2011 October IFRS Conference | Financial Instruments | C&M and Impairment Day-5 outline 08:30—Accounting for financial instruments in accordance with IFRSs.
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2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Day-5 outline
• 08:30—Accounting for financial instruments in accordance
with IFRSs issued at 1 January 2012, but not the IFRSs
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
IFRS 9Main changes from IAS 39
• Reduces complexity– only two classification categories– single impairment model (only FI’s at amortised cost)– embedded derivatives no longer separated from financial
asset host contracts
• Aligns measurement of financial assets with entity’s ‘business model’ and contractual cash flow characteristics of instruments
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
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To address ‘own credit risk’• Retain IAS 39 measurement requirements for financial
liabilities:– held for trading fair value through P&L– hybrid liabilities bifurcation requirements in IAS 39– ‘vanilla’ liabilities amortised cost– maintain FVO (with current eligibility conditions)
BUT• Separate out ‘own credit risk’ for FVO• ‘Own credit risk’ portion would be separated in a
manner similar to that previously used in IFRS 7 for disclosure (IFRS 7 B4)
• ‘Hedging’ and ‘hedge accounting’ are two different things
• What is hedging?– managing risks by using one financial instrument
(‘hedging instrument’) purposely to offset the variability in FV or cash flows of a recognised asset or liability, firm commitment, or future cash flows (‘hedged item’)
• On 1/12/X1 a jeweler purchased 1,000 ounces of gold for $1,500 per ounce to manufacture jewelry whose selling price fluctuates with changes in the gold price
• Jeweler is concerned the gold price will decline.– buys an option (settled net in cash) to sell 1,000 ounces of
gold at $1,500 anytime in the next two months. The option is measured at FVTPL.
– at 31/12/X1 gold price is $1,400– the $100,000 gain on the option is recognised in profit or
loss in 20X1– but the ‘loss’ attributable to the reduced selling price will affect profit or loss in the future (ie when the sale is recognised).
• Matching the change in FV of the hedging instrument and the hedged item in profit or loss for the same period
• Hedge accounting is only an issue when normal accounting would put the two fair value changes in different periods—sometimes referred to as an ‘accounting mismatch’
• Hedge accounting recognises the offsetting effects of changes in the fair values or the cash flows of the hedging instrument and the hedged item.
• Strict conditions must be met before hedge accounting is possible:
– there must be formal designation and documentation of a hedge, including the risk management strategy for the hedge.
– the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows of the hedged item that are attributable to the hedged risk.
• Hedge exposure to fair value changes of recognised asset or liability or unrecognised firm commitment (or portion of these attributable to a particular risk)
• Hedge of the foreign currency risk of a firm commitment
• Recognition of gains and losses on hedged item and hedging instrument in profit and loss and adjust the carrying amount of the hedged item (if not measured at cost)
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Types of hedge accountingFair value hedge accounting
• Entity borrows 1,000, 3 years, 5% fixed rate, payable at the end, measured at amortised cost
• Hedged with a derivative whose value is linked to an interest rate index
• End of year 1, market rate = 6%. FV of 50 payable in 1 year at 6% + 1,050 payable 2 years at 6% = 50 x .943396 + 1,050 x .889996 = 982, but this 18 ‘gain’ is not recognised
• Entity A has a wholly-owned subsidiary, Entity B. Entity has a CU functional currency and Entity B has a FCU functional currency. Entity A paid FCU100,000 for the investment in net assets at fair value of FCU80,000. Goodwill of FCU20,000 was recognised.
• At acquisition, Entity A loaned Entity CU15,000 (exchange rate was FCU2:CU1). Settlement is not planned or expected in the near future.
2011 October IFRS Conference | Financial Instruments | C&M and Impairment
Questions or comments?
Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.
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