Tutorial 9- ACW 3491 Financial Instruments Relevant Standards:
Disclosure 1. AASB 7 – Financial Instruments: Disclosure resentation !De"nition o# 2. AASB 132 – Financial Instruments: resentation "nancial instruments etc$ %eco&nition ion ' (easurement 3. AASB 139 – Financial Instruments: %eco&nit !Cate&ories$
)*T+S: Financial Instrument , any contract giving rise to both "nancial asset in one entity and "nancial liailit./ e0uit. instrument of another entity. Financial Asset - Cash - Contractual right to: i) Receive cashanother !nancial asset ii) Exchange !nancial instru"ents under potentially favourable conditions
Financial iailit. - Contractual Obligation to: i) Deliver cash another !nancial asset
ii) Exchange !nancial instru"ents under potentially unfavourable conditions
+0uit. Instrument #ny contract $roviding holder %ith residual interest in in assets of another co"$any after deduction of all its liabilities &in instru"ent ' e(uity AASB 132$ )o $otentially unfavourable contractual obligations *otential *otential for residual ris+ $resent. ,.g. Ordinary Shares •
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- #n e(uity instru"ent of another entity : derivatives or nonderivatives
- # contract that is derivative or nonderivative
Cate&ories o# Financial Instruments !AASB 139$ – ast ut (ST )*W
Cate&ories o# Financial Instruments !AASB 9$ 1. #t fair value 2. #"ortised Cost ##S recognition of !nancial instru"ent ' %hen entity beco"es $arty to contractual $rovisions of instru"ent. Generally measured at fair value).
AASB 13 Fair alue – Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on measurement date.
Financial asset Initial reco&nition / &air value ' Suse0uent / &0 or #"ortised cost. •
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se of &0 or #"ortised cost de$endent on: i) ,ntitys business "odel for "anaging !nancial asset ii) Contractual C& characteristics of !nancial asset. Fair 5alue ' if to realie fair value changes
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Amortise6 cost ' if to receive periodic interest payments ! principal repayment. eld for trading4 ' at fair value because 5O6 held to collect contractual cash 7o%s example of substance over form).
Financial liailities Suse0uent measurement ' #88 a"ortised cost / e9ective interest "ethod.
Deri5ati5es •
Creates rights and obligations %ith e9ect of trans#errin& one/more
"nancial riss in8erent in underlying $ri"ary !nancial instru"ent •
to s8i#t un6erl.in& ris an6 ene"t Derivative characteristics !AASB 139$: 0alue changes in res$onse to change in s$eci!ed interest rate; !nancial instru"ent $rice; co""odity $rice; fore< rate; inde< of $rices or rates; credit rating credit inde<; or other variable the
=underlying) Re(uires no initial net invest"ent or initial net invest"ent that is s"aller than re(uired for other ty$es of contracts that %ould be
e<$ected to have si"ilar res$onse to changes in "ar+et factors> Settled at future date
e6&in& !AASB 139$ "edge contract # #rrange"ent %ith another $arty; in %hich that $arty acce$ts ris+s associated %ith changing co""odity $rices or e
Cas8-;o< 8e6&e hedge future e<$ected cash 7o%s) ' the gain or loss on the hedging instru"ent for e
%or purchase of inventory& purchase not recognised until shipped Fair 5alue 8e6&e !hedge value of #8) the change in value of the
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hedged ite" and the change in value of the hedging instru"ent are both i""ediately ' in $ro!t or loss.
Preference shares/ Convertible bonds, notes)- AASB 132 1. re#erence S8ares/ Det Liability ' O$tion of mandatory rede"$tion for $reference •
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shares ?f 6et; $eriod $ay"ents @ interest e<$enses ' i"$act $ro!ts. Equity ' Ris+ and re%ard at entity's (issuer) discretion
2. Con5ertile notes/on6s !Compound instrument: Residual
approach ) older has right to: ecurities # *rdinary shares Double entry "ust segregate liability and e(uity co"$onent ?nterest C#5 be $art of #sset under Construction. ?nterest e<$ense "ust be segregated into cash and liability • • • •
$ortion.
