE ENTITY'S OWN EQUITY INSTRUMENT
        
        FIXED FOR FIXED TEST
        
        RULE
        LOOK AT QUANTITY OF SHARES NOT THE VALUE
        
        FIXED DEBT SETTLED WITH FIXED NO OF SHARE
        ALL COMPONENTS ARE FIXED
        
        PASS
        
        1 more item...
        
        EG : BORROW 100$ AND GIVE 10 SHARES TO SETTLE
        
        YES RISK
        
        1 more item...
        
        FIXED DEBT SETTLED WITH VARIABLE NO OF SHARE
        or
        VARIABLE DEBT & FIXED SHARES( BASED ON MOVEMENT IN SHARE PRICE)
        ANY COMPONENT IS VARIABLE
        
        FAIL
        
        2 more items...
        
        EG : BORROW 100$ AND GIVE AS MANY SHARES TO SETTLE
        
        NO RISK
        
        1 more item...
  - - - FINANCIAL LIABILITY
        
        CONTRACTUAL OBLIGATION TO PAY CASH
        
        EG : TRADE PAAYBLE , LOAN PAYABLE
        
        DELIVER CASH /FA
        
        EXCHANGE FA/FL - UNFAVOURABLE TO ENTITY
        
        CONTRACT THAT WILL OR MAY BE SETTLED IN THE ENTITY'S OWN EQUITY INSTRUMENT
        
        NON - DERIVATIVE = VARIABLE AMOUNT OF EQUITY INSTRUMENTS
        
        DERIVATIVE - SETTLEMENT EXCLUDES FIXED AMOUNT OF CASH & FIXED NUMBER OF ENTITY'S OWN EQUITY INSTRUMENTS
      - SETTLEMENT
        
        LIABILITY
        
        BEFORE LIQUIDATION
        
        EQUITY
        
        AT LIQUIDATION
      - EQUITY INSTRUMENT
        
        ASSETS - LIABILITIES = RESIDUAL
- - - - EG - PREPAID INSURANCE
- - - - 2 PARTIES
        
        AGREED FUTURE DATE
        
        AGREED PRICE
    - - NO CASH MOVEMENT
    - - RISK BORNE BY BOTH PARTIES
      - NEGOTIABLE , AS PARTIES ARE KNOWN
      - PRIVATE TRANSACTION
  - - - ASSET FOR HOLDER
    - - LIABILITY FOR HOLDER
- - - - FIXED ITEM
        
        FIXED PRICE
        
        FIXED FUTURE DATE
        
        BUY/SELL
      - EXCHANGE TRADED
        
        ABIDE BY AUSTRALIAN FUTURES EXCHANGE
        
        CONCEPT OF CLOSING OUT A POSITION
    - - MARGIN DEPOSIT
        
        MAINTAIN TILL END OF THE CONTRACT
    - - PROFIT/GAIN
        
        ADDED TO MARGIN DEPOSIT
      - LOSSES
        
        REMOVED FROM MARGIN DEPOSIT
        
        KEEP PUTTING MONEY TO MAINTAIN MARGIN DEPOSIT - VARIATION MARGIN
        
        THEREBY , HIGH LIQUID CONTRACTS
    - - AUSTRALIAN FUTURES EXCHANGE
        
        RISK IS BORNE BY AUS FUTURES EXCHANGE
      - NO INTERACTION/NEGOTIOATION WITH OTHER PARTY
        
        ELIMINATES COUNTERPARTY RISK
- - - - SWAP ONE STREAM OF CASH FLOW FOR ANOTHER
  - - - MITIGATE THE INTEREST RATE RISKS
      - NOTIONAL CAPITAL/PRINCIPAL AMOUNT IS NOT EXCHANGE
        
        EXCHANGE THE DIFFERENCE IN INTEREST PAYMNETS
      - FIXED FOR FLOATING
        
        PAY FIXED RATE
        
        NET EXPOSURE
        
        RECEIVE FLOATING RATE
        
        OFFSET WITH ORIGINAL BORROWING - FLOATING RATE
      - OTC
    - - MITIGATE THE FX RISKS
      - PRINCIPAL AND INTEREST WILL BE EXCHANGED WITH OTHER PARTIES
        
