Ifrs 9

Certified Finance and Accounting Professional 1
Advanced Accounting and Financial Reporting
A
C
-A
Contents
i
A. IFRS 9: Financial Instruments
an
B. IAS 19: Employee Benefits With IFRIC - 14
an
Kh
C. IFRS 2: Share Based Payments
D. IFRS 5: Non-Current Assets Held For Sale & Discontinued

Operations an
sa
E. IFRS 15: Revenue From Contracts With Customers
as
H
F. IFRS 16: Leases

ith
G. IFRIC 1: Changes In Existing Decommissioning, Restoration

tw
& Similar Liabilities

ar
H. IAS 12: Income Taxes (including SIC 25)

Sm
I. IAS 33: Earnings Per Share

y
J. IAS 40: Investment Property

ud
St
Hassaan Khanani From KnS Karachi

Teacher whose Students have Secured Back to Back Gold Medals
in FAR 2 in Aut 20 & Spr 21 Attempt
(MA)
A
C
i -A
an
an
Kh
FINANCIAL an
INSTRUMENTS
sa
as
H
ADVANCED ACCOUNTING & FINANCIAL REPORTING

ith
COMPILED BY: HASSAAN KHANANI, ACA

tw
ar
Sm
y
ud
St

(MA)
TOPIC OVERVIEW
(A) IAS 32 – Financial Instruments: Presentation
A
Definitions
C
- Financial instrument
-A
- Financial asset
- Financial liability
- Equity instrument
- Derivative
i
an
Debt v/s equity
Compound financial instrument
an
Treasury shares
Offsetting
Kh
(B) IFRS 9 – Financial Instruments: Recognition and measurement
Classification
- Financial asset
- Financial liability
Measurement
an
sa
Reclassification
Modification / Restructuring
as
Regular way transaction

Impairment
H
Derivatives
Embedded derivatives
ith
Hedge accounting
Derecognition
tw
(C) IFRS 7 – Financial Instruments: Disclosures

Disclosure requirement
ar
(D) IFRS 13 – Fair value measurement

Sm
Framework for fair value Measurement

Applies across IFRS
(E) Connected IASs and IFRICs
y
ud
IAS 21: The Effects of Changes in Foreign Exchange Rates

IFRIC 16: Hedges of a Net Investment in a Foreign Operation
St
IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments

KnS Institute of Business Studies 2
(MA)
1. FINANCIAL INSTRUMENT
Financial instrument is a contract that give rise to both:
A financial asset of one entity
Either a financial liability or an equity instrument of another entity
2. FINANCIAL ASSET
A financial asset is defined as any asset that is:
a) Cash
b) An equity instrument of another entity
c) A contractual right:
i. To receive cash / another financial asset from another entity; or
ii. To exchange financial assets / financial liabilities under conditions that are
potentially favorable to the entity
d) A contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to receive a variable
number of the entity’s own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s
own equity instruments.
2.1 CLASSIFICATION OF FINANCIAL ASSET

(MA)
2.2 DEBT INVESTMENT
2.2.1 DEBT INVESTMENT AT AMORTIZED COST
A
A debt instrument that meets the following two conditions must be measured at
C
amortized cost unless the asset is designated at FVTPL under the fair value option (see
-A
below):
‘Hold-to-collect’ business model test: The asset is held within a business model
whose objective is to hold the financial asset in order to collect contractual cash
i
flows; and
an
‘SPPI’ contractual cash flow characteristics test: The contractual terms of the
financial asset give rise to cash flows that are solely payments of principal and
an
interest (SPPI) on the principal amount outstanding on a specified date.
Examples of debt instrument that are likely to be classified and accounted for at
Kh
amortized cost under IFRS 9 include:
- Trade receivables;
- Loan receivables with ‘basic’ features;
an
- Investments in government bonds that are not held for trading;
- Investments in term deposits at standard interest rates.
sa
The accounting requirements for debt instruments classified at amortized cost are:
Debt investment at amortized cost is initially measured at fair value plus transaction
as
costs.
Debt investment at amortized cost is subsequently measured at amortized cost.
H
Interest income is recognized in P/L using the effective interest rate.

Foreign exchange gains and losses on the amortized cost are recognized in P/L.
ith
Credit impairment losses/reversals are recognized in P/L using credit impairment

methodology.
tw
2.2.2 DEBT INVESTMENT AT FVTOCI

A debt instrument that meets the following two conditions must be measured at fair
ar
value through other comprehensive income (FVTOCI) unless the asset is designated at
FVTPL under the fair value option (see below):
Sm
‘Hold to collect and sell’ business model test: The asset is held within a business
model whose objective is achieved by both holding the financial asset in order to
collect contractual cash flows and selling the financial asset; and
y
‘SPPI’ contractual cash flow characteristics test: The contractual terms of the
ud
financial asset give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
St

(MA)
Examples of debt instruments that may be classified and accounted for at FVTOCI under
IFRS 9 include:
- Investments in government bonds where the investment period is likely to be
A
shorter than maturity;
C
- Investments in corporate bonds where the investment period is likely to be shorter
than maturity
-A
The accounting requirements for debt instruments classified at FVTOCI are:
Debt investment at FVTOCI is initially measured at fair value plus transaction costs.
i
Debt investment at FVTOCI is subsequently measured at fair value.
an
Interest income is recognized in P/L using the effective interest rate.
Foreign exchange gains and losses are recognized in P/L.
an
Credit impairment losses/reversals are recognized in P/L using credit impairment
methodology.
Kh
Change in the carrying amount on remeasurement to fair value is recognised in OCI;
The cumulative fair value gain or loss recognised in OCI is recycled from OCI to P/L
when the related financial asset is derecognised.
2.2.3 DEBT INVESTMENT AT FVTPL an

sa
Fair value through profit or loss (FVTPL) is the residual category in IFRS 9. All other debt
instrument assets are measured at FVTPL.
as
The accounting requirements for debt instruments classified at FVTPL are:

Debt investment at FVTPL is initially measured at fair value.
H
Transaction costs are immediately recognised in P/L.

Debt investment at FVTPL is subsequently measured at fair value.
ith
Interest income is recognized in profit or loss using the effective interest rate.
Foreign exchange gains and losses are recognized in profit or loss.
tw
Change in the carrying amount on remeasurement to fair value is recognised in P/L.

ar
Key terms
Sm
Transaction costs are incremental costs that are directly attributable to the acquisition,
issue or disposal of a financial instrument. Examples of transaction costs are: fees and
commissions paid to agents, advisers, brokers and dealers; levies by regulatory agencies
and securities exchanges; transfer taxes and duties; credit assessment fees; registration
y
charges and similar costs.

ud
The effective interest rate is the internal rate of return (IRR) or that exactly discounts
the future cash flows to the amount initially recognised for the financial asset or financial
St
liability. Thus, it results in a net present value of zero. It is the IRR of all cash flows
associated with lending or borrowing.

(MA)
Question 1. [Investment in debt securities] [ACCA Technical Article]
An entity, Suarez Co., purchased a three year bond on 1st January 2010 at a cost of Rs. 5 million with
annual interest of 5% which is also the effective interest rate, payable on 31 December annually. As a
A
result in changes in general interest rates, the fair value of the bond was Rs. 5.2 million at 31 December
2010, Rs. 5.05 million at 31 December 2011.
C
Required:
-A
Account for the financial asset on the basis that:
(a) It is classified to be measured at amortized cost, on the assumption that it passes the necessary
test and has been properly designated at initial recognition; ands
i
(b) It is classified at FVTOCI
an
(c) It is classified at FVTPL.
an
Question 2. [Investment in debt securities] [ICAEW Corporate reporting – Study Manual]
Kh
st
On 1 January 2004, an entity subscribed for a Rs. 20,000 5% bond, interest being payable annually in
arrears. The issue costs associated with the bond are Rs. 500. The bond was issued at a discount of 5%
and was redeemed at a premium of 5% on 31 December 2006. The effective interest rate of the financial
instrument was calculated as 7.51%. As a result in changes in general interest rates, the fair value of the
an
bond was Rs. 19,400 at 31 December 2004 and Rs. 20,400 at 31 December 2005.
Required:
sa
Calculate the amount to be recognized in the financial statements of the entity of the three years if:
(a) It is classified to be measured at amortized cost, on the assumption that it passes the necessary
as
test and has been properly designated at initial recognition; and

(b) It is classified at FVTOCI.
H
(c) It is classified at FVTPL. (IRR was calculated as 8.49%)

ith
Question 3. [Investment in debt securities – Zero coupon bond]

Hoqani Limited purchased a Pakistan Treasury Bill (i.e. zero coupon bonds) having face value of Rs. 3
tw
million at a discounted price of Rs. 2.1 million on the first day of the current accounting period. The issue
costs associated with the T-Bill are Rs. 5,000. The T-Bill will be redeemed after 3 years at par. The
effective rate of interest is 12.536%.
ar
Required:
Sm
Journalize the above transaction if the T-bill are classified as:

(a) Amortized cost;
(b) FVTOCI; and
(c) FVTPL. (IRR is 12.625%)
y
ud
St

(MA)
2.3 EQUITY INVESTMENT
2.3.1 EQUITY INVESTMENT AT FVTOCI
A
Equity instrument can be measured at FVTOCI, provided that the following conditions
C
are complied with:
-A
the equity instrument must not be held for trading, and
there must have been an irrevocable choice for this designation upon initial
recognition of the asset.
i
an
The accounting requirements for equity instruments classified at FVTOCI are:
Equity investment at FVTOCI is initially measured at fair value plus transaction costs.
an
Equity investment at FVTOCI is subsequently measured at fair value.
Dividend is recognized in P/L.
Kh
Foreign exchange gains and losses are recognized in OCI.
Subsequent changes in the fair value of the equity instrument are recognised in OCI.
On disposal of the investment, the cumulative change in fair value is required to
an
remain in OCI and is not recycled to P/L. However entities have the ability to transfer
amounts between reserves within equity (i.e. between the FVOCI reserve and
retained earnings).
sa
2.3.2 EQUITY INVESTMENT AT FVTPL
as
Fair value through profit or loss (FVTPL) is the residual category in IFRS 9. Equity instrent
is classified and measured at FVTPL if it is:
H
A held-for-trading equity investment;

An equity investment which the entity has not elected to classify as at FVOCI.
ith
Examples is the investments in shares of listed companies that the entity has not
tw
elected to account for as at FVOCI.

The accounting requirements for equity instruments classified at FVTPL are:
ar
Equity investment at FVTPL is initially measured at fair value.

Sm
Equity investment at FVTPL is subsequently measured at fair value.

Dividend is recognized in P/L.
Foreign exchange gains and losses are recognized in P/L.
y
Subsequent changes in the fair value of the equity instrument are recognised in P/L.
ud
St

(MA)
Question 4. [Investment in equity securities] [ICAEW Corporate reporting – Study Manual]
An entity purchases 10,000 ordinary shares of another company which is quoted at 198 – 200 Rs. and
pays commission totaling Rs. 3 per share. At the entity’s first subsequent year end, the market quotes
A
such shares at 218 – 220 Rs. and it would cost Rs. 6 per share to dispose of it.
C
Required: Journalize the above if it is classified as:
(a) FVTPL; and
-A
(b) FVTOCI.
Question 5. [Investment in equity securities] [ICAEW Corporate reporting – Study Manual]
i
Green tree Co. purchased 25,000 shares in EG Co in 2001 for Rs. 20 each. Transaction costs on purchase
an
or sale are 1% of the purchase/sale price. The share price on 31 December 2001 was quoted at 22.5 –
22.8 Rs. The Green tree Co. sold the shares on 20 December 2002 for Rs. 26.2 each.
an
Required: Journalize the above if it is classified as:
(a) FVTPL; and
(b) FVTOCI.
Kh
Question 6. [Investment in equity securities] [AAFR Past Paper – Summer 2018, Q3(ii), 7 marks]
Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for the year
(ii) Equity investments:

an
ended 31 December 2017. Following transactions were carried out during the year.
sa
On 1 May 2017 KL acquired following equity investments:
Purchase price Transaction cost Total
as
-------------------- Rs. in million ----------------

Investment A 100 2 102
H
Investment B 150 3 153

Investment A was designated as measured at fair value through profit or loss whereas
ith
investment B was irrevocably elected at initial recognition as measured at fair value through
other comprehensive income.
tw
In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
ar
20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million
respectively in November 2017. Transaction cost was paid at 2%.
Sm
As on 31 December 2017, fair values of the remaining investments are given below:
Fair value Transaction cost on disposal Net Amount
-------------------- Rs. in million ----------------
Investment A 105 2.1 102.9
y
Investment B 130 2.6 127.4

ud
Required: Prepare the extracts relevant to the above transactions from KL’s statements of financial
position and comprehensive income for the year ended 31 December 2017, in accordance with the
St
IFRSs. (Comparative figures and notes to the financial statements are not required)

(MA)
3. FINANCIAL LIABILITY
A financial liability is defined as any liability that is:
a) A contractual obligation:
i. To deliver cash / another financial asset to another entity; or
ii. To exchange financial assets / financial liabilities under conditions that are
potentially unfavorable to the entity
b) A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to deliver a variable
number of the entity’s own equity instruments; or
ii. A derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s
own equity instruments.
3.1 CLASSIFICATION OF FINANCIAL LIABILITY
3.1.2 FINANCIAL LIABILITY AT AMORTIZED COST

At initial recognition, financial liability is classified and measured at amortised cost
unless either:
The financial liability is held for trading and is therefore required to be measured at
FVTPL (e.g. derivatives not designated in a hedging relationship); or
The entity elects to measure the financial liability at FVTPL (using the fair value
option).
Reclassification of a financial liability after initial recognition is not allowed.
(MA)
Examples of financial liabilities that are likely to be classified and measured at amortised cost
include:
- Trade payables;
A
- Loan payables with standard interest rates (such as a benchmark rate plus a margin) or the
C
host contract arising from a loan agreement which contains separable embedded
derivatives;
-A
- Bank borrowings.
The accounting requirements for financial liability classified at amortized cost are:
Financial liability at amortized cost is initially measured at fair value less transaction
i
an
costs.
Financial liability at amortized cost is subsequently measured at amortized cost.
an
Interest exchange is recognized in P/L using the effective interest rate.
Foreign exchange gains and losses on the amortized cost are recognized in P/L.
Kh
3.1.3 FINANCIAL LIABILITY AT FVTPL
At initial recognition, financial liability may be classified and measured at fair value
through profit (FVPL) only if:
an
it eliminates or significantly reduces a measurement or recognition inconsistency; or
sa
this would allow the company to reflect a documented risk management strategy.
Any such designation is irrevocable.
as
Examples of financial liabilities that are likely to be classified and measured at FVTPL include:
- Interest rate swaps (not designated in a hedging relationship);
H
- Commodity futures/option contracts (not designated in a hedging relationship);

- Foreign exchange future/option contracts (not designated in a hedging relationship);
ith
- Convertible note liabilities designated at FVTP;

- Contingent consideration payable that arises from one or more business combinations.
tw
The accounting requirements for financial liability classified at FVTPL are:

Financial liability at FVTPL is initially measured at fair value.
ar
Financial liability at FVTPL is subsequently measured at fair value.

Sm
Interest exchange is recognized in P/L using the effective interest rate.

Foreign exchange gains and losses are recognized in profit or loss.
Change in the carrying amount on remeasurement to fair value is recognised in P/L.
However, change in fair value that relate to the change in the entity’s own credit
y
status is recognized in OCI instead of P/L.

ud
On derecognition of the financial liability, the cumulative change in fair value arising
from change in entity’s own credit status is required to remain in OCI and is not
St
recycled to P/L. However, IFRS 9 permits entities to transfer the amount between
reserves within equity (i.e. between the FVOCI reserve and retained earnings).
(MA)
Question 7. [Financial liability at amortized cost] [ACCA Technical Article]
Broad Limited raises finance by issuing Rs. 20,000 6% four year loan notes on the first day of the current
accounting period. The loan notes are issued at a discount of 10%, and will be redeemed after four years
A
at a premium of Rs. 1,015. The effective interest rate is 12%. The issue costs were Rs. 1,000.
C
Required: How the loan is accounted for in the financial statement of Broad Limited.
-A
Question 8. [Financial liability at amortized cost – Zero coupon bond] [ACCA Technical Article]
Laxman Limited raises finance by issuing zero coupon bonds at par on the first day of the current
accounting period with a nominal value of Rs. 10,000. The bond will be redeemed after two years at a
premium of Rs. 1,449. The effective rate of interest is 7%.
i
an
Required:
How the loan is accounted for in the financial statement of Laxman Limited.
an
Question 9. [Financial liability at FVTPL] [ACCA Technical Article]
On 1st January 2011, Swann Limited issued three year 5% Rs. 30,000 loan notes at nominal value when
Kh
the effective rate of interest is also 5%. The loan notes will be redeemed at par. The liability is classified
at FVTPL. At the end of first and second accounting period market interest rates have risen to 6% and
7%.
Required:
an
How the loan is accounted for in the financial statement of Swann Limited.
sa
Question 10. [Financial liability at amortized cost] [ICAEW Corporate reporting – Study Manual]
On 1st January 2007, the Macmanus Company issued a three year Rs. 10 million bond at par. It has not
as
been classified as a financial liability at fair value through profit and loss.
The bond is redeemable on 1st January 2010 at a premium of 10%. Nominal interest rate is 6% payable
H
on 31 December each year. The issue costs associated with the bond are Rs. 300,000. The effective rate
of interest is 10.226%.
ith
Required:
Journalize the above transaction.
tw
Question 11. [Change in FV of Financial liability due to change in credit risk of borrower]
[P2 Past Paper, Dec 2014, 4 marks]
ar
Coatmin, a mini bank, provides loans to customers and funds the loans by selling bonds in the market.
The liability is designated as at fair value through profit or loss. The bonds had an overall fair value
Sm
increase of $50 million in the year to 30 November 2014 although the decline in Coatmin’s
creditworthiness has been calculated to have contributed to a fair value decline of $5 million. The
directors of Coatmin would like advice on how to account for this movement.
y
Required:
ud
Discuss, with suitable calculations where necessary, the accounting treatment of the above transactions
in the financial statements of Coatmin.
St

(MA)
On 1st January 2008, P issues a 5 year bond at par value of Rs. 300,000 and annual fixed coupon rate of
9% when KIBOR is 6%. Therefore spread on account of credit risk of P is 3% (9% - 6%). The liability is
A
designated as at fair value through profit and loss.
C
At 31st December 2008 KIBOR has moved to 5%, and the credit rating of the company has also improved
due to which spread has also decreased to 2.5%.
-A
Required:
Journalize the above transaction in the books of P for the year ended December 31, 2008.
i
an
On 1st January 2010, PSL issues a 3 year note at par value of Rs. 5,000,000 and annual fixed coupon rate
an
of 12% when KIBOR is 10%. Therefore spread on account of credit risk of PSL is 2% (12% - 10%). The
liability is designated as at fair value through profit and loss.
At 31st December 2010 KIBOR has moved to 8%, whereas the credit rating of the company has also
Kh
deteriorated due to which spread has also decreased to 3%.
Required:
an
Journalize the above transaction in the books of PSL for the year ended December 31, 2010.
sa
as
H
ith
tw
ar
Sm
y
ud
St

(MA)
4. EQUITY
An equity instrument is defined as any contract that evidences a residual interest in the
A
assets of an entity after deducting all of its liabilities.
The accounting requirements for equity transaction are:
C
Equity instruments are initially measured at fair value less any transaction costs. In
-A
many legal jurisdictions when equity shares are issued they are recorded at a
nominal value, with the excess consideration received recorded in a share premium
account and the issue costs being written off against the share premium.
i
Transaction costs of an equity transaction shall be accounted for as a deduction
an
from equity.
Distributions to holders of an equity instrument (i.e. Dividend) shall be recognised by
an
the entity directly in equity.
Changes in the fair value of an equity instrument are not recognised in the financial
Kh
statements.
Redemptions or re-financings of equity instruments are recognised as changes in
equity.
4.1 TREASURY SHARES an

sa
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’)
shall be deducted from equity.
as
No gain or loss shall be recognised in P/L on the purchase, sale, issue or cancellation of
an entity’s own equity instruments. Consideration paid or received shall be recognised
H
directly in equity.
Such treasury shares may be acquired and held by the entity or by other members of
ith
the consolidated group.
Question 14. [ACCA Technical Article]

tw
Dravid Limited issues 10,000 Rs. 10 ordinary shares for cash consideration of Rs. 25 each. Issue costs are
Rs. 10,000.
ar
Required: How the issue of shares is accounted for in the financial statements of Dravid Limited.
Sm
y
ud
St

