Docy Child

OTHER FINANCIAL INSTRUMENT ISSUES

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Other Financial Instrument Issues

Scope of Sections 11 and 12


  1. 1 Section 11 Basic Financial Instruments and Section 12 together deal with recognising, derecognising, measuring and disclosing financial instruments (financial assets and financial liabilities). Section 11 applies to basic financial instruments and is relevant to all entities. Section 12 applies to other, more complex financial instruments and transactions. If an entity enters into only basic financial instrument transactions then Section 12 is not applicable. However, even entities with only basic financial instruments shall consider the scope of Section 12 to ensure they are exempt.

Accounting policy choice


  1. 2 An entity shall choose to apply either:
    1. the requirements of both Sections 11 and 12 in full; or
    2. the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement and the disclosure requirements of Sections 11 and 12
      to account for all of its financial instruments. An entity’s choice of (a) or (b) is an accounting policy choice. Paragraphs 10.8–10.14 contain requirements for determining when a change in accounting policy is appropriate, how such a change should be accounted for and what information should be disclosed about the change in accounting policy.

Scope of Section 12


  1. 3 Section 12 applies to all financial instruments except the following:
    1. those covered by Section 11.
    2. investments in subsidiaries, associates and joint ventures that are accounted for in accordance with Section 9 Consolidated and Separate Financial Statements, Section 14 Investments in Associates or Section 15 Investments in Joint Ventures.
    3. employers’ rights and obligations under employee benefit plans (see Section 28 Employee Benefits).
    4. rights under insurance contracts unless the insurance contract could result in a loss to either party as a result of contractual terms that are unrelated to:
      1. changes in the insured risk;
      2. changes in foreign exchange rates; or
      3. a default by one of the counterparties.
    5. financial instruments that meet the definition of an entity’s own equity, including the equity component of compound financial instruments issued by the entity (see Section 22 Liabilities and Equity).
    6. leases within the scope of Section 20 Leases. Consequently, Section 12 applies to leases that could result in a loss to the lessor or the lessee as a result of contractual terms that are unrelated to:
      1. changes in the price of the leased asset;
      2. changes in foreign exchange rates;
      3. changes in lease payments based on variable market interest rates; or
      4. a default by one of the counterparties.
    7. contracts for contingent consideration in a business combination (see Section 19 Business Combinations and Goodwill). This exemption applies only to the acquirer.
    8. financial instruments, contracts and obligations under share-based payment transactions to which Section 26 Share-based Payment applies.
    9. reimbursement assets that are accounted for in accordance with Section 21 Provisions and Contingencies (see paragraph 21.9).
  1. 4 Most contracts to buy or sell a non-financial item such as a commodity, inventory or property, plant and equipment are excluded from this section because they are not financial instruments. However, this section applies to all contracts that impose risks on the buyer or seller that are not typical of contracts to buy or sell non-financial items. For example, this section applies to contracts that could result in a loss to the buyer or seller as a result of contractual terms that are unrelated to changes in the price of the non-financial item, changes in foreign exchange rates or a default by one of the counterparties.
  1. 5 In addition to the contracts described in paragraph 12.4, this section applies to contracts to buy or sell non-financial items if the contract can be settled net in cashor another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments, with the following exception: contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements are not financial instruments for the purposes of this section.

Initial recognition of financial assets and liabilities


  1. 6 An entity shall recognise a financial asset or a financial liability only when the entity becomes a party to the contractual provisions of the instrument

Initial measurement


  1. 7 When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value, which is normally the transaction price.

Subsequent measurement


  1. 8 At the end of each reporting period, an entity shall measure all financial instruments within the scope of Section 12 at fair value and recognise changes in fair value in profit or loss, except as follows:
    1. some changes in the fair value of hedging instruments in a designated hedging relationship are required to be recognised in other comprehensive income by paragraph 12.23; and
    2. equity instruments that are not publicly traded and whose fair value cannot otherwise be measured reliably without undue cost or effort and contracts linked to such instruments that, if exercised, will result in delivery of such instruments, shall be measured at cost less impairment.
  1. 9 If a reliable measure of fair value is no longer available without undue cost or effort for an equity instrument, or a contract linked to such an instrument that if exercised will result in the delivery of such instruments, that is not publicly traded but is measured at fair value through profit or loss, its fair value at the last date that the instrument was reliably measurable without undue cost or effort is treated as the cost of the instrument. The entity shall measure the instrument at this cost amount less impairment until it is able to determine a reliable measure of fair value without undue cost or effort.

