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CPD
Lecture 31
Content of Lecture 3
•Approach to a general theory question •Approach to specific theory question •Financial instruments •Share-based payments •Fair value measurement •Financial instruments impairments •Foreign exchange transactions •Fair value transactions
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Types of theory questions
General Specific
Conceptual Specific Framework Standard
Conceptual Framework
1. Identify the issue or issues
2. Consider the journal entry – debit (asset or expense) or credit (liability, income or equity)
3. Use the definitions provided in the framework to justify (no changes to the previous definitions) – SoFP bias 1. Application of the scenario to each point of theory
4. Conclude based on your argument!
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You need to have a PLAN!
HAVE A FRAMEWORK/ CHECKLIST, FOR EXAMPLE:
UNDERSTAND Required: Components: THE SCENARIO - Asset I - Provision - Liability Ex: - Finance Lease C - Operating Lease - Probable? R - Measurable? - R&R Transfer Initial / Subsequent M - Fair value - Cost
P&D 5
Financial instruments – IAS 32/IFRS9
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Issues dealt with:
• Financial instruments definition
• Classification of debt versus equity
• Classification of financial assets
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IAS 32 – Identification
•Financial instrument general principle (NB): •Contractual right/obligation to receive/pay CASH
•32.15: Classify instrument , or its component parts, on initial recognition as a financial liability, financial asset, or equity instrument, in accordance with the: •Substance of the contract •The definitions of FA, FL and E 8
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IAS 32 – Identification
•Scope exclusions •Items specifically dealt with by another standard •E.g. a lease?
•Commodity contracts (contracts to buy/sell a non-financial item) – 32.08 and 32.09 •What is our intention? •Speculate or Normal usage, purchase and sales requirements? • Net or Gross settlement?
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IAS 32 - Identification
• Financial asset: • Cash • Contractual right to receive cash • Equity instrument of another • Contract to exchange FA under conditions that are potentially favourable • Contract settled in our own equity (i.e. physically) that is • Non-derivative – by receiving a variable amount of shares • Derivative – other than by exchanging a fixed amount of shares for a fixed amount of cash
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IAS 32 - Identification
• Financial assets – Are the following financial assets or not? • Debtor? • Prepaid expenses? • Savings account? • 3 month FEC to buy US dollars at R7,00 (spot rate R7.50)? • Shares in SABMiller Plc.? • Holder of a put/call option over Goldfields Ltd shares? • Investment in debentures of Anglo American Ltd? • In S’s books: R100,000 loan granted by a subsidiary (S) to the Holding company (H) that will be re-payed by H settling the outstanding amount, by paying S back with S’s own shares (number of shares delivered R100,000/share price on repayment date)? • Would your answer change if H per the contract will repay the loan by delivering 10,000 shares? • What is the substance of the transaction?
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IAS 32 - Identification
• Financial Liability: • Contractual obligation to pay cash • Contract to exchange FA under conditions that are potentially unfavourable • Contract settled in our own equity that is • Non-derivative – by delivering a variable amount of shares • Derivative – other than by delivering a fixed amount of shares for a fixed amount of cash
What is the intention behind the “fixed for fixed” principle?
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IAS 32 - Identification
• Financial liabilities – Are the following financial liabilities or not? • Loan from bank? • Current tax liability? • 3 month FEC to buy US dollars at R7,00 (spot rate R6.50)? • Holder of a put/call option? • Writer of a put/call option? • 1,000 0% issued convertible debentures of R100 each (R100,000), settled by compulsory converting of the debentures into a variable number of ordinary shares i.e. R100,000/share price on conversion date • What if it was convertible at 2 shares for each debenture? • Written call option on our own shares at a strike price of R50 per share. Will be settled by physically delivery of shares to the option holder. • What if settled net in cash? 13
Approach to IAS 32 – Debt/equity
•Identify the instrument and then if there is multiple components (list) •Classify all components •Definitions and specific rules •Compound instrument •Initial measurement •Conclude
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IAS 32 – Classification FL vs. Equity
•3 possible components of any issued instrument
Value of any option (or Interest or Capital derivative) Dividends redemption for conversion/settle ment
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REVISION OF KEY PRINCIPLES IN IAS 32
•IAS 32.15 – When classifying financial instruments, the substance of the transaction needs to be looked at together with the definitions.