(MA)
5. REGULAR WAY TRANSACTION
Definition: 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
A
marketplace concerned.
C
For example, trades on the Pakistan Stock Exchange are typically settled 2 days after the date of
-A
the trade.
Accounting policy: An entity can choose to account for a regular way purchase / sale of
financial assets using either trade date accounting or settlement date accounting.
i
an
The same method must be applied consistently for all purchases and sales of financial assets
that are classified in the same way.
an
The two methods differ in terms of the timing of recognition and derecognition of assets.
TRADE DATE ACCOUNTING SETTLEMENT DATE ACCOUNTING
Kh
The trade date is the date that an entity The settlement date is the date that an asset
commits itself to purchase or sell an asset. is delivered to or by an entity
an
PURCHASE OF FINANCIAL ASSET
sa
Asset to be received and the liability to pay Asset recognised on the date it is received by
for it are recognised on the trade date an entity.
as
SALE OF FINANCIAL ASSET

H
Derecognition of an asset with recognition of Derecognition of an asset and recognition of

receivable and gain or loss arising occurs on any gain or loss on disposal on the day that it
the trade date is delivered by the entity.
ith
Settlement date accounting issues: An entity must account for any change in the fair value of
tw
the asset between the trade date and the settlement date in the same way as it accounts for the
acquired asset. In other words any change in value:
is not recognised for assets measured at amortized cost; but
ar
is recognised in P/L or OCI as appropriate for financial assets measured at fair value.
Sm
y
ud
St

(MA)
Question 15. [Regular way purchase of financial assets] [ICAEW Corporate reporting – Study Manual]
An entity entered into a contractual commitment on 27th December 2004 to purchase a financial asset
for Rs. 1,000. On 31st December 2004, the entity’s reporting date, the fair value of FA was Rs. 1,005. The
A
transaction was settled on 5th January 2005 when the fair value was Rs. 1,007. The entity has classified
the FA as at
C
(i) FVTPL; and
-A
(ii) Amortized cost.
Required:
How the transaction should be accounted for under trade date accounting and settlement date
i
accounting?
an
Question 16. [Regular way sale of financial assets] [ICAEW Corporate reporting – Study Manual]
An entity acquired an asset on 1 January 2004 for Rs. 1,000. On 27th December 2004, the entity entered
st
an
into a contract to sell the financial asset for Rs. 1,100. On 31st December 2004, the entity’s reporting
date, fair value of the asset was Rs. 1,104. The transaction was settled on 5th January 2005. The entity
Kh
classified the asset as at
(i) FVTPL; and
(ii) Amortized cost.
Required:
an
How the transaction should be accounted for under trade date accounting and settlement date
accounting?
sa
as
H
ith
tw
ar
Sm
y
ud
St

(MA)
6. IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Functional currency is the currency of the primary economic environment in which the
A
company operates. It is the own entity’s currency and all other currencies are “foreign
currencies”.
C
Presentation currency is the currency in which the financial statements are presented.
-A
When an entity enters into a transaction denominated in a currency other than its own
functional currency, then it must translate foreign currency items into its own functional
currency according to IAS 21.
i
an
When transactions create assets and liabilities that remain outstanding at the reporting
date, then these items need to be translated into the entity’s functional currency
following the provisions of IAS 21.
an
Foreign currency transactions are transactions which are denominated in foreign
currencies, rather than in the entity's functional currency. Such transactions arise when
Kh
tile entity:
Buys or sells goods or services whose price is denominated in a foreign currency
Borrows or lends funds where the amounts payable or receivable are denominated
in a foreign currency
an
Otherwise acquires or disposes of assets or incurs or settles liabilities~ llitl1lllltes
sa
denominated in a foreign currency
Initial recognition
as
On initial recognition, a transaction in a foreign currency must be translated at the spot

rate on the date of the transaction.
H
Where an entity has a high volume of transaction in foreign currencies, it might be

administratively difficult to record every transaction at the actual spot rate. For practical
ith
reasons, IAS 21 therefore allows entities to use an average rate for a time period.
For example, a duty free shop at PIA airport may receive a large amount of dollars every
tw
day and may opt to translate each currency into PKR using an average weekly rate.
Subsequent measurement
ar
A foreign currency transaction may give rise to assets or liabilities that are denominated
in a foreign currency. These assets and liabilities will need to be translated into the
Sm
entity's functional currency at each reporting date. How they will be translated depends
on whether the assets or liabilities are monetary or non-monetary items.
y
ud
St

(MA)
MONETARY OR NON-MONETARY ?
A
C
Is there a right/obligation to deliver fixed / determinable amount of currency units?
-A
Yes No
Monetary items Non-monetary items
i
an
Examples Examples
- Trade receivables - Property, plant and equipments
an
- Trade payables - Intangibles (including goodwill)
- Investment in debt securities - Inventories
Kh
- Deposit and bank accounts - Equity investment (e.g. shares)
- Cash - Biological assets
- Lease liability - Share capital
- Tax payable
an - Reserve/other component of equity
sa
Non-monetary items carried at
historical cost are translated using the
as
exchange rate on the date of

transaction (hislorical rate).
H
They are not subsequently retranslated

in the individual financial statements
ol the entity unless there has been a
ith
change in their undelying value e.g.

Foreign currency monetary items impairment etc.
tw
outstanding at the reporting date shall Non-monetary items carried at fair

be translated using the closing rate. value are translated using the
Exchange gain/loss on such translation exchange rate at the date when the
ar
shall be reported in P/L for the period. fair value was determined.
Exchange gains or losses on non-
Sm
monetary items are recognized

consistently with the recognition of
gains or losses on an item itself. For
example, when an item is revalued
y
with FV changes recognized in OCI,

ud
then exchange gain or loss is also

recognized in OCI, too.
St

(MA)
Question 17. [Exchange difference on monetary items] [ICAEW Corporate reporting – Study Manual]
White Cliffs Co, whose year end is 31 December, buys some goods from Rinka SA of France on 30
September. The invoice value is €40,000 and is due for settlement in equal installments on 30 November
A
and 31 January. The exchange rate moved as follows:
C
Exchange rate (€/£)
30 September 1.60
-A
30 November 1.80
31 December 1.90
i
31 January 1.85
an
Requirement: State the accounting entries in the books of White Cliffs Co.
an
Question 18. [Translation of inventory acquired in foreign currency]
Entity J's functional currency is the pound sterling. Entity J acquired inventories for $300,000 on 1 July
Kh
20X5 when the exchange rate was $1.50: £1.
At 31 December 20X5, the net realizable value of inventory has risen to $340,000. The exchange rate at
31 December 20X5 is $1.80: £1.
an
Requirement: How should management translate the inventory acquired?
sa
Question 19. [Translation of land: revaluations] [ICAEW Corporate reporting – Study Manual]
Entity A, having British pounds as its functional currency, acquired a piece of land was acquired on 1
as
June 20X4 in Mauritania (local currency Mauritania Lira).

Entity A's management follows the revaluation model in IAS 16 and measures its land and buildings at
revalued amounts (based on periodic valuations as necessary but not less frequent than every three
H
years).
ith
It has been revalued on 31 December 20X4 and 31 December 20X5 respectively as follows.
Mauritania Lira Date Exchange rate
tw
Cost at acquisition 200,000 1 June 20X4 Lira 1 = £1.30

Fair value 250,000 31 December 20X4 Lira 1 = £1.00
Fair value 260,000 31 December 20X5 Lira 1 = £1.20
ar
Required: Journalize the above.

Sm
Question 20. [Translation of impaired non-monetary item]

An entity whose functional currency is the pound sterling acquired on 30 September 20X4 a non-
depreciable foreign currency asset costing $450,000. The exchange rate on 30 September 20X4 was
y
$1.50/£1 and the asset was recorded at the date of purchase at £300,000.
ud
There are indications that the non-current asset has been impaired during the year.
At 31 December 20X4, the reporting date, the asset's recoverable amount in foreign currency is
St
estimated to be $400,000 when £1 = $1.25.

Requirement: How should the transaction be recorded?

(MA)
Question 21. [Translation at average exchange] [ICAEW Corporate reporting – Study Manual]
Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June. The company
recognised an interest accrual of $10,000 at its year-end (31 December). There were no other
A
movements on this account.
C
Exchange rates over the period were as follows:
 30 June: Rs. 100/$.
-A
 Average for the period Rs. 99/$.
 31 December (year-end): Rs. 95/$.
Requirement:
i
How should the transaction be recorded?
an
Question 22. [Translation of non-monetary asset] [ICAEW Corporate reporting – Study Manual]
an
On 1 January 20X5, an entity whose functional currency is the pound sterling purchased a US dollar
denominated equity instrument at its fair value of $500,000. The entity classifies the instrument as
Kh
FVOCI. The exchange rate at acquisition date was $1.90/£. The exchange rates and the fair value of the
instrument denominated in US dollars at different reporting dates are given below.
Exchange rate ($/£) Equity instrument value ($)
31 December 20X5
31 December 20X6
1.80
1.60 an 480,000
450,000
sa
Requirement:
What is the fair value of as at 1 January 20X5, 31 December 20X5 and 31 December 20X6?
as
Question 23. [Translation of financial instruments] [ICAEW Corporate reporting – Study Manual]
Entity A, whose functional currency is the pound sterling, acquired on 30 September 20X4 a dollar-
H
denominated financial instruments. (Entity A's accounting year end is 31 December).

(a) Listed equity instruments for $10 million, classified as FVOCI.
ith
At 31 December 20X4, the fair value of the listed investment has increased to $14.4 million. Exchange
rates are as follow:
tw
 30 September 20X4 $1: £1

 31 December 20X4 $1.20: £1
ar
Required:
Journalize the above.
Sm
y
ud
St

(MA)
Question 24. [Trade date and settlement date accounting - FCY investment]
[AAFR Past Paper – Winter 2011, Q2, 16 marks]
Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September 2011,
A
GIL entered into the following contracts with a UAE based company:
C
(i) On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011 for
AED 20,000. The fair value of these assets on balance sheet date and settlement date was
-A
AED 21,000 and AED 21,500 respectively.
(ii) On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011 having a
carrying value of AED 34,000 (Rs. 809,200) for AED 35,000. The fair value of these assets on
i
an
the balance sheet date and settlement date was AED 35,200 and AED 34,800 respectively.
The above types of financial assets are classified by GIL as held for trading. Exchange rates on the
relevant dates were as under:
an
Date 1 AED = Rs.
Kh
28 September 2011 24.00
29 September 2011 23.00
30 September 2011 23.50
03 October 2011
04 October 2011
an 25.00
26.00
sa
Required:
Prepare accounting entries to record the above transactions on the relevant dates in accordance with
as
International Financial Reporting Standards, using:

(a) Trade date accounting
H
(b) Settlement date accounting

ith
tw
ar
Sm
y
ud
St

(MA)
6.1 IFRIC 22: FOREIGN CURRENCY TRANSACTIONS AND ADVANCE
CONSIDERATION
A
When an entity pays or receives consideration in advance in a foreign currency, it
generally recognises a non-monetary asset or liability (before the recognition of the
C
related asset, expense or income.
-A
The related asset, expense or income (or part of it) is the amount recognised applying
relevant Standards, which results in the derecognition of the non-monetary asset or
non-monetary liability arising from the advance consideration.
i
an
In this respect, the exchange rate on the date on which an entity initially recognizes the
non-monetary asset or liability arising from the payment or receipt of advance
consideration, would be used for initial recognition of the related asset, expense or
an
income (or part of it).
If there are multiple payments or receipts in advance, the entity shall use the exchange
Kh
rate on the date of each payment or receipt of advance consideration.
Question 25. [Effects of Changes in FCY Rates] [AAFR Past Paper – Summer 2018, Q3(i), 6 marks]
an
Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for the year
ended 31 December 2017. Following transactions were carried out during the year.
sa
(i) Foreign currency transactions:
KL purchased an investment property in United States for USD 2.6 million. 10% advance
as
payment was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer of
title and possession of the property. The remaining amount was paid on 1 August 2017.
H
On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one
year and received full amount in advance on the same date.
ith
KL uses fair value model for its investment property. On 31 December 2017, an independent
valuer determined that fair value of the property was USD 2.5 million.
tw
Following spot exchange rates are available:
Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017

ar
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116
Sm
Following average exchange rates are also available:
Period 2017 Jul to Dec 2017 Sep to Dec 2017

USD 1 Rs. 105 Rs. 111 Rs. 113
y
ud
Required: Prepare the extracts relevant to the above transactions from KL’s statements of financial
position and comprehensive income for the year ended 31 December 2017, in accordance with the
St
IFRSs. (Comparative figures and notes to the financial statements are not required)

(MA)
7 FINANCIAL LIABILITY OR EQUITY?
The classification of financial instruments as debt versus equity is particularly important
A
with items that are financial liabilities or equity as the presentation of the two items and
associated financial effects are very different.
C
If a financial instrument is classified as a financial liability (debt), it will be reported
-A
within current or non-current liabilities. Interest expense, dividend payments, gains and
losses relating to a financial liability are recognised in the statement of profit and loss.
i
If a financial instrument is classified as equity, distributions on such instruments are
an
charged lo equity and therefore do not affect reported profit.
A financial liability is any liability where the issuer has a contractual obligation:
an
To deliver cash or another financial asset to another entity, or
Kh
To exchange financial instruments with another entity on potentially unfavorable
terms.
An equity instrument is defined as any contract that offers the residual interest in the
an
assets of the company after deducting all of the liabilities.
As set out in the definition of a financial liability, a critical feature is that there is a
sa
contractual obligation to deliver cash (or another financial instrument) or to exchange
financial assets or liabilities in unfavorable conditions. Where an entity issues a share to
as
another party, that entity is not obliged to deliver cash (or another financial instrument)
to the shareholder; the payment of dividends is at the discretion of the entity.
H
It is important that the substance of a financial instrument is considered, rather than its
legal form. Some forms of financial instruments are legally classified as equity but have
ith
the characteristics of financial liabilities and should therefore be classified as such. For
example, a preference share that is required, under the terms of its issue, to be
tw
redeemed at a specified date for a specified amount is a financial liability.

The right to deliver an entity’s own shares is not necessarily an equity instrument. If the
ar
contract is structured in such a way that a variable number of shares may be issued to
satisfy a fixed monetary amount, then this is a financial liability. For example, in 2007 an
Sm
entity enters into a contract that requires it to issue shares to the value of Rs. 10,000 on
1 January 2010. This is a financial liability since the entity is required to settle the
contract by issuing a variable number of shares based on a fixed monetary amount.
y
ud
St

(MA)
7.1 PREFERENCE SHARES: DEBT OR EQUITY?
Preference shares are shares that are entitled to a payment of their dividend, usually a
A
fixed amount each year, before the ordinary shareholders can be paid any dividend or
that rank ahead of ordinary shares for any distribution of net assets in the event of a
C
winding up of the company.
-A
Preference shares include the following types:
Redeemable preference shares are those that the entity has an obligation to buy
i
back (or the right to buy back) at a future date.
an
Irredeemable (perpetual) preference shares are those that will not be bought back
at any time in the future.
an
Convertible preference shares are those that are convertible at a future date into
another financial instrument, usually into ordinary equity shares of the entity.
Kh
7.1.1 CLASSIFICATION OF PREFERENCE SHARES
Depending on their characteristics, preference shares issued by a company might be
classified as:
Financial liability of the company; or
an
sa
Equity; or
as
Compound financial instrument containing elements of both financial liability and

equity.
H
IAS 32 states (in a guidance note) that the key factor for classifying preference shares is
the extent to which the entity is obliged to make future payments to the preference
ith
shareholders.
7.1.2 REDEEMABLE PREFERENCE SHARES
tw
- Redemption is mandatory: Since the issuing entity will be required to redeem the
shares, there is an obligation. The shares are a financial liability.
ar
- Redemption at the choice of the holder: Since the issuing entity does not have an
Sm
unconditional right to avoid delivering cash or another financial asset there is an

obligation. The shares are a financial liability.
- Redemption at the choice of the issuer: The issuing entity has an unconditional right
y
to avoid delivering cash or another financial asset there is no obligation. The shares
ud
are equity.
7.1.3 IRREDEEMABLE NON-CUMULATIVE PREFERENCE SHARES
St
It should be treated as equity, because the entity has no obligation to the shareholders
that the shareholders have any right to enforce.
(MA)
8 COMPOUND FINANCIAL INSTRUMENT
A compound financial instrument is one that contains both a liability component and an equity
A
component. It is a non-derivative financial instrument that contains two component:
Financial liability - Issuer’s contractual obligation to pay cash (i.e. principal and interest)
C
Equity instrument - A embedded option to convert the loan into equity shares of the issuer.
-A
An example of a compound instrument is a convertible bond. The company issues a bond that
can be converted into equity in the future or redeemed for cash. Initially, it is a liability, but it
has a call option on the company’s equity embedded within it.
i
an
Typically, a convertible bond pays a rate of interest that is lower than the market rate for a non-
convertible bond (a ‘straight bond’) with the same risk profile. This is because the terms of the
conversion normally allow the bondholder to convert the bond into shares at a rate that is
an
lower than the market price.
On initial recognition, compound financial instrument are required to be split into liability
Kh
component and equity component as follow:
Fair value of the instrument as a whole [i.e. proceeds from the issue of bond] XXXX
Less. Fair value of the liability component
an
[PV of contractually determined future cash flows discounted @ market interest
rate applicable to comparable instrument but without conversion option]
(XXXX)
sa
Equity component (Residual amount) XXXX
as
The split is made on initial recognition of the instruments and is not subsequently revised due to
change in interest rate, share price or possibility of exercise of conversion option.
H
Transaction / issue cost on compound financial instrument will be allocated to each component
on pro-rata basis of initially recognized amounts of equity and liability.
ith
IF CONVERSION IS EXERCISED: Derecognize the liability and recognize it as equity as follow:

tw
Debit: Financial Liability XXXX

Credit: Share capital + premium XXXX
The original equity component remains as equity (may be transferred within equity)
ar
Early conversion: If favorable conversion ratio is offered for early conversion, the fair value of
Sm
additional shares given under the revised terms is recognized as loss in P/L.
IF CONVERSION IS NOT EXERCISED: Derecognize the liability as follow:

Debit: Financial Liability XXXX
y
Credit: Cash / Bank XXXX

ud
Early repurchase: Allocate the consideration paid and transaction costs for early repurchase to
the liability and equity components in the same manner that is used in original allocation of the
proceeds received by the entity when the convertible instrument was issued. Any gain or loss is
St
recognized as follows:
- Gain or loss relating to liability component is recognized in P/L; and
- Consideration relating to equity component is recognized in equity.
(MA)
A
C
i -A
an
an
Kh
an
Question 26. [Compound financial instrument - Convertible into a fixed number of shares]
[AAFR Past Paper – Summer 2011, Q2(i), 6 marks]
sa
On April 1, 2010 the Kahkashan company had issued 0.5 million 12% Term Finance Certificates (TFCs) of
Rs. 100 each. The principal amount of Rs. 50 million is included in non-current liabilities.
as
Interest is payable annually in arrears. On the date of issue, the prevailing interest rate for similar debts
without conversion option was 14% per annum. TFCs would mature on March 31, 2014 but are
convertible into eight ordinary shares of Rs. 10 each, at the option of the certificate holders, at any time
H
prior to maturity.
Required: Prepare Journal entries for the year ended March 31, 2011 to record the above transactions.
ith
(Show all necessary calculations)

tw
Question 27. [Compound financial instrument - Convertible into a fixed number of shares with
transaction cost] [AAFR Past Paper – Winter 2012, Q2(b), 8 marks]
The following information pertains to Crow Textile Mills Limited (CTML) for the year ended 30 June
ar
2012:
Sm
(a) On 1 July 2011, 2 million convertible debentures of Rs. 100 each were issued. Each debenture is
convertible into 25 ordinary shares of Rs. 10 each on 30 June 2014. Interest is payable annually in
arrears @ 8% per annum. On the date of issue, market interest rate for similar debt without
conversion option was 11% per annum. However, on account of expenditure of Rs. 4 million,
incurred on issuance of shares, the effective interest rate increased to 11.81%.
y
ud
Required: Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.
St

