For financial instruments such as short-term trade receivables and payables, no disclosure of fair value is required when the carrying amount is a reasonable approximation of fair value. When distributions to holders of the preference shares, whether cumulative or non-cumulative, are at the discretion of the issuer, the shares are equity instruments. When it has a reasonable basis for doing so, management may indicate its opinion on the relationship between fair value and the carrying amount of financial assets and financial liabilities for which it is unable to determine fair value reliably. An entity groups into separate classes instruments denominated in different currencies or having substantially different credit risks when those factors result in instruments having substantially different rates. The inclusion of this additional paragraph further assists in clarifying the liability and equity classification of a financial instrument. Simultaneous settlement of two financial instruments may occur through, for example, the operation of a clearing house in an organised financial market or a face-to-face exchange. Assume the same facts as in a except that settlement will be made by delivering a fixed number of shares and receiving a fixed amount of cash, if Entity B exercises the option.
Many commodity contracts are of this type. Assume the same facts as in Example 3 a above except that Entity A has written a call option on its own shares instead of having purchased a call option on them. This is the case even if the contract itself is an equity instrument. It also discusses the effect of settlement options see d below. For example, in the case of an interest rate swap carried at fair value, the maximum exposure to loss at the reporting date is normally the carrying amount because it represents the cost, at current market rates, of replacing the swap in the event of default.
When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions a and b below are met. No cash is paid or received because the forward has an initial fair value of zero. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default. Upon exercise, it results in the issue of a fixed number of shares in exchange for a fixed price. Milley Ltd which is a book publisher located in Brisbane.
The contract will be settled net in cash. This Standard applies to recognised and unrecognised financial instruments. When a derivative financial instrument gives one party a choice over how it is settled e. Prepared on 26 November 2010 by the staff of the Australian Accounting Standards Board. The presentation requirements apply to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. Assume the same facts as in a except that settlement will be made net in shares instead of net in cash. Disclosures are provided about the significant terms and conditions of each financial instrument, although an entity may indicate in addition the nature of the relationship between the individual instruments see paragraph 65.
Words: 420 - Pages: 2. At each reporting date, the entity updates its estimated cash flows and adjusts the loss allowance accordingly. Control of such physical and intangible assets creates an opportunity to generate an inflow of cash or another financial asset, but it does not give rise to a present right to receive cash or another financial asset. This is so even when the amount of cash or other financial assets is determined on the basis of an index or other item that has the potential to increase or decrease, or when the legal form of the puttable instrument gives the holder a right to a residual interest in the assets of an issuer. This assessment is performed on the basis of scenarios that the entity reasonably expects to occur. The bonds are financial assets because they represent obligations of the issuing government to pay cash. Gains and losses related to changes in the carrying amount of a financial liability are recognised as income or expense in profit or loss even when they relate to an instrument that includes a right to the residual interest in the assets of the entity in exchange for cash or another financial asset see paragraph 18 b.
Assumptions: Contract date 1 February 2002 Exercise date 31 January 2003 European terms, i. One example is a net cash-settled share option. Defaults and breaches j With respect to any defaults of principal, interest, sinking fund, or redemption provisions during the period on loans payable recognised as at the reporting date, and any other breaches during the period of loan agreements when those breaches can permit the lender to demand repayment except for breaches that are remedied, or in response to which the terms of the loan are renegotiated, on or before the reporting date , an entity shall disclose: i details of those breaches; ii the amount recognised as at the reporting date in respect of the loans payable on which the breaches occurred; and iii with respect to amounts disclosed under ii , whether the default has been remedied or the terms of the loans payable renegotiated before the date the financial report was authorised for issue. Paragraph 28 applies only to issuers of non-derivative compound financial instruments. This option is irrevocable and applies only to equity instruments, which are neither held for trading nor are contingent consideration in a business combination. In the absence of any particular designation, the derivative is measured at fair value through profit or loss and the related liability is measured at amortised cost.
The costs of an equity transaction that is abandoned are recognised as an expense. When an entity extinguishes a convertible instrument before maturity through an early redemption or repurchase in which the original conversion privileges are unchanged, the entity allocates the consideration paid and any transaction costs for the repurchase or redemption to the liability and equity components of the instrument at the date of the transaction. Assets such as prepaid expenses for which the future economic benefit is the receipt of goods or services, rather than the right to receive cash or another financial asset, are not financial assets. Accordingly, any consideration received or paid for such a contract is added directly to or deducted directly from equity. The value of any derivative features such as a call option embedded in the compound financial instrument other than the equity component such as an equity conversion option is included in the liability component. A financial asset subject to a legally enforceable right of set-off against a financial liability is not presented on the balance sheet net of the liability unless settlement is intended to take place on a net basis or simultaneously. A number of other special transition provisions also apply; the most common ones are discussed below.
An entity may be exposed to credit risk as a result of a transaction in which no financial asset is recognised on its balance sheet, such as for a financial guarantee or credit derivative contract. Accordingly, a finance lease is regarded as a financial instrument and an operating lease is not regarded as a financial instrument except as regards individual payments currently due and payable. No Contractual Obligation to Deliver Cash or Another Financial Asset paragraph 16 a 17. This option has value on initial recognition even when it is out of the money. The issuer of such an instrument does not have the unconditional right to avoid delivering cash or another financial asset or otherwise to settle it in such a way that it would be a financial liability.
Strategic Plan The district is in the process of updating their strategic plan. For example, contracts that provide for settlement only by the receipt or delivery of a non-financial item e. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value. Nevertheless, some contracts to buy or sell non-financial items that can be settled net or by exchanging financial instruments, or in which the non-financial item is readily convertible to cash, are within the scope of the Standard as if they were financial instruments see paragraph 8. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A repurchasing a fixed number of its own shares in exchange for paying a fixed amount of cash or another financial asset.
In other words, the put option is out of the money. For example, an entity discloses information about the assumptions relating to prepayment rates, rates of estimated credit losses and interest or discount rates if they are significant. The contract will be settled net in cash. It incorporates relevant amendments made up to and including 27 October 2010. If no single instrument is individually significant to the future cash flows of the entity, the essential characteristics of the instruments are described by reference to appropriate groupings of like instruments. A multi-year contract may be considered for the right candidate. The transition requirements of the new standard are complex and require various assessments to be made at different points in time.