Net Investment in a Foreign Operation

Chapter 20 – Financial Instruments Page 278 directly in profit or loss for the period. [IAS 39.46, 39.55]

10.1.2 Held-to-maturity investments

A financial asset one that is not a derivative that has fixed, or determinable, payments and a fixed maturity date is classified as a held-to-maturity investment, provided the entity intends to hold it until its maturity and has the ability to do so. [IAS 39.9] Financial assets that meet the definition of a held-to-maturity investment may also be classified as held at fair value, as discussed above, or as an available-for-sale financial asset. A financial asset will not meet the definition of a held-to-maturity investment where it meets the definition of a loan or receivable. [IAS 39.9] An entity is prohibited from classifying financial assets as held-to-maturity if, in the recent past i.e. within the current or two preceding years, it has sold or reclassified more than an insignificant amount of such investments before their maturity dates. This prohibition is not applicable where the sale of a held-to-maturity investment was so close to its maturity date that the difference in fair value was minimal, or where the sale is after the entity has received substantially all the principal amount of the financial asset. Also, if the sale was a one-off unanticipated event beyond the entity’s control, then the prohibition does not apply. [IAS 39.9] After initial recognition at fair value, a financial asset classified as a held-to-maturity investment should be measured at “amortised cost using the effective interest method”. [IAS 39.46] The amortised cost of a financial asset is the initial amount recognised in respect of the financial asset, less any repayments of the principal sum not payments of interest or other financing costs and plus or minus any amortisation. The amortisation of the financial asset is calculated by applying the effective interest method to spread the financing cost over the period to maturity i.e. the difference between the initial amount recognised for the financial asset and the amount receivable at maturity. [IAS 39.9] The effective interest rate is the rate that exactly discounts the scheduled cash flows payable or receivable across the expected life of the financial instrument. [IAS 39.9] Amortisation, and write downs where the value of the financial asset is impaired i.e. its carrying amount exceeds its recoverable amount, should be reported directly in profit or loss in the period in which the amortisationimpairment occurs. Any profit or loss on disposal of the financial asset should also be recognised directly in profit or loss for the period. [IAS 39.56] An impairment loss should be calculated as being the difference between the asset’s carrying amount and the present value of the future cash flows expected to arise from the financial asset. The present value should be calculated by discounting the cash flows at the original effective interest rate used for amortisation purposes. [IAS 39.63] A decrease in a previously recognised impairment should be recognised as a reversal of the original impairment. The financial asset’s carrying amount should not exceed the amount of its amortised cost, had the original impairment not arisen. [IAS 39.65]

10.1.3 Loans and receivables

A non-derivative financial asset that has fixed, or determinable, payments but no fixed maturity date and is not quoted in an active market, is classified as a loan or receivable. Exceptions to this general classification are where it is classified as held for trading because the entity intends to sell it in the short-term, or where the entity may not substantially recover the initial investment. [IAS 39.9] An entity may still choose to classify a financial asset as available-for-sale or at fair value with changes being recognised directly in profit or loss, even where it meets the definition of a loan or receivable. [IAS 39.9] Chapter 20 – Financial Instruments Page 279 A financial asset classified as a loan or receivable should be measured at “amortised cost using the effective interest method” following initial recognition at fair value, i.e. on the same measurement basis as that used for held-to-maturity investments. [IAS 39.46] Amortisation, and write downs where the value of the financial asset is impaired, should be reported directly in profit or loss for the period. Any profit or loss on disposal of the financial asset should also be recognised directly in profit or loss. [IAS 39.56] An impairment loss should be calculated and treated in the same way as that for a held-to- maturity investment, as discussed above.

10.1.4 Available-for-sale financial assets

An available-for-sale financial asset is one that has been designated as such or has not been classified under the above three categories. [IAS 39.9] Available-for-sale financial assets should be measured at their fair value at the end of each reporting period. [IAS 39.46] The gain or loss arising from fair valuing the financial asset at the end of each reporting period should be recognised in other comprehensive income. On disposal, the cumulative gains and losses recognised in other comprehensive income will be reclassified from equity to profit or loss as a reclassification adjustment. [IAS 39.55] Illustration 4 An entity classifies as available-for-sale a financial asset with a fair value on initial recognition of CU150. At 31 December 2006 the cumulative gains recognised in respect of this asset in other comprehensive income are CU50. On 31 December 2007 the entity disposes of the asset for CU320. Profit or loss for the year will include: Gain on sale of available-for-sale investments CU120 CU320 proceeds – CU200 carrying amount CU150 + CU50 Reclassified to profit or loss CU50 recognised in other comprehensive income for the year ended 31 December 2006 Where a reduction in the value of an available-for-sale financial asset has been recognised directly in other comprehensive income but there is now evidence that the asset is impaired, the cumulative loss that was previously recognised in other comprehensive income should be reclassified from equity to profit or loss. The amount of the loss reclassified from equity should be the difference between the carrying amount of the asset and its current fair value, less any previously recognised impairment losses. [IAS 39.67, 39.68] An impairment recognised in profit or loss in respect of an available-for-sale equity instrument should not be reversed through profit or loss in future periods. However, if an impairment related to an available-for-sale debt instrument subsequently reverses, this reversal should be recognised in profit or loss. [IAS 39.69, 39.70] 10.1.5 Summary of treatment of financial assets The table below summaries the accounting treatment for financial assets, as discussed above.