(MA)
Question 28. [Compound financial instrument - Convertible into a fixed number of shares with
transaction cost] [P2 Past Paper – June 2009, 6 marks]
Aron, a public limited company, issued one million convertible bonds on 1 June 2006. The bonds had a
A
term of three years and were issued with a total fair value of $100 million which is also the par value.
Interest is paid annually in arrears at a rate of 6% per annum and bonds, without the conversion option,
C
attracted an interest rate of 9% per annum on 1 June 2006. The company incurred issue costs of $1
million. If the investor did not convert to shares they would have been redeemed at par. At maturity all
-A
of the bonds were converted into 25 million ordinary shares of $1 of Aron. No bonds could be converted
before that date. The directors are uncertain how the bonds should have been accounted for up to the
date of the conversion on 31 May 2009 and have been told that the impact of the issue costs is to
i
increase the effective interest rate to 9.39%.
an
Required: Discuss, with relevant computations, how the above financial instruments should be
accounted for in the financial statements for the year ended 31 May 2009.
an
Question 29. [Compound financial instrument – Mandatorily Convertible notes]
Kh
[BDO – IFRS IN PRACTICE (Accounting for convertible notes)]
An entity issues a face value CU 1,000 note which has a maturity of three years from its date of issue.
The note pays a 10% annual coupon and, on maturity, the note mandatorily converts into 10,000 of the
issuer’s shares. The market interest rate for a note without a conversion feature would have been 12%
at the date of issue.
an
Required: Prepare Journal entries to record the above transactions. (Show all necessary calculations)
sa
Question 30. [Compound financial instrument – Convertible into a variable number of shares]
as

An entity issues a note with a face value of CU 1,000. The note has a maturity of three years from its
H
date of issue. The note pays a 10% annual coupon and, at any point up to its maturity, the holder can
convert the note into the number of shares equal, at their quoted market price, to CU 1,000. Assume
there are no transaction costs.
ith
tw
Question 31. [Compound financial instrument – Early repurchase of bonds]

ar
An entity issues a face value CU 1,000 note which has a maturity date of four years from date of issue.
The note pays a 10% annual coupon and, on maturity, the holder has an option either to receive cash of
Sm
CU 1,000 or 10,000 of the issuer’s shares. The market interest rate for a note without a conversion
feature would have been 12% at the date of issue.
At the end of Year 2, the issuer offers the holder to get its note redeemed for CU 1,100 which the holder
accepts. The market interest rate for a note without conversion feature at the end of Year 2 is 9%.
y
ud
St

(MA)
Question 32. [Compound financial instrument – Early conversion of bonds]
An entity issues a face value CU 10,000 note which has a maturity date of four years from date of issue.
A
The note pays a 10% annual coupon and, on maturity, the holder has an option either to receive cash of
CU 10,000 or 1,000 of the issuer’s shares at a par value of CU 10 per share. The market interest rate for
C
a note without a conversion feature would have been 12% at the date of issue.
-A
At the end of year 2 Entity is struggling to pay interest and will not be able to redeem a note for cash, so
it offers an additional 50 shares to the holder to encourage early conversion which the holder accepts.
At the time of the offer of early conversion the share price is CU 25 per share.
i
an
Question 33. [Compound financial instrument – Early repurchase of bonds]
an
[CFAP 1 Past Paper, Winter 2017, Q4, 12 marks]
Lahore Steel Limited (LSL) issued 1 million six-year debentures on 1 January 2015 at par value of Rs. 100
Kh
each at a fixed rate of 6% per annum. Interest payable at the end of each year whereas the principal is
to be repaid in two equal instalments at the end of 2019 and 2020.
Debentures were issued with an option to convert 10 debentures into 4 ordinary shares of LSL till the
an
date of first principal redemption. The liability was not designated as measured at fair value through
profit or loss on initial recognition.
sa
The market interest rate for non-convertible debentures issued by entities having similar credit risk and
loan tenor is 1-Year KIBOR + 2% per annum.
as
On 1 January 2016 LSL repurchased 100,000 debentures at a premium of Rs. 5 per debenture.
Transaction cost of Rs. 2 per debenture was incurred on this redemption.
H
The market interest rates and market values of LSL’s shares are given below:
Market value
ith
Date 1-Year KIBOR

per share (Rs.)
1 January 2015 5% 200
tw
1 January 2016 6% 250
Required: Prepare journal entries in the books of LSL for the year ended 31 December 2016.
ar
Sm
y
ud
St

(MA)
9 MODIFICATION / RESTRUCTUIRNG OF FINANCIAL LIABILITY
Where lender and borrower agree to revise the terms for an existing loan, for example
A
change in timing of payment (restructuring) the liability, change in rate of interest,
waiving part of the loan etc., the financial liability is said to be modified to restructured.
C
-A
The accounting treatment for a modification depends on whether the terms of the loan
after the modification are substantially different from those of the original loan or not.
The terms are substantially different if the discounted present value of the cash flows
i
under the new terms, including any fees paid net of any fees received and discounted
an
using the original effective interest rate, is at least 10% different from the discounted
present value of the remaining cash flows of the original financial liability.
an
Modification with substantially different terms - Extinguishment Accounting
Kh
If the new terms are identified as a substantial modification, the original loan is
extinguished and a new financial liability is recognised in its place with any gain or loss
recognised in P/L . Any costs or fees incurred are recognised as part of the gain or loss
on the extinguishment.
an
The new liability is recognised at its fair value in accordance with the normal rules of
sa
recognition of financial instruments. This is found by discounting the revised future
payments at the market rate of interest that applies to such cash flows.
as
Modification with terms that are not substantially different - Modification Accounting
H
If the new terms are not substantially different, do not recognize the original liability.
Recalculate present value of the modified cash flows discounted at original effective
ith
interest rate. Any difference between this recalculated amount and existing carrying
value is recognized as modification gain/(loss) in P/L.
tw
Any modification fee paid / received is adjusted against the carrying amount of modified
financial liability, and are amortized over remaining term of modified financial liability
ar
(new IRR would be calculated to amortize the modification fee).

Sm
y
ud
St

(MA)
Question 34. [Substantial modification of a liability]
X Limited had a loan of Rs. 1,000 repayable in 4 years on which it paid interest at 10%. The carrying
amount of the liability was Rs. 1000. The effective rate of the liability is 10%. (The IRR of any loan carried
A
and redeemed at par is the same as the coupon rate).
C
The lenders approached X limited to extent the loan term for one more year (i.e. 5 years in total) and
agreed to reduce the interest rate to 8%. For this restricting, initiated by the lender, the lender also pays
-A
Rs. 50 to X limited as an incentive to agree the restricting of loan.
The market rate at the time of restructuring was 12%.
i
Required: Prepare journal entries to record the above transactions in the books of X Limited.
an
Question 35. [Modification with terms that are not substantially different]
an
[CFAP 1 – Study Support Material]
X Limited had a liability of Rs. 2,000,000 repayable in 5 years on which it paid interest at 15%. The
carrying amount of the liability was Rs. 2,000,000. The effective rate of the liability is 15%.
Kh
X Limited faced liquidity problems and the lender agreed to restructure the loan. Under this new
arrangement X limited was to make a single payment of Rs. 3,500,000 at the end of Year 5 instead of the
originally scheduled payments. A fee of Rs. 100,000 was paid for the revision.
The market rate at the time of restructuring was 12%.
an
sa
Required: Prepare journal entries to record the above transactions in the books of X Limited.
Question 36. [Modification of financial liability] [AAFR Past Paper – Summer 2012, Q4(ii), 6 marks]
as
Zee Power Limited (ZPL) has been facing short term liquidity issues during the financial year ended on 31
December 2011. As a result, the following transactions were undertaken:
H
(i) On 1 January 2009, ZPL had obtained a bank loan of Rs. 100 million at 10% per annum. The
interest was payable annually on 31 December and principal amount was repayable in five
ith
equal annual installments commencing from 31 December 2009. On 1 January 2011, the
bank agreed to facilitate ZPL as follows:
tw
Balance amount of the principal would be paid at the end of the loan’s term i.e. on
31 December 2013.
With effect from 1 January 2011, interest would be paid at the rate of 10.5% per
ar
annum.
The market rate for similar debt is 10%.
Sm
Required: Prepare journal entries to record the above transactions in the books of Zee Power Limited.
y
ud
St

(MA)
Question 37. [Modification of financial liability] [AAFR Past Paper – Summer 2009, Q2, 11 marks]
During the year ended December 31, 2008, a Pakistani Sugar Company (PSC) was facing severe problems
in meeting its foreign currency obligations especially in view of the steep increase in the foreign
A
exchange rates. In October 2008, PSC commenced negotiations with the foreign lenders for
restructuring of loans.
C
Following is a summary of the foreign exchange liabilities of the company as of December 31, 2008 prior
-A
to making adjustments on restructuring:
Lenders
SBD JICA AFI
i
Loan amount (US$) 350,000 500,000 270,000
an
Remaining number of installments including 5 4 3
due on December 31, 2008
an
Interest / markup rate 2.5% 3% 2%
The loans are repayable in equal annual installments. All the above liabilities are appearing in PSC’s
books at the exchange rate of US$ 1 = Rs. 65 which was the rate at the beginning of the year. The
Kh
exchange rate as at the end of the year is US$ 1 = Rs. 80.
Agreements with SBD and AFI were finalized and signed before year-end, however, the agreement with
JICA was finalized in January 2009 but before finalization of the financial statements. Following is the
information in respect of rescheduling agreements.
an Lenders
sa
SBD JICA AFI
Revised present value as per original 390,000 535,000 250,000
as
effective interest rate (US$)

Revised present value as per market interest 400,000 510,000 220,000
H
rate for similar instruments (fair value) (US$)

First installment due on 31-Dec-10 31-Dec-11 31-Dec-10
ith
Required:
a) Prepare accounting entries in the books of PSC to record the
tw
(i) Effect of exchange differences.

(ii) Effect of rescheduling, if any.
b) In respect of each of the above loans, identify the amounts to be reported as current portion of the
ar
loan in the financial statements, as at December 31, 2008.

Sm
y
ud
St

(MA)
10 MODIFICATION / RESTRUCTUIRNG OF FINANCIAL ASSET
A
For modifications that do not result in derecognition, recalculate present value of
C
modified cash flows using original effective interest rate. Any difference between this
recalculated amount and existing carrying amount is recognised in P/L as a modification
-A
gain / loss.
Any modification fee paid/received is recognized as a part of the carrying amount of
i
modified financial asset, and are amortized over remaining term of modified financial
an
asset (new IRR would be calculated to amortize the modification fee).
an
Question 38. [Restructuring of financial asset] [AAFR Past Paper – Winter 2009, Q6, 15 marks]
Arif Industries Limited (AIL) owns and operates a textile mill with spinning and weaving units. Due to
Kh
recurring losses, AIL disposed of the weaving unit for an amount of Rs. 100 million on July 1, 2007 and
invested the proceeds in Pakistan Investment Bonds (PIBs).
Details of investment in PIBs are as follows:
(i)
an
The PIBs were purchased through a commercial bank at face value. The bank initially charged
premium and investment handling charges of Rs. 4,641,483. At the time of purchase, AIL had
envisaged to liquidate the investment after four years and utilize the realized amount for
sa
expansion of its spinning business. The bank had agreed to repurchase the PIBs on June 30,
2011, at their face value.
as
(ii) The markup on PIBs is 15% for the initial two years and 20% for the remaining three years. The
effective yield on investment at the time of purchase was 15.50%.
H
However, due to economic turmoil in the European and American markets, the existing spinning unit is
working below its rated capacity. Therefore, on June 30, 2009 AIL decided to defer the expansion plan
ith
by one year. The bank agreed to extend the holding period accordingly but reduced the repurchase price
by 2%.
tw
Required:
Compute the amount of interest income (including the effect of revision of holding period, if any) to be
recognized in the financial years ended(ing) 2009, 2010, 2011 and 2012.
ar
Sm
y
ud
St

(MA)
11 RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITY
Reclassification of financial assets is required if, and only if, the objective of the entity’s business
A
model for managing those financial assets changes.
C
If an entity determines that its business model has changed in a way that is significant to its
operations, then it reclassifies all affected assets prospectively from the first day of the next
-A
reporting period (the reclassification date). Prior periods are not restated.
Reclassification of financial liability is not allowed.
i
10.1 MEASUREMENT ON RECLASSIFICATION OF FINANCIAL ASSETS
an
Reclassification to
an
FVPL FVOCI Amortized cost
Kh
Fair value on reclassification
date = new carrying amount.
date = new carrying amount.
FVPL
Calculate effective interest

Calculate effective based on
rate based on new carrying
amount.
an new carrying amount.
Reclassify financial asset at fair

sa
Fair value on reclassification value.
date = new carrying amount. Remove cumulative balance
Reclassification from
as
Reclassify accumulated OCI from OCI and use it to adjust

balance to P/L on the reclassified fair value.
FVOCI
reclassification date.
H
Adjusted amount = amortized

Effective interest rate cost.
determined at initial Effective interest rate
ith
recognition is not adjusted as determined at initial

a result of reclassification. recognition is not adjusted as
tw
a result of reclassification.
Remeasure to fair value, with

any difference recognized in
ar
Remeasure to fair value, with

P/L
Amortize cost
any difference recognised in

OCI.
Sm

date = new carrying amount. Effective interest rate
Effective interest rate determined at initial
determined at initial recognition is not adjusted as
recognition is not adjusted as a result of reclassification.
y
a result of reclassification.
ud
St

(MA)
Question 39. [Reclassification of financial asset]
On 1st January 2010, SPG Prints (Private) Limited acquired 50,000 15% debentures of Rs. 100 each for Rs.
4.5 million. The debentures will be redeemed after 3 year at face value. IRR is 19.727%.
A
As a result in changes in general interest rates, the fair value of the debenture was Rs. 4.8 million at 31
C
December 2010 and Rs. 5.1 million at 31 December 2011.
-A
Journalized the above transaction for the year 2010 and 2011 and 2012 if:
1. The debenture was initially classified to be measured at FVTPL, but due to change in business model
of the company during the year 2011, it was reclassified to be measured at FVTOCI.
i
an
2. The debenture was initially classified to be measured at FVTPL, but due to change in business model
of the company during the year 2011, it was reclassified to be measured at Amortized cost.
an
3. The debenture was initially classified to be measured at FVTOCI, but due to change in business
model of the company during the year 2011, it was reclassified to be measured at FVTPL.
Kh
4. The debenture was initially classified to be measured at FVTOCI, but due to change in business
model of the company during the year 2011, it was reclassified to be measured at Amortized cost.
an
5. The debenture was initially classified to be measured at Amortized cost, but due to change in
business model of the company during the year 2011, it was reclassified to be measured at FVTPL.
sa
6. The debenture was initially classified to be measured at Amortized cost, but due to change in
business model of the company during the year 2011, it was reclassified to be measured at FVTOCI.
as
Question 40. [Reclassification of financial asset] [AAFR Past Paper – Winter 2013, Q3(ii), 6 marks]
The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are under
H
finalization and the following matters are under consideration:

ith
(ii) On 1 October 2011, BL acquired 160,000 12% debentures of Rs. 100 each, for Rs. 15.5 million and
classified them as ' Amortized cost'.
tw
On 30 September 2013, in view of financing requirements for a new project, BL is uncertain about
holding the debentures till redemption. Therefore, it has decided to reclassify the debentures as
FVTOCI'.
ar
Other relevant information is as follows:

Sm
The debentures carry a fixed interest rate of 12%, payable annually in arrears.
The effective rate of interest is 14.09%.
The debentures are redeemable at Rs. 105 on 30 September 2015.
The market value per debenture as of 30 September 2012 and 2013 was Rs. 102 and Rs. 104
respectively.
y
ud
Required: Compute the related amounts as they would appear in the statements of financial position
and comprehensive income of Bravo Limited for the year ended 30 September 2013 in accordance with
IFRS. (Ignore corresponding figures)
St

(MA)
12 IMPAIRMENT OF FINANCIAL ASSETS
12.1 OVERVIEW OF THE NEW IMPAIRMENT MODEL
A
“IAS 36: Impairment of assets” operates an incurred loss model. This means that
C
impairment is recognised only when an event has occurred which has caused a fall in
-A
the recoverable amount as compared to carrying amount of an asset.
However, IFRS 9 has introduced a new impairment model based on expected losses.
i
Anticipating credit losses is a prudent approach, meaning it is less likely that assets will
an
be over-stated. Users of the financial statements are also provided with timely
information, because they are warned about potential impairment issues before actual
an
defaults have occurred.
The rules look complex because they have been drafted to provide guidance to banks
Kh
and similar financial institutions on the recognition of credit losses on loans made.
However, there is a simplified regime that applies to other financial assets as specified in
the standard (such as trade receivables and lease receivables).
an
IFRS 9 establishes a three-stage impairment model, based on whether there has been a
sa
significant increase in the credit risk of a financial asset since its initial recognition. These
three-stages then determine the amount of impairment to be recognised as expected
as
credit losses (ECL) at each reporting date as well as the amount of interest revenue to
be recorded in future periods:
H
Stage 1: Credit risk has not increased significantly since initial recognition – Recognise
12 months ECL, and recognise interest on a gross basis;
ith
Stage 2: Credit risk has increased significantly since initial recognition – Recognise
tw
lifetime ECL, and recognise interest on a gross basis;
Stage 3: Financial asset is credit impaired - The financial asset is written down to its
ar
estimated recoverable amount – Recognise lifetime ECL, and present interest

on a net basis (i.e. on the gross carrying amount less credit allowance).
Sm
y
ud
St

(MA)
12.2 SCOPE
The following financial instruments are included within the scope of the impairment
A
requirements in IFRS 9:
C
Debt instruments measured at amortised cost;
Debt instruments measured at fair value through other comprehensive income
-A
(FVOCI);
Issued loan commitments (except those measured at FVTPL);
i
an
Issued financial guarantee contracts (except those measured at FVTPL);
Lease receivables within the scope of IFRS 16 Leases;
an
Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers;
Kh
12.3 KEY DEFINITIONS
Credit loss
an
The difference between all contractual cash flows that are due to an entity in
accordance with the contract and all the cash flows that the entity expects to receive
(i.e. all cash shortfalls), discounted at the original effective interest rate)
sa
Expected credit losses
as
The weighted average of credit losses with the respective risks of a default occurring as
the weights.
H
Lifetime expected credit losses

ith
The expected credit losses that result from all possible default events over the expected
life of a financial instrument.
tw
12-month expected credit losses

ar
The portion of lifetime expected credit losses that represent the expected credit losses
that result from default events on a financial instrument that are possible within the 12
Sm
months after the reporting date.

y
ud
St

(MA)
12.4 EXPECTED LOSS MODEL
12.4.1 SIMPLIFIED APPROACH
A
C
Compulsory application
-A
Trade Receivable without significant financing component
Contract Assets without significant financing component
Optional application
i
an
For following financial assets, entity has to choose as an accounting policy to be applied
consistently to apply either the “General approach” or “Simplified approach” for
an
recognising expected losses.
Trade Receivable with significant financing component
Kh
Contract Assets with significant financing component
Lease Receivables
MEASUREMENT an
sa
A loss allowance measured as the lifetime expected credit losses is recognised. Because
the maturities will typically be 12 months or less, the credit loss for 12-month and
as
lifetime ECLs would be the same.

Expected credit losses on trade receivables can be calculated using provision matrix
H
ith
tw
ar
Sm
y
ud
St

(MA)
12.4.2 GENERAL APPROACH
Compulsory application
A
Debt instruments measured at amortised cost
C
Debt instruments measured at fair value through other comprehensive income
-A
(FVOCI)
Optional application
For following financial assets, entity has to choose as an accounting policy to be applied
i
an
consistently to apply either the “General approach” or “Simplified approach” for
recognising expected losses.
an
Trade Receivable with significant financing component
Contract Assets with significant financing component
Kh
Lease Receivables
MEASUREMENT AT INITIAL RECOGNITION
an
A loss allowance measured as the 12-month expected credit losses is recognised at
initial recognition.
sa
MEASUREMENT AT SUBSEQUENT RECOGNITION
as
The expected credit loss associated with the financial asset is then reviewed at each
subsequent reporting date. The amount of expected credit loss recognised as a loss
H
allowance depends on the extent of credit deterioration since initial recognition.

ith
If there is no significant increase in credit risk, the loss allowance for that asset is
remeasured to the 12 month expected credit loss as at that date.
tw
If there is a significant increase in credit risk the loss allowance for that asset is
remeasured to the lifetime expected credit losses as at that date. This does not
ar
mean that the financial asset is impaired. The entity still hopes to collect amounts
due but the possibility of a loss event has increased. A significant increase in credit
Sm
risk can include:

- Changes in general economic and/or market conditions (e.g. expected increase
in unemployment rates, interest rates);
y
- Significant changes in the operating results or financial position of the borrower;

ud
- Changes in the amount of financial support available to an entity (e.g. from its
St
parent);
- Expected or potential breaches of covenants;

(MA)
- Expected delay in payment (Rebuttable presumption that credit risk has
increased significantly when contractual payments are more than 30 days past
due).
A
If there is credit impairment, the financial asset is written down to its estimated
C
recoverable amount. The entity accepts that not all contractual cash flows will be
-A
collected and the asset is impaired.
Future revenue recognition: Interest is recognised in the future by applying the
effective rate to the new amortized cost (after recognition of the impairment loss).
i
an
CREDIT IMPAIRMENT
an
A financial asset is credit-impaired when one or more events that have a detrimental
impact on the estimated future cash flows of that financial asset have occurred.
Evidence that a financial asset is credit-impaired include (but is not limited to)
Kh
observable data about the following events:
Significant financial difficulty of the issuer or the borrower;
an
Actual breach of contract (e.g. default or delinquency in payments);
Granting of a concession to the borrower due to the borrower’s financial difficulty;
sa
Probable that the borrower will enter bankruptcy or other financial reorganisation;
as
Disappearance of an active market for that financial asset because of financial

difficulties; or
H
Purchase or origination of a financial asset at a deep discount that reflects the

incurred credit losses.
ith
If an entity revises its estimates of receipts it must adjust the gross carrying amount of
the financial asset to reflect actual and revised estimated contractual cash flows. The
tw
financial asset must be re measured to the present value of estimated future cash flows
from the asset discounted at the original effective rate.
ar
FUTURE REVENUE RECOGNITION

Sm
Interest is recognised in the future by applying the effective rate to the new amortised
cost (after the recognition of the impairment loss).
REVERSAL OF IMPAIRMENT
y
ud
Subsequently, if the credit risk of the financial instrument improves so that the financial
asset is no longer credit-impaired and the improvement can be related objectively to an
event since the net method was applied, the calculation of interest revenue reverts to
St
the ‘gross method’ from the beginning of the next reporting period.

(MA)
LOSS ALLOWANCE
Loss allowance for financial assets carried at amortised cost
A
Movement on the loss allowance is recognised in profit or loss.
C
The loss allowance balance is netted against the financial asset to which it relates on the
face of the statement of financial position. This is just for presentation only; the loss
-A
allowance does not reduce the carrying amount of the financial asset in the double
entry system.
i
Loss allowance for financial assets at fair value through OCI
an
Movement on the loss allowance is recognised in profit or loss but the loss allowance
balance is not netted against the financial asset to which it relates as this is carried at
an
fair value. The loss allowance is recognised in other comprehensive income.
Kh
12.5 PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSETS
If a financial asset is credit impaired when purchased, then interest income is calculated
using a credit adjusted effective interest rate. This incorporates expected lifetime credit
an
losses at the inception date and therefore the allowance recorded against such assets
should only be the change in the lifetime expected credit losses since inception.
sa
as
H
ith
tw
ar
Sm
y
ud
St

(MA)
Question 41. [Impairment of Financial asset at amortized cost – 12 month expected credit loss]
On 1 January 20X1, X Limited has purchased a bond for Rs. 1,000,000. The bond pays interest at 5% and
A
is to be redeemed at par in 5 years’ time. 12 month expected credit loss = Rs. 25,000. The bond is
classified to be measured at amortized cost.
C
On 31 December 20X1, interest is collected at its due date. There is no significant change in credit risk.
-A
12 month expected credit loss = Rs. 30,000.
Required: Show the double entries on initial recognition and at 31 December necessary to account for
the bond and the loss allowance.
i
an
Question 42. [Impairment of Financial asset at amortized cost – lifetime expected credit loss]
[P2 Exam Kit, 8 marks]
an
Glasgow is a provider of finance, whose year end is 31 October 2013. On 1 November 2012, it acquired a
portfolio of financial assets that were debt instruments. These were made up of four year loans and
were initially recognised at their nominal value $100,000 (which was also their fair value). They were
Kh
classified to be measured at amortised cost. Each loan has a coupon rate of 8% as well as an effective
rate of 8%.
By the 31 October 2013, no actual defaults had occurred. However, information emerged that the sector
an
in which the borrowers operate is experiencing tough economic conditions. The directors of Glasgow
therefore felt that the risk of default over the remaining loan period had increased substantially. After
sa
considering a range of possible outcomes, and weighting these for probability, the overall rate of return
from the portfolio is expected to be approximately 2% of nominal value per annum for each of the next
as
three years.
Required: Explain how the above should be accounted for in the year ended 31 October 2013. (8 marks)
H
Question 43. [Impairment of Financial asset at FVTOCI – 12 month expected credit loss]
ith
On 1 January 20X1, X Limited has purchased a bond for Rs. 1,000,000. The bond pays interest at 5% and
is to be redeemed at par in 5 years’ time. 12 month expected credit loss = Rs. 25,000. X Limited often
tw
holds bonds until the redemption date, but will sell prior to maturity if investments with higher returns
become available.
ar
On 31 December 20X1, interest is collected at its due date. There is no significant change in credit risk.
The fair value of the bond is Rs. 940,000. 12 month expected credit loss = Rs. 30,000.
Sm
Required: Show the double entries on initial recognition and at 31 December necessary to account for
the bond and the loss allowance.
y
ud
St

(MA)
Question 44. [Impairment of Financial asset at FVTOCI – 12 month expected credit loss]
[P2 Exam Kit, 9 marks]
On 1 December 20X3, Artwright, a public limited company, purchased $10 million of bonds at par. These
A
bonds had been issued by Winston, an entity operating in the video games industry. The bonds were
due to be redeemed at a premium on 30 November 20X6, with Artwright also receiving 5% interest
C
annually in arrears. The effective rate of interest on the bonds was 15%. Artwright often holds bonds
-A
until the redemption date, but will sell prior to maturity if investments with higher returns become
available. Winston’s bonds were deemed to have a low credit risk at inception.
On 30 November 20X4, Artwright received the interest due on the bonds. However, there were wider
i
an
concerns about the economic performance and financial stability of the video games industry. As a
result, there has been a fall in the fair value of bonds issued by Winston and similar companies. The fair
value of the Artwright’s investment at 30 November 20X4 was $9 million. Nonetheless, based on
an
Winston’s strong working capital management and market optimism about the entity’s forthcoming
products, the bonds were still deemed to have a low credit risk.
Kh
The financial controller of Artwright calculated the following expected credit losses for the Winston
bonds as at 30 November 20X4:
12 month expected credit losses $0.2m
Lifetime expected credit losses $0.4m an

sa
Discuss how the investment in the bonds of Winston should be accounted for in the year ended 30
November 20X4.
as
Question 45. [Impairment of Financial asset at amortized cost – Credit impairment]

H
Company X invests in a bond. The bond has an issue value of Rs. 1 million and pays a coupon rate of 5%
interest for two years, then 7% interest for two years (this known as a stepped bond).
ith
Interest is paid annually on the anniversary of the bond issue. The bond will be redeemed at par after
four years. The effective rate for this bond is 5.942%
tw
At the end of the second year it becomes apparent that the issuer has financial difficulties and it is
estimated that Company X will only receive 60 paisa in the rupee of the future cash flows.
ar
Required: Show the double entries on initial recognition and at year end necessary to account for the
bond and the loss allowance.
Sm
y
ud
St

(MA)
Question 46. [Impairment of trade receivable with no significant financing component]
X Limited has total trade receivables of Rs. 30,000,000. The trade receivables do not have a significant
A
financing component. The loss allowance recognised at the end of the previous year was Rs. 500,000. X
Limited has constructed the following provision matrix to calculate expected lifetime losses of trade
C
receivables.
-A
1–30 days 31–60 days 61-90 days More than
Current
overdue overdue overdue 90
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
i
an
The trade receivables of X Limited as at year end are as follows:
Gross carrying amount
an
(Rs. in million)
Not overdue 15
1 – 30 days overdue 7.5
Kh
31 – 60 days overdue 4
More than 90 days 1
Required: Calculate the lifetime expected credit loss, show the necessary double entry to record the
an
loss and state the amounts to be recognised in the statement of financial position.
sa
Question 47. [Impairment of trade receivable with no significant financing component]
[P2 Exam Kit, June 07, 6 marks]
Wader, a public limited company, has a year end of 31 May 20X7. The following information is relevant:
as
Wader’s receivables are short-term and do not contain a significant financing component. Using
historical observed default rates, updated for changes in forward-looking estimates, Wader estimates
H
the following default rates for its trade receivables that are outstanding as at 31 May 20X7:
1–30 days 31–60 days 61+ days
ith
Not overdue
overdue overdue overdue
Default rate 0.5% 1.5% 6.1% 16.5%
tw
The trade receivables of Wader as at 31 May 20X7 are as follows:

Gross carrying amount ($m)
ar
Not overdue 10.1

Sm

61 + days overdue 1.0
Wader has recognised a loss allowance of $0.2 million in respect of its trade receivables.
y
Required: Discuss, with suitable calculations, the accounting treatments of the above items in the
ud
financial statements for the year ended 31 May 20X7. (Note: A discount rate of 5% should be used
where necessary).
St

(MA)
Question 48. [Credit Impairment of financial asset] [AAFR Past Paper – Summer 2014, Q3(b), 6 marks]
On 1 January 2013, Elegant Generators Limited (EGL) sold a heavy duty generator to Rivera Limited (RL)
for Rs. 6,000,000 on the following terms and conditions.
A
10% of sales price was paid on delivery of the generator.
C
Remaining amount was payable on 31 December 2013. Interest charge on the amount unpaid
was agreed at 6% per annum.
-A
The market interest rate is 12% per annum.
In December 2013, RL conveyed its inability to pay the amount due on 31 December 2013 and requested
EGL to recover the amount in installments. After negotiations, EGL agreed to receive four half yearly
i
installments of Rs. 1,600,000 each, commencing from 30 June 2014.
an
Required:
an
Compute the impact of the above transactions on various items forming part of profit and loss account
and statement of financial position of EGL, for the year ended 31 December 2013 in accordance with
International Financial Reporting Standards. (Notes to the financial statements are not required)
Kh
Question 49. [Credit Impairment of financial asset] [AAFR Past Paper – Summer 2013, Q5, 14 marks]
On 1 January 2009 Qasmi Investment Limited (QIL) purchased 1 million 12% Term Finance Certificates
an
(TFCs) issued by Taj Super Stores (TSS), which operates a chain of five Super Stores. The terms of the
issue are as under:
sa
The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. These are
redeemable at a premium of 20% after five years.
Interest on the TFCs is payable annually in arrears on 31 December each year.
as
Effective interest rate calculated on the above basis is 16.426% per annum.
H
Due to a property dispute, TSS had to temporarily discontinue operations of two stores in 2010.
Consequently, TSS was unable to pay interest due on 31 December 2010 and 31 December 2011.
ith
At the time of finalization of accounts for the year ended 31 December 2010, QIL was quite hopeful of
recovery of the interest and therefore, no impairment was recorded. However, in 2011, after a thorough
review of the whole situation, QIL’s management concluded that it would be able to recover the face
tw
value of the TFCs along with the premium on the due date i.e. 31 December 2013, but the interest for
the years 2010 to 2013 would not be received. Accordingly, QIL recorded impairment in the value of the
TFCs on 31 December 2011.
ar
In 2012, TSS reached an out of court settlement of the property dispute and the stores became
Sm
operational. Subsequently, QIL and TSS agreed upon a revised payment schedule according to which the
present value of the agreed future cash flows on 31 December 2012 is estimated at Rs. 115 million.
Required:
y
Prepare journal entries in the books of QIL for the years ended 31 December 2011 and 2012. Show all
ud
the relevant computations.

St

(MA)
Question 50. [Impairment of financial asset at amortized cost]
[AAFR Past Paper – Winter 2016, Q4(b), 8 marks]
The financial statements of XYZ Limited for the year ended 30 June 2016 are in the final stage of
A
preparation and the following matters are under consideration:
C
On 1 July 2013, XYZ purchased 1 million five year bonds issued by Ali Manufactures Limited (AML) at a
premium of Rs. 5 per bond with the intention to hold them till maturity i.e. 30 June 2018. The bonds will
-A
be redeemed at their face value i.e. Rs. 100 per bond. The transaction costs associated with the
acquisition of the bonds were Rs. 1.5 million. The coupon interest rate is 6% per annum while the
effective interest yield at the time of purchase was 4.5186%.
i
Due to certain financial and liquidity issues, AML restructured the payment plan with effect from 30
an
June 2016, after due consultation with bondholders. Under the revised plan the maturity date was
extended by one year. Further, the coupon rate was increased to 6.25% for 2017 and 2018 and 6.5% for
an
2019.
The management of XYZ is of the view that due to restructuring the credit risk on the loan has increased
Kh
significantly. As a result, it estimates lifetime expected credit losses of Rs. 5 million on the investment.
Required:
In accordance with the requirement of International Financial Reporting Standards, describe the
an
accounting treatment in respect of the above transactions in the financial statements of XYZ Limited for
the year ended 30 June 2016.
sa
Question 51. [Reclassification and Impairment of financial asset (Equity securities)]
[AAFR Past Paper – Summer 2017, Q2(b), 11 marks]
as
On 15 October 2016, Rashid Industries Limited (RIL) made the following investments:
Percentage of *Cost of
H
Name of Investees No. of shares shareholding investment

acquired (Rs. in million)
ith
Karim Limited (KL) 155,000 4% 20

Bashir Limited (BL) 135,000 2% 65
* including transaction cost
tw
Investment in KL was made with no intention to sell the shares while investment in BL was made with
the intention to sell the shares before 31 December 2016.
ar
The board of directors in its meeting held on 30 November 2016 decided that since the future prospects
Sm
of BL are quite attractive, its shares should be held till 30 June 2018. The market rate on 30 November
2016 was Rs. 621.
On 31 December 2016, RIL decided to record an impairment loss of Rs. 5 million against investment in
KL. The market price of shares of KL and BL as on 31 December 2016 was Rs. 80 and Rs. 600 respectively.
y
ud
RIL’s broker normally charges transaction costs of 0.2%.
Required: Explain the accounting treatment of above transactions in accordance with International
St
Financial Reporting Standards.

(MA)
Question 52. [Impairment of financial asset at amortized cost]
[AAFR Past Paper – Summer 2019, Q5, 16 marks]
On 3 January 2015, French Limited (FL) purchased 15,000 debentures (having face value of Rs. 100 each)
A
issued by Greek Limited. Debentures were purchased at Rs. 97 each. However, the fair value of each
debenture as on the date of purchase was Rs. 96 in the quoted market. Transaction cost of Rs. 35,000
C
was also incurred on purchase of debentures. Coupon rate is 12% which is payable annually on 31
-A
December whereas the effective interest rate is 12.6%.
FL classified the investment in debentures as financial asset at amortised cost. At initial recognition, FL
determined that debenture was not credit impaired.
i
an
On 31 December 2016, FL determined that there had been a significant increase in credit risk since the
acquisition of the debentures.
an
On 31 December 2017, FL determined that the debenture was credit impaired.
FL’s estimates of expected credit losses in respect of the investment in debentures at different dates are
Kh
given below:
Date Life time 12 months
3 January 2015 Rs. 54,500 Rs. 11,200
31 December 2015
31 December 2016
Rs. 54,500
Rs. 62,600 an Rs. 11,200
Rs. 12,400
sa
31 December 2017 Rs. 70,900 Rs. 14,500
31 December 2018 Rs. 70,900 Rs. 14,500
as
Annual interest has been received on time each year.

H
Required: Prepare journal entries in the books of FL in respect of the above for the years ended 31
December 2015 to 31 December 2018.
ith
tw
ar
Sm
y
ud
St

(MA)
13 DERIVATIVES
A derivative is a financial instrument:
A
- whose value changes in response to the change in an underlying variable such as
an interest rate, commodity or security price, or index etc.;
C
- where the initial investment is zero or is small in relation to the value of the
-A
underlying variable; and
- that is settled at a future date.
i
Common derivatives include futures contracts, forwards, options, and swaps.
an
Over the life of the derivative contract, its fair value will depend on the spot
exchange rates and the time to the end of the contract.
an
A derivative can be used for hedging or speculation.
Kh
Initial measurement: All derivatives have to be initially recognized at fair value, i.e. at
consideration paid or received at inception of the contract.
Subsequent measurement: All derivatives shall be accounted for at FV through P/L
an
unless designated as a hedging instrument is hedge a/c relationship.
sa
13.1 FUTURES
Futures is a standardized contract to buy or sell
as
- a particular commodity/financial item

- at a predetermined price
H
- at a specified time in the future.

ith
Futures details the quality and quantity of the underlying asset; they are
standardized to facilitate trading on a futures exchange.
tw
Some futures contracts may call for physical delivery of the asset, while others are
settled in cash.
ar
13.2 FORWARD CONTRACTS

Sm
Forward contract is a tailor-made or customized contract to buy or sell

- a specified amount
- of a specified item (commodity or financial item)
y
- on a specified future date

ud
- at a specified price agreed upon today.

A forward contract settlement can occur on a cash or delivery basis.
St
Forward contracts do not trade on a centralized exchange and are therefore

regarded as over-the-counter (OTC) instruments.
(MA)
13.3 OPTIONS
Under option contract, the holder/buyer of the option has entered into a contract
A
that gives it the right but not the obligation to buy (call option) or sell (put option) a
specified amount of a specified commodity at a specified price.
C
An option differs from a forward arrangement. An option not only offers its
-A
buyer/holder the choice to exercise his rights under the contract, but also the choice
not to enforce the contract terms.
i
The issuer/seller of the option must fulfil the terms of the contract, but only if the
an
option holder chooses to enforce them.
The option holder has to pay a sum of money (premium) to the option seller. This
an
premium is paid when the option is arranged, and non-refundable if the holder later
decides not to exercise his rights under the option.
Kh
For holder, option will only ever be recorded as an asset. Initially, atthe amount of
premium. The holder would exercise the option only if it is beneficial to do so.
Therefore it could only be an asset.
13.4 SWAPs an
sa
A swap is an agreement between parties to exchange cash flows related to an
underlying obligation.
as
The most common type is an interest rate swap. In an IRS, two parties agree to
H
exchange interest payments on the same notional amount of principal, at regular

intervals over an agreed number of years.
ith
One party might pay interest to other party at a variable rate, and in return the
other party may pay interest on the same principal at a fixed rate.
tw
A swap might be an asset or liability at any particular date depending upon the
interaction between the amount to be paid and the amount to be received.
ar
Sm
y
ud
St

(MA)
Question 53. [Forward contract]
On October 1, 2009, the Lie Dharma Company purchased 100 February 1, 2010, soybean forward
contracts. The quoted market prices at the date of purchases is Rs. 5.80 a bushel; each contract covers
A
5,000 bushels. The initial margin deposit is Rs. 240,000. At the end of Year 1, the quoted market price of
the soybean contract is Rs. 5.60 a bushel.
C
On February 1, 2010, when the quoted market price is Rs. 5.30 a bushel, Lie Dharma Company
-A
purchased 500,000 bushels of soybean from market. And the contract is closed on February 1, 2010 by
way of cash settlement.
Required: Pass the journal entries.
i
an
Burhan Ltd (a Pakistan Company) has a 30 June year end. On 1 June 2015, Burhan Ltd sells goods to ASU
an
International for $100,000 on three months credit i.e. for settlement on 1 September 2015. On 1 June
2015 Brit Ltd also enters into a forward contract to sell $100,000 on 1 September 2015 at a forward rate
of $1:PKR93.
Kh
On 1 September, ASU International paid Burhan Ltd in full and the contract is closed by way of cash
settlement.
The PKR to $ exchange rates are as follows:
Date Spot rate an Forward rate (September)
sa
1 June 2015 Rs. 90/$ Rs. 93/$
30 June 2015 Rs. 87/$ Rs. 89/$
1 September 2015 Rs. 85/$ -
as
Required: Journalize the above transaction.