•IAS 32.19 – Unconditional right to avoid delivering cash – “cash avoidance test”
•IAS 32.28 – For a compound financial instruments – identify the liability and equity component.
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Basic options: Financial assets
Exception: Options for Equity option Business Model through OCI
Held to collect Held for Dual purpose cash flows trading
Amortised FTOCI FTP&L cost
Financial Liabilities Classification
•Always at amortised cost unless held for trading or specifically designated at FV through P/L.
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Impairment of financial assets
IFRS 9 Expected Credit Loss Model
General Simplified Approach Approach
3 Stages 1 Stage
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IFRS 9: Impairment of financial assets
Example
• Purple Ltd (hereafter “Purple) has an investment in 100 000, 10% MNT Ltd debentures. The debentures were acquired on 1 July 2014 at a cost (fair value) of R5 per debenture. Transaction costs amounting to R10 000 were incurred. The debentures are redeemable on 30 June 2019 at a premium of 5%. The 12-month expected credit losses was R45 000.
• The fair value of MNT Ltd debentures increased to R5,20 on 30 June 2015. On that date, the debentures’ credit risk increased significantly and the expected lifetime credit losses was estimated to be R52 000.
• At 30 June 2016, the fair value increased to R5,80. The expected lifetime credit losses was estimated to be R60 000.
• On 1 July 2016, the debentures were deemed to be credit impaired. The expected lifetime credit losses was estimated to be R70 000. On 30 June 2017, the fair value had decreased to R4,80. The expected lifetime credit losses remained unchanged.
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Example Calculation
• N=5 • PV= 510 000 • FV=525 000 • PMT= 50000 • CPT I/Y= 10.283%
Example Calculation
01.07.2014 30.06.2015 30.06.2016 30.06.2017
Financial asset 510 000 512 443 515 137 518 109 Balance
Effective interest 52 443 52 694 52 971
Fair value of 510 000 520 000 580 000 480 000 financial asset
Loss Allowance 45 000 52 000 60 000 70 000
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a) Assuming amortised cost classification
1 July 2014 Investment in MNT debentures(SFP) 510 000 Bank (SFP) 510 000 Initial recognition of investment
Expected credit losses (P/L) 45 000 Loss allowance: Investment in MNT (SFP) 45 000 Recognition of 12 month losses at origination
30 June 2015 Investment in MNT debentures(SFP) 52 443 Interest income(P&L) 52 443 Interest income for 2015 Figure from amortisation table (period 1) in calculator or (510 000*10.283%)
Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2015 (500 000*10%)
Expected credit losses (P/L) 7 000 Loss allowance: Investment in MNT (SFP) 7 000 Recognition of a change in the expected credit losses
a) Assuming amortised cost classification
30 June 2016 Investment in MNT debentures(SFP) 52 695 Interest income(P&L) 52 695 Interest income for 2016 (510 000+52 443-50 000)*10.283%
Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2016 (500 000*10%)
Expected credit losses (P/L) 8 000 Loss allowance: Investment in MNT (SFP) 8 000 Recognition of a change in the expected credit losses
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a) Assuming amortised cost classification
1 July 2016 Expected credit losses (P/L) 10 000 Loss allowance: Investment in MNT(SFP) 10 000 (Recognition of a change in the expected credit losses)
30 June 2017 Investment in MNT debentures(SFP) (gross) 52 971 Loss allowance (SFP) 7 197 Interest income(P&L) (nett) 45 774** Interest income for 2017 ** = (512 443+52 695-50 000-70 000)*10.283%
Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2017 (500 000*10%)
b) Assuming debt instrument at FV through OCI classification
1 July 2014 Investment in MNT debentures(SFP) 510 000 Bank (SFP) 510 000 Initial recognition of investment Expected credit losses (P/L) 45 000 Expected credit losses reserve (OCI) 45 000 Recognition of 12 month expected credit losses at origination
30 June 2015 Investment in MNT debentures(SFP) 52 443 Interest income(P&L) 52 443 Interest income for 2015 Figure from amortisation table (period 1) in calculator or (510 000*10.283%)
Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2015 (500 000*10%) Investment in MNT debentures(SFP) 7 557 Fair value adjustment(OCI) 7 577 Fair value adjustment of debenture at the end of the year (510 000+52 443-50 000) – (5.20*100 000) Expected credit losses (P/L) 7 000 Expected credit losses reserve (OCI) 7 000 Recognition of a change in the expected credit losses
