IFRS 2e Slides 15

Chapter 15
Financial Instruments
– Introduction
© 2008-11 Nelson Lam and Peter Lau Intermediate Financial Reporting: An IFRS Perspective, 2E (Chapter 15) - 1
Agenda
1. Applicable Standard and Scope

2. Meaning of Financial Instruments
3. Initial Recognition of Financial Assets and Financial Liabilities
4. Initial Measurement of Financial Assets and Financial Liabilities
5. Compound Financial Instruments and Embedded Derivatives
• The financial reporting issues for financial instruments are
mainly covered in:
– IAS 39 Financial Instruments: Recognition and Measurement to
establish principles for recognising and measuring financial assets,
financial liabilities and some contracts to buy or sell non-financial
items
– IAS 32 Financial Instruments: Presentation to set out the
requirements for presenting information about financial instruments
– IFRS 7 Financial Instruments: Disclosures to set out the
requirements for disclosing information about financial instruments
– IFRS 9 Financial Instruments to establish principles for recognising
and measuring financial assets and financial liabilities and to
replace the relevant requirements in IAS 39 (when IFRS 9
becomes effective)
IFRS 7 IFRS 9
IAS IAS
32 39
Interests in subsidiaries, associates and joint ventures accounted  
for under IAS 27, 28 and 31
Rights and obligations under leases to which IAS 17 applies except 
for derecognition and embedded derivatives
Employers’ rights and obligations under employee benefit plans, to  
which IAS 19 applies
Financial instruments issued by the entity that meet the definition of 
an equity instrument in IAS 32
Rights and obligations under an insurance contract as defined in  
IFRS 4, except for embedded derivatives
Contracts for contingent consideration in a business combination  
(see IFRS 3) for the acquirer only
Contracts between an acquirer and a vendor in a business 
combination to buy or sell an acquiree at a future date
Certain loan commitments (IAS 37 and 18) 
Instruments and obligations under share-based payment  
transactions (IFRS 2), except for some contracts
Rights to payment to reimburse a recognised provision under IAS 
37
• Loan commitments are not within the scope of IFRS 9 and IAS 39,
except for:
1. Loan commitments that the entity designates as financial liabilities at fair
value through profit or loss.
2. Loan commitments that can be settled net in cash or by delivering or issuing
another financial instrument. These loan commitments are derivatives.
3. Commitments to provide a loan at a below-market interest rate that is one
kind of financial liabilities and explained in Chapter 17.
• The scope of financial instruments in IFRS 9 and IAS 39
– Includes those contracts to buy or sell a non-financial item that can be
settled net in cash or another financial instrument, or by exchanging
financial instruments.
– Apply to such contracts as if they were financial instruments.
– Not be applied to those contracts that were entered into and
continue to be held for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements.
• Financial instrument is formally defined in IAS 32 while IAS 39 refers to
the same definition as follows:
• A financial instrument is any contract that gives rise to
– a financial asset of one entity and
– a financial liability or equity instrument of another entity.
Financial
Financial
asset of one entity
asset
Financial
Financial
instrument
instrument
Financial
Financial Equity
Equity
liability or instrument of another entity
liability instrument
Financial asset is any asset that is: Financial
Financial
asset
asset
• Cash Financial
Financial
• An equity instrument of another entity instrument
instrument
• A contractual right
i) to receive cash or another financial asset from another entity
ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity
• A contract that will or may 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. For this purpose the entity’s own equity instruments
do not include certain instruments,
• say specified puttable financial instruments, or instruments that are
contracts for the future receipt or delivery of the entity’s own equity
instruments
Financial liability is any liability that is
• A contractual right
i) to deliver cash or another financial asset from another entity
ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavourable to the entity
• A contract that will or may 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. (For this purpose, certain other conditions are
required to observe)
Financial
Financial
instrument
instrument
Financial
Financial
liability
liability
• An equity instrument
– is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.
• More restrictive requirements for the issuers are set out in IAS 32
Financial
Financial
asset of one entity
asset
Financial
Financial
instrument
instrument
Financial
Financial Equity
Equity
Example
Example
• Do the following items held by entity meet the definition of financial
asset:
1. gold bullion,
2. artefact and antique,
3. inventories,
4. income tax receivable, and
5. prepaid expenses?
Financial
Financial
asset of one entity
asset
Financial
Financial
instrument
instrument
Financial
Financial Equity
Equity
Derivative ⇒ is a financial instrument or other contract within the