H

On 1st January 2005, a company entered into a foreign currency transaction by taking a loan of US $
ith
100,000 at interest rate of 6% per annum. The amount of loan is to be repaid on 31st December 2005.
On 1st January 2005, the company entered into a forward exchange contract for the transaction to
tw
mitigate the risk associated with change in exchange rates.

The exchange rate (Rs. per US$) are as below
ar
Date Spot rate Forward rate (1 year) Forward rate (6 month)

1 January 2005 Rs. 45/$ Rs. 48/$ -
Sm
30 June 2005 Rs. 47/$ - Rs. 51/$

31 December 2005 Rs. 52/$ -

y
ud
St

(MA)
Question 56. [Call Options]
Hale Ltd purchased 500 American style call options contract on May 1, 2010 to purchase Laredo Ltd.
stock at Rs. 100 per share, when Laredo shares are trading at Rs. 100 per share. The option expires on
A
July 31, 2010. Hale purchases the call options for Rs. 4 per option
C
On June 30, 2010 (Year-end of Hale Ltd), the price of Laredo shares has increased to Rs. 120 per share
and the value of the option has increased to Rs. 21.5 per option.
-A
On 15 July 2010, Hale Ltd has to purchase 500 shares of Laredo Ltd. Determine whether Hale Ltd. should
exercise the options held or purchase shares from market and dispose of the options. On 15 July 2010,
the share price of Laredo Ltd. is Rs. 115 per share and the value of the option is Rs. 15.70 per option.
i
an
an
Question 57. [Put Options] [ICEAW Corporation Reporting – Study Manual]
On January 1, 2011, Entity Theta purchases put options over 100,000 shares in Omega Ltd. which expires
on December 31, 2011. The exercise price of the option is Rs. 20 per share (i.e. current market price)
Kh
and the premium paid is Rs. 111,000.
Entity Theta has 30 June year end.
Share value of an
The value of share of Omega Ltd. and put options on different dates is as follow:
Value of put option
sa
Omega (per share) (Per option)
1 January 2011 Rs. 20 Rs. 1.11
30 June 2011 Rs. 19 Rs. 1.35
as
31 December 2011 Rs. 18.5 Rs. 1.5

H
On 31 December 2011, Entity Theta sells the options.

ith
Question 58. [Right shares]

tw
On 1 March 2014, Gilgit Company Limited purchased 200,000 shares of a listed company namely Hunza
Foods Limited for Rs. 5,600,000 as a long-term investment. On April 5, 2014, Hunza Foods Limited
announced the issuance of one right share for every 4 shares held by the shareholders of the company
ar
at exercise price of Rs. 18. Par value of the shares is Rs. 10 per share. Market value of shares and letter
of right on relevant dates are as follow:
Sm
Market value Market value of

Event Date
of shares letter of right
Purchase of 200,000 shares 1-Mar-14 28 -
Announcement date - (Cum-right) 5-Apr-14 31 -
y
Book closure - (Cum-right) 26-Apr-14 34 -

ud
Letter of right issued 15-May-14 36 14

Year-end 30-Jun-14 37 16
Exercise date 15-Jul-14 41 -
St
Required: Suggest the necessary journal entries in the books of Gilgit Company Limited.

(MA)
Question 59. [Right shares]
On 1 March 2014, Akbar Company Limited purchased 350,000 shares of Joda Limited for Rs. 12,250,000
as a long-term investment. On April 5, 2014, Joda Limited announced the issuance of one right share for
A
every 4 shares held by the shareholders of the company at exercise price of Rs. 20. Par value of the
shares is Rs. 10 per share. Market value of shares and letter of right on relevant dates are as follow:
C
Market value Market value of
Event Date
-A
of shares letter of right
Purchase of 350,000 shares 1-Mar-14 35 -
Announcement date - (Cum-right) 5-May-14 37 -
Book closure - (Cum-right) 26-May-14 38 -
i
an
Year-end – (Ex-right) 30-Jun-14 35 -
Letter of right issued 15-Jul-14 36 16
Exercise date 1-Jul-14 41 -
an
Required: Suggest the necessary journal entries in the books of Akbar Company Limited in the following
Kh
situation:
(a) If the rights are exercised.
(b) If the rights are not exercised but are sold at Rs. 17 per right on 20 July 2014.
an
(c) If the rights are not exercised and are allowed to expire.
Question 60. Interest rate SWAP

sa
Entity X issued Rs. 100 million of 5 year variable rate debt on 1 January 2000. The variable rate of the
debt is KIBOR plus spread of 200 basis points. Initial KIBOR is 5 percent. The debt pays interest on an
as
accrual basis and the rate of interest reset on annual basis on 31 December.
On 1 January 2000, Entity X entered into a five year pay fixed and received KIBOR interest rate SWAP
H
with the notional amount of Rs. 100 million. The interest rate SWAP is on the market at inception and
has fair value of zero. The term of the interest rate SWAP are as follows:
ith
Notional Amount Rs. 100 million

Entity X pays 5.5 %
Entity X receives KIBOR
tw
Payment and receipt date Annually on 31st December

Variable reset Annually on 31st December
ar
The KIBOR and fair value of interest rate SWAP are as follow:
Sm
Date KIBOR Fair value of interest rate SWAP

1 January 2000 5% -
31 December 2000 6.57% Rs. 4,068,000
31 December 2001 7.7% Rs. 5,793,000
y
31 December 2002 6.79% Rs. 2,303,000

ud
31 December 2003 5.76% Rs. 241,000

St

(MA)
14 HEDGE ACCOUNTING
HEDGING
A
Hedging is the process of entering into a transaction in order to reduce risk. Companies
C
may use derivatives to establish ‘positions’, so that gains or losses from holding the
position in derivatives will offset losses or gains on the related item that is being
-A
hedged.
HEDGE ACCOUNTING
i
Hedge accounting provides special rules that allow the matching of the gain or loss on
an
the derivatives position with the loss or gain on the hedged item. This reduces volatility
in the statement of financial position and the statement of profit or loss, and so is very
an
attractive to the preparers of accounts. Hedge accounting is optional, not obligatory.
Under IFRS 9, hedge accounting rules can only be applied if hedging relationship meets
Kh
the following criteria:
i. Hedging relationship consists only of
- Eligible hedged items and
- Eligible hedging instruments an
sa
ii. At inception of hedge, there must be formal designation and documentation
identifying
- Risk management objective and strategy
as
- Eligible hedged item

- Eligible hedging instrument
H
- Nature of the risk being hedged.

- How hedge effectiveness will be assessed.
ith
iii. Hedging relationship must meet hedge effectiveness requirements.

tw
ELIGIBLE HEDGE ITEM

A hedged item is ① asset, ② liability, ③ firm commitment, ④ highly probable
ar
forecast transaction or ⑤ net investment in a foreign operation that exposes the entity
to risk of changes in fair value or future cash flows and is designated as being hedged.
Sm
ELIGIBLE HEDGE INSTRUMENT

A hedging instrument is a designated derivative or a designated non-derivative financial
y
asset or non-derivative financial liability measured at FVTPL whose fair value or cash
ud
flows are expected to offset changes in the fair value or cash flows of a designated
hedged item.
St

(MA)
HEDGE EFFECTIVENESS CRITERIA
An entity must assess at inception and at each reporting date whether the hedge
A
meets all of the following hedge effectiveness criteria:
C
i. Economic relationship: There must be an economic relationship between
hedged item & hedging instrument meaning that the hedging instrument and
-A
the hedged item must be expected to have offsetting changes in fair value.
For example, an entity with a Rupees as functional currency might sell goods or
services to customers that use US dollars. If the entity entered into a forward
i
an
contract to exchange US dollars for Rupees on a specified future date (to
coincide with the expected date of US dollar payments by customers), changes in
an
the fair value of that forward contract would be expected to offset changes in
the fair value of cash to be collected that is denominated in US dollars.
Kh
ii. Credit risk: The effect of credit risk does not dominate the change in value from
that economic relationship i.e. the fair value changes due to credit risk should
not be a significant driver of the changes in fair value of either the hedging
instrument or the hedged item.
an
iii. Hedge ratio: Hedge ratio is the same for both the:
sa
- Hedging relationship
- Quantity of the hedged item actually hedged, and the quantity of the
as
hedging instrument used to hedge it.

For example, an entity hedges 90% of the foreign exchange exposure of a
H
financial instrument. The hedging relationship should be designated using a

hedge ratio resulting from 90% of the foreign currency exposure and the
ith
quantity of the hedging instrument that the entity actually uses to hedge the
90%.
tw
Hedge effectiveness relates to expectations and therefore the assessment of

effectiveness must be forwards-looking (prospective).
ar
Sm
y
ud
St

(MA)
14.1 HEDGE ACCOUNTING MODELS
Where the conditions for using hedge accounting are met, the method of hedge
A
accounting to be used depends on the type of hedge.
C
There are three types of hedging relationship:
i. Fair value hedges
-A
ii. Cash flow hedges; and
iii. Hedges of a net investment in a foreign entity (accounted for as a cash flow hedge).
i
an
14.2 FAIR VALUE HEDGE
an
Fair value hedge is a hedge of exposure to changes in fair value of a recognised asset
or liability or firm commitment that is attributable to a risk that could effect P/L.
Kh
For example, oil held in inventory could be hedged with an oil forward contract to
hedge the exposure to a risk of a fall in oil sales prices or the risk of a change in the
fair value of a fixed rate debt owed by a company could be hedged using an interest
rate swap.
ACCOUNTING TREATMENT an
sa
At the reporting date, hedging instrument and hedged item will be measured at fair
value.
as
Gain / (loss) on hedge instrument and (loss) / gain on hedge item will be recorded:
H
- in P/L in most cases, but

- in OCI if the hedged item is an investment in equity measured at FVTOCI.
ith
tw
ar
Sm
y
ud
St

(MA)
14.3 CASHFLOW HEDGE
Cash flow hedge is a hedge of exposure to variability in cash flows that is
A
attributable to a particular risk associated with a recognised asset or liability or a
highly probable forecast transaction.
C
For example, floating rate debt issued by a company might be hedged using an
-A
interest rate swap to manage increases in interest rates or future US dollar sales of
airline seats by a Pakistani company might be hedged by a US$/Rs. forward contracts
to manage changes in exchange rates. These are hedges relating to future cash flows
i
an
from interest payments or foreign exchange receipts.
ACCOUNTING TREATMENT
an
At the reporting date, hedge instrument will be re-measured to fair value.
Effective portion of gain/ (loss) on hedge instrument is recognized in OCI (Cash Flow
Kh
Hedge Reserve –CFHR). Effective portion is the gain/ (loss) on the hedge instrument
to the extent of (loss)/ gain on hedged item.
an
Ineffective portion of gain/ (loss) on hedge instrument is recognized in P/L. Effective
portion is the gain/ (loss) on the hedge instrument in excess of (loss)/ gain on
hedged item.
sa
Gain /(loss) on hedging instrument recognised in OCI (i.e. CFHR) will reclassified to
as
P/L when the hedged transaction affects P/L. However, in case of forecast
transactions that results in a non-financial asset/liability, CFHR is removed and
H
included in initial cost of the non-financial asset/liability.

If hedge accounting ceases for a CF hedge because forecast transaction is no longer
ith
expected to occur, gain / (loss) deferred in OCI must be taken to P/L immediately.
If transaction is still expected to occur but hedge relationship ceases, amounts
tw
accumulated in equity will be retained in equity until the hedged transaction occurs.
DISCONTINUATION OF HEDGEACCOUNTING
ar
Discontinuance of hedge accounting is accounted for prospectively

Sm
Hedge accounting must be discontinued if :

- Hedging relationship no longer meets the qualifying criteria
- Hedging instrument is expired, sold, terminated or exercised
y
ud
St

(MA)
14.4 HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION [IFRIC 16]
Foreign operation: An entity that is a subsidiary, associate, joint venture or branch of
A
a reporting entity, the activities of which are based or conducted in a country or
currency other than those of the reporting entity.
C
Net investment in a foreign operation: the amount of the reporting entity’s interest
-A
in the net assets of that operation.
It is a hedge of an entity’s interest in the net assets of a foreign operation.
i
an
It can be applied only to foreign exchange differences arising between parent’s
functional currency and foreign operation’s functional currency.
an
The hedging instrument may be held by any entity within the group.
Hedge accounting of the foreign exchange risk of the net investment in a foreign
Kh
operation only applies in financial statements where the interest in the foreign
operation is included as the investing company’s share of its net assets. This means
that hedge accounting in respect of the foreign exchange risk associated with an
an
investment in a foreign subsidiary is only allowed in the consolidated financial
statements.
sa
Under IAS 21, the net assets of the foreign subsidiary are translated at the end of
each financial year, and any foreign exchange differences are recognised in other
as
comprehensive income (until the foreign subsidiary is disposed of, when the
cumulative profit or loss is then reclassified from ‘equity’ to profit or loss).
H
ACCOUNTING TREATMENT
ith
Accounting treatment for hedge instrument is same as for cash flow hedge. Effective
portion of gain/ (loss) on hedge instrument is recognized in OCI whereas ineffective
portion of gain/ (loss) on hedge instrument is recognized in P/L
tw
Upon disposal of the foreign operation, following foreign exchange translation

reserve will be reclassified to P/L:
ar
- Cumulative translation reserve recorded on consolidation of net investment (IAS

Sm
21); &
- Cumulative effective gain / (loss) on hedging instrument (IFRS 9)
y
ud
St

(MA)
Question 61. [Fair value hedge] [IFRS Kit – IFRS Box]
On 1 October 2016, Coffee Toffee Ltd. acquired 25,000 pounds of coffee beans at Rs. 150 / pound.
Coffee Toffee's managers are concerned about falling prices of coffee beans on the market and
A
therefore, they decided to enter into commodity forward contract to sell 25,000 pounds of coffee beans
at Rs. 152.5 / pound with the delivery on 31 March 2017.
C
On 31 December 2016 (Year-end), the market price of coffee beans is Rs. 151.8 / pound and similar
-A
commodity forward contracts with delivery on 31 March 2017 sell for Rs. 154 / pound.
On 31 March 2017, Coffee Toffee sold the inventory of coffee beans and closed out the commodity
forward at the spot price of Rs. 162.6 / pound by cash settlement. Assume all hedge accounting criteria
i
are met
an
Required: What journal entries shall Coffee Toffee make with respect to this transaction?
an
Question 62. [Fair value hedge] [AAFR Past Paper – Winter 2012, Q2(a), 5 marks]
The following information pertains to Crow Textile Mills Limited (CTML) for the year ended 30 June
Kh
2012:
(a) Stocks include 4,000 maunds of cotton which was purchased on 1 April 2012 at a cost of Rs. 6,200
per maund. In order to protect against the impact of adverse fluctuations in the price of cotton, on
the price of its products, CTML entered into a six months futures contract on the same day to deliver
an
4,000 maunds of cotton at a price of Rs. 6,300 per maund.
At year end i.e. 30 June 2012, the market price of cotton (spot) was Rs. 5,500 per maund and the
sa
futures price for September delivery was Rs. 5,550 per maund.
All necessary conditions for hedge accounting have been complied with. (05)
as
Required: Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.
H
Question 63. [Fair value Hedge – IRS] [AAFR Past Paper – Summer 2017, Q5, 10 marks]
ith
On 1 October 2016, Pasham Telecom Limited (PTL) raised Rs. 900 million by issuing 5-year Term Finance
Certificates (TFCs) at par value of Rs. 1,000 each carrying interest at a fixed rate of 8% per annum. The
interest is payable at the end of each quarter whereas principal will be repaid in lump sum at the end of
tw
5 years.
Considering the expected decline in interest rate, PTL entered into swap agreements (at market rates) of
ar
an equal amount i.e. Rs. 900 million. The brokerage house which facilitated the agreements was paid a
brokerage of Rs. 1.0 million. The swap agreements would allow PTL to receive a fixed rate of 6.5% per
Sm
annum whereas PTL would pay a variable rate. Both payments would be made at the beginning of each
quarter. The swap agreements have the same maturity dates as the TFCs.
All necessary documentation was completed on 1 October 2016 when the variable interest rate was 6.27%
y
per annum.
ud
On 31 December 2016, as a result of a rise in market interest rates, the fair value of the TFCs fell to Rs.
992 per TFC and the net fair value of the swap was Rs. 7.29 million (loss).
St
Required: Explain how the above transactions should be accounted for in the books of PTL during the year
ended 31 December 2016 assuming that hedging criteria are met. Show all relevant calculations.

(MA)
Question 64. [Cash flow Hedge] [AAFR Past Paper – Winter 2015, Q6, 9 marks]
Asia Sports Limited (ASL) signed a contract on 1 May 2015 to buy high speed machines to cater to the
growing demand of its products. The machines cost USD 6 million and the amount was paid on 1 August
A
2015.
C
ASL hedged the foreign exchange risk by entering into a 3-month forward contract with a bank to buy
USD 6 million on 1 August 2015.
-A
The spot and forward rates per USD were as follows:
Forward rates (for delivery
Dates Spot Rates
on 1 August 2015)
i
an
1 May 2015 Rs. 103.20 Rs. 103.63
30 June 2015 Rs. 105.38 Rs. 105.50
1 August 2015 Rs. 106.00 Rs. 106.00
an
ASL’s financial year ends on 30 June.
Kh
Required: Show all necessary accounting entries relating to these transactions on the following dates, in
accordance with the requirements of the International Financial Reporting Standards on the assumption
that conditions for hedge accounting are met:
(i)
(ii)
1 May 2015
30 June 2015 an
sa
(iii) 1 August 2015
Question 65. [Cash flow hedge] [AAFR Past Paper – Winter 2013, Q7, 16 marks]
as
Dynamic Steel Limited (DSL) signed an agreement on 1 June 2013 for import of equipment for SK 50
million. According to the agreement, the plant was delivered on 1 November 2013 and invoice thereof
H
was paid on 1 December 2013.

