FL and equity

  1. Equity instruments criteria
    • No contractual obligation to deliver cash
    • pass fixed for fixed test
  2. fixed for fixed test - failing criteria
    • contractual obligation to deliver variable number of shares (based on value of something else)
    • Exchanging a fixed number of its own equity for a variable amount of cash or financial asset
    • (eg. for cash based on value of gold(derivative))
  3. Financial liabilities and equity classification
    Substance over form
  4. initial recognition and measurement of financial liabilities
    • FL@FVPL if designated an initial recognition or held for trading, amount= fair value
    • Otherwise it is financial liabilities at amortized cost =fair value - transaction cost
    • No reclassification allowed
  5. Subsequent measurement of FL@AC
    Liability is measured at amortized cost using the effective interest method
  6. Subsequent measurement of FL@FVPL - designated
    • Changes in FV attributable to changes in credit risk presented in other comprehensive income
    • Remaining amount of fair value change presented in profit or loss
  7. Subsequent measurement of FL@FVPL - held for trading
    all changes in FV in profit or loss
  8. Compound Financial instrument
    • Contains both liability and Equity component
    • The components are classified separately ( from issuer's perspective) and the classification is not revised
    • The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole and the amount separately determined the liability component
  9. Compound Financial instrument - issuer has put option - initial recognition (P172)
    • 1. choose to repay principle with cash> recog cashed received, income and the present value of the principal and interest
    • 2. choose to repay principle with shares> recognize cash received, the present value of Interest, and the residual as the equity reserve
  10. Financial liability- when the convertible bond is a hybrid instrument instead of a compound instrument...
    • The conversion option is accounted for as a derivative@FVPL instead of equity instruments
    • The initial carrying amount of the host contract= cash received - FV of the derivative
    • * if compound instrument, equity = FV of whole contract - FV of liability component
  11. derecognition of financial liabilities
    • Remove a financial liability when it is extinguished
    • Modification of term: substantial modification of terms is accounted for as an extinguishment of the original Financial liability (A) and the recognition of a new Financial liability
    • Substantially different means the present value of the cash flows under the new terms, discounted at the original effective interest rate, is at least 10% different from the present value of the remaining cash flows of original FL
    • (A): The difference between the carrying amount of the financial liability extinguished and the consideration paid is recognized in profit or loss
Card Set
FL and equity
FL and equity