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=Aar+ to "ar+et @ denoting or relating to a syste" of valuing
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assets by the "ost recent "ar+et $rice. S%a$: 5o need table ' ,ntity ulti"ately $aying !
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receive di9erence. &or%ard contract: 5eed table to co"$ute net gain. ' ?f have foreign $ayable; in for%ard agree"ent; the $ayable $art %ill be !
Tutorial
3 W8at is a 6eri5ati5e "nancial instrument= ro5i6e some e>am?les Derivative &inancial ?nstru"ents: •
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?nstru"ents %hich create ri&8ts an6 oli&ations that have the e9ect of trans#errin& one or more o# t8e "nancial riss inherent in an un6erl.in& ?rimar. "nancial instrument > and 6he 5alue of the contract nor"ally re;ects c8an&es in t8e 5alue o# t8e un6erl.in& "nancial instrument ?nternational #ccounting Standards Co""ittee; ,<$osure Draft B: &inancial ?nstru"ents). 6his is consistent %ith the descri$tion $rovided at $aragra$h # 1E of ##S 132 %hich states:
Derivative !nancial instru"ents create rights and obligations that have the e9ect of transferring between the parties to the instru"ent one or more of the +nancial risks inherent in an underlying primary +nancial instrument . •
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On ince$tion; derivative !nancial instru"ents give one $arty a contractual right to e
4 W8at #actors in;uence t8e 5alue o# a 6eri5ati5e "nancial instrument@ an6 8o< s8oul6 c8an&es in t8e 5alue o# 6eri5ati5es e treate6 #rom an accountin& ?ers?ecti5e= •
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6he 5alue o# a 6eri5ati5e is 6irectl. relate6 to anot8er un6erl.in& item. &or e
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?n relation to the "easure"ent of derivative !nancial instru"ents there is a general re(uire"ent; as $rovided in ##S 13; that
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"nancial instruments are to e measure6 at #air 5alue. #s %ith !nancial instru"ents generally; all derivatives are re(uired to be recognised and "easured at fair value. ains and losses on the !nancial instru"ents %ould generally go directly to the $ro!t and loss
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account. o%ever; this will be inuenced by whether there is an associated hedge that has been designated as a hedge and that has been dee"ed to be =e/ective'. Fhere there is a designated cas8-;o< 8e6&e; the gain or loss on the hedging instru"ent for e
initiall. recor6e6 in e0uit. . ?t can suse0uentl. e trans#erre6 to ?ro"t an6 loss so as to oset the i"$act on $ro!t or loss of any change in value of the hedged ite" for e
Fhere an ite" is designated a #air 5alue 8e6&e usually oneo/ ); the change in value of the hedged ite" and the change in value of the hedging instru"ent are both i""ediately recognised in $ro!t or loss.
W8at is a com?oun6 "nancial instrument= ro5i6e some ans
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Contains both a "nancial liailit. an6 e0uit. com?onent 6here is a re(uire"ent that the 6et an6 e0uit. com?onents of a co"$ound instru"ent be accounte6 #or se?aratel. ?ncludes convertible notes Si"ilar to convertible bonds; e
AASB 132: Re(uires e(uity co"$onent @ %0 of the whole instrument %0 of the liability component ,(uity co"$onent is the residual "easure see notes above)
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##S &ra"e%or+ considers $erceived $robabilities of conversion Di9erently fro" ##S 132
12 W8en 6oes ri&8t o# set-o e>ist= ##S 132 allo%s assets and liabilities to be set-o9 for state"ent of !nancial $osition $ur$oses %hen: • •
