1. Embedded derivatives
An embedded derivative is a feature within a contract, such that the cash flows associated with that feature behave in a similar fashion to a stand-alone derivative. In the same way that derivatives must be accounted for at fair value on the balance sheet with changes recognised in the income statement, so must some embedded derivatives. IAS 39 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when: [IAS 39.11]
· the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract
· a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and
· the entire instrument is not measured at fair value with changes in fair value recognised in the income statement
>> > At ABC there are no contracts with embedded derivatives.
2. Classification of financial assets
For the purpose of measuring a financial asset after initial recognition, this Standard classifies financial assets into the following four categories [IAS 39.45]
· Financial assets at fair value through profit or loss
· Available-for-sale financial assets
· Loans and receivables
· Held-to-maturity investments
>>> In ABC, financial instruments are not classified to measurement, therefore it is necessary to classify and compute subsequent measurement of financial assets.
3. Classification of financial liabilities
IAS 39 recognises two classes of financial liabilities: [IAS 39.47]
· Financial liabilities at fair value through profit or loss
· Other financial liabilities measured at amortised cost using the effective interest method
>>> In ABC, there is only financial liabilities measured at amortised cost using the effective interest method.
4. Initial measurement
Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]
>>> In ABC, all transaction costs were made up the cost of investment.
5. Measurement subsequent to initial recognition
Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with the following exceptions: [IAS 39.46-47]
· Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be measured at amortised cost using the effective interest method.
· Investments in equity instruments with no reliable fair value measurement (and derivatives indexed to such equity instruments) should be measured at cost.
· Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to measurement under the hedge accounting requirements of the IAS 39.
· Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or that are accounted for using the continuing-involvement method, are subject to particular measurement requirements.
>>> In ABC, all financial instruments were measured at cost, therefore it is necessary to evaluate the appropriate to measure subsequently at cost or fair value and make adjustment.
6. IAS 39 fair value option [IAS 39.9]
IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial liability to be measured at fair value, with value changes recognised in profit or loss.
>>> It is not applicable to ABC.
7. Impairment [IAS 39.63]
A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is objective evidence as a result of one or more events that occurred after the initial recognition of the asset. An entity is required to assess at each balance sheet date whether there is any objective evidence of impairment.
>>> ABC has not tested impairment of financial instrument. But all receivable accounts and investment classified under IAS 39 has not impaired.
8. Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due. [IAS 39.9]
>>> It is not applicable to ABC
9. Derecognition of a financial asset
The basic premise for the derecognition model in IAS 39 is to determine whether the asset under consideration for derecognition is: [IAS 39.16]
· an asset in its entirety or
· specifically identified cash flows from an asset or
· a fully proportionate share of the cash flows from an asset or
· a fully proportionate share of specifically identified cash flows from a financial asset
>>> In ABC, there are no financial asset/financial liabilities that meet the conditions for derecognition for FY 2012
10. Derecognition of a financial liability
A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IAS 39.39]
>>> In ABC, there are no financial asset/financial liabilities that meet the conditions for derecognition for FY 2012
11. Hedge accounting [IAS 39.71]
>>> It is not applicable to ABC
Analysis
Accounting Standards | • IFRS International Accounting Standard 39 (IAS 39) |
Balance sheet | • Recognise all financial instruments at cost • Not perform test impairment • Transaction cost of investment (measure at FVTPL) include in cost of investment |
Income Statement | • Not record impairment los s |
Impact | • The amount of financial assets and liabilities on balance sheet may be fairly presented under IAS 39 rather than VAS. |
• The amount of financial expense and income were fairly recorded. |
To test measure of financial instruments we follow these steps:
- Obtain all information related to the instruments; company’s policies about financial instruments.
- Determine whether the applicable interest rate is market rate, if not, re-determine market rate to fair value the instrument.
- Identify whether there is discount/premium, transaction fee, special payment structure leading to the nominal interest rate be different from EIR for purpose of amortized cost application.
- Identify any potential embedded derivatives
- Identify those with indicators of specific impairment (such as: overdue , restructured, subject to adverse information) to perform impairment test investment/account receivable.
In case of some available measures (Ex: independent model/guidance or the Company's itself) to compute fair value, fair value was calculate base on whichever is more prudent.
Full download at VAS - IFRS conversion
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