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IFRS Basic disclosure requirements for financial instruments

IFRS Basic disclosure requirements for financial instruments

IFRS Basic disclosure requirements for financial instruments: An entity must choose to account for financial instruments either by applying the requirements of both Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues in full or by applying the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement (of full IFRSs) and the disclosure requirements of Sections 11 and 12. This training material covers only the first option (ie it does not cover the option to apply IAS 39). Whichever of the options above an entity applies, it must also apply in Equity and Liabilities.

This module focuses on the accounting and reporting of basic financial instruments in accordance with Section 11 of the IFRS for SMEs. Module 12 applies to all other financial instrument issues and hence covers more complex financial instruments and related transactions including hedge accounting.

Module introduces the learner to the accounting and reporting of basic financial instruments, guides the learner through the official text of Section 11, develops the learner’s understanding of the requirements through the use of examples and indicates significant judgements that are required in accounting for basic financial instruments. Furthermore, the module includes questions designed to test the learner’s knowledge of the requirements and case studies to develop the learner’s ability to account for basic financial instruments in accordance with Section 11 of the IFRS for SMEs.

IFRS Basic disclosure requirements for financial instruments

Learning objectives

Upon successful completion of this module you should know the financial reporting requirements for basic financial instruments in accordance with the IFRS for SMEs. Furthermore, through the completion of case studies that simulate aspects of the real world application of that knowledge, you should have enhanced your ability to account for basic financial instruments in accordance with the IFRS for SMEs. In particular you should, in the context of Section 11 of the IFRS for SMEs, be able:

  • to define a financial instrument, a financial asset, a financial liability and an equity instrument.
  • to identify financial assets and financial liabilities.
  • to explain when to recognise a financial instrument and demonstrate! how to account for financial instruments on initial recognition.
  • to measure a financial instrument within the scope of Section 11 both on initial recognition and subsequently.
  • to determine amortised cost of a financial instrument using the effective interest method.
  • to identify when to recognise an impairment loss (or reversal of an impairment loss) for financial instruments held at cost or .amortised cost, and demonstrate how to measure that impairment loss (or the reversal of an impairment loss).
  • to identify appropriate methods of determining fair value for investments in ordinary or preference shares.
  • to explain when to derecognise financial assets and financial liabilities and demonstrate how to account for such derecognition.
  • to prepare appropriate information about financial instruments that would satisfy the disclosure.
  • to demonstrate an understanding of the significant judgements that are required in accounting for basic financial instruments.

IFRS Basic disclosure requirements for financial instruments

The disclosures below make reference to disclosures for financial liabilities measured at fair value through profit or loss. Entities that have only basic financial instruments (and therefore do not apply Section 12) will not have any financial liabilities measured at fair value through profit or loss and hence will not need to provide such disclosures.

IFRS Basic disclosure requirements for financial instruments: Disclosure of accounting policies for financial instruments

An entity shall disclose, in the summary of significant accounting policies, the measurement basis (or bases) used for financial instruments and the other accounting policies used for financial instruments that are relevant to an understanding of the financial statements.

Investments in non-puttable ordinary shares Investments in non-puttable ordinary shares in entities that are not associates, joint ventures or subsidiaries are initially measured at the transaction price, excluding any transaction costs. Thereafter such investments are measured at fair value with changes in fair value recognised in profit or loss. If fair value cannot be measured reliably, investments are measured at cost less impairment. Dividends are included in other income. Loan receivables Entity A occasionally provides its associates or employees with loans. Loan receivables are measured at amortised cost using the effective interest method less any impairment. Interest income is included in other income.

IFRS Basic disclosure requirements for financial instruments:Trade receivables

Most sales are made on normal short-term credit terms. Trade receivables in respect of such sales are measured at the undiscounted amount of cash expected to be received less any impairment. For sales made on terms that extend beyond normal credit terms, receivables are initially measured at the present value of future receipts discounted at a market rate of interest and are subsequently measured at amortised cost using the effective interest method.

IFRS Basic disclosure requirements for financial instruments: Impairment of financial assets

At the end of each reporting period, the carrying amounts of financial assets that are not measured at fair value are reviewed to determine whether there is any objective evidence of impairment. If so, an impairment loss is recognised immediately in profit or loss and the carrying amount of trade receivables is reduced accordingly. Trade payables Trade payables are obligations that have arisen by purchasing goods and services under normal short-term credit terms. Trade payables are measured at the undiscounted amount of cash to be paid. Entity A buys some goods from overseas suppliers.

Trade payables denominated in a foreign currency are translated into CU using the exchange rate at the reporting date. Foreign exchange gains or losses are included in other income or other expenses. Bank loans and overdrafts Loans are measured at amortised cost using the effective interest method. Interest expense is recognised on the basis of the effective interest method and is included in finance costs. Overdrafts are repayable in full on demand and are initially measured and subsequently stated at face value (the amount of the loan).

IFRS Basic disclosure requirements for financial instruments: Statement of financial position – categories of financial assets and financial liabilities 11.41 An entity shall disclose the carrying amounts of each of the following categories of financial assets and financial liabilities at the reporting date, in total, either in the statement of financial position or in the notes:

  1. financial assets measured at fair value through profit or loss.
  2. financial assets that are debt instruments measured at amortised cost.
  3. financial assets that are equity instruments measured at cost less impairment .
  4. financial liabilities measured at fair value through profit or loss.
  5. financial liabilities measured at amortised cost.
  6. loan commitments measured at cost less impairment.

IFRS Basic disclosure requirements for financial instruments

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