Topic 7 (2014)Apunte Español
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International Financial Accounting
Topic 7. Financial Instruments (IAS 32, IAS 39, IFRS 7)
1. Definitions and classification
Primary financial instruments
• Financial assets: such as cash, receivables
and equity instrument of another entity.
• Financial liabilities: such as debt or bonds. .
Derivative financial instruments • Financial options, forwards, swaps and futures.
Classification of Financial Instruments Tainting rules 1 International Financial Accounting Elisabeth Martinez Initial recognition Subsequent measurement 2. Assets held-for-trading 2 International Financial Accounting Elisabeth Martinez I. EXAMPLE On 1st January X1, Entity Y acquires shares which will be held for trading 300€ (financial assets at FV through IS), expenses related to the transaction 25 €.
A) Register the transaction €300 Shares TO Banks €300 €25 Financial Expenses TO Banks €25 TO Benefits from shares held for trading (income statement) €50 B) Increase shares to 350 €50 Shares C) Decrease shares at 330 €20 Loss from shares hold for trading TO Shares €20 D) Shares sold for 362€. Expenses for the transaction €5 €362 Bank TO Share €330 Benefits from SALE of shares hold-fortrading €20 €5 Financial Expenses TO Banks €5 3. Available-for-sale financial assets 3 International Financial Accounting Elisabeth Martinez I. EXAMPLE On 1-1-X1 Entity Y had some held-to-maturity bonds and reclassifies them as shares classified as available-for-sale, Valued at 400 €.
A) 1/7/X1 the value of shares is €450 €50 Banks TO Revaluation surplus bonds €50 TO Bonds €20 TO Bonds €430 Benefits from SALE of bonds €100 B) 31/12/X1 the value is 430 €20 Revaluation reserve bonds C) 3/1/X2 Sells for 500 €500 Banks €30 Revaluation surplus Bonds 4. Loan classification According to maturity: -Current Loans: To be returned in less than one year -Noncurrent Loans: To be returned in a period longer than one year According to the moment of interest payment: -At the beginning of the period: Prepaid interests.
-At the end of the period: Interest expenses. They can also be payable in the near future (liability) Payments: Constant amount -Increasing amount I. Loan and receivables. Example (No initial costs) On 1st January 20X1 entity Y receives a four-year € 1,000,000. Annual interest is 10%.
The loan will be returned in 4 payments of 250,000 every end of year.
Register the journal entries assuming: 1st January €1,000,000 Banks TO Current loan payable €250,000 Non-current loan payable €750,000 A) Interest paid every 31/12 On 31 dec X1 €250,000 Current Loan payable €100,000 Interest expenses €250,000 Non current loan payable Reclassification of debt TO Bank €350,000 TO Current Loan Payable €250,000 Reclassification of debt 4 International Financial Accounting Elisabeth Martinez On 31 dec X2 €250,000 Current Loan payable €75,000 Interest expenses €250,000 Non current loan payable Reclassification of debt TO Bank €325,000 TO Current Loan Payable €250,000 Reclassification of debt €1,000,000 TO Current loan payable €250,000 Non-current loan payable €750,000 €100,000 prepaid interest expense (asset) TO …. Go on until year 4! B) Interest paid in advance every 1/1 1st of January X1 Bank €100,000 31 Dec X1 €250,000 Current loan payable TO Bank €250,000 €100,000 Interest expense TO Prepaid interest expense €100,000 €250,000 Non current loan payable Reclassification of debt TO Current Loan Payable €250,000 Reclassification of debt 1st January X2 €75,000 Prepaid interest expense TO Bank €75,000 And so on! C) What would be the entries if the company closed its accounts on 30th April? €1,000,000 Banks TO Current loan payable €250,000 Non-current loan payable €750,000 30th April-Closing accounts €33,333 Interest expense (1,000,000*10%*4/12) TO Interest payable (liability) €33,333 31st December (interest payment) €250,000 Current payable €33,333 Interest Payable €666,667 Interest Expenses €250,000 Non current loan payable Reclassification of debt TO Bank 350,000 TO Current Loan Payable €250,000 Reclassification of debt 5 International Financial Accounting Elisabeth Martinez 6 International Financial Accounting Elisabeth Martinez 7 International Financial Accounting Elisabeth Martinez 5. Bonds. .
Definition: Debt of the entity, divided in equal parts.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐵𝑜𝑛𝑑𝑠 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐵𝑜𝑛𝑑𝑠 ∗ 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 Nominal value (NV): base value to calculate interest.
Emission value (EV): value paid for the bond when acquiring it.
Reimbursement value (RV): value received when the bond has reached maturity Explicit interest rate: Interest on the bond nominal value Implicit interest rate: Takes into account EV and RV.
To find out Internal Rate of Return 0 = EV – (VN*i)/(1+IRR)1 - (VN*i)/(1+IRR)2 -..... - (VN*i)/(1+IRR)n - RV/(1+IRR)n 8 International Financial Accounting Elisabeth Martinez I. Registration for Investment Company EXAMPLE On 31-12-X0 Entity Y issues three-year bonds with a nominal value of € 1,000. The interest rate is 10% and reimbursement value € 1,100.
i=10% IRR= 12,94% because I get more than the reimbursement.
9 International Financial Accounting Elisabeth Martinez FROM THE POINT OF VIew OF THE COMPANY ISSUING BOND Year 1 2 3 4 Amortization Cost 1,000 1,029.37 1,062.54 1,100 €1,000 Banks Effective Interest 129,37 133.27 137.46 Explicit Interest 100,00 100.00 100.00 Implicit Interest 29,37 33.17 37.46 Total Payment 1,129.37 1,062.54 1,100 TO Non-Current Bonds €1,000 TO Bank €100 Non-current Bond €29.37 €133.17 Interest Expenses TO Bank €100 Non-current Bond €33.17 1062.54 Non-current bond TO Current Bond 1062.54 €137.46 Interest Expenses TO Bank €100 Bond €37.46 1,100 Bonds TO Bank 1,100 1st Year €129,37 Interest Expenses 2nd Year 3rd year FROM THE POINT OF VIEW OF THE COMPANY BUYING BONDS Is the same changing what is on the credit side to the debit side and vice-versa and changing current liabilities to current receivable.