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Comparison of IFRS for SMEs and Full IFRS on Financial Instruments

Comparison of IFRS for SMEs and Full IFRS on Financial Instruments. WHITE ROCK I n v e s t m e n t s. Financial Instruments: Summary. WHITE ROCK I n v e s t m e n t s. Full IFRS: IAS 39. IFRS for SMEs. 4 Measurement Categories:. 2 Measurement Categories:. FVTPL. Fair Value. AFS.

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Comparison of IFRS for SMEs and Full IFRS on Financial Instruments

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  1. Comparison of IFRS for SMEs and Full IFRS • on Financial Instruments WHITE ROCK I n v e s t m e n t s

  2. Financial Instruments: Summary WHITE ROCK I n v e s t m e n t s Full IFRS: IAS 39 IFRS for SMEs 4 Measurement Categories: 2 Measurement Categories: FVTPL Fair Value AFS Fair Value Basic Amortized Cost L&R Amortized Cost Complex Fair Value HTM Amortized Cost Less restrictive More restrictive (i.e. Limited no. of risks and hedging instruments permitted) Hedging effectiveness test required No quantitative hedging effectiveness test required

  3. Financial Instruments: General Information WHITE ROCK I n v e s t m e n t s • Outline of Discussion Accounting policy option Definition, scope and examples Initial recognition Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  4. Financial Instruments: General Information • Accounting policy option IFRS for SMEs Full IFRS Accounting policy option Not applicable ENTITY Full IFRS for SMEs Sec 11 and 12 Recognition and measurement (IAS 39) Disclosure (IFRS for SMEs Sec 11 and 12) Reference IFRS for SMEs 11.2, 12.2 Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  5. Financial Instruments: General Information • Definition, scope and examples IFRS for SMEs Full IFRS Definition of a financial instrument A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity Same as IFRS for SMEs Reference IFRS for SMEs 11.3 IAS 32.11 Categories 2 Measurement Categories: Basic Complex 4 Measurement Categories: FVTPL AFS HTM L&R Reference IFRS for SMEs 11.1, 12.1 IAS 39.9 Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  6. Financial Instruments: General Information • Definition, scope and examples IFRS for SMEs Full IFRS Scope Exceptions to application: Interests in subsidiaries, associates and joint ventures Financial instruments that meet the definition of an entity’s own equity Leases Employee benefits Insurance contracts Contracts for contingent consideration in a business combination Similar to IFRS for SMEs But also scopes out contracts between an acquirer and a vendor in a business combinationand certain loan commitments Reference IFRS for SMEs 11.7, 12.3 IAS 32.4, IAS 39.2, IFRS 7.3 Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  7. Financial Instruments: General Information • Definition, scope and examples IFRS for SMEs Full IFRS Examples of basic financial instruments Cash AR, AP, NR, NP Loans from banks or other third parties Commercial paper and commercial bills held Bonds and similar debt instruments Not applicable Reference IFRS for SMEs 11.5 – 11.6 Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  8. Financial Instruments: General Information • Definition, scope and examples IFRS for SMEs Full IFRS Examples of more complex financial instruments Asset-backed securities and repurchase agreements Options, rights, warrants, futures, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instruments Hedging instruments Commitments to make a loan to another entity Investments in another entity’s equity instruments other than non-convertible and non-puttable ordinary shares and preference shares Investments in convertible debt Not applicable Reference IFRS for SMEs 11.5 – 11.6 Accounting policy option Definition, scope and examples Initial recognition WHITE ROCK I n v e s t m e n t s

  9. Financial Instruments: General Information • Initial recognition IFRS for SMEs Full IFRS Initial recognition A financial instrument is recognized only when the entity becomes a party to its contractual provision Similar to IFRS for SMEs Reference IFRS for SMEs 11.12 – 12.6 IAS 39.14 Accounting policy option Accounting policy option Definition, scope and examples Definition, scope and examples Initial recognition Initial recognition WHITE ROCK I n v e s t m e n t s WHITE ROCK I n v e s t m e n t s

  10. Financial Instruments: General Information WHITE ROCK I n v e s t m e n t s • Outline of Discussion  Accounting policy option  Definition, scope and examples  Initial recognition