        FROM ONE CURRENCY TO ANOTHER CURRENCY
        
        EXCHANGED AT THE OUTSET OF THE SWAP
        
        RE-EXCHANGED AT CONCLUSION
- - - - PAYS THE PREMIUM UPFRONT
      - RIGHT
      - COUNTERPARTY RISK TO BUYER
    - - RECEIVES THE PREMIUM
      - OBLIGATION TO DELIVER THE OPTION
      - NO CREDIT / COUNTERPARTY RISK TO SELLER
    - - UNDERLYING ASSET
        
        AGREED PRICE
        
        ON / BEFORE FIXED FUTURE DATE
  - - - RIGHT BUT NO OBLIGATION
        
        BUY
        
        FUTURE
        
        FIXED PRICE
    - - RIGHT BUT NO OBLIGATION
        
        SELL
        
        FUTURE
        
        FIXED PRICE
    - - EXERCISED
        
        ANYTIME UPTO MATURITY
    - - EXERCISED
        
        ONLY ON MATURITY DATE
- - - - GOES DOWN
        
        LIABILITY
      - GOES UP
        
        ASSET
- - - - JOURNAL ENTRY for IMPAIRMENT ALLOWANCE
        
        EXPECTED CREDIT LOSSES
        (12 MONTHS OF EXPECTED CREDIT LOSSES)**
    - - GROSS AMMORTIZED COST BASE
  - - - JOURNAL ENTRY FOR STAGE 1 TO STAGE 2
        
        RECOGNISE ENTRY FOR LIFETIME EXPECTED CREDIT LOSSES
        JOURNAL ENTRY for IMPAIRMENT ALLOWANCE
        
        REVERSAL EXPECTED CREDIT LOSSES
        (12 MONTHS OF EXPECTED CREDIT LOSSES)
    - - GROSS AMMORTIZED COST BASE
  - - - JOURNAL ENTRY for IMPAIRMENT ALLOWANCE
        
        LIFETIME EXPECTED CREDIT LOSSES
    - - NET OF IMPAIRMENT LOSSES
- - - - ANY OF THE CRITERIA
        
        CONTRACTUAL RIGHT TO RECEIVE CASH FLOW MUST EXPIRE
        
        ENTITY COLLECT ALL AMOUNTS OWING FROM DEBTORS /BORROWERS
        
        ASSET MUST TRANSFERRED TO ANOTHER ENTITY IN ACCRODANCE WITH PARA 3.2.4 /3.2.6 ( IFRS 9 )
        
        3.2.4
        
        PG 216
        
        transferred the contractual rights to receive cash flows of the financial asset
        
        Retained the contractual rights to receive the cash flows but then passed these cash flows to another entity
        (a ‘pass-through’ arrangement).
        
        NO USE TO US
        
        3.2.5
        
        PASS THORUGH ARRANGEMENT
        
        the transferor has no obligation to pay any amounts to the transferee unless it collects equivalent amounts
        from the financial asset
        
        NO OTHER OBLIGATION APART FROM TRANSFEREING CASH FLOWS TO 3RD PARTY
        
        the transferor has an obligation to pass the cash flows to the transferee without material delay.
        
        the transferor is prohibited from selling or pledging the transferred asset
        
        3.2.6
        
        where substantially all risks and rewards of ownership are transferred, the financial asset is derecognized. If the transferor retains any rights or obligations, new assets or liabilities are recognised.
        
        where an entity retains substantially all risks and rewards of ownership, the financial asset is not derecognised.
        
        where the transferor retains control, the entity shall continue to recognise the financial asset to the extent of the continuing involvement in the financial asset.
        