In order to hedge the commitment to pay SK 50 million, on 1 June 2013, DSL entered into a forward
ith
contract to buy the required SK on 1 December 2013 at a fixed exchange rate of SK 1=Rupees 15.
Exchange rates on various dates are as follows:
tw
1-Jun-2013 30-Sep-2013 1-Nov-2013 1-Dec-2013

SK 1
Spot rate Rs. 14.50 12.00 11.15 10.00
ar
Froward rate Rs. 15.00 12.39 11.35 -

Sm
It is DSL's policy to adjust any gain or loss arising on forward contracts to the carrying value of the
imported goods. DSL’s accounting year end is 30 September.
Required: Prepare accounting entries relating to the above transactions, on each of the above dates, in
accordance with the requirement of IFRS.
y
ud
St

(MA)
Question 66. [Cash flow Hedge - Interest rate SWAP]
Entity X issued Rs. 100 million of 5 year variable rate debt on 1 January 2000. The variable rate of the
debt is KIBOR plus spread of 200 basis points. Initial KIBOR is 5 percent. The debt pays interest on an
A
accrual basis and the rate of interest reset on annual basis on 31 December.
C
On 1 January 2000, Entity X entered into a five year pay fixed and received KIBOR interest rate SWAP
with the notional amount of Rs. 100 million. The SWAP is designated as cash flow hedge of the
-A
forecasted future interest payments on the KIBOR portion of the debt. Entity does not intend to
repurchase the debt prior to its maturity. The interest rate SWAP is on the market at inception and has
fair value of zero.
i
The term of the interest rate SWAP are as follows:
an
Notional Amount Rs. 500 million
Entity X pays 5.5 %
an
Entity X receives KIBOR
Payment and receipt date Annually on 31st December
Kh
Variable reset Annually on 31st December
The interest rate SWAP is expected to be highly effective because the principal terms and conditions of
the debt and SWAP match.
Date
1 January 2000
KIBOR
5%
an
Fair value of interest rate SWAP
-
sa
31 December 2000 6.57% Rs. 4,068,000
31 December 2001 7.7% Rs. 5,793,000
as
31 December 2002 6.79% Rs. 2,303,000

31 December 2003 5.76% Rs. 241,000
H

ith
Question 67. [Cash flow hedge] [P2 Exam Kit, Dec 13, 3 marks]
Bental, a listed company, had a number of highly probable future sales transactions that qualified for
tw
cash flow hedge accounting. The hedges were considered to be effective and gains on the hedging
instruments had been recognised in accordance with IFRS 9 Financial Instruments. At 30 November
2013, it was decided that the hedged transactions were no longer highly probable, although they are
ar
still more likely than not to occur. Bental requires advice on how to deal with this.
Sm
y
ud
St

(MA)
Question 68. [Derivative and hedge accounting] [P2 Exam Kit]
Artwright, a public limited company, produces artefacts made from precious metals. Artwright has
entered into three derivative contracts during the year ended 30 November 20X4, details of which are
A
as follows:
Initial
C
Fair value at
recognition at Reason
the year-end
-A
fair value
Artwright believes that oil prices are due to rise in the future
so during the year has entered into oil futures contract to
$20m buy oil at a fixed price. Artwright has no exposure to oil
A Nil
i
(Liability) prices in the course of its business. In fact, oil prices have
an
fallen resulting in the loss at the year-end.
an
Artwright has an investment in equity designated to be
measured at fair value through other comprehensive
income. Artwright is concerned the investment will fall in
Kh
value and it wishes to cover this risk. Thus during the year it
$9m
B $1m has entered into derivative B to cover any fall in value and
(Liability)
designated this as a hedging instrument as part of a fair
an
value hedge. In fact, the asset has risen in value by $8.5
million.
sa
Artwright is concerned about the potential for raw material
prices to rise. It wishes to cover this risk that future costs will
as
rise over the next two to three years. Thus it has entered
$25m
C Nil into derivative C – a futures contract. This arrangement has
(Asset)
been designated as a cash flow hedge. At the year-end the
H
raw material prices have risen, potentially giving the

company an increased future cost of $24 million.
ith
All designated hedges meet the effectiveness criteria outlined in IFRS 9 Financial Instruments.
tw
Required: Discuss how each of the three derivatives would be accounted for in the financial statements
for the year ended 30 November 20X4.
ar
Sm
y
ud
St

(MA)
15 DERECOGNITION OF FINANCIAL ASSETS
An entity shall derecognize a financial asset when:
A
(a) the contractual rights to the cash flows from the financial asset expire; or
C
(b) the financial asset is transferred and substantially all of the risks and rewards of
ownership pass to the transferee; or
-A
(c) the financial asset is transferred, substantially all of the risks and rewards of
ownership are neither transferred nor retained but control of the asset has been
lost.
i
an
Derecognition of a financial asset is often straightforward, as the above criteria can be
implemented easily. For example, a trade receivable should be derecognised when an
an
entity collects payment. The collection of payment signifies the end of any exposure to
risks or any continuing involvement.
Kh
However, financial assets may be subject to complicated transactions where some of
the risks and rewards that attach to an asset are retained but some are passed on. This
is explained by way of flow chart on the next page.
ACCOUNTING TREATMENT an
On derecognition of a financial asset, the difference between:
sa
(a) the carrying amount (measured at the date of derecognition) and
as
(b) the consideration received (including any new asset obtained less any new liability
assumed)
H
shall be recognized in profit or loss.

ith
tw
ar
Sm
y
ud
St

(MA)
The following flow chart illustrates the evaluation of whether and to what extent a
financial asset is derecognised:
A
C
i -A
an
an
Kh
an
sa
as
H
ith
tw
ar
The following points relate to this flowchart:

(a) If the contractual rights to receive the cash flows from the asset have expired or
Sm
have been wholly transferred, the whole of the asset should be derecognized. This
is also the case if the contractual rights have been retained by the entity but it has
assumed a contractual obligation to pay the cash flows to one or more recipients.
y
Such an obligation is only assumed if:

ud
The entity has no obligation to pay unless amounts are actually collected;
The entity is forbidden to sell or pledge the original asset other than to the
St
recipient of the cash flows; and

The entity must remit the cash flows collected without material delay.
(MA)
(b) If an entity has sold just a portion of the cash flows arising from an asset, only part
of the asset should be derecognised.
(c) If substantially all the risks and rewards of ownership have been transferred, the
A
financial asset should be derecognised; if they have not, it should not.
C
(d) If the entity has neither retained nor transferred all the risks and rewards of
-A
ownership, it should determine whether it has retained control of the financial
asset. If it has, it continues to recognise the asset to the extent of its continuing
involvement.
i
an
Some common transactions, such as repurchase agreements and factoring, that are
employed in order to try to remove assets from the statement of financial position are
an
discussed below.
Remember always to apply the principle of substance over form.
Kh
15.1 REPURCHASEAGREEMENT
In repurchase agreement, a financial asset is sold with a simultaneous agreement to buy
it back at some future date at an agreed price.
an
If repurchase is at specified price, continue to recognize the financial asset and
sa
recognize the financial liability for cash received.
as
If repurchase at fair market price, derecognize the financial asset and debit the
consideration received with any gain / (loss) recognized in P/L.
H
15.2 FACTORING
ith
In a factoring transaction, one party transfers the right to some receivables to another
party for an immediate cash payment. Factoring arrangements are either with recourse
tw
or without recourse.
In factoring without recourse, the transferor does not provide any guarantees about
ar
the performance of the receivables. In such case, the entity has transferred the risks and
rewards of ownership of asset and therefore the entity shall derecognize the receivables
Sm
against the consideration received with any gain / (loss) recognized in P/L.
In factoring with recourse, the transferor sells its invoices to a factor, with the promise
to buy back any uncollected invoices. The factor does not take the risk of any
y
uncollected invoices. The transferor has not therefore transferred fully the risks to
ud
another party. In such case, the entity shall not derecognize the receivable and
recognize financial liability for consideration received.
St

(MA)
Where the entity provide guarantee to pay for default losses on a transferred assets,
the entity shall record:
Transferred asset
A
Transferred asset is measured at lower of:
C
- Carrying amount of asset; or
-A
- Maximum amount of the consideration in the transfer that the entity could be
required to repay (“Guarantee amount”).
Subsequently, the carrying amount of the asset is reduced by an impairment losses.
i
an
Associated liability
Associated liability is initially measured at the
an
- Guarantee amount plus
- FV of the guarantee.
Kh
Subsequently, FV of guarantee is recognized in P/L on time proportion basis.
15.3
an
SALE OF FINANCIAL ASSET (AT FV) WITH PURCHASED CALL OPTION
Where a financial asset is sold along with call option that provides the transferor a right
sa
(not obligation) to repurchase the asset from transferee at specified price, the entity
shall record:
as
Transferred asset
Transferred asset shall be measured at fair value.
H
ith
Associated liability shall be measured at:

- If option is in or at the money Option exercise price less time value of option.
tw
- If option is out of the money Fair value less time value of option.
15.4 SALE OF FINANCIAL ASSET (AT FV) WITH WRITTEN PUTOPTION

ar
Where a financial asset is sold along with put option that provides the transferee a right
Sm
(not obligation) to sell the asset to transferor at specified price, the entity shall record:
Transferred asset
Transferred asset shall be measured at lower of:
y
- Fair value; or
ud
- Option exercise price

St
Associated liability shall be measured at option exercise price.

(MA)
Question 69. [Derecognition of financial asset]
Zed Limited bought an investment (shares) for Rs. 40 million plus associated transaction cost of Rs. 1
million. At the reporting date, fair value of the shares had risen to Rs. 60 million. Shortly after the
A
reporting date, the shares were sold for Rs. 70 million.
C
-A
(a) The investment was classified at FVTPL
(b) The investment was classified at FVTOCI.
Question 70. [Derecognition of part of financial asset] [IFRS Kit – IFRS Box]
i
On 1 January 20X1, ABC provided a loan to DEF amounting to Rs. 500,000 with maturity date on 31
an
December 20X7. DEF pays annual interest of Rs. 30,000 on 31 December each year in arrears. ABC
recognizes the loan as a financial asset at amortized cost.
an
On 1 January 20X4, ABC unconditionally sells the right to receive remaining 4 interest payments to the
Bee Bank for the fair value of 4 future payments amounting to Rs. 108,897. The fair value of 4 future
Kh
payments was calculated based on the current market interest rate that would be available to the
borrower of 4%.
Required: What journal entries should ABC make in relation to this transaction?
Question 71. [Factoring without recourse] an

Company A has sold its trade receivable of Rs. 35 million to a Factoring Co. for Rs. 33 million. Under the
sa
terms of factoring arrangement this is the only money that Company A will receive regardless of when
or even if the customer settles the debt that is the factoring arrangement is said to be without recourse.
as
However, Company A continue to service the receivables, as the debtors have not been informed that
their receivables have been transferred.
H

ith
Question 72. [Factoring with recourse]

Company A has sold its trade receivable of Rs. 35 million to a Factoring Co. and received an initial
amount of Rs. 30 million. The receivable have 90 days terms. Under the terms of factoring arrangement
tw
if the debtors settles on time, Factoring Co. will pay further sum of Rs. 5 million to Company A less
interest on initial amount of Rs. 30 million @ 10% and any default (i.e. debtors not settling their account
within 90 days).
ar
After 90 days, 90% of the debtor pays on time, whereas 10% debtors are still outstanding.
Sm
Question 73. [Factoring without recourse] [CFAP 1 – Study Support Material]

ABC sells Rs. 100,000 of its accounts receivables to a factor and receives an 80% advance immediately.
y
The factor charges a fee of Rs. 8,000 for the service.

ud
The debts are factored without recourse and a balancing payment of Rs. 12,000 will be paid by the
factor 30 days after the receivables are factored.
St

(MA)
Question 74. [Factoring with recourse] [CFAP 1 – Study Support Material]
ABC sells Rs. 100,000 of its accounts receivables to a factor and receives an 80% advance immediately.
The factor charges a fee of Rs. 8,000 for the service.
A
The debts are factored with recourse and a further advance of 12% will be received by the seller if the
C
customer pays on time.
-A
Question 75. [Factoring – De-recognition with continuing involvement] [IFRS Kit – IFRS Box]
Food Co. big food producer, has a portfolio of trade receivables to retail chains and decides to sell a part
i
of its portfolio to the factoring company. Carrying amount of sold portfolio is Rs. 5,000,000, fair value of
an
portfolio is Rs. 5,050,000 and the cash received from factoring company for the portfolio is Rs.
4,990,000. The related contract says:
an
Rs. 4,970,000 represents the payment for the receivables
Rs. 20,000 represents the payment for the guarantee. According to the guarantee, Food Co.
Kh
agrees to refund the credit losses from portfolio up to Rs. 500,000 to the factoring company.
What journal entries should Food Co. make in relation to this transaction?
Question 76. [Repo transaction / repurchase agreement] [ICAEW Corporate reporting – Study Manual]
an
An entity sold an equity investment classified as FVTOCI to a counter party for Rs. 840. The entity had
previously recognized a gain of Rs. 100 in other comprehensive income in respect of this investment. On
sa
the same date, it entered into a 60 days contract to repurchase the equity investment from the counter
party for Rs. 855 less any equity distribution received by the counter party during the 60 days period.
as
Question 77. [Repo transaction / repurchase agreement] [IFRS Kit – IFRS Box]
H
ABC Co. holds a government bond of Rs. 1,000 issued on 1 January 20X1, paying interest of Rs. 20 twice
a year and redeemable on 31 December 20X5 at par. ABC Co. accounts for this bond at amortized cost.
ith
On 1 January 20X4, ABC enters into the following REPO transaction with the Bee Bank:
The bond is sold for Rs. 900 which is the fair value of bond at the time of transaction.
ABC will purchase the same bond back on 1 January 20X5 for Rs. 930.
tw
Bee Bank will receive bond's coupon payments (interest) on 30 June 20X4 and 31 December
20X4 (as it is a legal owner).
ar
How should this transaction be reflected in the financial statements of ABC?

Sm
y
ud
St

(MA)
Question 78. [Repo transaction] [AAFR Past Paper – Summer 2012, Q4(ii), 6 marks]
Zee Power Limited (ZPL) has been facing short term liquidity issues during the financial year ended on 31
December 2011. As a result, the following transactions were undertaken:
A
(ii) On 27 December 2011, ZPL sold its investment in listed Term Finance Certificates (TFCs) to
C
Vee Investment Company Limited with an agreement to buy them back in 10 days. Relevant
details are as follows:
-A
Rupees
Sale price 10,150,000
Buy back price 10,183,337
Value in ZPL’s books as on 27 December 2011 10,144,332
i
an
Market price as on 31 December 2011 10,163,125
ZPL intends to hold these TFCs till maturity.
an
Required: Prepare journal entries to record the above transactions in the books of Zee Power Limited.
Kh
Question 79. [Sale of asset with call option]
On 1 October 2010, Mohammad Ali Ltd. entered into a contract to sell its financial assets (carrying value
is Rs. 250,000) as follow:
Sale price = Rs. 260,000
an
Mohammad Ali Ltd. will be having a call option for such assets under which Mohammad Ali Ltd.
sa
has an option to repurchase the asset at an excise price of Rs. 300,000 at any time on or before
31 December 2013.
as
The details of fair value of financial asset and value of option are as follow:
Time value of Intrinsic value of
Dates Fair value of asset Value of option
H
option option
1 October 2010 300,000 40,000 40,000 -
31 December 2010 320,000 50,000 30,000 20,000
ith
31 December 2011 370,000 90,000 20,000 70,000

31 December 2012 280,000 - 10,000 -
tw
31 December 2013 260,000 - - -

ar
Question 80. [Sale of asset with put option]

Sm
On 1 October 2010, Danish Ltd. entered into a contract to sell its financial assets (carrying value is Rs.
250,000) at a price of Rs. 320,000 along with the put option for the buyer under which buyer has an
option to sell the financial asset to Danish Ltd. at an excise price of Rs. 300,000 at any time on or before
31 December 2013. In case of exercise of option by buyer, Mr. Danish would be obliged to purchase
asset at the agreed excise price.
y
ud
St

(MA)
The details of fair value of financial asset and value of option are as follow:
Time value of Intrinsic value of
Dates Fair value of asset Value of option
option option
A
1 October 2010 300,000 20,000 20,000 -
C
31 December 2010 320,000 35,000 15,000 20,000
31 December 2011 370,000 80,000 10,000 70,000
-A
31 December 2012 280,000 - 5,000 -
31 December 2013 260,000 - - -
i
an
Question 81. [Exchange of financial asset] [AAFR Past Paper – Winter 2008, Q2(c), 7 marks]
Red Limited has carried out the following transactions during the year ended June 30, 2008.
an
(c) The company holds 500,000 shares of Green Limited (GL), a listed company, which were
purchased many years ago at Rs. 10 per share. The transaction cost on purchase was Rs.
Kh
120,000. The shares were classified as “FVTOCI”. On May 31, 2008, the fair value of GL’s shares
was Rs. 20 per share. On the same day, GL was acquired by Orange Limited (OL), a listed
company. As a result, Red Limited received 200,000 shares of OL which had a market value of
Rs. 65 per share, on that date.
an
Required: Prepare journal entries to record the above transactions including the effect of deferred tax
thereon, if any, in the books of Red Limited, for the year ended June 30, 2008.
sa
Question 82. [Exchange of financial asset] [AAFR Past Paper – Summer 2014, Q2, 8 marks]
as
Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired 20,000 ordinary
shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based company at a cost of AED 240,000
which was equivalent to Rs. 6,000,000. The face value of the shares is AED 10 each. OL intends to hold
H
the shares to avail benefits of regular dividends and capital gains.

On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL in exchange for
ith
every four shares held in AWL.

Other relevant information is as under:
tw
AWL HL
Final dividend received on 31 March 2013:
- Cash 15% -
ar
- Bonus shares 10% -

Final cash dividend received on 10 April 2014 - 20%
Sm
Fair value per share as at: 31 December 2012 AED 13.00 -

1 June 2013 AED 14.00 AED 18.00
31 December 2013 - AED 19.50
Exchange rates on various dates were as follows:
y
ud
31-Dec-2012 31-Mar-2013 1-Jun-2013 31-Dec-2013 10-Apr-2014

1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20
Required: Determine the amounts (duly classified under appropriate heads) that would be included in
St
OL’s statement of comprehensive income for the year ended 31 December 2013 in respect of the above
investment.

(MA)
16 DERECOGNITION OF FINANCIAL LIABILITY
A financial liability is derecognized only when extinguished i.e. when the obligation
A
specified in the contract is discharged or cancelled or expired.
C
The difference between the carrying amount of a financial liability extinguished or
transferred to a 3rd party and the consideration paid is recognised in P/L.
-A
16.1 EXTINGUISHING FINANCIAL LIABILITIESWITH EQUITY INSTRUMENTS [IFRIC 19]
BACKGROUND AND SCOPE
i
an
Terms of a liability might be renegotiated such that the lender (creditor) accepts
equity instruments as payment instead of cash.
an
IFRIC19 sets out how a borrower that issues equity instruments to extinguish all or
part of financial liability should account for the transaction.
Kh
Following transactions are scoped out of IFRIC 19:
- Transactions with the creditor in its capacity as an existing shareholder(e.g. a
-
rights issue);
an
Lender and borrower are controlled by the same party or parties before and
sa
after the transaction; or
- Issue of equity shares to extinguish debt is in accordance with original terms of
as
financial liability (such as convertible debt).

H
ISSUES ADDRESSED
ISSUES CONSENSUS
ith
1. Are equity instruments issued Issue of equity instruments is “consideration

tw
to extinguish financial liability paid” to extinguish all or part of a financial

considered “consideration liability. This leads to derecognition of the
paid”? liability.
ar
If fair value of equity instrument issued is

Sm
reliably measured
Equity instruments issued must be initially
2. How should an entity initially measured at fair value of the issued equity
measure the equity instruments.
y
instruments issued? If fair value of equity instrument issued is not

ud
reliably measured
Equity instrument issued can be measured
St
at fair value of the liability extinguished.