scope of IFRS 9 and IAS 39 with all 3 of the following
characteristics:
Value
Valuechange
changebased
based a) its value changes in response to the change in a
on an underlying
on an underlying specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices
or rates, credit rating or credit index, or other variable
(sometimes called the ‘underlying’);
Little
Littleororno
noinitial
initialnet
net
investment b) it requires no initial net investment or an initial net
investment
investment that is smaller than would be required for
other types of contracts that would be expected to have a
similar response to changes in market factors; and
Settled
Settledatat c) it is settled at a future date.
aafuture date
future date
Example
Example
• Melody Limited makes a five-year fixed rate loan to Tony Inc, while
Tony at the same time makes a five-year variable rate loan for the
same amount to Melody.
• There are no transfers of principal at inception of the two loans, since
Melody and Tony have a netting agreement.
• Is this a derivative under IFRS 9 or IAS 39?
Yes.
Yes.
•• This
Thismeets
meetsthe
thedefinition
definitionof
ofaaderivative
derivative(that
(thatisisto
tosay,
say,there
thereisisan
an
underlying
underlyingvariable,
variable,nonoinitial
initialnet
netinvestment
investmentor oran aninitial
initialnet
netinvestment
investment
that
thatisissmaller
smallerthan
thanwould
wouldbe berequired
requiredfor
forother
othertypes
typesofofcontracts
contractsthat
that
would
wouldbe beexpected
expectedto tohave
haveaasimilar
similarresponse
responseto tochanges
changesininmarket
market
factors,
factors,and
andfuture
futuresettlement).
settlement).
Example
Example
•• The
Thecontractual
contractualeffect
effectofofthe
theloans
loansisisthe
theequivalent
equivalentofofan
aninterest
interestrate
rate
swap
swaparrangement
arrangementwith withnonoinitial
initialnet
netinvestment.
investment.Non-derivative
Non-derivative
transactions
transactionsare
areaggregated
aggregatedand andtreated
treatedas
asaaderivative
derivativewhen
whenthe
the
transactions
transactionsresult,
result,ininsubstance,
substance,ininaaderivative.
derivative.
•• Indicators
Indicatorsof
ofthis
thiswould
wouldinclude:
include:
–– they
theyare
areentered
enteredinto
intoatatthe
thesame
sametime
timeand
andinincontemplation
contemplationofofone
oneanother
another
–– they
theyhave
havethe
thesame
samecounterparty
counterparty
–– they
theyrelate
relatetotothe
thesame
samerisk
risk
–– there
thereisisno
noapparent
apparenteconomic
economicneed
needororsubstantive
substantivebusiness
businesspurpose
purposefor
for
structuring
structuringthe
thetransactions
transactionsseparately
separatelythat
thatcould
couldnot
notalso
alsohave
havebeen
been
accomplished
accomplishedininaasingle
singletransaction.
transaction.
•• The
Thesame
sameanswer
answerwould
wouldapply
applyififMelody
Melodyand andTony
Tonydid
didnot
nothave
haveaa
netting
nettingagreement,
agreement,because
becausethe
thedefinition
definitionof
ofaaderivative
derivativedoes
doesnot
not
require
requirenet
netsettlement.
settlement.
3. Initial Recognition
• Initial recognition requirements for financial assets and
financial liabilities in both IFRS 9 and IAS 39 are the
same.
• An entity is required to recognise a financial asset or a
Imply
Imply trade
trade date
date
financial liability on its balance sheet when, and only
accounting
accounting
when, the entity becomes a party to the contractual
provisions of the instrument.
• In other accounting standards, the recognition criteria
are Imply
Imply settlement
settlement
1) it is probable that future economic benefits associated date
date accounting
accounting
with the item will flow to (or flow out from) the entity; and
2) the cost of the item can be measured reliably.
Financial
Financial
asset
asset
Financial
Financial
instrument
instrument
Financial
Financial
liability
liability
• The settlement date is the date that an asset is
