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Equity instruments criteria
- No contractual obligation to deliver cash
- pass fixed for fixed test
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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))
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Financial liabilities and equity classification
Substance over form
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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
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Subsequent measurement of FL@AC
Liability is measured at amortized cost using the effective interest method
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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
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Subsequent measurement of FL@FVPL - held for trading
all changes in FV in profit or loss
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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
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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
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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
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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
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