  11. Section 11: Basic Financial Instruments WHITE ROCK I n v e s t m e n t s • Outline of Discussion Definition Measurement Impairment Derecognition Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  12. Section 11: Basic Financial Instruments • Definition IFRS for SMEs Full IFRS Basic financial instruments Cash Debt instruments that provide fixed unconditional returns to the holder and do not contain provisions that could result in the holder losing principal, interest, pre-payment or put provisions contingent on future events A commitment to receive a loan that cannot be settled in cash, and when executed, meet criteria of a basic instrument Investments in non-convertible preference shares and non-puttable ordinary shares or preference shares Not applicable Reference IFRS for SMEs 11.8 – 11.9 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  13. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Initial measurement Transaction price (including transaction costs) Exceptions: Instrument at FVTPL – transaction costs expensed Arrangement constituting a financing transaction – PV of future payments if payment is deferred or is financed at an interest rate that is not a market rate Fair value plus transaction costs Exceptions: Instrument at FVTPL Note: - Fair value = normally the transaction price, unless part of the consideration is for something other than a financial instrument or the instrument bears an off-market interest rate Reference IFRS for SMEs 11.13 IFRS 39.43, IAS 39, AG 64-65 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  14. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Subsequent measurement Basic debt instruments: Amortized cost using effective interest method Commitments to receive a loan: Cost less impairment Investments in non-convertible and non-puttable C/S or P/S: If FV measurable reliably – FVTPL If FV not measurable reliably – Cost less impairment Held for trading and designated as at FVTPL: FVTPL HTM investments and L&R: Amortized cost AFS investments: Fair value with changes in fair value recorded in equity Investments in equity securities whose fair value cannot be measured reliably: Cost less impairment Reference IFRS for SMEs 11.14 IFRS 39.46-47, 39.66 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  15. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Amortized cost Amortized cost is the net of: Measurement at initial recognition, less principal repayments Plus/minus cumulative amortization using effective interest method of initial recognition and maturity amount difference Less reduction for impairment or uncollectibility (for financial assets) Same as IFRS for SMEs Reference IFRS for SMEs 11.15 IFRS 39.9 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  16. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Fair value – investments in C/S or P/S Best evidence: Quoted price in an active market If not available: Price of most recent transaction for an identical asset If market for a financial instrument not active and recent transactions of an identical asset are not a good estimate: Management estimates of the fair value by using a valuation technique Same as IFRS for SMEs. Reference IFRS for SMEs 11.27 IFRS 39.48 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  17. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Fair value – valuation technique Objective: Establish what the transaction price would have been on measurement date in an arm’s length transaction Examples: Using recent market transactions Reference to the current fair value of identical or similar instrument DCF analysis Option pricing models Similar to IFRS for SMEs, but more guidance provided around valuation Reference IFRS for SMEs 11.28-29 IAS 39.48, IAS 39 AG 69-79 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  18. Section 11: Basic Financial Instruments • Measurement IFRS for SMEs Full IFRS Fair value – no active market • When fair value of equity instruments reliably measurable: • If the variability in the range of various estimates = not significant • If the probabilities of the various estimates can be reasonably assessed • If these conditions are not met: • Entity is precluded from measuring the asset at fair value • Asset is carried at cost (less impairment) defined as carrying amount at the last day when the asset was reliably measurable Similar to IFRS for SMEs, but more guidance provided around valuation Reference IFRS for SMEs 11.30-32 IAS 39, AG 80-81 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  19. Section 11: Basic Financial Instruments • Impairment IFRS for SMEs Full IFRS General Financial assets at amortized cost: Reviewed for objective evidence of impairment at the end of each reporting period Impairment losses: Recognized in P&L immediately If objective evidence reverses in subsequent period: Impairment losses are reversed in P&L of subsequent periods Similar to IFRS for SMEs except for the following: Impairment review for AFS financial assets carried at fair value through equity as well Impairment losses on equity investments carried at cost and AFS equity investments cannot be reversed Reference IFRS for SMEs 11.21, 11.26 IAS 39.58, 39.66, 39.69 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  20. Section 11: Basic Financial Instruments • Impairment IFRS for SMEs Full IFRS Assets measured at amortized cost Example:Trade accounts, Notes receivable, Loans from banks Impairment loss = Carrying amount of asset – present value of estimated future cash flows discounted at original effective interest rate Similar to IFRS for SMEs Reference IFRS for SMEs 11.25 (a) IAS 39.63 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  21. Section 11: Basic Financial Instruments • Impairment IFRS for SMEs Full IFRS Assets measured at cost less impairment Impairment loss = Asset’s carrying amount – best estimate of the amount that the entity would receive for the asset if it were to be sold Impairment loss = Asset’s carrying amount – present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset Reference IFRS for SMEs 11.25 (b) IAS 39.66 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  22. Section 11: Basic Financial Instruments • Derecognition IFRS for SMEs Full IFRS Financial assets Rights to cash flows from the assets have expired or are settled Entity has transferred substantially all the risks and rewards of ownership of the financial asset Entity has retained some significant risks and rewards but has transferred control of the asset to another party. In this case, the asset is derecognized, and any rights and obligation created or retained are recognized. Similar to IFRS for SMEs; however, IFRS includes additional guidance on pass-through arrangements, continuing involvement and some other relevant aspects relating to transfer of a financial asset Reference IFRS for SMEs 11.33 IAS 39.17, 39.37 Definition Measurement Impairment Derecognition WHITE ROCK I n v e s t m e n t s