        RISK AND REWARDS ARE TRANSFERED - 3RD PARTY
        
        where the entity neither retains nor transfers substantially all the risks and rewards of ownership, a decision is made about the control of the financial asset. Generally, the test for loss of control relates to the transferee’s ability to sell or pledge approximately the full fair value of the transferred asset. Where the transferee is free to do this, the transferor has lost control of the transferred asset; the financial asset is derecognised, and any new rights or obligations arising from the transfer are separately recognised.
        
        table - in excel notes
    - - ANY OF THE CRITERIA
        
        PRO -RATA PORTIONS OF ALL CASH FLOWS
        
        EG : TRANSFER X % OF ALL CASH FLOW
        
        PRO - RATA OF SPECIFICALLY IDENTIFIED CASH FLOWS
        
        EG : X% OF THE principal repayment portion of principal and interest repayments
        
        TRANSFER SPECIFICALLY IDENTIFIED CASH FLOW OR CASH FLOWS TO ANOTHER ENTITY
        
        EG : Principal repayment portion of principal and interest repayments
  - - - DR CASH
        CR FINANCIAL ASSET
        CR GAINS ( P&l)
    - - DR CASH
        DR LOSS (P&l)
        CR FINANCIAL ASSET
- - - - EG OFFSETTING DTA & DTL
- - - - SETTLED BY EXCHANGING FINANCIAL INSTRUMENTS
      - SETTLED NET IN CASH
        
        underlying items referred to in a contract are not transferred at settlement date but rather, the items’ values are off set against each other and the residual gain or loss it ultimately transferred in cash.
        
        EG : FORWARD CONTRACT TO PURCHASE SILVER FOR 1 MIL
        VALUE OF FORWARD CONTRACT ON SETTLEMENT DATE = 900,000
        CASH EXCHNAGED WOULD BE NET - 1MIL - 900,000 = 100,000
        
        ALTHOUGH SILVER IS THE NON - FINANCIAL ITEM , CASH IS DELIVERED AND RECEIVED ; SILVER IS NEITHER DELIVERED NOR RECEIVED
      - SETTLED WITH ANOTHER FINANCIAL INSTRUMENT
- - - - INFORM CREDITORS OF TRANSFER
        
        DEBTS WILL BE SETTLED FROM PROCEEDS OF TRANSFER OF ASSET
  - - - IFRS 9
        
        IFRS 9 DOESNT ALLOW THE DE-RECOGNITION AS THE COMPNAY CAN CALL BACK THE ASSETS AT ANY TIME FROM THE TRUST ENEITY , AND CREDITORS WILL BE IN TROUBLE
        
        HENCE NEED A LEGAL RELEASE TO RECOGNIZE , AS THE CO. CANNOT CALL BACK THE ASSETS
- - - - If this is chosen , INCONSISTENCY IN MEASUREMENT , BECAUSE INITIAL AT FV
        
        ACCOUNTING MISMATCH
        
        TO AVOID , IFRS 9
        
        IRREVOCABLE ELECTION AT THE BEGINNING OF THE CONTRACT
        
        FINANCIAL ASSETS & LIABILITIES CAN BE DONE AT FV
        
        don't have to apply to all assets/liabilities , but applied consistently across all periods
        
        can be applied in groups
        
        mixed measurement model - eg asset measured at FVP/L and liability measured at amortised cost - also leads to accounting mismatch
- - - - MEASUREMENT
        