# legally recognised right of set-o9 e 6he entities e<$ect to settle the debts on a net basis.
S$eci!cally; $aragra$h B2 of ##S 132 states: 1 +nancial asset and a +nancial liability shall be o/set and the net amount presented in the statement of +nancial position when& and only when& an entity2
currently has a leally enforceable riht to set o/ the recognised
(a)
amounts and intends either to settle on a net basis& or to realise the asset and
(b)
settle the liability simultaneously . 19 +>?lain 8o< a currenc. s
S%a$s occur %hen borro%ers e!chane aspects of their respective
loan obliations" &oreign currency s%a$s occur %hen the obligation related to a loan deno"inated in one currency is s%a$$ed for a loan •
deno"inated in another currency. ?f an organisation has receivables and $ayables that are both deno"inated in another $articular foreign currency; then changes in
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the s$ot rates %ill create gains on one; but losses on the other. 6o the e
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receivable). ?f a $articular organisation has a nu"ber of receivables that are deno"inated in a foreign currency then changes in s$ot rates "ay $otentially create siGeable foreign currency gains; or siGeable foreign
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currency losses. ?f that sa"e organisation does not have any $ayables deno"inated in
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the sa"e currency then it %ill be e<$osed to $otential gains and losses. ?f it is able to convert so"e of its do"estic loans into foreign currency loans; of the sa"e deno"ination as its receivables; then it %ill be able to e9ectively insulate or hedge itself fro" the e9ects of changes in
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s$ot rates. # gain on one %ill e9ectively o9set the loss on the other. Such an organisation "ay see+ to !nd another entity that is $re$ared to s%a$ its foreign currency loans for the organisations do"estic loans.
2E +>?lain 8o< an interest rate s
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Fhen an interest rate s%a$ occurs; one $arty e
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of interest $ay"ents %hich are of a ">e6 amount. &or a s%a$ to $roceed; ot8 $arties to the s%a$ %ill need to recei5e
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ene"ts in the for" of re6uctions in total interest ?a.ments. 6hey %ill be able to achieve savings in interest e<$enses and be able to obtain their $referred ter"s; for e
22 W8ere are t8e &ains an6 losses on a #utures contract re?orte6= Is t8e re?ortin& o# t8e &ains/losses on a #utures contract in;uence6 . <8et8er or not t8e contract is use6 as ?art o# a 8e6&in& instrument= •
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6he gains or losses on a futures contract %ould be ta+en to pro+t or loss as they occur . +>ce?tion: i. ?f the futures are used as $art of a hedin arranement > and ii. the hedging arrange"ent is dee"ed to be both eecti5e> and iii. 6o be a cas8-;o< 8e6&e in %hich case the gain or loss on the hedging instru"ent can be ta+en initially to e(uity if it is a cash7o% hedge and then transferred to $ro!t or loss to counter the gain or loss "ade on the hedged ite").
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6hree ty$es of hedges are identi!ed in $aragra$h HE of ##S 13: fair value hedges o cash-7o% hedges o o hedges of net invest"ents in foreign o$erations
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&or a #air 5alue hedge: o t8e 8e6&in& instrument for e
loss. 6he 8e6&e6 item@ %hich "ight for instance be a share $ortfolio; %ould also be valued at fair value %ith changes also going to
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$ro!t or loss. +>ce?tion: o Fhere the entity; at its own option; designates an arrangement o
as a cash-ow hedge. &or hedge accounting to be allowed; and for the gain or loss to be included in e$uity ; the hedge "ust be dee"ed to be =e9ective. ?f a cash-7o% hedge is not dee"ed to be e9ective then
the
gain
or
loss on
the
hedging
instru"ent
goes
i""ediately to $ro!t or loss. •
&or a cas8-;o< 8e6&e *aragra$h HE of ##S 13): o ain or loss on the hedging instru"ent to be transferred initiall.