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b) Assuming debt instrument at FV through OCI classification
30 June 2016 Investment in MNT debentures(SFP) 52 695 Interest income(P&L) 52 695 Interest income for 2016 (510 000+52 443-50 000*10.283%) Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2016 (500 000*10%) Investment in MNT debentures(SFP) 57 305 Fair value adjustment(OCI) 57 305 Fair value adjustment of debenture at the end of the year [(520 000+52 695-50 000) – (5.80*100 000)] Expected credit losses (P/L) 8 000 Expected credit losses reserve (OCI) 8 000 Recognition of a change in the expected credit losses
b) Assuming debt instrument at FV through OCI classification
1 July 2016 Expected credit losses (P/L) 10 000 Expected credit losses reserve (OCI) 10 000 Recognition of a change in the expected credit losses
30 June 2017 Investment in MNT debentures(SFP) 45 774 Interest income(P&L) 45 774 Interest income for 2015 (512 443+52 695-50 000-70 000)*10.283%
Bank(SFP) 50 000 Investment in MNT debentures(SFP) 50 000 Payment received for 2017 (500 000*10%)
Fair value adjustment(OCI) 95 774 Investment in MNT debentures(SFP) 95 774 Fair value adjustment of debenture at the end of the year [(580 000+45 774-50 000) – (4.80*100 000)]
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SHARE-BASED PAYMENTS – IFRS 2
Identification of share based payment transactions
•Is it a SBP? DEFINITION •Definitions of equity and cash settled •Application of information in scenario •Conclude
Equity settled: Cash settled:
The entity will deliver The entity has an obligation to its own equity deliver cash and/assets linked instruments and has to equity to settle the SBP - as NO obligation to deliver soon as the entity can AVOID cash and/assets to paying cash it is NOT cash settle the SBP settled
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Measurement – Difference between cash SBP and equity SBP
•Cash SBP: Assumptions relating to market conditions included in re- measurement of the liability every year
•Equity SBP: Assumptions relating to market conditions included in grant date FV, but never re-measured
•Non-market conditions are re-measured at every year end
INTERCOMPANY TRANSACTIONS
• Where are you? • Done in company accounts (airport) • Should be done at group • Where should you be? level (program GPS)
• Route calculated by GPS • Pro-forma journal entry
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Group and Treasury Share Transactions
• If the entity has to buy their own instruments or the shareholders granted the instruments and provided the instruments – Always equity-settled
• Share-based payment involving shares of the parent: • Parent issues own shares to employees of sub - Equity-settled in sub Equity-settled in group • Sub issues parent shares to own employees - Cash-settled in sub Equity-settled in group
• Refer to par 43A-D when an IFRS 2 question is combined with groups – this will help
Group Shares
Issues the shares to Parent the employees
Subsidiary Subsidiary receives the services rendered
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Group Shares
Parent
Issues the parents shares to Subsidiary the employees Subsidiary receives the services rendered
Foreign exchange
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Foreign exchange transactions
Basic principles of IAS 21 IFRIC 22 Prepayments?
Translations
Non-monetary IAS Monetary items Net items 21.16 investment in foreign entity Not revalued Revalued
All ex-diffs to P/L Ex-diffs to @ Closing spot No OCI rate (Truck and retranslation trailer principle) 39
IFRS 13 FV Measurement
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The issues you need to be aware of:
• Definition of fair value • “Exit price” • “Market participant based” • FV ≠ Value in use or NRV • FV adjusts for specific characteristics of asset/liability being measured (age, location, condition, contractual restrictions, risk assumptions) • FV is obtained from principal market (or most advantageous market) • Highest and best use assumption for non-fin assets • Adjust FV for transport costs, but not for transaction costs • Levels in FV hierarchy • Valuation techniques (Cost based, Market Based, Income approach)
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Thank you!
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