(MA)
ISSUES CONSENSUS
3. How should the entity account Difference between the carrying amount of
A
for any difference between the liability extinguished and consideration paid
carrying amount of the liability must be recognised in P/L.
C
and the equity instruments Separate line item or disclosure in the notes is
-A
issued? required.
PART EXTINGUISHMENT – ADDITIONAL CONCERNS
i
an
If only part of the financial liability is extinguished, entity is required to assess
whether some of the consideration paid relates to a modification of the terms of the
an
outstanding liability
If some of the consideration paid relates to modification of terms of remaining
Kh
liability, the entity allocates the consideration paid between
- Part of the liability extinguished and
- Part of the liability that remains outstanding.
an
and apply “modification of financial liability” rules accordingly.
sa
as
H
ith
tw
ar
Sm
y
ud
St

(MA)
Question 83.
ABC Ltd has been carrying a loan of Rs. 3,000,000 at the interest rate of 12% on its balance sheet. In
order to obtain a further borrowing from a bank, it need to improve its debt to equity ratio. For the
A
purpose, it negotiated with its previous lenders to issue 35,000 shares in the company against the loan
of Rs. 3,000,000.
C
Journalize the above if:
-A
(a) The fair value of share is Rs. 110 per share.
(b) The fair value of liability is Rs. 3,400,000 and more reliable then FV of shares.
i
(c) Fair value of both the liability and equity is not ascertainable.
an
Question 84.
On 1st January 2010, a financial liability with a carrying amount of Rs. 1,000,000 was appearing the books
an
of ABC Ltd. The liability carried a coupon rate of 12% and effective rate of 14.5%. On 1st September
2010, the 70% of the liability was extinguished by issuing 10,000 ordinary shares of the company (Par
Kh
value Rs.10). Fair value of equity was 120% of the amount of liability extinguished. No interest would be
paid on the portion of liability extinguished as the settlement price contains a consideration for it.
Question 85. an [CFAP 1 – Study Support Material]

On 1st January 2010, X Limited borrowed Rs. 25,000,000 on the following terms:
sa
Face value Rs. 25,000,000
as
Term of loan 10 years

Redemption value Rs. 30,000,000
Coupon rate 12%
H
Effective rate (IRR) 13.08150%

ith
On 31 December 2015, X Limited has fallen into financial difficulties and renegotiated the terms of the
loan. The lender has agreed to extinguish 55% of the loan in exchange for an equity stake in X Limited.
The terms of the agreement were as follows:
tw
Value of shares to be issued by X Limited to lender of which Rs. 17,000,000

- Consideration for extinguishment of 55% of the loan Rs. 16,500,000
ar
- Shares issued for modification (restructuring fee) Rs. 500,000

Market rate at the date of arrangement 14.5%
Sm
Under the terms of the modification no interest will be paid on the remaining amount and a sum of Rs.
30,000,000 will be paid at the end of the term. (5 Years from now)
y
Required: Show how X Limited must account for the modification to the terms of the loan.
ud
St

(MA)
FINANCIAL INSTRUMENTS
Compiled by: Hassaan Khanani
FINANCIAL INSTRUMENTS
IAS 32 – Financial Instruments: IFRS 9 – Financial Instruments IFRS 7 – Financial Instruments: IFRS 13 – Fair value
Presentation Disclosures measurement
 Classification
 Definitions - Financial asset  Disclosure requirement  Framework for fair value
- Financial instrument - Financial liability Measurement
- Financial asset  Measurement  Applies across IFRS
- Financial liability  Reclassification
- Equity instrument  Modification / Restructuring
Connected IASs and IFRICs
- Derivative  Regular way transaction
 Debt v/s equity  Impairment  IAS 21: The Effects of Changes in Foreign Exchange Rates
 Compound financial  Derivatives  IFRIC 16: Hedges of a Net Investment in a Foreign
instrument  Embedded derivatives  Operation
 Treasury shares  Hedge accounting  IFRIC 19: Extinguishing Financial Liabilities with Equity
 Offsetting  Derecognition Instruments
IMPORTANT DEFINITIONS
FINANCIAL INSTRUMENT FINANCIAL LIABILITY

is a contract that giver rise to both:
 A financial asset of one entity  A contractual obligation:
 Either a financial liability or an equity instrument of another entity i. To deliver cash / another financial asset to another entity; or
ii. To exchange financial assets / financial liabilities under conditions
that are potentially unfavorable to the entity
FINANCIAL ASSET  A contract that will or may be settled in the entity’s own equity
instruments and is:
 Cash i. A non-derivative for which the entity is or may be obliged to
 An equity instrument of another entity deliver a variable number of the entity’s own equity instruments;
 A contractual right: or
i. To receive cash / another financial asset from another entity; or ii. A derivative that will or may be settled other than by the
ii. To exchange financial assets / financial liabilities under conditions exchange of a fixed amount of cash or another financial asset for
that are potentially favorable to the entity a fixed number of the entity’s own equity instruments.
 A contract that will or may be settled in the entity’s own equity
instruments and is:
i. a non-derivative for which the entity is or may be obliged to EQUITY INSTRUMENT
receive a variable number of the entity’s own equity instruments;
or A contract that
ii. a derivative that will or may be settled other than by the  evidences a residual interest in the assets of an entity after
exchange of a fixed amount of cash or another financial asset for deducting all of its liabilities and
a fixed number of the entity’s own equity instruments.  represents a financial asset of the holder and equity of the issuer.
CLASSIFICATION OF FINANCIAL ASSET & FINANCIAL LIABILITY
Financial Assets Financial Liability
Equity Instrument Debt Instrument
Fair value through Hassaan Fair value through

Fair value through AmortizedKhanani From KnS Karachi
Fair value through Amortized Fair value through
other comprehensive other comprehensive
profit / loss cost
Teacher whose Students have Secured Backprofit cost
/ loss Gold Medals
to Back profit / loss
income income
KnS Institute of Business Studies (MA)
IFRS 9 – FINANCIAL INSTRUMENTS
Compiled by: Hassaan Khanani
CLASSIFICATION OF FINANCIAL ASSET
No Are the asset’s contractual Yes Is the business model’s Yes

Is the asset an equity
cash flows solely principal objective to hold to collect
investment?
and interest? contractual cash flows?
Yes
Yes No No
Is it held for trading?
No Is the business model’s
No
objective achieved both by
Has the entity elected the OCI collecting contractual cash
option (irrevocable)? No flows and by selling financial
assets?
Yes
Yes
Accounting Treatment FVTOCI FVTPL FVTPL FVOCI Amortized Cost
Initial measurement Fair value + TC Fair value Fair value Fair value + TC Fair value + TC
Transaction cost (TC) Capitalized Expensed out Expensed out Capitalized Capitalized
Subs. measurement Fair value Fair value Fair value Fair value Amortized cost
Δ in fair value OCI P/L P/L OCI Not applicable
Impairment Not applicable Not applicable Not applicable P/L P/L
FCY gain / (loss) OCI P/L P/L P/L P/L
Dividend / Interest P/L P/L P/L (IRR) P/L (IRR) P/L (IRR)
Recycling of gain/(loss)
to P/L on derecognition Not allowed Not applicable Not applicable Allowed Not applicable
CLASSIFICATION OF FINANCIAL LIABILITY
Yes
Is the liability a derivative or financial liability that is held for trading?
No
Yes
Is it designated under the fair value option?
No
Accounting Treatment Amortized Cost FVTPL
Initial measurement Fair value – TC Fair value
Transaction cost (TC) Capitalized Expensed out
Subs. measurement Amortized cost Fair value
P/L (except Δ in fair value

Δ in fair value Not applicable due to Δ in credit risk – OCI)
FCY gain / (loss) P/L P/L
Interest expense P/L (IRR) P/L (IRR)

KnS Institute of Business Studies Hassaan Khanani From KnS Karachi
(MA)
IAS 32 - FINANCIAL INSTRUMENTS: PRESENTATION
CLASSIFICATION AS LIABILITY OR EQUITY Compiled by: Hassaan Khanani
 Is there a contractual obligation to transfer economic benefit? OFFSETTING A FINANCIAL ASSET & A FINANCIAL LIABILITY
- If YES → Liability (For e.g. Loan, redeemable preference share etc)
- If NO → Equity (For e.g. Ordinary shares, irredeemable  Presenting financial asset & financial liability as a single net amount
preference shares etc.)  Offsetting only when:
 An entity must on initial recognition of an instrument classify it as a - there is a legally enforceable right to offset; and
financial liability or equity. - an intention to settle net or both amounts simultaneously
 The classification may not be changed subsequently .  The right of set-off:
(a) Must not be contingent on a future event
TREASURY SHARES (b) Must be legally enforceable in all of the following
circumstances:
 Treasury shares are reacquired entity’s own equity shares. - The normal course of business
 Gain / loss is not recognised on purchase, sale, issue, or cancellation - The event of default
of treasury shares. Consideration paid / received is recognised - The event of insolvency or bankruptcy of the entity and
directly in equity. all of the counterparties.
CONVERTIBLE INSTRUMENT (From borrower/issuer’s perspective)
Convertible in variable number of shares

Convertible into fixed number of shares
(i.e. loan amount ÷ market value per shares)
Mandatory conversion Optional conversion Mandatory conversion Optional conversion
Compound Financial Financial Liability

Instrument (Only interest Option at borrower Option at lender Option at borrower Option at lender
portion is liability) For e.g. Loan mandatorily
Compound FI (Only Compound FI convertible into variable Financial Liability Financial Liability
For e.g. Loan mandatorily interest portion is (Principle & number of borrower’s
convertible into fixed liability) interest are equity shares for the For e.g. Loan For e.g. Loan
number of borrower’s liability) value of loan convertible into convertible into
equity shares For e.g. Loan variable numbers variable numbers
convertible into For e.g. Loan of borrower’s of borrower’s
fixed numbers of convertible into equity shares at the equity shares at the
borrower’s equity fixed numbers of option of borrower option of lender
shares at the borrower’s equity
option of borrower shares at the
option of lender
KnS Institute of Business Studies
COMPOUND FINANCIAL INSTRUMENT
 A non-derivative financial instrument that contains two component: IF CONVERSION IS EXERCISED

- Financial liability - Issuer’s contractual obligation to pay cash (i.e.
principal and interest) Derecognize the liability and recognize it as equity as follow:
- Equity instrument - A embedded option to convert the loan into equity Debit: Financial Liability xxxx
shares of the issuer. Credit: Share capital + premium xxxx
 Compound instruments are required split into liability component and equity The original equity component remains as equity (may be
component as follow: transferred within equity)
Fair value of the instrument as a whole xxxx Early conversion
Less. Fair value of the liability component If favorable conversion ratio is offered for early conversion, the
[PV of contractually determined future cash flows fair value of additional shares given under the revised terms is
discounted @ market interest rate applicable to recognized as loss in P/L.
comparable instrument but without conversion option] (xxxx)
IF CONVERSION IS NOT EXERCISED
Equity component (Residual amount) xxxx .
 The split is made on initial recognition of the instruments and is not
Derecognize the liability as follow:
subsequently revised due to change in interest rate, share price or possibility
Debit: Financial Liability xxxx
of exercise of conversion option. Credit: Cash / Bank xxxx
 Transaction / issue cost on compound financial instrument will be allocated on
Early repurchase:
pro-rata basis of initially recognized amounts of equity and liability.
Allocate the consideration paid and transaction costs for early
repurchase to the liability and equity components in the same
On issue of compound financial instrument
manner that is used in original allocation of the proceeds received
Debit: Cash / Bank xxxx
by the entity when the convertible instrument was issued. any
Credit: Financial liability xxxx Hassaan Khanani From KnS Karachi
gain or loss is recognized as follows:
Credit: Equity xxxx
Teacher
Transaction / issue cost (if any)
whose Students have Secured - Back
Gain ortolossBack
relatingGold Medals
to liability component is recognized in
P/L; and
Debit: Financial liability xxxx in FAR 2 in Aut 20 & Spr- 21Consideration
Attemptrelating to equity component is recognized in
Debit: Equity xxxx
Credit: Cash / Bank xxxx
(MA) equity.
REGULAR WAY TRANSACTIONS
Definition
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.
Accounting policy
An entity can choose to account for a regular way purchase / sale of financial assets using either trade date accounting or settlement date
accounting. The same method must be applied consistently for all purchases and sales of financial assets that are classified in the same way.
Settlement date accounting issues
An entity must account for any change in the fair value of the asset between the trade date and the settlement date in the same way as it
accounts for the acquired asset. In other words any change in value:
 is not recognised for assets measured at amortized cost; but
 is recognised in P/L or OCI as appropriate for financial assets measured at fair value.
TRADE DATE ACCOUNTING SETTLEMENT DATE ACCOUNTING
PURCHASE OF FINANCIAL ASSET
Asset to be received and the liability to pay for it are recognised on Asset recognised on the date it is received by an entity.
the trade date
At trade date At trade date

 Record financial asset and financial liability  No entry
Debit: Financial asset xxxx At reporting date
Credit: Financial liability xxxx  Revalue financial asset, if measured at FV.
Debit: Receivable xxxx
At reporting date Credit: Gain - P/L or OCI (if any) xxxx
 Revalue financial asset, if measured at FV.  Do not revalue financial asset, if measured at amortized cost.
Debit: Financial asset xxxx At Settlement date
Credit: Gain - P/L or OCI (if any) xxxx  Record financial asset at FV, if measured at FV, derecognize
 Do not revalue financial asset, if measured at amortized cost. the receivable recorded at reporting date (if any),record
outflow of cash with difference to P/L or OCI.
At Settlement date Debit: Financial asset xxxx
 Revalue financial asset, if measured at FV. Credit: Cash / Bank xxxx
Debit: Financial asset xxxx Credit: Receivable (If any) xxxx
Credit: Gain - P/L or OCI (if any) xxxx Credit: Gain – P/L or OCI (if any) xxxx
 Do not revalue financial asset, if measured at amortized cost.  Record financial asset at purchase price, if measured at
 Settle financial liability against cash amortized cost and record outflow of cash
Debit: Financial liability xxxx Debit: Financial asset xxxx
Credit: Cash / Bank xxxx Credit: Cash / Bank xxxx
SALE OF FINANCIAL ASSET
Derecognition of an asset with recognition of receivable and gain or Derecognition of an asset and recognition of any gain or loss on
loss arising occurs on the trade date disposal on the day that it is delivered by the entity.
At trade date At trade date

 Derecognize the financial asset and record receivable with any  Revalue the financial asset to its selling price and record any
gain/(loss) in P/L gain/(loss) in P/L
Debit: Receivable xxxx Debit: Financial asset xxxx
Credit: Financial asset xxxx Credit: Gain – P/L xxxx
Credit: Gain – P/L xxxx
At Reporting date At Reporting date
 No entry  No entry
At settlement date
 Record inflow of cash and derecognize the receivable At settlement date
Debit: Cash / Bank xxxx  Record inflow of cash and derecognize the financial asset
Credit: Receivable xxxx Debit: Cash / Bank xxxx
Credit: Financial asset xxxx

(MA)
IAS 21 - THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Functional currency is the currency of the MONETARY OR NON-MONETARY ?

primary economic environment in which the
company operates. It is the own entity’s
currency and all other currencies are “foreign
currencies”. Is there a right/obligation to deliver fixed / determinable amount of currency units?
Presentation currency is the currency in which

the financial statements are presented. Yes No
REPORTING OF FOREIGN CURRENCY Examples Examples

TRANSACTIONS IN THE FUNCTIONAL  Trade receivables  Property, plant and equipments
CURRENCY  Trade payables  Intangibles (including goodwill)
 Investment in debt securities  Inventories
Initially  Spot exchange rate at the date of  Deposit and bank accounts  Equity investment (e.g. shares)
transaction  Cash  Biological assets
 Lease liability  Share capital
Subsequently Rate?
 Tax payable  Reserve / other component of equity
Monetary items Closing rate
Non-monetary items Historical rate

at historical cost (transaction date)
Non-monetary items Rate at the date when TREATMENT OF EXCHANGE RATE GAIN / LOSS
at fair value FV was measured

CONSOLIDATION OF FOREIGN ENTITIES AND
TRANSLATION OF FINANCIAL STATEMENTS TO Exchange rate gain / loss on a monetary Exchange rate gains or losses on non-
A PRESENTATION CURRENCY item that forms a part of a reporting monetary items are recognized
entity’s net investment in a foreign consistently with the recognition of gains
 Assets & liabilities – closing rate operation shall be recognized: or losses on an item itself.
 Income and expenses – rate at transaction  In separate entity’s or foreign For example, when an item is revalued
date (for practical purposes some period operation’s financial statements: in with the changes recognized in OCI, then
average rate might approximate the P/L also exchange rate component of that
transaction date rates)  In consolidated financial statements: gain or loss is recognized in OCI, too.
 The resulting exchange differences are o initially in OCI and
recognised in other comprehensive income o subsequently, on disposal of net
(foreign currency translation reserve). investment in foreign operation,
they shall be reclassified to P/L

(MA)
RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITY
 Reclassification of financial assets is required if, and only if, the objective of the entity’s business model for managing those financial assets changes.
 If an entity determines that its business model has changed in a way that is significant to its operations, then it reclassifies all affected assets
prospectively from the first day of the next reporting period (the reclassification date). Prior periods are not restated.
 Reclassification of financial liability is not allowed.
MEASUREMENT ON RECLASSIFICATION OF FINANCIAL ASSETS
Reclassification to
FVTPL FVOCI Amortized cost
Fair value on reclassification date = new Fair value on reclassification date = new
carrying amount. carrying amount.
FVTPL
Calculate effective interest rate based on Calculate effective based on new carrying
new carrying amount. amount.
Fair value on reclassification date = new Reclassify financial asset at fair value.
Reclassification from
carrying amount. Remove cumulative balance from OCI and

Reclassify accumulated OCI balance to P/L use it to adjust the reclassified fair value.
FVTOCI
on reclassification date. Adjusted amount = amortized cost.

Effective interest rate determined at initial Effective interest rate determined at initial
recognition is not adjusted as a result of recognition is not adjusted as a result of
reclassification. reclassification.
Remeasure to fair value, with any Remeasure to fair value, with any
difference recognized in P/L difference recognised in OCI.
Amortized cost
Fair value on reclassification date = new

carrying amount. Effective interest rate determined at initial
recognition is not adjusted as a result of
Effective interest rate determined at initial
reclassification.
recognition is not adjusted as a result of
reclassification.
MODIFICATION / RESTRUCTURING OF FINANCIAL ASSET
 For modifications that do not result in derecognition, recalculate gross carrying amount of asset by discounting modified contractual cash flows using
original IRR. Any difference between this recalculated amount and existing gross carrying amount is recognised in P/L as a modification gain / loss.
 Any modification fee paid/received is adjusted against the carrying amount of modified financial asset, and are amortized over remaining term of
modified financial asset (new IRR would be calculated to amortize the modification fee).
MODIFICATION / RESTRUCTUIRNG OF FINANCIAL LIABILITY
(PV of modified CF @ original IRR + modification fee paid – modification fee received) - PV of original CF @ original IRR (i.e. Carrying amount) x 100
PV of original CF @ original IRR (i.e. Carrying amount)
≥ 10% < 10%
Modification with substantially different terms Modification with terms that are not substantially different
Extinguishment Accounting Modification Accounting
 Derecognize the original liability Do not derecognize the original liability.