to e0uit. and suse0uentl. to ?ro"t or loss to oset t8e o
&ains or losses on t8e 8e6&e6 item. 6his can be contrasted %ith a =fair value hedge; %here the gains or losses on the hedging instru"ent are to be transferred to
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$ro!t or loss as they occur. Only if the entity "eets the strict re(uire"ents set out in $aragra$h HH of ##S 13; the gains and losses on the hedging instru"ent in this case; on the futures) "ay initially be ta+en directly to e(uity and treated as $art of =other co"$rehensive inco"e
in the state"ent of co"$rehensive inco"e) and
subse(uently transferred to $ro!t or loss $ursuant to $aragra$h I of ##S 13 so as to o9set the losses on the ite" that %as the •
subJect
of
the
hedge
in
this
deno"inated in an overseas currency). +>ce?tion:
case;
the
receivable
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?f assu"ed not a =designated hedge; the gain or loss associated %ith the hedging arrange"ent %ould be ta+en directly to the $eriods $ro!t or loss. # hedge can e
3 a$ W8at is 8e6&e accountin& an6 <8at are t8e 3 t.?es o# 8e6&es i6enti"e6 in AASB 139= edging transaction: Fhen an entity enters an agree"ent that ta+es a $osition opposite to the original transaction. edge accounting is underta+en to account for the hedging transaction. *ur$ose of hedge accounting: Recognise =the o9setting e9ects on $ro!t or loss of changes in the •
fair values of the hedging instru"ent and the hedged ite". 6here are three "ain ty$es of hedges; these being: L L L
fair value hedges cash-7o% hedges hedges of net invest"ents in a foreign o$eration.
$ W8at is a 8e6&e6 item an6 a 8e6&in& instrument= e6&in& instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates only) a designated non-derivative +nancial asset or non-derivative +nancial liability whose fair value or cash ows are expected to o/set •
changes in the fair value or cash ows of a designated hedged item e6&e6 item is an asset; liability; !r" co""it"ent; highly $robable forecast transaction or net invest"ent in a foreign o$eration that:
a) e<$oses the entity to ris+ of changes in fair value or future cash 7o%s and b) is designated as being hedged
c$ o< are &ains/losses on t8e 8e6&in& instrument to e treate6 #or accountin& ?ur?oses #or a #air 5alue 8e6&e an6 a cas8 ;o< 8e6&e res?ecti5el.= &or a #air 5alue 8e6&e; both the hedged item and the hedging instrument to be valued at fair value %ith any gains or losses due to the fair value adJust"ents to be treated as $art of the $eriods $ro!t or loss. ?f the gains or losses on the hedged item are =$erfectly hedged then the gains or losses on the hedging instrument %ill o9set the gains or losses on the hedged ite" such that the net e9ect on the $eriods $ro!t or loss could be Mnil. •
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&or a cas8-;o< 8e6&e; the gain or loss on "easuring the hedged item at fair value is to be treated as $art of the $eriods $ro!t or loss. 6he gain or loss on the hedging instrument is to be initially transferred to e(uity; but subse(uently transferred to $ro!t or loss as necessary to o9set the gains or losses recorded on the hedged ite". #t the conclusion of the hedging arrange"ent; any a"ount still in e(uity as relating to the hedging instrument shall be transferred to $ro!t or loss.
e6&es o# a net in5estment in a #orei&n o?eration; including a hedge of a "onetary ite" that is accounted for as $art of the net invest"ent see ##S 121); $aragra$h 12 of ##S 13 re(uires that the hedge shall be accounted for si"ilarly to cash-7o% hedges. S$eci!cally: (i) the portion of the gain or loss on the hedging instrument that is determined to be an e/ective hedge (see paragraph 33) shall be recognised directly in e$uity through the statement of changes in e$uity (see 114 565) and (ii) the ine/ective portion shall be recognised in pro+t or loss. 7he gain or loss on the hedging instrument relating to the e/ective portion of the hedge that has been recognised
directly in e$uity shall be recognised in pro+t or loss on disposal of the foreign operation.
Tr. G3H – #utures contract Tr. G3 – con5ertile on6 c8ec ans
