Financial Instruments (IFRS 9, IAS 32, IFRS 7)

Flashcards covering key vocabulary, standards, definitions, and measurement rules for Financial Instruments under IFRS 9, IAS 32, and IFRS 7.

Financial Instrument (FI)

Any contract that gives rise to a financial asset of one entity AND a financial liability or equity instrument of another entity.

Contract

An agreement between two or more parties that creates enforceable rights and obligations.

IFRS 9

The standard that deals with the classification and measurement of financial instruments, impairment of financial assets, and hedge accounting.

IAS 32

The standard governing financial instruments presentation, including whether to classify an item as a financial asset, financial liability, or equity instrument, rules on offsetting, and compound financial instruments.

IFRS 7

The international accounting standard that deals with disclosure requirements for financial instruments.

Financial Asset (FA)

Cash, an equity instrument of another entity, a contractual right to receive cash/another financial asset, a contractual right to exchange financial instruments under potentially favourable conditions, or certain contracts to be settled in the entity's own equity instruments.

Equity Instrument

A contract that evidences a residual interest in the entity's assets after deducting all of its liabilities (representing ownership, not an obligation).

Financial Liability (FL)

Any liability that is a contractual obligation to deliver cash or another financial asset, exchange financial assets or liabilities under possibly unfavourable conditions, or a contract settled in the entity's own equity instruments.

Fair Value (IFRS 13)

The current market price of an asset or liability based on what others would pay for it today (market-based, not entity-specific).

Puttable Financial Instrument

An instrument that gives the holder the right to put (sell) it back to the issuer for cash or another financial asset (e.g., an investor deciding to sell back debentures).

Derivative

A financial instrument whose value depends on the value of another underlying item.

Recognition of Financial Assets

Occurs when the entity becomes party to the contractual provisions of the financial instrument and becomes legally entitled to the economic benefit of the contract.

Contractual Cash Flows (CCF) Test

Also referred to as the SPPI test; assesses whether a financial asset's contractual terms result in cash flows on specified dates that are solely payments of principal and interest.

Business Model (BM) Test

An assessment of business objectives determining whether an asset is held to collect contractual cash flows, held to collect and sell, or held to sell.

FVOCI - Equity Election

An irrevocable elective classification at initial recognition for an investment in an equity instrument that is not held for trading and not contingent consideration in an IFRS 3 business combination.

Face Value

The future amount ($FV$) that the issuer will repay at maturity from the issuer perspective.

Coupon Rate

The stated interest rate that the issuer will pay based on how much they will repay at maturity ($FV$).

Effective Interest Rate (EIR)

The interest the buyer will actually receive based on how much they paid ($PV$) for the instrument from the buyer perspective.

Held for Trading

A financial liability status where the instrument is acquired primarily to repurchase/sell in the near term, is a derivative (with exceptions), or is part of a portfolio managed together with evidence of short-term profit-taking.

Transaction Costs

Incremental costs directly attributable to the acquisition, issue, or disposal of a financial asset or financial liability that would not have been incurred otherwise.

Amortised Cost

The original amount paid or received, adjusted over time for repayments, interest using the effective interest rate, and any impairment.

Initial Measurement of FLs at FVPL

Measured at Fair Value ($FV$), with directly attributable transaction costs expensed in profit or loss.

Initial Measurement of FLs at Amortised Cost

Measured at Fair Value minus transaction costs (the transaction costs are capitalised/deducted from initial carrying amount).

Initial Measurement of FAs at Amortised Cost / FVOCI

Measured as Fair Value plus transaction costs ($\text{FV} + \text{transaction costs}$).

Interest Income Formula

$$\text{Interest Income} = \text{Opening Gross Carrying Amount} \times \text{Effective Interest Rate}$$

Closing Gross Carrying Amount Formula

$$\text{Closing Gross Carrying Amount} = \text{Opening Gross Carrying Amount} + \text{Interest Income} - \text{Receipts}$$