 Record any modification fee paid / received in P/L. Recalculate amortized cost of modified financial liability by

 Recognize new liability at its fair value, with any gain / (loss) in P/L. discounting modified contractual cash flows using original EIR.
 The new liability is recognised at its FV in accordance with the  Any difference between this recalculated amount and existing
normal rules of recognition of financial instruments. This is found carrying value is recognized as modification gain/(loss) in P/L.
by discounting the revised future payments Hassaan Khanani
at the market rate of From KnS
 Any Karachi
modification fee paid / received is adjusted against the
interest that applies to such cash flows.
Teacher whose Students have Securedcarrying
Backamount
to Backof modified
Gold financial liability, and are
Medals
amortized over remaining term of modified financial liability
in FAR 2 in Aut 20 & Spr(new
21IRRAttempt
would be calculated to amortize the modification fee).
(MA)
IFRS 9 – FINANCIAL INSTRUMENTS - IMPAIRMENT
SCOPE IMPORTANT DEFINITION
 Investment in debt securities measured at amortized cost; Credit loss: The difference between all contractual cash flows that are due to an
 Investment in debt securities measured at FVTOCI; entity in accordance with the contract and all the cash flow that the entity expects
 Loan commitments when there is a present obligation to to receive (i.e. all cash shortfalls), discounted at the original effective interest rate.
extend credit (except where these are measured at FVTPL); Contractual cash flows (as per the terms) xxxx
 Financial guarantee contracts to which IFRS 9 is applied Expected cash flow (now) (xxxx)
(except those measured at FVTPL); Cash shortfall xxxx
 Lease receivables (IFRS 16); and PV at original effective rate xxxx
 Contract assets (IFRS 15).
Expected credit losses: The weighted average of credit losses with the respective
 IFRS 9 introduces a new impairment model based on risks of a default occurring as the weights.
expected losses, (rather than incurred loss as per IAS 39).
Lifetime expected credit losses: The expected credit losses that result from all
 Anticipating credit losses is a prudent approach, meaning it
possible default events over the expected life of a financial instrument.
is less likely that assets will be over-stated. Users of the
financial statements are also provided with timely 12-month expected credit losses: The portion of lifetime expected credit losses that
information, because they are warned about potential represent the expected credit losses that result from default events on a financial
impairment issues before actual defaults have occurred. instrument that are possible within the 12 months after the reporting date.
EXPECTED LOSS MODEL
GENERAL APPROACH SIMPIFIED APPROACH
Compulsory application Compulsory application

 Debt instrument measured at amortized cost  Trade Receivable without significant financing component
 Debt instruments carried at FV through OCI  Contract Assets without significant financing component
Optional application Optional application
 Trade Receivable with significant financing component  Trade Receivable with significant financing component
 Contract Assets with significant financing component  Contract Assets with significant financing component
 Lease Receivables  Lease Receivables
Measurement at Initial recognition  A loss allowance measured as the lifetime expected credit losses is
A loss allowance measured as the 12-month expected credit losses. recognised.
 Expected credit losses on trade receivables can be calculated using
Measurement at subsequent recognition provision matrix
Expected credit loss associated with financial asset is then reviewed at
each reporting date. Expected credit loss recognised as a loss allowance
depends on the extent of credit deterioration since initial recognition.
 If there is no significant increase in credit risk the loss allowance for LOSS ALLOWANCE
that asset is re-measured to 12 month expected credit loss. Adjustments to the loss allowance are charged to P/L.
 If there is a significant increase in credit risk the loss allowance for
that asset is re-measured to lifetime expected credit losses. The Loss allowance for financial assets carried at amortized cost
entity still hopes to collect amounts due but the possibility of a loss The loss allowance balance is netted against the financial asset to which
event has increased. (Rebuttable presumption that credit risk has it relates on the face of the statement of financial position.
increased significantly when contractual payments are more than 30 NB: this is just for presentation only; the loss allowance does not reduce
days past due) the carrying amount of the financial asset in the double entry system.
 If the asset is credit impaired, expected credit losses should be
measured as the difference between the asset’s gross carrying Loss allowance for financial assets at fair value through OCI
amount and the present value of the estimated future cash flows The loss allowance balance is not netted against the financial asset to
when discounted at the original effective rate of interest. The which it relates as this is carried at fair value. The increase (or decrease)
financial asset is written down to its estimated recoverable amount. in the allowance is still charged to profit or loss but the other side of the
The entity accepts that not all contractual cash flows will be entry is recorded in other comprehensive income.
collected and the asset is impaired.
Future revenue recognition
Interest is recognised in the future by applying the effective rate to
PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSETS
the new amortized cost (after recognition of the impairment loss).
Subsequently, if the credit risk of the financial instrument improves If a financial asset is credit impaired when purchased, then interest
so that the financial asset is no longer credit-impaired and the income is calculated using a credit adjusted effective interest rate. This
improvement can be related objectively to an event since the net incorporates expected lifetime credit losses at the inception date and
method was applied, the calculation of interest
Hassaanrevenue reverts to
Khanani therefore
From KnS the Karachi
allowance recorded against such assets should only be the
the ‘gross method’ from the beginning of the next reporting period. change in the lifetime expected credit losses since inception.
KnS Institute of Business Studies in FAR 2 in Aut 20 & Spr 21 Attempt
(MA)
FINANCIAL INSTRUMENTS - DERIVATIVES
2. FORWARD CONTRACTS
DERIVATIVE  Forward contract is a tailor-made or customized contract to buy or sell
- a specified amount
 A derivative is a financial instrument:
- of a specified item (commodity or financial item)
- whose value changes in response to the change in an
- on a specified future date
underlying variable such as an interest rate,
- at a specified price agreed upon today.
commodity or security price, or index etc.;
 A forward contract settlement can occur on a cash or delivery basis.
- where the initial investment is zero or is small in
 Forward contracts do not trade on a centralized exchange and are therefore
relation to the value of the underlying variable; and
regarded as over-the-counter (OTC) instruments.
- that is settled at a future date.
 Common derivatives include futures contracts, forwards,
options, and swaps. 3. OPTIONS
 Over the life of the derivative contract, its fair value will
depend on the spot exchange rates and the time to the  Under option contract, the holder/buyer of the option has entered into a
end of the contract. contract that gives it the right but not the obligation to buy (call option) or sell
 A derivative can be used for hedging or speculation. (put option) a specified amount of a specified commodity at a specified price.
 An option differs from a forward arrangement. An option not only offers its
buyer/holder the choice to exercise his rights under the contract, but also the
MEASUREMENT choice not to enforce the contract terms.
 The issuer/seller of the option must fulfil the terms of the contract, but only if
Initial measurement the option holder chooses to enforce them.
All derivatives have to be initially recognized at fair value, i.e.  The option holder has to pay a sum of money (premium) to the option seller.
at consideration paid or received at inception of the contract. This premium is paid when the option is arranged, and non-refundable if the
Subsequent measurement holder later decides not to exercise his rights under the option.
All derivatives shall be accounted for at FV through P/L unless  For holder, option will only ever be recorded as an asset. Initially, at the
designated as a hedging instrument is hedge a/c relationship. amount of premium. The holder would exercise the option only if it is beneficial
to do so. Therefore it could only be an asset.
1. FUTURES
4. SWAPs
 Futures is a standardized contract to buy or sell
- a particular commodity/financial item  A swap is an agreement between parties to exchange cash flows related to an
- at a predetermined price underlying obligation.
- at a specified time in the future.  The most common type is an interest rate swap. In an IRS , two parties agree to
 Futures details the quality and quantity of the underlying exchange interest payments on the same notional amount of principal, at
asset; they are standardized to facilitate trading on a regular intervals over an agreed number of years.
futures exchange.  One party might pay interest to other party at a variable rate, and in return the
 Some futures contracts may call for physical delivery of other party may pay interest on the same principal at a fixed rate.
the asset, while others are settled in cash.  A swap might be an asset or liability at any particular date depending upon the
interaction between the amount to be paid and the amount to be received.
EMBEDDED DERIVATIVE
HYBRID CONTRACT = N0N-DERIVATIVE HOST CONTRACT + EMBEDED DERIVATIVE
 Embedded derivative is a component of a

Contract outside the Financial hybrid (combined) instrument that also includes
Financial asset
scope of IFRS 9 liability a non-derivative host contract, with the effect
that some of the cash flows of the instrument
vary in a way similar to a stand-alone derivative.
 If host contract is not a financial asset within the If the host contract is a
 An embedded derivative causes some or all the
scope of IFRS 9, then the embedded derivative be financial asset within the
cash flows of the host to be modified. Based in
separated from its host contract and measured in scope of IFRS 9 then
specified interest rate, financial instrument
accordance with IFRS 9 (i.e. at FVTPL ) if: entire contract must be
price, commodity price, foreign exchange rate,
- Economic characteristics and risks of the classified and measured
credit rating , credit index or other variables.
embedded derivative and the host contract are in accordance with IFRS 9.
 A key characteristics of embedded derivative is
not closely related;
that the embedded derivative can not be
- A separate instrument with same terms as
transferred to a third party independently of the
embedded derivative would meet the definition
instrument.
of a derivative; and
- Entire (hybrid) contract is not measured at FV
with changes in FV recognised in P/L.
 If embedded derivative is separated, the host Where an entity is unable to If FV of embedded derivative cannot
contract is accounted for in accordance with
Hassaan Khanani measureFrom KnSderivative
the embedded Karachi be determined reliably, then value of
Teacher whose Students have
appropriate standard. that is required to be
Secured separated
Back to from
Back embedded
Gold Medals derivative would be the
its host, entire hybrid contract should difference between value of hybrid
in FAR 2 in Aut 20 & Spr
be designated 21 Attempt
as at FVTPL. and host contract.
(MA)
IFRS 9 – FINANCIAL INSTRUMENTS – DERECOGNITION
DERECOGNITION OF FINANCIAL ASSETS
On derecognition of a financial asset, the Consolidate all subsidiaries including special purpose
difference between: entities (SPEs).
(a) the carrying amount (measured at the
date of derecognition) and
(b) the consideration received (including Determine whether the derecognition principles are
any new asset obtained less any new applied to all or part of the asset.
liability assumed)
shall be recognized in profit or loss. Yes
Have the right to the cash flow from the asset expired? Derecognize the asset
No
Yes Has the entity transferred its rights to receive the cash
flows from the asset?
Where the contractual rights to receive cash
flows have been retained by the entity but it No
has assumed a contractual obligation to pay No
Has the entity assumed an obligation to pay Continue to recognize
those cash flows to one or more entities,
the cash flows from the asset? the asset
additional derecognition criteria will be
considered only if : Yes
 Entity has no obligation to pay unless it Yes
Has the entity transferred substantially all
collects amounts from the original asset; Derecognize the asset
risks and rewards?
 Entity is prohibited by “terms of transfer
contract” to sell or pledge the original No
asset other than as security to the Yes
Has the entity retained substantially all Continue to recognize
eventual recipients of cash flows; and
risks and rewards? the asset
 Entity must remit any cash flows it
collects on behalf of eventual recipients No
without material delay. The entity is not No
entitled to reinvest cash flows except for Has the entity retained control of the asset? Derecognize the asset
short period between collection and Yes
remittance. Any interest earned thereon
is remitted to the eventual recipients. Continue to recognize asset to the extent of the
entity’s continuing involvement.
FACTORING REPURCHASE AGREEMENT
In a factoring transaction, one party transfer the right to some In repurchase agreement, a financial asset is sold with a simultaneous
receivables to another party for an immediate cash payment. agreement to buy it back at some future date at an agreed price.
With out recourse With recourse Repurchase at specified price Repurchase at fair market price
Derecognize the financial Continue to recognize the Continue to recognize the Derecognize the financial asset
asset and debit consideration financial asset and recognize the financial asset and recognize and debit the consideration
received with any gain / (loss) financial liability for cash the financial liability for cash received with any gain / (loss)
recognized in P/L. received. received. recognized in P/L.
GUARANTEE (Continuing involvement)
Where the entity provide guarantee to pay for default losses on a transferred assets, the entity shall record:
Transferred asset Associated liability
 Transferred asset is measured at lower of:  Associated liability is initially measured at the
- Carrying amount of asset; or Hassaan Khanani From- KnS Guarantee
Karachiamount plus
- Maximum amount of the consideration in the transfer that - FV of the guarantee.
Teacher whose Students have Secured
the entity could be required to repay (“Guarantee amount”).
Back to Back Gold Medals
 Subsequently, FV of guarantee is recognized in P/L on time
 Subsequently, the carrying amount of thein FAR
asset 2 inbyAut
is reduced proportion
an 20 & Spr basis.
21 Attempt
impairment losses. (MA)
IFRS 9 – FINANCIAL INSTRUMENTS – DERECOGNITION
DERECOGNITION OF FINANCIAL ASSETS (Continued)
SALE OF FINANCIAL ASSET (At FV) WITH PURCHASED CALL OPTION SALE OF FINANCIAL ASSET (At FV) WITH WRITTEN PUT OPTION
Where a financial asset is sold along with call option that provides the Where a financial asset is sold along with put option that provides the
transferor a right (not obligation) to repurchase the asset from transferee a right (not obligation) to sell the asset to transferor at
transferee at specified price. specified price.
Transferred asset Associated liability Transferred asset Associated liability
Transferred asset shall be Associated liability shall be Transferred asset shall be Associated liability shall be
measured at fair value. measured at: measured at lower of: measured at option exercise
 If the option is in or at the  Fair value; or price.
money  Option exercise  Option exercise price
price less time value of option
 If the option is out of the
money  Fair value less time
value of option
DERECOGNITION OF FINANCIAL LIABILITIES

 A financial liability is derecognized only when extinguished i.e. when the obligation specified in the contract is
- Discharged;
- Cancelled; or
- Expired
 The difference between the carrying amount of a financial liability extinguished or transferred to a 3rd party and the consideration paid is
recognised in P/L.
IFRIC 19 - EXTINGUISHING FINANCIAL LIABILITIES WITH EQUITY INSTRUMENTS
SCOPE PART EXTINGUISHMENT – ADDITIONAL CONCERNS
 Terms of a liability might be renegotiated such that the lender (creditor)  If only part of the financial liability is extinguished,
accepts equity instruments as payment instead of cash. entity is required to assess whether some of the
 IFRIC 19 sets out how a borrower that issues equity instruments to extinguish consideration paid relates to a modification of the
all or part of financial liability should account for the transaction. terms of the outstanding liability
 Following transactions are scoped out of IFRIC 19:  If some of the consideration paid relates to
- Transactions with the creditor in its capacity as an existing shareholder modification of terms of remaining liability, the
(e.g. a rights issue); entity allocates the consideration paid between
- Lender and borrower are controlled by the same party or parties before - Part of the liability extinguished and
and after the transaction; or - Part of the liability that remains outstanding.
- Issue of equity shares to extinguish debt is in accordance with original and apply “modification of financial liability” rules
terms of financial liability (such as convertible debt). accordingly.
ISSUES CONSENSUS
1. Are equity instruments issued to extinguish Issue of equity instruments is “consideration paid” to extinguish all or part of
financial liability considered “consideration paid”? a financial liability. This leads to derecognition of the liability.
If fair value of equity instrument issued is reliably measured

- Equity instruments issued must be initially measured at fair value of the
2. How should an entity initially measure the equity issued equity instruments.
instruments issued? If fair value of equity instrument issued is not reliably measured
- Equity instrument issued can be measured at fair value of the liability
extinguished.
Hassaan KhananiDifference
3. How should the entity account for any difference From between
KnS Karachi
the carrying amount of liability extinguished and
between the carrying amount ofwhose
Teacher the liability and
Students considerationBack
have Secured paid must
tobeBack
recognised
Goldin P/L.
Medals
the equity instruments issued? Separate line item or disclosure in the notes is required.
(MA)
IFRS 9 – FINANCIAL INSTRUMENTS – HEDGE ACCOUNTING
HEDGE ACCOUNTING CRITERIA  Assets / Liabilities / Unrecognized firm commitment / Highly

ELIGIBLE HEDGE
probable forecast transactions.
Hedge accounting is optional, not obligatory. Under ITEM
 Net investment in a foreign operation.
IFRS 9, hedge accounting rules can only be applied if
hedging relationship meets the following criteria: ELIGIBLE HEDGE  Derivatives
INSTRUMENT  Other financial asset / liability measured at FVTPL
 Hedging relationship consists only of
- Eligible hedged items and
- Eligible hedging instruments
HEDGE EFFECTIVENESS CRITERIA
 At inception of hedge, there must be formal
 An entity must assess at inception and at each reporting date whether the hedge
designation and documentation identifying
meets all effectiveness criteria. These criteria are as follows:
- Eligible hedged item
- There must be an economic relationship between hedged item & instrument
- Eligible hedging instrument
- Effect of credit risk does not dominate the change in value from that economic
- Nature of the risk being hedged.
relationship
- How hedge effectiveness will be assessed.
- Hedge ratio is the same for both the:
 Hedging relationship must meet hedge • Hedging relationship
effectiveness requirements. • Quantity of the hedged item actually hedged, and the quantity of the hedging
instrument used to hedge it.
 If the hedged item is a forecast transaction, then  Hedge effectiveness relates to expectations and therefore the assessment of
transaction must be highly probable. effectiveness must be forwards-looking.
CATEGORIES OF HEDGE
FAIR VALUE HEDGE CASHFLOW HEDGE HEDGES OF A NET INVESTMENT IN

A FOREIGN OPERATION
Fair value hedge is a hedge of exposure to Cash flow hedge is a hedge of exposure to variability in
changes in fair value of a recognised asset cash flows that is attributable to a particular risk associated  It is a hedge of an entity’s
or liability or firm commitment to buy that with a recognised asset or liability or a highly probable interest in the net assets of a
is attributable to a risk that could effect P/L. forecast transaction. foreign operation.
 It can be applied only to
At the reporting date, hedging instrument At the reporting date, hedge instrument will be re- foreign exchange differences
and hedged item will be re-measured to fair measured to fair value. arising between parent’s
value. functional currency and
 Effective portion of gain / (loss) on hedge instrument is
foreign operation’s functional
Gain / (loss) on hedge instrument and (loss) recognized in OCI (Cash Flow Hedge Reserve – CFHR)
currency
/ gain on hedge item will be recorded:  Ineffective portion of gain / (loss) on hedge instrument is
 Hedge accounting in respect of
- in P/L in most cases, but recognized in P/L.
exchange risk associated with
- in OCI if the hedged item is an  Gain / (loss) on hedge instrument is recognised in OCI.
an investment in a foreign
investment in equity measured at However, if gain / (loss) on the hedging instrument since
subsidiary is only allowed in
FVTOCI. inception of hedge is greater than (loss) / gain on the
consolidated FS.
hedged item then the excess gain / (loss) on the
instrument must be recognised in P/L. Same as cash flow hedge
 Effective portion of gain / (loss)
 Gain / (loss) on hedging instrument recognised in OCI
on hedge instrument is
(i.e. CFHR) will reclassified to P/L when the hedged cash
recognized in OCI.
transaction affects P/L.
 Ineffective portion of gain /
 However, in case of forecast transactions that results in
DISCONTINUATION OF HEDGE (loss) on hedge instrument is
a non-financial asset/liability, CFHR is removed and
ACCOUNTING recognized in P/L
included in initial cost of the non-financial asset/liability.
 Discontinuance of hedge accounting is Upon disposal of the foreign
 If hedge accounting ceases for a CF hedge because
accounted for prospectively operation, Following will be
forecast transaction is no longer expected to occur,
 Hedge accounting must be reclassified to P/L:
gain / (loss) deferred in OCI must be taken to P/L
discontinued if : - cumulative translation reserve
immediately.
- Hedging relationship no longer recorded on consolidation of
 If transaction is still expected to occur but hedge
meets the qualifying criteria net investment (IAS 21); &
relationship ceases, amounts accumulated in equity
- Hedging instrument is expired, sold, - Cumulative effective gain /
will be retained in equity until the hedged transaction
terminated or exercised (loss) on hedging instrument
occurs.

(MA)

Ifrs 9

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ifrs 9

Uploaded by

Copyright:

Available Formats

Certified Finance and Accounting Professional 1

Advanced Accounting and Financial Reporting

D. IFRS 5: Non-Current Assets Held For Sale & Discontinued

F. IFRS 16: Leases

G. IFRIC 1: Changes In Existing Decommissioning, Restoration

& Similar Liabilities

H. IAS 12: Income Taxes (including SIC 25)

I. IAS 33: Earnings Per Share

J. IAS 40: Investment Property

Hassaan Khanani From KnS Karachi

ADVANCED ACCOUNTING & FINANCIAL REPORTING

COMPILED BY: HASSAAN KHANANI, ACA

Hassaan Khanani From KnS Karachi

Regular way transaction

(C) IFRS 7 – Financial Instruments: Disclosures

(D) IFRS 13 – Fair value measurement

Framework for fair value Measurement

IAS 21: The Effects of Changes in Foreign Exchange Rates

IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments

Hassaan Khanani From KnS Karachi

2.1 CLASSIFICATION OF FINANCIAL ASSET

Hassaan Khanani From KnS Karachi

2.2.1 DEBT INVESTMENT AT AMORTIZED COST

Interest income is recognized in P/L using the effective interest rate.

Credit impairment losses/reversals are recognized in P/L using credit impairment

2.2.2 DEBT INVESTMENT AT FVTOCI

Hassaan Khanani From KnS Karachi

2.2.3 DEBT INVESTMENT AT FVTPL an

The accounting requirements for debt instruments classified at FVTPL are:

Transaction costs are immediately recognised in P/L.

Change in the carrying amount on remeasurement to fair value is recognised in P/L.

charges and similar costs.

Hassaan Khanani From KnS Karachi

test and has been properly designated at initial recognition; and

(c) It is classified at FVTPL. (IRR was calculated as 8.49%)

Question 3. [Investment in debt securities – Zero coupon bond]

Journalize the above transaction if the T-bill are classified as:

Hassaan Khanani From KnS Karachi

2.3.1 EQUITY INVESTMENT AT FVTOCI

A held-for-trading equity investment;

elected to account for as at FVOCI.

Equity investment at FVTPL is initially measured at fair value.

Equity investment at FVTPL is subsequently measured at fair value.

Hassaan Khanani From KnS Karachi

Question 5. [Investment in equity securities] [ICAEW Corporate reporting – Study Manual]

(ii) Equity investments:

-------------------- Rs. in million ----------------

Investment B 150 3 153

Investment B 130 2.6 127.4

Hassaan Khanani From KnS Karachi

3.1 CLASSIFICATION OF FINANCIAL LIABILITY

3.1.2 FINANCIAL LIABILITY AT AMORTIZED COST

- Commodity futures/option contracts (not designated in a hedging relationship);

- Convertible note liabilities designated at FVTP;

The accounting requirements for financial liability classified at FVTPL are:

Financial liability at FVTPL is subsequently measured at fair value.

Interest exchange is recognized in P/L using the effective interest rate.

status is recognized in OCI instead of P/L.

Hassaan Khanani From KnS Karachi

Hassaan Khanani From KnS Karachi

4.1 TREASURY SHARES an

the consolidated group.