Notes for L4

IFRS 9 Financial Instruments (recognition and measurement)

Financial instruments → contract on financial asset (one entity) and financial

liability/equity (another entity)

Definition of financial asset, financial liability and equity instruments

Initial recognition and measurement

Initial recognition → when entity becomes a party to the contract

Initial measurement → at fair value (transaction price, amount of consideration

payable or receivable)

Transaction costs (brokers’ and professional fees) → added / deducted to / from

the carrying amount of financial asset (FA) / financial liability (FL). (exemption
– FVTPL method to expense)

➔ FA & FL = transaction price (FV) +/(-) transaction cost

Subsequent measurement of FA
FVTPL
FVTOCI
Amortized cost (in Adv FAR syllabus)

Amortized cost (effective interest method)

Initial amount recognised
Less any repayment of principal
Plus any amortisation

Subsequent measurement of FL
Amortised cost using effective interest method

➔ FA/FL = initial amount + amortisation (int/exp) – repayment of principal

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 Financial
Liability

Financial
Asset

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IAS 32 Financial Instruments (presentation)

Financial instruments → presented in SOFP as A, L or E

Financial instruments classification → according to substance of the contract

Preference Share

Redeemable Irredeemable

Liability • Mandatory • Non mandatory

dividend dividend
• cumulative • Dividend is
discretionary

Liability Equity

Compound financial instruments → split between liability and equity

components

Interest, dividends, gains and losses → presented in consistent with

classification of related financial instruments

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Calculate the equity and liability components of the 9% convertible loan stock
30,000 x RM10 x 6% = RM18,000

284,168 25,575 (18,000) 291,743

291,743 26,257 (18,000) 300,000

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IFRS 7 Financial Instruments Presentation

Disclosure:
Significance of financial instruments
Nature and extent of risks

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IFRS 13 Fair Value

Fair value → Price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.

Fair value hierarchy:

Level 1: Quoted + Active Market + Identical Asset
Level 2: Quoted + Active Market + Similar Asset
Quoted but no Active Market + Identical / Similar Asset
No Quoted + use Significant Observable Inputs
Level 3: Use Significant Unobservable Inputs
Which FV is most reliable?

Example
Company A wants to sell the property now for
Company A bought $500,000
a property 5 years Market value of this property is generally $380,000
ago and paid A potential buyer offers $420,000 to buy this
$250,000 property

Which is the Fair Value according to IFRS 13?

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IAS 21 Effects of Changes in Foreign Exchange Rates
Functional currency → Currency of primary economic environment
Foreign currency → Currency other than functional currency
Exchange rate → Ratio of exchange for two currencies
Exchange difference → Different from translating one currency into another
currency at different exchange rate
Closing rate → Year end rate
Spot rate / Historical rate → Exchange rate at transaction date
At YE → retranslated foreign currency assets and liabilities into functional
currency
Monetary Asset / Liability
Initial - rate on date of transaction
Settlement – rate on date of settlement
P/L
Reporting date – at closing rate
Non-monetary Asset / Liability
Historical cost – rate on date of transaction
Fair value – rate on date the fair value determines
Other amount – rate on date other amount determine (NRV, FV-CTS) OCI

SOFP items
Monetary items – Account Receivables; Account Payables; Cash at Bank; Loan
- Measure at Closing Rate
Non-monetary items – PPE, Inventories
- Measure at historical rate

PL items
Income and Expense – measure at average rate of exchange rate is not fluctuate
/ change during the year
- Historical rate if exchange rate is fluctuate / change
frequently during the year

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1/1/20X0 1/7/20X0
S$0.4: RM1 31/12/20X0
S$0.5 : RM1 S$0.42 : RM1
Bought machine on credit for Paid for S$10,000
S$10,000 / S$0.4 = RM25,000 Outstanding = S$20,000
S$30,000 S$20,000 / S$0.42 = RM47,619
S$30,000 / S$0.5 = RM60,000 A/Payable = S$10,000/S$0.5
= RM20,000 A/Payable = S$20,000/S$0.5
Dr. Machine 60,000 = RM40,000
Cr. A/Payable 60,000 Dr. A/Payable 20,000
Dr. P/L 5,000 Dr. P/L 7,619
Cr. Bank 25,000 Cr. A/Payable 7,619

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IFRS 15 Revenue
Revenue recognition and accounting → accrual basis of accounting
Revenue recognition principle → when control on goods or services has been
transferred to customers
Control → ability to direct use of and obtain the remaining benefits of the assets
Revenue → income arising in the course of entity’s ordinary activities
IFRS 15 → five-stage process
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract (distinct / series of
distinct of goods / services)
Step 3: Determine the transaction price (fixed / variable, most likely method vs
expected value method; discount, refund)
Step 4: Allocate the transaction price to performance obligations in the contract
(based on stand-alone selling price)
Step 5: Recognise revenue when / as the entity satisfies a performance
obligation (when PO satisfies - at point of time / over time)
At point of time → the point when control is transferred, typically for promises
to transfer goods to a customer
Over time → typically for promises to transfer services to a customer
Performance obligations satisfied over time → recognises revenue by measuring
progress towards complete satisfaction of performance obligation using two
methods:
Output method - measuring value to the customer of goods or services
transferred to date; or
Input method - measuring cost of goods or services transferred to date
When unable to reasonably measure outcome of performance obligation (in
early stages) → revenue = costs incurred.
Presentation in SOFP → contract liability, contract asset or a receivable,
depending on entity's performance and customer's payment.
Contract liability → customer paid > entity performance
Contract asset → customer paid < entity performance

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Receivable → revenue has been invoice
• Deferred consideration (> 1 yr → time value of money; financing
component → difference between SP – Cash price)
• Principal vs Agent (exclude the collection on behalf of third party)
• Goods and services provided in one contract (sell car with free servicing
and insurance etc)
• Warranties
• Sale with a right of return

▪ Promise to provide
distinct / series of goods or
services
distinct
▪ Are ofthegoods / services
goods or
services
distinct?
Per stand-alone selling price

▪ At point of time
▪ Over time

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