        AMORTIZED COST
        
        MOVEMENTS IN AMORTIZED COST ARE NOT REPORTED INT HE FINANCIAL STATEMENTS
      - PURPOSE
        
        HELD TO COLLECT CASH FLOWS
        
        KEPT UNTILL MATURITY
        
        ONLY SOLD IF SOMETHING WRONG WITH THE ASSET - LIKE LOOSING CREDIT RATING
        
        INFREQUENT SALES
    - - MEASUREMENT
        
        FAIR VALUE
        
        MOVEMENT GOES TO P&L
      - PURPOSE
        
        ACQUIRED TO MAKE A GAIN FROM SHORT TERM (<3 MONTHS) PRICE FLUCTUATIONS
        
        FREQUENT SALES
    - - MEASUREMENT
        
        AMORTIZED COST
        
        MOVEMENTS IN AMORTIZED COST ARE NOT REPORTED IN THE FINANCIAL STATEMENTS
    - - MEASUREMENT
        
        FAIR VALUE
        
        MOVEMENT GOES TO OCI
      - PURPOSE
        
        COLLECT CASH FLOWS
        
        GOOD DEAL - DISPOSE/sold
- - - - AMORTIZED COST
        
        2 CONDITIONS TO SATISFY
        
        BUSINESS MODEL
        
        OBJECTIVE
        
        HOLD UNTILL MATURITY TO COLLECT CONTRACTUAL CASH FLOWS
        
        LOANS & RECEIVABLES
        AND
        HELD TO MATURITY
        
        1 more item...
        
        solely PAYMENTS - PRINCIPAL & INTEREST
      - FAIR VALUE - P&L
        
        DONT MEET 2 CONDITIONS HAVE TO CHOOSE THIS
      - FAIR VALUE - OCI
        
        2 CONDITIONS TO SATISFY
        
        solely PAYMENTS - PRINCIPAL & INTEREST
        
        INTEREST = TIME VALUE FO MONEY
        *
        CREDIT RISK (PRINCIPAL AMOUNT OUTSTANDING)
        
        Contractual Cash Flows Test
        
        PAY /RECEIVE
        
        CONDITION SATISFIED
        
        1 more item...
        
        DON'T SATISFY THE CONDITION
        
        2 more items...
        
        INTEREST RATE
        
        based on LIBOR ( London Interbank Offered Rate)
        
        UPPER LIMIT
        
        LOWER LIMIT
        
        EG : LIBOR +/-X%
        
        CONDITION
        
        2 more items...
        
        BUSINESS MODEL
        
        OBJECTIVES
        
        HOLD THE FINANCIAL ASSETS , AND AT THE SAME TIME STRIKE A DEAL TO SELL THEM
        
        AVAILABLE FOR SALE
        
        1 more item...
        
        EARN GAINS BUY SHORT TERM SELLING THE FINANCIAL ASSETS
        
        HELD FOR TRADING
        
        1 more item...
- - - - P&L
  - - - P&L
    - - IRREVOCABLE ELECTION @ THE BEGINNING OF THE CONTRACT
        
        OCI
        
        NON -RECLASSIFYING ITEMS
- - - - REMEASURE THE HEDGE INSTRUMENT TO FAIR VALUE
        
        FAIR VALUE MOVEMENT
        
        P & L
      - REMEASURE THE HEDGE ITEM TO FAIR VALUE
        
        FAIR VALUE MOVEMENT
        
        P & L
    - - IF - HEDGED ITEM
        
        FAIR VALUE MOVEMENT
        
        OCI
        
        Equity
      - THEN - HEDGED INSTRUMENT
        
        FAIR VALUE MOVEMENT
        
        OCI
        
        Equity
- - - - ASSET
    - - LIABILITY
- - - - FINANCIAL LIBAILITY + EQUITY INSTRUMENT
        
        EXAMPLE : CONVERTIBLE NOTE PAYABLE
        
        2 ELEMNTS
        
        DEBT + EQUITY
        
        HOLDER
        
        CONVERT INTO EQUITY
        
        EQUITY
        
        REDEEM THE CONVERTIBLE NOTES FOR CASH ON MATURITY
        
        LIABILITY
- - - - TRADE RECEIVABLES /PAYABLES, LOAN RECEIVABLES , BONDS
  - - - MEANING - DERIVED FROM
      - VALUE OF THE SECONDARY FINANCIAL INSTRUMENT DERIVED FROM THE PRIMARY FINANCIAL INSTRUMENT
- - - - ENTITY WILL TRANSFER THE ASSET
        
        repurchase
    - - INTIAL ENTRY
        
        DR CASH (amount sold for)
        CR LOAN PAYABLE
        ( TO RECORD THE LOAN FROM ABC)
      - SUBSEQUENT ENTRY
        BUY BACK /Repurcahse
        
