Financial Instruments: General principles
1. Reference texts, Scope and Definitions
1.1. Reference Standards
- IAS 32 - Financial Instruments: Presentation
- IAS 39 - Financial Instruments: Recognition and Measurement, which will probably be superseded by IFRS 9 - Financial instruments, effective 1 January 2015
- IFRS 7 - Financial Instruments: Disclosures
- IFRIC 16 - Hedges of a Net Investment in a Foreign Operation
- IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments
1.2. Scope
This note must be applied by all entities for all types of financial instruments except:
- Investments in subsidiaries, associates and joint ventures recognised pursuant to IAS 27 "Separate Financial Statements", IAS 28 "Investments in Associates and Joint Ventures";
- The rights and obligations of employers stemming from employee benefit plans to which IAS 19 "Employee Benefits" applies.
1.3. General definitions
(IAS 32, par 11)
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
A puttable instrument is a financial instrument that gives the holder the right to return this instrument to the issuer in consideration for cash or another financial instrument, or that is automatically returned to the issuer in the event of an uncertain future event or the death or retirement of the holder of the instrument.
Financial assets definition + Content of financial assets
Financial liabilities definition + Content of financial liabilities
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
(IAS 39, par 9)
Definitions relating to recognition and measurement
The amortised cost of a financial asset or financial liability is:
- the amount at which the financial asset or financial liability is measured at initial recognition,
- minus principal repayments,
- plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount,
- and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses.
The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see IAS 18 Revenue), transaction costs, and all other premiums or discounts.
Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s statement of financial position.
A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (...). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
Such costs may include:
- Fees and commission paid to third parties: agents, advisers, brokers, traders and banks;
- Levies received by regulatory bodies and financial market authorities; miscellaneous levies and taxes.