Accounting Standards for Private Enterprises Financial Instruments. Kate Ward. Principal, Accounting Standards

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1 Accounting Standards for Private Enterprises Financial Instruments Kate Ward Principal, Accounting Standards

2 Agenda Principles Scope Recognition Mea surement Lia bilities vs. equity Hedge a ccounting 2

3 Underlying principles Financial instruments are assets and lia bilities Balance sheet contains only assets and liabilities Fair value measurement is usually best Exceptions only when specific criteria met 3

4 Principles Cost benefit considerations: Costly to choose among 4 classifications Identifying and measuring embedded derivatives is complex Other comprehensive income poorly understood Hedge a ccounting requires sophistica tion 4

5 Scope and application Comprehensive: Replaces Section 3020, 3025, 3860, AcG-13, for entities that did not adopt the financial instrument sta nda rds Also replaces 3855, 3865, 3861, 3862, 3863 for entities that adopted the financial instrument standards Numerous EIC Abstra cts 5

6 Scope and application Excludes commodity contracts except for qua lifying hedging rela tionships No ability to elect public company financial instrument standard within accounting standards for private enterprises 6

7 Recognition and initial measurement All financial instruments recognized on trade date Arm s length transactions measured at fair value Related party transactions measured per Section 3840 Note that persons whose sole relationship is in capacity of management are not related parties for purposes of fina ncia l instrument tra nsa ctions 7

8 Classification Two models needed: Cost or a mortized cost Fair value Free-sta nding deriva tives Equities traded in an active market Fair value option 8

9 Embedded derivatives Leases, insurance contracts and nonfinancial contracts exempted in Section 3855 Convertible debt Indexed debt Investment assets 9

10 Embedded derivatives Convertible debt Bifurcation required Equity portion may be measured Residual amount Relative fair value Zero Disclosures required 10

11 Embedded derivatives Indexed debt Indexing feature measured at intrinsic value Disclosures Nature, terms and effect of feature 11

12 Classification Debt vs. equity Retra cta ble preferred sha res Preferred shares issued in tax reorga niza tion equity Disclosures include redemption amount on balance sheet Most other retra cta bles lia bilities 12

13 Other simplifications Interest measurement and transaction costs 13

14 Impairment Assess for indications of impairment at end of period Fina ncia l difficulty Breach of contract, default Adverse change in customer/ issuer s business environment Adverse regiona l or industry conditions 14

15 Impairment Write down to highest of Present value of expected cash flows Discount rate = appropriate current market rate of interest Rea liza ble a mount from a disposition Amount realizable by exercising rights to collateral Reverse if situation improves 15

16 Offsetting Offset a financial asset and a financial lia bility only when Legally enforceable right to set off Intent to settle net 16

17 Derecognition Tra nsfer of receiva bles Accounting guideline AcG-12 Fina ncia l lia bilities EIC 88/ Section 3855 Extinguishments a nd modifica tions 17

18 Hedge accounting Always optional Inconsistent use many entities thought previous models were too complica ted: Prove effectiveness Mea sure ineffectiveness 18

19 Hedge accounting Simple risk ma na gement problems Lock in price of anticipated purchase or sale of commodity with a forward contract Lock in exchange rate with a forward contra ct Convert interest rate from fixed to floating or vice-versa 19

20 Hedge accounting All significant terms of hedged instrument ma tched by hedging instrument Ma turity Amount Basis Designa te a nd document No elective discontinua nce 20

21 Hedge accounting Derivatives in qualifying hedging relationships measured on cash or accrual basis Settlements a djust the hedged item Disclosure Terms of hedged and hedging items 21

22 Disclosures Minimal Measurement basis of financial assets Accounts a nd notes receiva ble Tra nsfers of receiva bles Impaired assets and related allowances 22

23 Disclosures Terms of fina ncia l lia bilities Secured debt a nd colla tera l provided Five yea r pa yment requirements Details of compound liability/ equity issues Deta ils of indexed debt Tax planning (hi-low) preferred shares 23

24 Disclosures Derivatives Notionals and carrying amounts Method to determine fair value Swa ps designa ted in hedging rela tionships Fair value from dealer quote Derivatives over other entity s equity instruments whose fair value cannot be readily determined Hedges 24

25 Disclosures Income Gains and losses on financial instruments Total interest income Tota l interest expense a nd current/ noncurrent split Impa irment losses a nd reversa ls Risks a nd uncerta inties 25

26 Questions To learn more, visit To subscribe for AcSB updates, go to csbca na da.org/ subscribe Questions? Contact Kate Ward at ka te.wa 26

IFRS 9 Financial Instruments

A C C O U N T I N G S U M M A R Y IFRS 9 Financial Instruments Objective The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities