12B. Financial Liabilities

Equity instrument

Financial instrument: contract that gives right to a financial asset in one
entity and a financial liability or equity instrument of another entity.

Amortised cost

FVPL

Initially: FV - issue costs

Hold at amortised cost

Default position

Shares issued:

Entity B

Issue a fixed number of shares in Entity B (EI)

Initially: FL- DR Cash & CR Financial Liability

Contractual obligation to deliver cash (FL) or

Initially: EI - DR Cash & CR Equity

Received cash from Entity A

Entity will appear less geared - look less risky investment

Dividends paid - charged against RE & goes in SOCE

Contractual obligation to issue a fixed number of shares

Convertible bond

Derecognition

DR Cash & CR S/Capital + S/Premium

b/f + interest - payment = c/f

Initially: FV (expense any issue costs)

Trading, designation made, derivative

Remeasure each year with gain through SPL

but If gain due to credit risk then: DR FL & CR OCI + SPL

Equity

Liability

We will give you 50,000 shares in 2yrs time

Interest in equity: share price to be high

Fixed number of shares

Variable number of shares

We will give you the value of $50,000 in 2yrs time

Shareholders have no interest in equity

Just the movement to top up FL: DR FL & CR SPL

Initially: DR Cash & CR FL (@ PV) + Equity

PV of future payments to be made

Year 1: Interest to be paid (rate 3% *number of shares) X Rate of return (1/10.6^1)

Year 5: Cash flow(Interest + Redemption) X Rate (1/1.06^5)

BY YEAR END

FV: held at amortised cost

Equity never changes: will sit in Equity until we wait for decision

B/F + Interest - Payment =CF

Obligation is extinguished

Modification of debt

Contract is: discharged, cancelled or expired

Difference between CA & FL recognised in SPL

Existing loan exchanged for a new loan

Terms of existing loan have changed (Rate, payment, period)

Create a new loan

Modification of FL

Changes are substantially different 10% +

Changes are different > than 10%

PV of cash flow under new arrangement at least 10% different to the PV of remaining cash flow under original agreement

Derecognise existing LL & Recognise a new liability at FV

Difference is recognised in SPL

Any fees incurred are expensed to SPL

PV of cash flow under new arrangement is less than 10% different to the PV of remaining cash flow under original agreement

But Restate Liability @ PV of the revised cash flows (discounted at effective rate)

Do not derecognise the existing Liability

Fees are deducted from the value of the Liability

Difference is recognised in SPL