Fair value


  1. 10 An entity shall apply the guidance on fair value in paragraphs 11.27–11.32 to fair value measurements in accordance with this section as well as for fair value measurements in accordance with Section 11.
  1. 11 The fair value of a financial liability that is due on demand is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.
  1. 12 An entity shall not include transaction costs in the initial measurement of financial assets and liabilities that will be measured subsequently at fair value through profit or loss. If payment for an asset is deferred or is financed at a rate of interest that is not a market rate, the entity shall initially measure the asset at the present value of the future payments discounted at a market rate of interest.

Impairment of financial assets measured at cost or amortised cost


  1. 13 An entity shall apply the guidance on impairment in paragraphs 11.21–11.26 to financial assets measured at cost less impairment in accordance with this section.

Derecognition of a financial asset or financial liability


  1. 14 An entity shall apply the derecognition requirements in paragraphs 11.33–11.38 to financial assets and financial liabilities to which this section applies.

Hedge accounting


  1. 15 If specified criteria are met, an entity may designate a hedging relationship between a hedging instrument and a hedged item in such a way as to qualify for hedge accounting. Hedge accounting permits the gain or loss on the hedging instrument and on the hedged item to be recognised in profit or loss at the same time.
  1. 16 To qualify for hedge accounting, an entity shall comply with all of the following conditions:
    1. the entity designates and documents the hedging relationship so that the risk being hedged, the hedged item and the hedging instrument are clearly identified and the risk in the hedged item is the risk being hedged with the hedging instrument.
    2. the hedged risk is one of the risks specified in paragraph 12.17.
    3. the hedging instrument is as specified in paragraph 12.18.
    4. the entity expects the hedging instrument to be highly effective in offsetting the designated hedged risk. The effectiveness of a hedge is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to the hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.
  1. 17 This Standard permits hedge accounting only for the following risks:
    1. interest rate risk of a debt instrument measured at amortised cost;
    2. foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction;
    3. price risk of a commodity that an entity holds or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity; and
    4. foreign exchange risk in a net investment in a foreign operation.

      Foreign exchange risk of a debt instrument measured at amortised cost is not in the list because hedge accounting would not have any significant effect on the financial statements. Basic accounts, notes and loans receivable and payable are normally measured at amortised cost (see paragraph 11.5(d)). This would include payables denominated in a foreign currency. Paragraph 30.10 requires any change in the carrying amount of the payable because of a change in the exchange rate to be recognised in profit or loss. Consequently, both the change in fair value of the hedging instrument (the cross-currency swap) and the change in the carrying amount of the payable relating to the change in the exchange rate would be recognised in profit or loss and should offset each other except to the extent of the difference between the spot rate (at which the liability is measured) and the forward rate (at which the swap is measured).
  1. 18 This Standard permits hedge accounting only if the hedging instrument has all of the following terms and conditions:
    1. it is an interest rate swap, a foreign currency swap, a foreign currency forward exchange contract or a commodity forward exchange contract that is expected to be highly effective in offsetting a risk identified in paragraph 12.17 that is designated as the hedged risk;
    2. it involves a party external to the reporting entity (ie external to the group, segment or individual entity being reported on);
    3. its notional amount is equal to the designated amount of the principal or notional amount of the hedged item;
    4. it has a specified maturity date not later than:
      1. the maturity of the financial instrument being hedged;
      2. the expected settlement of the commodity purchase or sale commitment; or
      3. the occurrence of the highly probable forecast foreign currency or commodity transaction being hedged.
    5. it has no prepayment, early termination or extension features.

Hedge of fixed interest rate risk of a recognised financial instrument or commodity price risk of a commodity held

  1. 19 If the conditions in paragraph 12.16 are met and the hedged risk is the exposure to a fixed interest rate risk of a debt instrument measured at amortised cost or the commodity price risk of a commodity that it holds, the entity shall:
    1. recognise the hedging instrument as an asset or liability and the change in the fair value of the hedging instrument in profit or loss; and
    2. recognise the change in the fair value of the hedged item related to the hedged risk in profit or loss and as an adjustment to the carrying amount of the hedged item.
  1. 20 If the hedged risk is the fixed interest rate risk of a debt instrument measured at amortised cost, the entity shall recognise the periodic net cash settlements on the interest rate swap that is the hedging instrument in profit or loss in the period in which the net settlements accrue.
  1. 21 The entity shall discontinue the hedge accounting specified in paragraph 12.19 if:
    1. the hedging instrument expires or is sold or terminated;
    2. the hedge no longer meets the conditions for hedge accounting specified in paragraph 12.16; or
    3. the entity revokes the designation.
  1. 22 If hedge accounting is discontinued and the hedged item is an asset or liability carried at amortised cost that has not been derecognised, any gains or losses recognised as adjustments to the carrying amount of the hedged item are amortised into profit or loss using the effective interest method over the remaining life of the hedged item

