IAS 32 – Financial Instruments
(Disclosure & Presentation)
Objective: To enhance user's understanding and the significance of financial instruments that an entity have. Classification of an instrument will be either as a liability or an equity instrument. An instrument is a financial liability if the issuer may be obligated to deliver cash or another financial assets, or the holder has right to demand cash or another financial assets. Interest, dividends, gains or losses, relating to an instrument that is classified as liability should be reported as income or expenses.
An issuer must classify separately the debt and equity components.
A financial asset or financial liability will be reported at the net amount when and only when an entity has a legally enforceable right to set off the amounts and intends to settle.
Disclosure Requirements Include:
1. Risk management and hedging policies.
2. Hedge accounting policies and practices, and gains and losses from hedges.
3. Terms and conditions of an accounting policies, for all financial instruments.
4. Information about exposure to interest rate risk.
5. Fair values of all financial assets and financial liabilities.
6. Information about derecognition, collateral, impairment, defaults and breaches, reclassification.
IAS 39 – Financial Instruments
Objective: To establish principles for recognizing and measuring financial assets and financial liabilities. All financial assets and financial liabilities must be recognized on the balance sheet. Financial instruments are measured at fair value on the date of acquisition or issuance. Usually this is the same as cost, but some time an adjustment is required. An entity has an option of recognizing normal purchases and sale securities in the market place consistently either at trade date or settlement date.
For the purpose of measuring a financial asset IAS 39 classified assets into four categories:
1. Loans and receivables not held for trading.
2. Held-to-maturity Investment: such as debt securities, and proffered shares.
3. Financial assets measured at fair value through profit and loss, like short term profit taking to the entity
4. Available-for-sale financial assets, that include all investment in equity that are not measured at fair value through profit and loss, and any loan and any receivable for sale.
Recognition:
1. All financial assets in (1) and (2) carried at amortized cost subject to a test for impairment.
2. All financial assets in (3) are carried at fair, with value changes recognized in profit and loss.
3. All financial assets in (4) are measured at fair value in the balance sheet, with value changes recognized in equity, and if the fair value of asset cannot be measured reliably the asset is carried at cost.
Most financial liabilities are measured at original recorded amount less principal repayments and amortization, and the next three categories of liabilities are measured at fair value:
1. Derivative liabilities
2. Liabilities held for trading.
3. Liabilities that entity designates to be measured at fair value.
Fair value is the amount for which an assets could be exchanged, or a liability settled between knowledgeable, willing parties in an transaction and is:
1. Quoted market price in active market
2. Otherwise use a valuation technique that makes max of market price input.
Derecognition of financial Assets or liabilities: IAS 39 establishes conditions for determining when control over financial assets or liabilities has been transferred to another party and therefore it should be removed from the balance sheet. Derecognition is not permitted when only portion of an asset it has transferred.
Hedging Instruments
Hedge accounting is permitted in certain circumstances, provided that the hedging relationship is clearly defined and measurable, and actually effective.
IAS 39 sets type of hedges
Fair value hedge – If entity hedges have changes in the fair value of recognized assets or liability, the change in fair value of both the hedging instrument and item are recognized in profit or loss when they occur.
Cash flow hedge – If entity hedges have changes in the future cash flow relating recognized assets or liability or a probable forecast transaction. The change in fair value of the hedging instrument is recognized directly to equity until future cash flow occurs.