        DR LOAN PAYABLE (amount sold for)
        DR INTEREST EXPENSE (balancing figure)
        CR CASH (amount paid to repurchase)
        ( TO RECORD REPAYMENT TO ABC)
  - - - INITIAL ENTRY
        DERECOGNITION OF FINANCIAL ASSET*
        
        LOSS
        
        DR CASH ( amount sold for)
        DR LOSS , P/L (lossfrom sale)
        CR FINANCIAL ASSET/receivable ( carrying amount)
        
        PROFIT
        
        DR CASH ( amount sold for)
        CR GAINS , P/L (profit from sale)
        CR FINANCIAL ASSET/receivable ( carrying amount)
      - SUBSEQUENT ENTRY
        RECOGNITION OF FINANCIAL ASSET
        
        DR FINANCIAL ASSET /receivable (FV of asset)
        CR CASH
- - - - CLASSIFICATION
        
        DIVIDEND
      - REDEMPTION AT DISCRETION OF THE ISSUER , AND THE ISSUER HAS NOT YET EXERCISED THE OPTION
  - - - REDEMPTION AT DISCRETION OF THE ISSUER , AND THE ISSUER HAS NOTIFIED FORMALLY OF THE INTENTION
      - CLASSIFICATION
        
        INTEREST EXPENSE
      - REDEEMABLE IN THE FUTURE AT THE REQUEST OF THE HOLDER
      - FIXED REDEMPTION DATE
- - - - COMPENSATING ALL THE LOSSES THAT ARE COMING FROM THE FINANCIAL ASSETS
        
        TRANSFEROR
        
        recognise LIABILITY IN THE BALANCE SHEET -
        
        The transferor transfers $5 million of debtors to another entity but guarantees the transferee for all losses due to bad debts up to $1 million. In this case, the continuing involvement is the guaranteeing of the debtors. Similar to example 6.6, the $5 million debtors balance is derecognised, and at the same time, the transferor will recognise a financial liability for $1 million.
        
        guaranteeing for all the lossess
        
        de- recognise the financial asset
      - PROVIDES A PUT OPTION ALONG WITH THE ASSET
        
        TRANSFEREE HAS THE RIGHT TO SELL THE ASSETS @ a specified price but no obligation
        
        TRANSFEROR WILL BUY IT BACK /REPURCHASE before maturity
        
        FIXED PRICE
        
        LOAN PAYABLE TRANSACTION I.e Sale & Buy back transaction ( refer above notes)
        
        NONE OF THE ASSET WILL BE DE-RECOGNISED FROM THE TRANSFEROR'S BALANCE SHEET
        
        FAIR VALUE
        
        DE-RECOGNITION & RECOGNITION OF FINANCIAL ASSETS
        ( refer above notes)
        
        STEP 1 - DE -RECOGNISE ASSET FROM THE BALANCE SHEET
        
        STEP 2 - RECOGNISE THE ASSET WHEN YOU REPURCHASE THE FINANCIAL ASSET
        
        The transferor writes a put option for the transferee for the $5 million of debtors. This option allows the transferee (being the holder of the option), at its discretion, to require the transferor to repurchase (or ‘put’) the debtors at any time before the option’s maturity. In this case, none of the debtors is to be derecognised, as the transferor has a continuing involvement with the total amount of debtors transferred. It is important to note the transferor/writer of a put option sells to another party the right but not the obligation to sell an underlying commodity (in this case debtors) to the writer of the option for a specified price.
        
        The extent of the involvement with written put options measured at fair value is the lower of the fair value of the transferred financial asset and the option exercise price.
        
        will not de-recognize the put option
        
        guarantee of put option exercised - then transferor retains substantially all of the risks of ownership & accounts it as secured borriwng
        
        Transferre is the holder of the option
- - - - ON THE RECLASSIFICATION DATE
        
        AMORTIZED COST - FAIR VALUE (P&L)
        
        RECOGNISE GAINS & LOSSES IN P/L
  - - - where an entity transfers financial assets between different portfolios
      - where a market for financial assets temporarily disappears
      - where an entity changes its intention to hold a financial asset
  - - - PREVIOUSLY RECOGNISED GAINS & LOSSES SHOULD NOT BE REVERSED/RESTATED
      - ON THE RECLASSIFICATION DATE
        