delivered to or by an entity.
• The trade date is the date that an entity commits itself
to purchase or sell an asset.
• The recognition criteria in both IFRS 9 and IAS 39
require an entity to recognise financial asset or
financial liability when it becomes a party to the
contractual provisions of the instruments.
– These criteria imply an entity to recognise financial asset
or financial liability on a trade date basis.
Financial
Financial
asset
asset
Financial
Financial
instrument
instrument
Financial
Financial
liability
liability
• In consequence of the recognition criteria of both IFRS
9 and IAS 39, all the financial assets and liabilities,
including derivatives (such as options and futures),
become “on-balance sheet” from the trade date.
– In other words, an entity is also required to recognise all
of its contractual rights and obligations under derivatives
in its balance sheet as assets and liabilities.
Financial
Financial
asset
asset
Financial
Financial
instrument
instrument
Financial
Financial
liability
liability
• For financial assets, an entity can choose to recognise
and derecognise a financial asset either using trade
date accounting or settlement date accounting if it is a
regular way purchase or sale of financial asset
• A regular way purchase or sale is a purchase or sale of
a financial asset under a contract whose terms require
delivery of the asset within the time frame established
generally by regulation or convention in the
marketplace concerned.
Initial Recognition
Financial
Financial Regular Way
asset
asset Trade Date
Financial of Financial
Financial Accounting
instrument Assets
instrument
• Both IFRS 9 and IAS 39 specifically states that a
contract that requires or permits net settlement of the
change in the value of the contract (such as derivative
contract) is not a regular way contract.
– Such contract is accounted for as a derivative in the
period between the trade date and the settlement date.
• No matter which accounting method is used for a
regular way purchase or sale, the method used is
applied consistently for all purchases and sales of
financial assets that belong to the same category of
financial assets.
Initial Recognition
Financial
Financial Regular Way
asset
asset Trade Date
Financial of Financial
Financial Accounting
instrument Assets
instrument
4. Initial Measurement
• For both financial assets and financial liabilities, both
IFRS 9 and IAS 39 has
– the same initial recognition requirements
– the same initial measurement basis
• When a financial asset or financial liability (except for it
at fair value through profit or loss) is recognised
initially, an entity is required to measure it at:
1. its fair value plus
2. its transactions costs that are directly attributable
to the acquisition or issue of the financial asset or
financial liability
• In the case of a financial asset or financial liability that
will be classified as financial asset or financial liability
at fair value through profit or loss,
– an entity is only required to measure it at its fair
value only
– its transaction costs should not be recognised.
• Fair value is the amount for which an asset could be
exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction.
• Transaction costs are incremental costs that are
directly attributable to the acquisition, issue or disposal
of a financial asset or financial liability. An incremental
cost is one that would not have been incurred if the
entity had not acquired, issued or disposed of the
financial instrument.
• The fair value of a financial instrument on initial
recognition is normally the transaction price,
i.e. the fair value of the consideration given or
received.
• However, if part of the consideration given or received
is for something other than the financial instrument,
– the fair value of the financial instrument is
estimated using a valuation technique.
• Chapter 16 has more explanation on fair value for
Case
Case
Accounting report 2006

