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
Author
yhliuaa
ID
326963
Card Set
FL and equity
Description
FL and equity
Updated