The functional currency FOREIGN EXCHANGE
5.2 Compound financial instruments
A compound financial instrument is one that contains both a liability component and an equity component. Such components should be classified separately according to their substance. [IAS 32.28] A compound instrument should be split into its component parts at the date that it is issued. The split should not be revised for subsequent changes in market interest rates, share prices, or other events that change the likelihood that the conversion option will be exercised. A convertible bond is an example of a compound instrument, since it has a debt element and a potential equity element on conversion. The economic effect of issuing the convertible bond is the same as issuing a non-convertible bond and an option to purchase shares. The value of the convertible bond should therefore be split into its component parts to reflect the substance of the instrument. An entity should estimate the fair value of the component parts. The fair value of a similar financial liability that does not have an equity element is used as an estimate of the carrying amount of the liability element, with the equity instrument being the difference between this and the fair value of the compound instrument as a whole. Fair value is the “amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.” [IAS 32.11] If the compound financial instrument is converted, the carrying amount of the financial liability element should be reclassified as part of equity, with the original equity amount also remaining as part of equity. No gain or loss is recognised on conversion of the instrument at its maturity. Illustration 2 An entity issues 3,000 convertible, 10-year bonds at CU100 each, with a nominal interest rate of 5. The fair value of similar 10 year bonds with no convertible element is CU250,000. The conversion details are 100 shares for each bond to be exercised after 5 years but before the redemption date in 10 years time. At the date of issuance of the financial instrument, the following amounts should be recognised: Proceeds of bond issue 3,000 x CU100 CU300,000 Fair value of liability component CU250,000 Equity component CU300,000 less CU250,000 CU50,000 Chapter 20 – Financial Instruments Page 275 6 Treasury Shares If an entity acquires its own shares, they are deducted from equity. Such shares are known as treasury shares. [IAS 32.33] An entity should not recognise any gain or loss made from a transaction involving treasury shares, and any consideration paid or received should be recognised directly in equity. [IAS 32.33] The amount of treasury shares held should be disclosed either in the statement of financial position or in the notes to the financial statements in accordance with IAS 1 Presentation of financial statements. 7 Interest, Dividends, Losses and Gains Where interest, dividends, losses or gains arise in relation to a financial instrument that is classified as a financial liability, they should be recognised in profit or loss for the period. [IAS 32.35] Dividends payable in respect of a financial instrument that is classified as a financial liability are classified as an expense. For example, dividends payable in respect of redeemable preference shares are presented as finance costs in the statement of comprehensive income. They may either be reported as part of interest or presented as a separate line item. Distributions, such as dividends, paid to holders of a financial instrument classified as equity should be charged directly against equity. [IAS 32.35] When equity shares are issued, the transaction costs should be deducted from equity, net of any related income tax benefit. The transaction costs to be deducted are only the incremental costs directly attributable to the transaction that would have been otherwise avoided. [IAS 32.25] Illustration 3 An entity issues 100,000 new CU1 ordinary shares which have a fair value of CU2.50 per share. Professional fees in respect of the share issue are CU50,000. The costs are deductible in arriving at the entity’s income tax liability. The rate of tax is 40. The management of the entity estimates that costs incurred internally for time incurred working on the share issue are CU25,000. The internal costs should be recognised in profit or loss for the period. The professional fees are directly attributable to the transaction and CU30,000 should be deducted from equity CU50,000 net of 40 tax. Equity will increase by CU220,000 100,000 x CU2.50 - CU30,000.Parts
» The International Accounting Standards Committee IASC
» The International Organisation of Securities Commissions IOSCO
» The Financial Accounting Standards Board FASB
» The Committee of European Securities Regulators CESR
» The IASB FINANCIAL REPORTING CONTEXT
» The Standards Advisory Council SAC
» The International Financial Reporting Interpretations Committee IFRIC
» The standard-setting process THE IFRS FRAMEWORK
» Preface to International Financial Reporting Standards
» Definition THE IFRS FRAMEWORK
» Financial statements THE IFRS FRAMEWORK
» Economic decisions Users and their information needs
» Accountability of management THE IFRS FRAMEWORK
» Financial position, performance and changes in financial position
» Underlying assumptions THE IFRS FRAMEWORK
» Understandability Qualitative characteristics of financial statements
» Relevance Qualitative characteristics of financial statements
» Reliability Qualitative characteristics of financial statements
» Definitions of elements Elements of financial statements
» Recognition of elements in financial statements Measurement in financial statements
» The statement of financial position
» The statement of comprehensive income
» Currentnon-current distinction PRESENTATION OF FINANCIAL STATEMENTS
» Notes PRESENTATION OF FINANCIAL STATEMENTS
» Fair presentation and compliance with IFRS
» Comparative information Other considerations
» Additional disclosures Other considerations
» ACCOUNTING POLICIES IFRSs) Learning Materials
» Servicing fees included in the price of the product
» Cost of inventories INVENTORIES
» Cost formulae Net realisable value NRV
» Initial recognition and elements of cost
» Self-constructed assets PROPERTY, PLANT AND EQUIPMENT
» Ceasing recognition of costs
» Subsequent expenditure PROPERTY, PLANT AND EQUIPMENT
» Depreciation and revalued assets
» Which costs should be capitalised?
» When should capitalisation of borrowing costs commence?