  23. Section 11: Basic Financial Instruments • Derecognition IFRS for SMEs Full IFRS Financial liabilities • When extinguished: • When the obligation is discharged • When the obligation is cancelled • When the obligation expires Similar to IFRS for SMEs Reference IFRS for SMEs 11.36 IAS 39.39 Definition Definition Measurement Measurement Impairment Impairment Derecognition Derecognition WHITE ROCK I n v e s t m e n t s WHITE ROCK I n v e s t m e n t s

  24. Section 11: Basic Financial Instruments WHITE ROCK I n v e s t m e n t s • Outline of Discussion Definition  Measurement  Impairment  Derecognition 

  25. Section 12: Additional Financial Instruments WHITE ROCK I n v e s t m e n t s • Outline of Discussion Measurement Impairment and Derecognition Hedge Accounting Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  26. Section 12: Additional Financial Instruments • Measurement IFRS for SMEs Full IFRS Initial recognition Measure at transaction price Same Reference IFRS for SMEs 12.7 IAS 39.43 Subsequent measurement • All financial instruments are measured at FVTPL except for: • Equity instruments not publicly traded and no reliable measure of FV • Contracts linked to such instruments • These are measured at cost less impairment. (cost is FV at last reliable measure date) Held for Trading – measured at FVTPL AFS – recorded in equity HTM – amortized cost Reference IFRS for SMEs 12.8-9 IAS 39.46-47 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  27. Section 12: Additional Financial Instruments • Measurement IFRS for SMEs Full IFRS Fair Value Same as section 11 Financial liability payable on demand – not less than the amount payable on demand, discounted from the first date payment could be required to be paid. Same Reference IFRS for SMEs 12.10-11 IAS 39.48-49 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  28. Section 12: Additional Financial Instruments • Impairment and Derecognition IFRS for SMEs Full IFRS General Same as basic financial instruments Impairment loss is recognized in profit or loss Can be reversed for all types of instruments only up to the amount as if no impairment loss has been recognized Equity investments for AFS and HTM – impairment cannot be reversed Reference IFRS for SMEs 12.14 IAS 39.58, 39.66, 39.69 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  29. Section 12: Additional Financial Instruments • Hedge accounting IFRS for SMEs Full IFRS Hedge accounting • Gains and losses of hedged item and hedged instrument can both be recognized in profit and loss at the same time • Hedge accounting allowed for: • Interest rate risk of debt instrument • Forex or IR risk in a firm commitment or highly probable forecast transaction • Forex risk in a net investment in foreign operation • Price risk of commodity • Cash flow Hedge • FV Hedge • Hedges of a net investment in a foreign operation Reference IFRS for SMEs 12.15 12.17 IAS 39.86 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  30. Section 12: Additional Financial Instruments • Hedge accounting IFRS for SMEs Full IFRS Hedging instruments permitted • More specific: • Interest rate / Forex swap • Forex forward • Commodity forward • Notional amount = designated amt of principal or notional amt of the hedged item • Has specified maturity date no later than the maturity of hedged item • No pre-payment, early termination or extension features • More broad • Derivatives that are not net written options • Non-derivative assets or liabilities used as a hedge of forex risk • Does not require the notional amt to be equal • No requirement on maturity to correspond to hedged item as long as hedge is demonstrated to be highly effective • Does not restrict pre-payment, early termination or extension features Reference IFRS for SMEs 12.18 IAS 39.82-88 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  31. Section 12: Additional Financial Instruments • Hedge accounting IFRS for SMEs Full IFRS Effectiveness testing No quantitative requirements to prove hedge effectiveness Required to perform quantitative retrospective and prospective effectiveness tests at least once per reporting period Reference IFRS for SMEs 12.16 d IAS 39.88 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  32. Section 12: Additional Financial Instruments • Hedge accounting IFRS for SMEs Full IFRS Subsequent Accounting (CF Hedge) Effective part is recognize in OCI Ineffective part (changes in FV of hedging instrument) is recognized in profit and loss Amount recognized in OCI is moved to P&L when hedged item affects P&L Cumulative changes in the fair value of hedging instrument and hedged risk are recognized in OCI. Reference IFRS for SMEs 12.23-25 IAS 39.95-101 Measurement Impairment and Derecognition Hedge Accounting WHITE ROCK I n v e s t m e n t s

  33. Section 12: Additional Financial Instruments • Hedge accounting IFRS for SMEs Full IFRS Subsequent Accounting (FV Hedge) Change in FV of hedged item and hedging instrument are recognized in P&L Same Reference IFRS for SMEs 12.19-22 IAS 39.89-94 Measurement Measurement Impairment and Derecognition Impairment and Derecognition Hedge Accounting Hedge Accounting WHITE ROCK I n v e s t m e n t s WHITE ROCK I n v e s t m e n t s

  34. Section 12: Additional Financial Instruments WHITE ROCK I n v e s t m e n t s • Outline of Discussion Measurement  Impairment and Derecognition  Hedge Accounting 

  35. Comparison of IFRS for SMEs and Full IFRS • on Financial Instruments WHITE ROCK I n v e s t m e n t s

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