The Differences and Similarities between US GAAP Law and IFRS
Significant Differences & Similarities:
Financial Instruments Presentation and Disclosure
IFRS | US Law GAAP | |
Separate presentation on the face of the balance sheet is required for financial assets and liabilities. | Like IFRS SEC regulations require a Separate presentation on the face of the balance sheet is required for financial assets and liabilities. Unlike IFRS for companies that SEC regulation do not apply there is no requirement for separate presentation on the face of the balance sheet is required for financial assets and liabilities. | Presentation |
IFRS | US Law GAAP | |
There is no guide for presentation of gain or losses from financial instruments in the income statement. IFRS | For sec companies there is a guide and profit or loss from financial instrument presented separately in the income statement. US Law GAAP | Presentation of gains or loss from financial instrument in the income statement |
A financial asset and a financial liability are offset only when there is a legally enforceable right to offset and an intention to settle net or to settle both amounts simultaneously | Like IFRS a financial asset and a financial liability are offset only when there is a legally enforceable right to offset and an intention to settle net or to settle both amounts simultaneously | Offset of financial assets & Liabilities |
The term and condition of financial instrument are disclosed. | Like IFRS the term and condition of financial instrument are disclosed. | Disclosers |
Qualitative information in respect of risks arising from financial instruments and management's approach to managing these risks is disclosed. Quantitative disclosures are required for at least credit, liquidity, and market risks arising from financial instruments and how the entity manages those risks | Unlike IFRS specific qualitative disclosures in respect of risks arising from financial instruments, other than concentrations of credit risk are not disclosed. Only companies under SEC requires certain Quantitative disclosures that are required for market risks arising from financial instruments and their disclosures are provided outside of the financial statements. | Disclosed Risks Information |
The fair value of each class of financial asset and liability is disclosed, as well as information about the methods and significant assumption used in determining fair value. | Like IFRS the fair value of each class of financial asset and liability is disclosed, as well as information about the methods and significant assumption used in determining fair value | Fair Value Disclosure |
Financial Instruments
IFRS | US Law GAAP | |
A derivative is a financial instrument if: 1. The value of the derivative changes in response to an underlying variable 2. The derivative has net investment smaller than would be required by other instrument with a similar response to the variable. 3. The derivative will be settled at a future date. נגזר -Derivative | Like IFRS a derivative is a financial instrument if: 1. The value of the derivative changes in response to an underlying variable 2. The derivative has net investment smaller than would be required by other instrument with a similar response to the variable. 3. The derivative will be settled at a future date Unlike IFRS 1. the derivative require or permits net settlement 2. the derivative can be settled through market outside of the contract 3. the derivative can settled by asset that is convertible to cash. | נגזר Derivative |
Financial Asset is defined as: 1. cash 2. equity instrument of other entity 3. contract obligation to receive from another entity: 3a. cash or other financial asset or 3b. the ability to replace financial asset or financial liabilities with another entity. Equity Instruments are : 1. shares 2. minority interest 3. investor shares in associates 4. derivative that is settled in cash or other financial asset. Definition | equity instrument of other entity is: 1. investment in shares of another entity. 2. investment in option of another entity. contract obligation to receive from another entity cash or other financial asset 1. cash 2. customers 3. cash receivables 4. loans to another entity 5. financial lease 6. investment in bonds Examples | Financial Assets: |
Financial Liabilities is defined as: 1. A contract obligation to: a. give to another entity cash or financial asset. b. replace financial assets with another entity or financial liabilities in preferred terms to the entity. 2. contract that are terminate or may be terminate with equity instruments of the entity. For example : An entity buy from suppliers stock in the amount of $10,000 and as agreed in the contract the payment will be one year from now : 1. the entity will give the supplier 12,000 shares ($10 thousand with interest) 2. or cash $12,000. IFRS | contract obligation to receive from another entity the ability to replace financial asset or financial liabilities with another entity: 1. investment in option that give the entity the ability to receive shares of another entity or cash. 2. entity that perches put option or call option on its own shares 3. forward contract, where there is foreign currency on rent contract when the change in the currency create an asset. A contract obligation to give to another entity cash or financial asset. 1. cash 2. suppliers 3. cash payable 4. loans that the entity receive from others 5. finance leasing obligation 6. bonds that the entity issued to other entities' A contract obligation to replace financial assets with another entity or financial liabilities in preferred terms to the entity. 1. option issued by the entity to other. 2. forward contract, where there is foreign currency on rent contract when the change in the currency create an liability US Law GAAP | Financial Asset (cont) Financial Liabilities |
Financial instrument are classified in one of the following categories 1. at fair value through profit or loss 2. held-to-maturity investments 3. loans and receivable 4. available-for-sale financial assets 5. other liabilities. Financial instrument: is a contract that create a financial asset of one entity and financial liability or equity instrument of another entity. | Unlike IFRS the classification of financial instrument generally is not specified other than for debt and marketable equity securities, which are classified as: 1. trading 2. held-to-maturity 3. available-for-sale | Financial instrument Classification |
All financial instruments are measured initially at fair value Financial instruments at fair value through profit or loss are measured at fair value and all changes therein are recognized immediately in profit or loss. | Like IFRS most financial instruments are measured initially at fair value, Unlike IFRS other financial instrument are measured at cost. Like IFRS financial instruments at fair value through profit or loss are measured at fair value and all changes therein are recognized immediately in profit or loss. | Measurement |
Loans and receivables and held-to-maturity investment are measured at amortized cost. All other financial assets are measured at fair value, with limited exceptions. | Like IFRS loans and receivables and held-to-maturity investment are measured at amortized cost. However unlike IFRS loans held for sale are measured at the lower of cost or market. Unlike IFRS other financial assets and liabilities are measured at cost. Like IFRS trading and available-for-sale securities are measured at fair value. | |
All derivatives are recognized in the balance sheet and measured at fair value. | Like IFRS all derivatives are recognized in the balance sheet and measured at fair value. | Derivatives measurement |
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