Investments in debt and equity securities
– The group’s and the company’s policies for investments in debt and
equity securities, other than investments in subsidiaries, associates
and jointly controlled entities, are as follows:
o Investments in debt and equity securities are initially stated at cost,
which is their transaction price
• unless fair value can be more reliably estimated using
valuation techniques whose variables include only data from
observable markets.
o Cost includes attributable transaction costs, except where
indicated ……
Example
Example
• Advance Finance Inc. originates a loan of $1 million that bears an off-
market interest rate, 6% per annum, when the market rate for similar
loans is 8%, and receives an up-front fee of $250,000 as compensation.
• Advance Finance Inc. should recognise the loan at its fair value, i.e. net
of the fee it receives, at $750,000 ($1,000,000 - $250,000).
• While cash interest of $60,000 per annum will be received, the effective
interest rate is still 8% per annum ($60,000 ÷ $750,000).
Example
Example
• Advance Finance Inc. grants a 3-year loan of $50,000 to a new
customer on 1 January 2008.
• Advance Finance Inc. charges the interest at 4% per annum as it
expects to generate more new business from this new customer.
• The current market lending rate of a similar loan is 6% per annum.
• Discuss the implication of the loan.
Example
Example
•• On
Oninitial
initialrecognition,
recognition,Advance
AdvanceFinance
FinanceInc.Inc.should
shouldrecognise
recognisethe theloan
loan
receivable
receivableatatthe thefair
fairvalue.
value.
•• Even
Eventhe thebest
bestevidence
evidenceofofthe thefair
fairvalue
valueofofthe
theloan
loanatatinitial
initialrecognition
recognitionisisthe the
transaction
transactionprice pricebut
butpart
partofofthe
theconsideration
considerationgivengivenisisfor
forsomething
somethingother otherthan
than
the
theloan,
loan,the thefair
fairvalue
valueofofthe
theloan
loanshould
shouldbe beestimated
estimatedusingusingaavaluation
valuation
technique.
technique.
•• The
Thefair
fairvalue
valueofofthe
theloan
loanreceivable
receivablecan canbebeestimated
estimatedas asthe
thepresent
presentvalue
valueofof
all
allfuture
futurecashcashreceipts
receiptsdiscounted
discountedusing usingthe
theprevailing
prevailingmarket
marketinterest
interestrate
ratefor
for
aasimilar
similarinstrument.
instrument.
•• By
Byusing
usingthe themarket
marketinterest
interestrate
rateofof6%6%forforaasimilar
similarloan,
loan,Advance
AdvanceFinance
FinanceInc. Inc.
derives
derivesthe thepresent
presentvalue
valueof ofthe
theinterests
interestsandandprincipal
principalrepayments
repaymentsas asfollows:
follows:
Cash
Cashinflow
inflow Discount
Discountfactor
factor Present
Presentvalue
value
2008
2008 $$ 2,000
2,000 11÷÷(1+6%)
(1+6%)1
1
$$ 1,887
1,887
2009
2009 2,000
2,000 11÷÷(1+6%)
(1+6%)2
2
1,780
1,780
2010
2010 2,000
2,000 11÷÷(1+6%)
(1+6%)3
3
1,679
1,679
2010
2010 50,000
50,000 11÷÷(1+6%)
(1+6%)3
3
41,981
41,981
Present
Presentvaluevalueofofall
allfuture
futurecash
cashreceipts
receipts 47,327
47,327
Example
Example
•• Discounting
Discountingthetheinterest
interestand
andprincipal
principalrepayments
repaymentsusing
usingthe
themarket
marketraterateofof6%,
6%,
Advance
AdvanceFinance
FinanceInc.
Inc.will
willrecognise
recogniseananoriginated
originatedloan
loanof
of$47,327.
$47,327.TheThe
difference
differenceofof$2,673
$2,673between
between$50,000
$50,000and and$47,327
$47,327may
mayrepresent
representthethevalue
valueofof
future
futurebusiness
businesswith
withthe
thecustomer.
customer.However,
However,ititdoes
doesnot
notqualify
qualifyfor
forrecognition
recognition
as
as an asset and should be expensed immediately. Advance FinanceInc.
an asset and should be expensed immediately. Advance Finance Inc.
recognises
recognisesthetheloan
loanreceivable
receivableas asfollows:
follows:
Dr
Dr Financial
Financialasset
asset $47,327
$47,327
Profit
Profitor
orloss
loss 2,673
2,673
Cr
Cr Cash
Cash $50,000
$50,000
5. Compound Fin. Instrument & ED
• There are certain financial instruments that have a hybrid
or combined nature.
• For example, a convertible bond is a debt instrument
with an embedded option to convert the debt instrument
to equity shares.
– From the perspective of the issuer, the debt instrument is a
financial liability while the embedded option may be an
equity instrument.
– From the perspective of the holder of that convertible bond,
the debt instrument is a financial asset and the embedded
option is similar to a derivative.
• In IAS 32, from the perspective of an issuer, these kinds
of financial instruments are termed as compound
– IAS 32 requires an issuer of a compound financial
instrument to separately classify different
components of the instrument in accordance with the
definition of financial liability and equity instrument.
• In IAS 39, from the perspective of a holder, these kinds
of financial instruments are termed as hybrid (combined)
instruments.
– IAS 39 requires a holder of a hybrid instrument to
separately account for the embedded derivative of
the instrument if certain conditions are fulfilled.
Compound Financial Instrument