        FAIR VALUE - AMORTIZED COST
        
        FV RECOGNISED AS NEW CARRYING AMOUNT
- - - - OCI
      - ISSUE BECAUSE ONE PORTION GOES TO P & L AND ONCE GOES TO OCI - ACCOUNTING MISMATCH
        
        CO MAKES AN IRREVOCABLE ELECTION @ THE BEGINNING OF THE CONTRACT
        
        ENTIRE MOVEMENT IS REPORTED IN
        
        P & L
        
        every other risk goes here
- - - - EQUITY
      - DEBT
- - - - RECOGNIZE DEBT & EQUITY
      - DEBT
        
        PRESENT VALUE OF INTEREST PAYMENTS
        
        CALCULATED @ COUPON RATE
        
        PRESENT VALUE OF PRINCIPAL AMOUNT
        
        PRESENT VALUE
        
        EFFECTIVE INTEREST RATE/ MARKET RATE
  - - - FINANCIAL LIABILITY
      - EQUITY ELEMENT/INSTRUMENT
- - - - AGAINST THE CHANGES IN THE
        
        CASH FLOW
        
        FAIR VALUE
        
        OF HEDGED ITEM
    - - GENERAL - DERIVATIVE
        
        EXCEPT OPTIONS ( NOT A HEDGED FINANCIAL INSTRUMENT)
- - - - ENSURE IT IS NOT AFFECTED BY CREDIT RISK
      - IF AFFECTED BY CREDIT RISK - MOVEMENT GOES TO OCI
  - - - IF IT DID MOVEMENT GOES TO OCI
- - - - EFFECTIVE SAME amount - Opposite MOVEMENT
        
        EG HEDGE INSTRUMENT GOES UP BY 100$ AND HEDGE ITEM GOES DOWN BY 100 $ , VALUE IS SAME
      - INEFFECTIVE - Not same amount - opposite movement
        
        INEFFECTIVE HEDGE ITEM GOES UP 100$
        HENDGE ITEM GOES DOWN BY 90$
        10$ GOES TO P&L
  - - - RECLASSIFIED TO
        
        HEDGE ITEM
        
        P&L
    - - ASSET / LIABILITY
        
        HEDGE INSTRUMENT GAINS IN OCI
        
        HEDGE ITEM
        
        reclassified to original cost of the ASSET/LIABILITY
    - - HEDGE INSTRUMENT GAINS IN OCI
        
        reclassfied
        
        P&L
    - - OCI
      - IF THE LOSS ARE NOT IMMEDIATELY RECOVERED IN FUTURE
        
        ALL LOSSES RECLASSIFIED TO P&L
        
        DR CASH FLOW HEDGE LOSS (P/L)
        CR OCI
      - JOURNAL ENTRY
        
        DR LOSS ( OCI)
        CR HEDGE INSTRUMENT
- - - - USEFUL LIFE OF FINANCIAL LIABILITY
    - - USEFUL LIFE OF FINANCIAL ASSET
- - - - EQUITY in B/S
      - PAYMENT ON THE INSTRUMENTS
        
        DIVIDEND
  - - - LIABILITY in B/S
      - PAYMENT ON THE INSTRUMENT
        
        INTEREST EXPENSE
    - - COMPANY A ISSUED PREFERENCE SHARE TO B
      - REDEEM @ OPTION OFTHE HOLDER
        
        HOLDER NOT AT RISK
        
        preference shares classified - liability ( issuer B/S)
        
        payments on preference share - Interest Expense
    - - COMPANY A ISSUED PREFERENCE SHARE TO B
        
        A - issuer , B - Holder
      - Redeem @ OPTION OFTHE ISSUER
        
        HOLDER @ RISK
        
        preference shares classified - equity instruments ( issuer B/S)
        
        payments on preference share - dividends
- - - - OCI
      - EXCHANGE DIFFERENCES ON TRANSLATING FOREIGN OPERATION
      - FV of hendged instrument also goes to OCI