Hedge of variable interest rate risk of a recognised financial instrument, foreign exchange risk or commodity price risk in a firm commitment or highly probable forecast transaction or a net investment in a foreign operation

  1. 23 If the conditions in paragraph 12.16 are met and the hedged risk is:
    1. the variable interest rate risk in a debt instrument measured at amortised cost;
    2. the foreign exchange risk in a firm commitment or a highly probable forecast transaction;
    3. the commodity price risk in a firm commitment or highly probable forecast transaction; or
    4. the foreign exchange risk in a net investment in a foreign operation,

      the entity shall recognise in other comprehensive income the portion of the change in the fair value of the hedging instrument that was effective in offsetting the change in the fair value or expected cash flows of the hedged item. The entity shall recognise in profit or loss in each period any excess (in absolute amount) of the cumulative change in the fair value of the hedging instrument over the cumulative change in the fair value of the expected cash flows of the hedged item since inception of the hedge (sometimes called hedge ineffectiveness). The hedging gain or loss recognised in other comprehensive income shall be reclassified to profit or loss when the hedged item is recognised in profit or loss, subject to the requirements in paragraph 12.25. However, the cumulative amount of any exchange differences that relate to a hedge of a net investment in a foreign operation recognised in other comprehensive income shall not be reclassified to profit or loss on disposal or partial disposal of the foreign operation.
  1. 24 If the hedged risk is the variable interest rate risk in a debt instrument measured at amortised cost, the entity shall subsequently recognise in profit or loss the periodic net cash settlements from the interest rate swap that is the hedging instrument in the period in which the net settlements accrue.
  1. 25 The entity shall discontinue prospectively the hedge accounting specified in paragraph 12.23 if:
    1. the hedging instrument expires or is sold or terminated;
    2. the hedge no longer meets the criteria for hedge accounting in paragraph 12.16;
    3. in a hedge of a forecast transaction, the forecast transaction is no longer highly probable; or
    4. the entity revokes the designation.

      If the forecast transaction is no longer expected to take place or if the hedged debt instrument measured at amortised cost is derecognised, any gain or loss on the hedging instrument that was recognised in other comprehensive income shall be reclassified to profit or loss.

Disclosures


  1. 26 An entity applying this section shall make all of the disclosures required in Section 11 incorporating in those disclosures financial instruments that are within the scope of this section as well as those within the scope of Section 11. In addition, if the entity uses hedge accounting, it shall make the additional disclosures in paragraphs 12.27–12.29.
  1. 27 An entity shall disclose the following separately for hedges of each of the four types of risks described in paragraph 12.17:
    1. a description of the hedge;
    2. a description of the financial instruments designated as hedging instruments and their fair values at the reporting date; and
    3. the nature of the risks being hedged, including a description of the hedged item.
  1. 28 If an entity uses hedge accounting for a hedge of fixed interest rate risk or commodity price risk of a commodity held (paragraphs 12.19–12.22) it shall disclose the following:
    1. the amount of the change in fair value of the hedging instrument recognised in profit or loss for the period; and
    2. the amount of the change in fair value of the hedged item recognised in profit or loss for the period.
  1. 29 If an entity uses hedge accounting for a hedge of variable interest rate risk, foreign exchange risk, commodity price risk in a firm commitment or highly probable forecast transaction or a net investment in a foreign operation (paragraphs 12.23–12.25), it shall disclose the following:
    1. the periods when the cash flows are expected to occur and when they are expected to affect profit or loss;
    2. a description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur;
    3. the amount of the change in fair value of the hedging instrument that was recognised in other comprehensive income during the period (paragraph 12.23);
    4. the amount that was reclassified to profit or loss for the period (paragraphs 12.23 and 12.25); and
    5. the amount of any excess of the cumulative change in fair value of the hedging instrument over the cumulative change in the fair value of the expected cash flows that was recognised in profit or loss for the period (paragraph 12.23).

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