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12B. Financial Liabilities - Coggle Diagram
12B. Financial Liabilities
Equity instrument
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
DR Cash & CR S/Capital + S/Premium
Financial instrument: contract that gives right to a financial asset in one
entity and a financial liability or equity instrument of another entity.
FL
Amortised cost
Initially: FV - issue costs
Hold at amortised cost
Default position
b/f + interest - payment = c/f
FVPL
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
Just the movement to top up FL: DR FL & CR SPL
Derecognition
Obligation is extinguished
Contract is: discharged, cancelled or expired
Difference between CA & FL recognised in SPL
Modification of debt
Existing loan exchanged for a new loan
Terms of existing loan have changed (Rate, payment, period)
Create a new loan
Changes are substantially different 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
Modification of FL
Changes are different > than 10%
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
Shares issued:
Equity
We will give you 50,000 shares in 2yrs time
Interest in equity: share price to be high
Fixed number of shares
Liability
Variable number of shares
We will give you the value of $50,000 in 2yrs time
Shareholders have no interest in equity
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
Convertible bond
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