• The issuer of a single non-derivative financial instrument
is required to evaluate the terms of the financial
instrument to determine whether it contains both a
liability and an equity component.
• Such components are classified separately as financial
liabilities, financial assets or equity instruments in
accordance with the substance of the contractual
arrangement and the definitions of a financial liability,
financial asset and equity instrument.
• On initial recognition, the issuer is required to recognise
separately the components of a financial instrument that:
1. creates a financial liability of the entity and
2. grants an option to the holder of the instrument to
convert it into an equity instrument of the entity.
Example
Example
• An entity issues 2,000 convertible bonds at the start of year 1.

• The bonds have a 3-year term, and are issued at par with a face value
of $1,000 per bond, giving total proceeds of $2,000,000.
• Interest is payable annually in arrears at a nominal annual interest rate
of 6%.
• Each bond is convertible at any time up to maturity into 250 ordinary
shares.
• When the bonds are issued, the prevailing market interest rate for
similar debt without conversion options is 9%.
• Discuss and calculate in accordance with IAS 32.
Example
Example
•• The
Theliability
liabilitycomponent
componentisismeasured
measuredfirst,first,and
andthe
thedifference
differencebetween
between
the
theproceeds
proceedsof ofthe
thebond
bondissue
issueandandthethefair
fairvalue
valueofofthe
theliability
liabilityisis
assigned
assignedto tothe
theequity
equitycomponent.
component.
•• The
Thepresent
presentvaluevalueofofthe
theliability
liabilitycomponent
componentisiscalculated
calculatedusing
usingaa
discount
discountraterateof of9%,
9%,thethemarket
marketinterest
interestrate
ratefor
forsimilar
similarbonds
bondshaving
havingno
no
conversion
conversionrights.
rights.
Present
Presentvaluevalueof ofthe
theprincipal
principal
$2,000,000
$2,000,000payablepayableat atthe
theend
endof ofthree
threeyears
years $1,544,367
$1,544,367
Present
Presentvaluevalueof ofthe
theinterest
interest
$120,000
$120,000payable
payableannually
annuallyininarrears
arrearsfor forthree
threeyears
years 303,755
303,755
Total
Totalliability
liabilitycomponent
component $$1,848,122
1,848,122
Equity
Equitycomponent
component(by (bydeduction)
deduction) 151,878
151,878
Proceeds
Proceedsof ofthe
thebond
bondissue
issue $2,000,000
$2,000,000
• A hybrid instrument includes
– a non-derivative host contract and
Hybrid
Hybrid(Combined)
(Combined)
– an embedded derivative with the effect that Contract
Contract
some of the cash flows of the hybrid
instrument vary in a way similar to a stand-
alone derivative. Host
Host Contract
Contract
• However, a derivative that is attached to a
Embedded
Embedded
financial instrument but is contractually Derivative
Derivative
transferable independently of that instrument, or
has a different counterparty from that instrument,
is not an embedded derivative, but a separate
financial instrument.
• From the perspective of a holder of hybrid
(combined) instruments
– IFRS 9 adopts a two-step approach in accounting Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
for hybrid instruments
– IAS 39 uses a single-step approach in accounting
for hybrid instruments. Host
Host Contract
Contract
Embedded
Embedded
Derivative
Derivative
• Under IFRS 9, a holder to determine whether a
hybrid contract contains a host that is an asset
within the scope of IFRS 9 and, Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
1. If a hybrid instrument contains a host that is an
asset within the scope of IFRS 9 (or hybrid
instrument with a financial-asset host), the holder
Host
Host Contract
Contract
will only recognise and measure the entire hybrid
instrument as a normal financial asset. Embedded
Embedded
2. If a hybrid contract contains a host that is not an Derivative
Derivative
asset within the scope of IFRS 9 (other hybrid
instrument), the holder will be required to
the instrument if certain conditions are fulfilled.
• Under IAS 39, a holder is not required to
determine whether a hybrid contract contains a
host that is an asset within the scope of IAS 9 but Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
