Investments in equity instruments

In almost all cases, investments in equity instruments are excluded from being classified as cash and cash equivalents, because they typically have no maturity and are subject to significant potential changes in value. However, it is possible (but not straightforward likely) that an instrument such as a redeemable preference share, which is purchased with a short period remaining to its maturity date, will meet the definition of a cash equivalent.

IFRS 32 Financial Instruments: Presentation

IAS 32 Financial Instruments: Presentation outlines the accounting requirements for the presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments. The standard also provide guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.

Liabilities and equity

Classification of financial assets

Whether a financial asset is classified as at amortised cost, at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVPL) is mainly based on the business model assessment and the solely payments of principal and interest (SPPI-) test.

Business model hold to collect

Ok so the financial instrument to classify and measure is a debt instrument.

Based on the overall business, not instrument-by-instrument

Centers on whether financial assets are held to collect contractual cash flows:

The objective of the ‘hold to collect’ business model is to hold financial assets to collect their contractual cash flows, … Continue reading

Business model hold to collect and sell

Ok so the financial instrument to classify and measure is a debt instrument and the business model is not to hold to collect.

Based on the overall business, not instrument-by-instrument

Centers on whether financial assets are held to collect contractual cash flows:

Under the ‘hold to collect and sell’ business model, the … Continue reading

The SPPI test

Ok so the financial instrument to classify and measure is a debt instrument, the business model is to hold to collect.

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

A more elaborate explanation and examples of assets likely/not likely to meet the SPPI test.

The question is: Are the payments Continue reading

The SPPI test

Ok so the financial instrument to classify and measure is a debt instrument, the business model is to hold to collect and sell.

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

A more elaborate explanation and examples of assets likely/not likely to meet the SPPI test.

The question is: Are Continue reading

Is the fair value option applied?

At initial recognition an entity may irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see Designation eliminates …. an accounting mismatch).

The question is: Do you want to designate a financial asset as measured Continue reading

Is the fair value option applied?

At initial recognition an entity may irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see Designation eliminates …. an accounting mismatch).

The question is: Do you want to designate a financial asset as measured Continue reading

Equity instruments held for trading?

OK the financial asset is an equity instrument.

Held for trading or not?

Financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-term profit taking are held for trading. Financial assets acquired or held for the purpose of holding for a longer period of time are not held for trading but as longer term investments.

The question is: Is the equity instrument held for trading? Continue reading