IAS 39 Financial Instruments

Examples of financial assets include:

·cash

·accounts receivable

·notes receivable

·current and long-term loans receivable

·lease payments receivable

·investments in bonds

·secondary or derivative items such as investments in

¡convertible bonds

¡forward or option contracts

¡futures contracts

¡dual-currency bonds

 

Physical assets, intangibles, and other prepaid or deferred items are not financial assets. They do not give the owner the right to receive cash or another financial asset (an item may provide the opportunity for cash through sale and still not be classified as a financial asset).

 

Examples of non-financial assets

 

Examples of financial liabilities include:

·accounts payable

·notes payable

·current and long-term loans payable

·bonds payable

·secondary or derivative items such as

¡outstanding convertible bonds

¡put options

¡covered option securities

·term preferred shares

 

A financial liability exists when there is a contractual agreement to pay interest and/or a maturity amount on specified dates and when there is a contractual obligation to deliver cash or/another financial asset to another party (for example, long-term debt).

 

Examples of equity instruments include:

·common shares

·preferred shares (with some exceptions)

·share options (excluding stock option plans open to all employees such as non-compensatory stock option plans)

·share rights

·share warrants

·any other devices that represent a future obligation to issue common or preferred shares

 

All items need to be reported based on the "substance" of the instrument and not the legal form. The items also need to be measured at Fair Value except for the following:

·interests in subsidiaries,

·interests in entities subject to significant influence,

·interests in joint ventures,

·employer’s obligations for employee future benefits and related plan assets, and

·pension obligations of defined benefit pension plans

 

When recording short-term and long-term investments do you recognize gains on financial assets and liabilities only when the instruments are sold or at the time they occur in order to report the positive or negative effect on operations during the income statement for the reporting period? ****

 

It is at least important to note that financial assets need to be sold to arms-length parties in order to avoid inflated losses or gains on the Statement of Profit and Loss and Statement of Changes in Owner´s Equity.

 

Other types of *legal* off-balance sheet accounting are part of the “invisible banking system.”

 

Examples include:

·sales of assets with repurchase options or obligations

·joint ventures with venturer agreements that obligate the venturers to purchase or sell preset amounts of product

·long-term product purchase and sale agreements in the resource industry

·throughput and take-or-pay commitments entered into by pipelines or public utilities

·agreements for the sale and repurchase of securities in financial institutions

 

These instruments may expose the firm to substantial:

·credit risk — risk that the other party will not honour its commitment

·liquidity risk — risk that the firm itself might be unable to fulfil its commitment

·price risk — risk that interest or currency rates will move unfavourably

 

These financial instruments are intentionally not recorded on the balance sheet, and shareholders may be unaware of these potentially disastrous risks.

Reporting of Financial Instruments

 

• Financial liabilties and equity should be classified based on their substance, not their legal form of their contractual arrangement that exists.

 

• If a financial instrument has a component for both liability and equity component, it should be split and presented based on its separate components, consistent with the definitions of a financial liability and an equity instrument.

 

• Payments relating to, or gains and losses on disposal of, the liability component of a compound financial instrument should be reported in the inomce statement. Payments or distributions relating tot he equity component of a compound financial instrument should be reported either in the statement of retained earnings or directly in equity.

 

• Financial assets and liabilities should be offset and reported net only when there is a legally enforceable right to offset the amounts and the company intends to settle them either on a net basis or simultaneously.

 

• *Convertible debt such as bonds, preferred shares and term preferred shares are classified as equity regardless of how much they resemble debt. 

If however, an instrument requires the issuer to deliver cash or another financial asset under conditions that are potentially unfavorable, then it should be classifed as a liability.

 

The following are classified as debt:

 

• Preferred shares that provide mandatory redemption by the issuer (term preferred)

 

• Preferred shares with provisions that compel the issuer to redeem them at some future date, such as an accelerated dividend requirement

 

• Preferred shares that give the shareholder the right to require the issuer to redeem the shares for a fixed or determinable amount (retractable shares)

 

• Financial instruments classified as equity that give the holder an option to redeem if a highly likely future event has occurred