» Suspension of capitalisation BORROWING COSTS
» Ceasing capitalisation BORROWING COSTS
» Non-monetary government grants GOVERNMENT GRANTS
» Repayment of government grants
» No specific relation to operating activities
» Proposed revision of standard
» Changes of plan NON-CURRENT ASSETS HELD FOR SALE
» Nature of investment properties Scope
» Initial recognition INVESTMENT PROPERTY
» Measurement after recognition INVESTMENT PROPERTY
» Applicable to both the fair value model and the cost model
» The cost model INVESTMENT PROPERTY
» Separately acquired intangible assets
» Exchanges of assets INTANGIBLES
» Intangible assets acquired as part of a business combination
» The research phase INTANGIBLES
» The development phase INTANGIBLES
» The cost of internally generated intangible assets
» Stage 1 – Indicators of impairment
» Stage 2 – Measuring recoverable amount
» Stage 3 – Recognising an impairment loss
» Future operating losses Provisions
» Contingent liabilities and contingent assets
» Best estimate PROVISIONS AND CONTINGENCIES
» Present value PROVISIONS AND CONTINGENCIES
» Other measurement points PROVISIONS AND CONTINGENCIES
» Reimbursements PROVISIONS AND CONTINGENCIES
» Decommissioning, restoration and environmental funds
» Waste management costs PROVISIONS AND CONTINGENCIES
» Carrying amount versus tax base Calculate the temporary difference
» Determining deferred tax TAXATION
» Revaluations Recognition criteria: further issues
» The expected manner of recovery of an asset
» Annual review Recognition criteria: further issues
» Discounting Recognition criteria: further issues
» Temporary differences and investments
» Other related disclosures TAXATION
» Risks and rewards Situations indicating the existence of a finance lease
» Initial recognition Finance lease recognition
» Depreciation Finance charge Finance lease recognition
» Actuarial method Methods of allocating finance charges
» Disclosures for finance leases
» Operating lease incentives Accounting treatment of operating leases
» Disclosures for operating leases
» Disclosure by a lessor for finance lease arrangements
» Disclosure by a lessor for operating lease arrangements
» Operating lease incentives Operating leases
» An overview All short-term benefits
» Short-term compensated absences Profit-sharing and bonus plans
» Recognition and measurement Disclosure
» The discount rate Movements during the period
» Variations in actuarial assumptions
» Past service costs Sundry considerations
» Curtailments and settlements Sundry considerations
» Minimum funding requirements and the limit on a defined benefit asset
» Disclosure and presentation of defined benefit plans
» Share-based payment transactions – cash-settled or equity-settled
» Group and treasury share transactions
» Objectives, scope and definitions of IFRS 2 Disclosure requirements
» EVENTS AFTER THE REPORTING PERIOD
» The functional currency FOREIGN EXCHANGE
» The presentation currency FOREIGN EXCHANGE
» Monetary and non-monetary items
» Summary of the approach of IAS 21
» Initial recognition FOREIGN EXCHANGE
» Reporting at the ends of subsequent reporting periods
» Transactions settled within the period
» Transaction balance is outstanding at the end of the reporting period
» Net Investment in a Foreign Operation
» Change in Functional Currency
» Translation of a foreign operation
» Disposal of a foreign operation
» Settlement options FOREIGN EXCHANGE
» Compound financial instruments FOREIGN EXCHANGE
» Financial assetliability at fair value through profit or loss
» Held-to-maturity investments Loans and receivables
» Available-for-sale financial assets Financial assets
» IFRIC 2 Members’ shares in co-operative entities and similar instruments
» Derecognition in its entirety Continuing involvement after a transfer
» Financial liabilities FOREIGN EXCHANGE
» Qualifying for hedge accounting
» Fair value hedge Cash flow hedge
» Hedge of a net investment in a foreign operation
» Objectives and Scope of IFRS 7
» Fair value Other disclosures
» Statement of comprehensive income Nature and extent of risks
» Objective and scope What is cash?
» The direct method FOREIGN EXCHANGE
» Indirect method FOREIGN EXCHANGE
» Non-cash transactions FOREIGN EXCHANGE
» Additional disclosures FOREIGN EXCHANGE
» Identifying segments FOREIGN EXCHANGE
» Reportable segments FOREIGN EXCHANGE
» Reporting formats FOREIGN EXCHANGE
» Discontinued operations Disclosure Prior periods
» Contents Form FOREIGN EXCHANGE
» Selected explanatory notes FOREIGN EXCHANGE
» Impairment in the interim period
» Calculating earnings FOREIGN EXCHANGE
» Calculating the weighted average number of ordinary shares
» Calculation of earnings Calculation of the weighted average number of shares
» Related parties FOREIGN EXCHANGE
» Contract revenue FOREIGN EXCHANGE
» Contract costs FOREIGN EXCHANGE
» Stage of completion FOREIGN EXCHANGE
» Reliable measurement FOREIGN EXCHANGE
» Loss making contracts FOREIGN EXCHANGE
» Key Concepts FOREIGN EXCHANGE
» Valuation of assets Disclosure
» What is an insurance contract?
» Scope of consolidated financial statements
» Special purpose entities FOREIGN EXCHANGE
» Basic approach FOREIGN EXCHANGE
» Reporting dates and consistent accounting policies
» The statement of financial position The statement of comprehensive income
» Gain or loss on net monetary position
» Introduction Statement of cash flows
» Initial application of IAS 29
» Identifying a business combination
» Acquisition method of accounting
» General principle FOREIGN EXCHANGE
» Specific issues FOREIGN EXCHANGE
» A business combination achieved in stages
» Subsequent accounting for contingent consideration
» Classifying and measuring the identifiable net assets acquired
» Initial recognition and subsequent adjustments
» Subsequent measurement FOREIGN EXCHANGE
» Recognition and measurement of goodwill
» Gain on bargain purchase Adjustments to provisional values
» Impairment losses FOREIGN EXCHANGE
» Jointly controlled operations FOREIGN EXCHANGE
» Proportionate consolidation Equity method
» Jointly controlled assets Investors separate financial statements
» Transactions between a venturer and a joint venture
» Operators of joint ventures Investors of a joint venture
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