IAS 32 Financial Instruments - Definition
v 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
v The financial instruments includes
Ø Cash and cash equivalents
Ø Sundry Debtors & Creditors
Ø Secured and Unsecured Loans
Ø Derivatives
Ø Equity & Preference Shares (for both Investor and Investee)
Ø Loans and other receivables
But does not include
Ø Inventories
Ø Fixed Assets and Intangible assets
Ø Leased assets
IAS 32 Financial Instruments - Recognition & Measurement
v Initial Recognition
Ø Financial assets and liabilities are initially measured at Fair Value
v Classification of Financial Assets
Ø Held for trading – Carry at Fair value – Changes to impact P&L
Ø Held to maturity investments - Carry at Amortized cost
n Amortized cost reflects accounting based on effective yield at inception
n Restriction on sale before maturity
Ø Available for sale - Carry at fair value – Changes to impact Equity until disposal
v Hedge Accounting
Ø Separate rules for Financial assets and liabilities which are part of a hedging relationship
Hedge Accounting – What it means?
v Hedge Accounting changes the timing of recognition of gains and losses on either the hedged item or the hedging instrument so that both are recognized in profit or loss in the same accounting period
v To qualify for hedge accounting, an entity
(a) To formally designates and documents a hedge relationship between a qualifying hedging instrument and qualifying hedged items at the inception of the hedge.
(b) Both at inception and on an ongoing basis, demonstrates that the hedge is highly effective.
v Hedge Accounting aims at offsetting effects on profit or loss
Ø Changes in the fair values of the hedging instrument and the hedged item
v Hedging Instrument
Ø A designated derivative whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item
v Hedged item
Ø An asset
Ø A liability
Ø firm commitment
Ø highly probable forecast transaction or
Ø net investment in a foreign operation that
(a) exposes the entity to risk of change in fair value OR future cash flows and
(b) is designated as hedged
v Three types of hedge relationship
Ø Fair value hedge
Ø Cash flow hedge
Ø Net Investment hedge
v Fair value hedge :
The hedged item is adjusted for the gains or loss attributable to the hedged risk. That element is included in the income statement where it will offset the gain or loss on the hedging instrument.
v Cash flow hedge :
Gains and losses on the hedging instrument, to the extent it is an effective hedge, are initially included in equity (OCI). They are reclassified to the profit or loss when the hedged item affects the income statement.
v Net Investment hedge :
a hedge of the foreign currency risk on a net investment in a foreign operation to be accounted for similarly to cash flow hedges.
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