1 Best Complete Read – Financial Instruments

Financial Instruments is a summary of the current (Financial Statements preparation for 2020 on wards) IFRS reporting requirements relating to the combination of IAS 32 Financial Instruments: Presentation, IFRS 7 Financial instruments: Disclosure and IFRS 9 Financial Instruments, into one overall narrative.

IFRS standards for Financial Instruments have a complicated history. It was originally intended that IFRS 9 would replace IAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments be improved quickly, the project to replace IAS 39 was divided into three main phases.

The three main phases of the project to replace IAS 39 were:

  1. Phase 1: classification and measurement of financial assets and financial liabilities.
  2. Phase
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The best 1 in overview – IFRS 9 Impairment requirements

IFRS 9 Impairment requirements

forward-looking information to recognise expected credit losses for all debt-type financial assets

 

Under IFRS 9 Impairment requirements, recognition of impairment no longer depends on a reporting entity first identifying a credit loss event.

IFRS 9 instead uses more forward-looking information to recognise expected credit losses for all debt-type financial assets that are not measured at fair value through profit or loss.

IFRS 9 requires an entity to recognise a loss allowance for expected credit losses on:

  • debt instruments measured at amortised cost
  • debt instruments measured at fair value through other comprehensive income
  • lease receivables
  • contract assets (as defined in IFRS 15 ‘Revenue from Contracts with Customers’)
  • loan commitments that are not measured at fair value through profit or loss
  • financial guarantee contracts (except those accounted for as insurance contracts).

IFRS 9 requires an expected loss allowance to be estimated for each of these types of asset or exposure. However, the Standard specifies three different approaches depending on the type of asset or exposure:

IFRS 9 Impairment requirements

* optional application to trade receivables and contract assets with a significant financing component, and to lease receivables

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1st and best IFRS Accounting for client money

IFRS Accounting for client money

If an entity holds money on behalf of clients (‘client money’):

  • should the client money be recognised as an asset in the entity’s financial statements?
  • where the client money is recognised as an asset, can it be offset against the corresponding liability to the client on the face of the statement of financial position?

DEFINITION: Client money

“Client money” is used to describe a variety of arrangements in which the reporting entity holds funds on behalf of clients. Client money arrangements are often regulated and more specific definitions of the term are contained in some regulatory pronouncements. The guidance in this alert is not specific to any particular regulatory regime.

Entities may hold money on behalf of clients under many different contractual arrangements, for example:

  • a bank may hold money on deposit in a customer’s bank account;
  • a fund manager or stockbroker may hold money on behalf of a customer as a trustee;
  • an insurance broker may hold premiums paid by policyholders before passing them onto an insurer;
  • a lawyer or accountant may hold money on behalf of a client, often in a separate client bank account where the interest earned is for the client’s benefit.

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Best example Amortised cost and EIR calculations

Amortised cost at subsequent periods: a numerical example Amortised cost and EIR calculations

Example Amortised cost and EIR calculations

The following example illustrates the principles underlying the calculation of the amortised cost and the effective interest rate (EIR) for a fixed-rate financial asset:

  • On 1 January 2019, entity A purchases a non-amortising, non-callable debt instrument with five years remaining to maturity for its fair value of €995 and incurs transaction costs of €5. The instrument has a nominal value of €1,250 and carries a contractual fixed interest of 4.7% payable annually at the end of each year (4.7% * €1,250 = €59). Its redemption amount is equal to its nominal value plus accrued interest.
  • The instrument qualifies for a measurement at amortised cost. As explained in the preceding section, its initial carrying amount is the sum of the initial fair value plus transaction costs, i.e. €1,000.
  • The Effective Interest Rate (EIR) is the rate that exactly discounts the expected cash flows of this financial asset, presented in the table below, to its initial gross carrying amount (i.e. €995 + €5 = €1,000 in this example). In practice, entities will need to establish a timetable of all the expected cash flows of the financial instrument (see the table below) and then use for example an Excel formula to determine this rate. The table below summarises the timing of the expected cash flows of the instrument:

Figure 1

Figure 1

In the present case, using an Excel formula, the EIR amounts to 10%. The following table shows that the sum of the discounted cash flows amounts to zero:

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IFRS 7 Financial instruments Disclosures High level summary

Scope IFRS 7 Financial instruments Disclosures High level summary

IFRS 7 applies to all recognised and unrecognised financial instruments (including contracts to buy or sell non-financial assets) except:

  • Interests in subsidiaries, associates or joint ventures, where IAS 27/28 or IFRS 10/11 permit accounting in accordance with IAS 39/IFRS 9
  • Assets and liabilities resulting from IAS 19
  • Insurance contracts in accordance with IFRS 4 (excluding embedded derivatives in these contracts if IAS 39/IFRS 9 require separate accounting)
  • Financial instruments, contracts and obligations under IFRS 2, except contracts within the scope of IAS 39/IFRS 9
  • Puttable instruments (IAS 32.16A-D).

Disclosure requirements: Significance of financial instruments in terms of the financial position and performance

Statement of financial position

Statement of

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Convertible notes

Convertible notes are a form of long-term debt that converts into equity, typically in conjunction with a future financing round used in start-up operations

Examples of adjustments of errors

Examples of adjustments of errors – When errors affecting income are discovered, careful analysis is necessary to determine the required action to correct the account balances. As indicated, most errors will be caught and adjusted prior to closing the books. The few material errors not detected until subsequent periods and those that have not already been counterbalanced must be treated as prior-period adjustments. See also ‘Types of errors‘.

The following sections describe and illustrate the procedures to be applied when error adjustments require prior-period adjustments. It is assumed that each of the errors is material. Errors that are discovered usually affect the income tax liability for a prior period. Amended tax returns are usually prepared either to claim Read more

Main FS Statements Insurance contracts

Main FS Statements Insurance contracts – These examples of the main Financial Statements statements demonstrate the requirements in respect of presentation and disclosure according to IFRS 17 Insurance contracts. They also includeMain FS Statements Insurance contracts the requirements (introduced or amended) in respect of presentation and disclosure according to IFRS 9 Financial instruments and IFRS 7 Financial instruments: Disclosures.

It is prepared for illustrative purposes only and should be used in conjunction with the relevant financial reporting standards and any other reporting pronouncements and legislation applicable in specific jurisdictions. Main FS Statements Insurance contracts

Presentation of insurance service result Main FS Statements Insurance contracts

 

IFRS 17 83,
85,
B120 – B127

Clarifications:

Insurance revenue reflects the consideration to which the

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Presentation Insurance contracts

Presentation Insurance contractsPresentation Insurance contracts – IFRS 17 specifies minimum amounts of information that need to be presented on the face of the statement of financial position and statement of financial performance. These are supplemented by disclosures to explain the amounts recognized on the face of the primary financial statements (see ‘Disclosure of Insurance contracts’).

IFRS 17 requires separate presentation of amounts relating to insurance contracts issued and reinsurance contracts held in the primary statements. There is nothing to prevent an entity from providing further sub-analysis of the required line items (which may make the relationship of the reconciliations to the face of the statement of financial position more understandable).

Indeed, IAS 1 Presentation of Financial Statements requires presentation of additional line Read more

Restatement for effects of hyperinflation

Restatement for effects of hyperinflationRestatement for effects of hyperinflation

This example accompanies, but is not part of, IFRIC 7.

IE1 This example illustrates the restatement of deferred tax items when an entity restates for the effects of inflation under IAS 29 Financial Reporting in Hyperinflationary Economies. As the example is intended only to illustrate the mechanics of the restatement approach in IAS 29 for deferred tax items, it does not illustrate an entity’s complete IFRS financial statements. Restatement for effects of hyperinflation

Facts Restatement for effects of hyperinflation

IE2 An entity’s IFRS balance sheet at 31 December 20X4 (before restatement) is as follows: Restatement for effects of hyperinflation

Restatement for effects of hyperinflation

(a) In this example, monetary amounts are denominated in currency units (CU).

Notes Restatement

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