This documents provides a summary of the key concepts under financial instruments such as financial assets, financial liabilities, amortized cost, etc. Examples on financial assets and financial liabilities are also given with calculations and journal entries.
IAS 12 Taxation: Various types, current income tax and deferred tax
IAS 37 and IAS 10 Provisions, contingencies and events after the reporting date
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University of KwaZulu-Natal (UKZN)
Accounting (ACCT211/212)
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IFRS 9 FINANCIAL INSTRUMENTS
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.
A financial asset as per IAS 32 is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right:
To receive cash or another financial asset from another entity
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 be settled in the entity’s own equity
instruments and is:
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
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
Initial measurement of a financial asset
At initial recognition, an entity shall measure a financial asset at its fair value
plus transaction costs that are directly attributable to the acquisition of the
financial asset.
Subsequent measurement of a financial asset
An entity shall subsequently measure a financial asset at
• Amortised cost if:
The financial asset is held within a business model whose objective is
to hold financial assets in order to collect contractual cash flows and
The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding
, • Fair value through other comprehensive income if:
The financial asset is held within a business model whose objective
is achieved by both collecting contractual cash flows and selling
financial assets
The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding
• Fair value through profit or loss if the financial asset is held within a
business model whose objective is achieved by selling financial assets.
Transaction costs will be expensed and not added to the financial asset
under this classification.
If it is classified as amortised cost or fair value through other comprehensive
income, you will use the effective interest rate method to calculate interest
income. This further means you must do your amortised cost table
OB INTEREST RECEIPTS CB
xxxxxx xxxxxx (xxxxx) xxxxx
Example
DGZ Limited purchased 100 000 15% debentures from TBN Limited for
R1 500 000 on 1 January 2021. Transaction costs of R150 000 were incurred.
The entity’s business model is to collect contractual cash flows and sell
financial assets.
The effective interest rate has been calculated to be 16.5%.
The fair value of the debentures was R1 700 000 on 31 December 2021
The fair value of the debentures was R1 720 000 on 31 December 2022
Prepare journal entries for the years ended 31 December 2021 and 31
December 2022.
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