Accounting for Financial Instruments Set 3

• Initial measurement at its fair value
  • financial assets
  • financial liabilities
• Fair value of a financial instrument on initial recognition is normally the transaction price
• Consideration of transaction costs that are directly attributable to the acquisition (in the case of a financial instrument that is not classified at "fair value through profit or loss")

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• Originiated or aquired loans and receivables
• Limitation to financial instruments with fixed or determinable maturity not quoted on an active market
• Active markets are ones where
  • items traded within the market are homogeneous
  • willing buyers and sellers can normally be found at any time
  • prices are available to the public
• Active markets if prices are regulary available from an exchange, dealer, broker, industy group, pricing service, or regulatory agency
• Loans and receivables from which a lender cannot materially recover his entire initial net investment (other than impaired loans) are considered financial assets "available for sale"
• Holdings in investment funds not containing loans or receivables also classified as financial assets "available for sale"
• Exceptions - loans and receivables
  • voluntary designated under fair value option or
  • voluntary designated as available for sale

• Non-derivative financial assets
• Fixed or determinable maturities
• Positive intention and ability to hold the asset to maturity
• Exceptions - investments
  • voluntary designated under fair value option or
  • voluntary designated as available for sale or
  • financial assets that meet the criteria of loans and receivables

• More than a marginal part of investments has been sold within the current year or within the preceding two years (tainting rule) unless
  • such sales were so close to maturity (within three months or less) that this did not materially impact thei fair values
  • payments received up to the sale of the asset substantially correspond to the repayment amount (at least 90%)
  • sales result from an event beyond holder's control

• Two subcategories
  • financial assets or financial liabilities held for trading
  • financial assets or financial liabilities voluntarily designated to fair value option

• Assets or liabilities acquired or incurred principally for purpose of short-term sale or repurchase
• Parts of portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking
• Derivatives (except that is a financial guarantee contract or a designated and effective hedging instrument)

• Excludes equity instruments without an active market if their fair value cannot be measured reliably
• Allowable if relevant information is made
  • providing recognition inconsistencies (accounting mismatches) are eliminated or significantly reduced
    • inconsistent measurement of assets or liabilites
    • inconsistent recognition of gains and losses
  • or managed and its performance is evaluated on a fair value basis
• Allowable for contracts which include one or more mebedded derivatives unless
  • the embedded derivative has no significant effects on the cash flow of the host contract or
  • separation is prohibited (i.e. embedded termination rights in certain loan agreements)
• Mandatory for entire contract if derivative cannot be valued separately (IAS 39.12)