simply requires a holder of hybrid instrument to
the instrument if certain conditions are fulfilled. Host
Host Contract
Contract
• It implies that:
– A holder of other hybrid instrument, i.e. hybrid Embedded
Embedded
Derivative
Derivative
instrument with non-financial-asset host, under
IFRS 9 and a holder of all kinds of hybrid instrument
under IAS 39 are required to evaluate whether the
embedded derivative has to be separately
accounted for in accordance with IFRS 9 or IAS 39.
Example
Example
• Examples of contract with embedded derivative
include:
1. A call, put, or prepayment option embedded in a Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
host debt contract.
2. An option or automatic provision to extend the
remaining term to maturity of a debt instrument. Host
Host Contract
Contract
3. Equity-indexed interest or principal payments
embedded in a host debt instrument. Embedded
Embedded
Derivative
Derivative
4. Commodity-indexed interest or principal payments
embedded in a host debt instrument.
5. An equity conversion feature embedded in a
convertible debt instrument.
• When a holder of other hybrid instrument (under IFRS 9)
or a holder of a hybrid instrument (under IAS 39) is
required to evaluate whether the embedded Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
derivative has to be separately accounted for
in accordance with IFRS 9 or IAS 39, IFRS 9 and
IAS 39 requires an entity to separate an embedded Host
Host Contract
Contract
derivative from the host contract and account for such
embedded derivative as a derivative if, and only if: Embedded
Embedded
Derivative Derivative
1. the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics
and risks of the host contract;
2. a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and
3. the hybrid instrument is not measured at fair value with changes
in fair value recognised in profit or loss (i.e. a derivative that is
embedded in a financial asset or financial liability at fair value
through profit or loss is not separated).
Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
Host
Host Contract
Contract
Embedded
Embedded
Derivative
Derivative
• If an embedded derivative is separated, the host
contract is accounted for
– under IFRS 9 or IAS 39 if it is a financial
instrument, and
– in accordance with other appropriate
accounting standards if it is not a financial Host
Host Contract
Contract
instrument.
Embedded
Embedded
• IFRS 9 or IAS 39 does not address whether an Derivative
Derivative
embedded derivative is presented separately in
the financial statements.
• The separated embedded derivative is similar to a
simple derivative to be accounted for in the same
manner as other derivatives.
• If a contract contains one or more embedded
derivatives, an entity may designate the entire
hybrid (combined) contract as a financial asset or Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
financial liability at fair value through profit or loss
unless:
1. the embedded derivative does not significantly modify the
cash flows that otherwise would be required by the
contract; or
2. it is clear with little or no analysis when a similar hybrid
instrument is first considered that separation of the
embedded derivative is prohibited, such as a prepayment
option embedded in a loan that permits the holder to
prepay the loan for approximately its amortised cost.
• If an entity is required by IFRS 9 or IAS 39 to
separate an embedded derivative from its host
contract, but is unable to measure the embedded Hybrid
Hybrid(Combined)
(Combined)
Contract
Contract
derivative separately (either at acquisition or
subsequently),
– the entity is required to designate the entire
hybrid contract as at fair value through profit or
loss.
• The classification of financial asset or financial
liability at fair value through profit or loss is further
discussed in Chapter 16.
Chapter 15
Financial Instruments
– Introduction

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Chapter 15

1. Applicable Standard and Scope

Derivative ⇒ is a financial instrument or other contract within the

Accounting report 2006

Compound Financial Instrument

• An entity issues 2,000 convertible bonds at the start of year 1.

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