Financial Instruments. IAS 32 Presentation IAS 39 Recognition and Measurement IFRS 7 - Disclosures

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1 Financial Instruments IAS 32 Presentation IAS 39 Recognition and Measurement IFRS 7 - Disclosures

2 Financial Instruments IAS 32 Not applicable for (32.4): Investments in subsidiaries (IAS 27) Investments in associates (IAS 28) Joint ventures (IAS 31) Employee benefit plans IAS 19 (incl Stock option programs) Obligations in insurance contracts (IFRS 4)

3 Financial Instruments IAS 32 Not used for (32.9) Hedging of commodities To cover the entity s own needs Contract was only set up for this purpose Will be settled through delivery of the commodities

4 Financial Instruments IAS 32 Definition (32.11) Contract, that gives rise to a financial asset of one entity and a financial liability of another entity or an equity instrument of another entity

5 Financial assets (32.11) a) cash b) Any contract that gives rise to a financial asset of one entity and a financial liability of another entity c) A contractional right, i. To receive cash or another financial asset from another entity; or ii. To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity, or d) A contract that will or may be settled in the entity s own equity instruments and is a) Non derivative + receive a variable No of the entity s own equity instruments b) Derivative that will be settled other than by exchange of a fixed amount of cash or another fin asset for a fixed number of the entity s own equity instruments

6 Financial liability (32.11) a) Contractual obligation, i. To deliver cash or another financial asset to another entity; ii. or To exhchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or b) A contract that will or may be settled int the entity s own equity instruments and is: i. Non-derivative with obligation to deliver a variable No of ii. the entity s own equity instruments A derivative that will or may be settled other than by the exchange of fixed amount of cash or another financial asset for a fixed No of the entity s own equity instruments

7 Equityinstrument (32.11) Equityinstrument (32.11) Contract that evidences a residual interest in the assets of an entity after deducting all of its liablities (= interest in the equity of an entity) Contractual / Contract (32.13) Enforcable by law May take a variety of forms (e.g. need not be in writing)

8 Distinction between Equity and Liabilities ( ) Equity-Instrument, both a) and b) are met a) Includes no contractual obligation i. To deliver cash or another financial asset to another entity; or ii. To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer b) If the instrument will or may be settled in the issuer s own equity instruments, it is i. A non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or ii. A derivative that will be settled only by the issure exchanging a fixed amount of cash of another financial asset for a fixed number of its own equity instruments

9 Distinction Equity - Liabilities ( ) Main Features (32.17) Not repayable No obligatory dividends Substance over form, e.g..: Preferred share with obligation to be repaid = Liability Investment that can be cancelled = Liability

10 Distinction Equity - Liabilities ( ) As far as an entity does not have an unconditional right to avoid delivering cash financial liability (32.19) A financial instrument that does not explicitly establish a contractual obligation to deliver cash through its terms and conditions (32.20) E.g. shares must be paid back when no dividend is paid out - liability

11 Distinction Equity - Liabilities ( ) Settlement in the Entity s own Equity instruments If they are defined in values (eg 100 CU or 100 ounces Gold) and not as a fixed number of shares - liabilities Against a fixed number of shares - equity 100 Equity instr. against cash with a value of 100 ounces Gold liability or asset

12 Distinction Equity - Liabilities (32.25) Contingent Settlement Provisions Financial Instrument can be either equity instrument or financial liability, depends on objective, non forseeable contingencies (e.g. a certain stock index, priceindex, etc.) = liability

13 Distinction Equity - Liabilities Settlement options ( ) If a derivative financial instrument gives one party a choice over how it is settled It is a financial asset or an financial liability unless all of the settlement alternatives would result in it being an equity instrument E.g. stockoptions, the issuer can decide if settlement will be in cash or in delivery of own shares financial asset or financial liability

14 Compound Financial Instruments ( ) Financial Instruments, that contain both a liablity and an equity component compound fin.instr. Equity and liability component have to be presented seperately Measurement through difference method Defining the fair value of the financial liability (e.g. bond within a convertible bond) Difference between issuing value and fair value of the liability component gives you the value of the equity component (presented as reserve)

15 Treasury Shares ( ) If an entity reacquires its own equity instruments (treasury shares) shall be deducted from equity disclosure Direct in equity Number of treasury shares (in notes)

16 Interests, dividends and capital gains Interest in P&L dividends Inflow in P&L (IAS ) Outflow direct in Equity Gains have to recognised in income statements

17 Transaction costs ( ) Cost of issuing capital Recognised direct in equity Net of tax (deferred taxes) Issue of compound financial instruments Transaction costs that relate jointly to more than one transaction, they are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds

18 Offsetting a Financial Asset and a Only if Financial Liability ( ) There is a legally enforcable right An entity intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously

19 IAS 39 Definitiones (39.9) derivative (3 elements) Value changes in response to the change of A specified interest rate, commodity price, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract ( underlying ) No initial net investment necassary It is settled at a future date

20 Financial Instruments - Definitionen Original financial instruments receivables, debts, equity instruments Derivatives options, forward contracts, interestswaps, currencyswaps

21 Financial Instruments - Definitions Put and call options of equityinstruments are Classified as equity instruments guarantees etc Not in the balance sheet, but are financial liabilities

22 Categories of Financial Instruments (39.9) At fair value through profit or loss held for trading Purpose of selling within a short term Part of portfolio with a recent pattern of short-term profit-taking Derivative (if no hedging instrument)

23 Categories of Financial Instruments Fair Value Option (39.9) Designation of this category unless There is no active market There is no reliable way to measure the fair value reliably

24 Categories of Financial Instruments Held to maturity) Not when (39.9) Initial measure ment at fair value through P/L Designated available for sale by the entity Loans and receivables by definition Banned for two years if you have significant early sales of HTM-fin instr

25 Categories of Financial Instruments (39.9) Loans and receivables Not if listed on an active market or designated to a different category Not if a pool of assets does not consist of loans and receivables available for sale AFS If no other category

26 Definitiones for measurement (39.9) Amortised cost cost Principle repayments +/- cumulative amortisation using the effective interest method of any differnce between that initial amount and the maturity amount Minus reduction for impairment or uncollectibility

27 Definitiones of measurement (39.9) Effective interest method Serves to Calculate amortised cost Allocate interst income of expenses over the relevant period Effective interst rate, exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate a shorter period to the net carrying amount of the financial asset or financial liability Cash flows also comprise of fees, transaction cost, Agios and Disagios

28 Definitions for Measurement (39.9) Fair value Is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an at arm s length deal Marketvalue Active market for purchase and payback

29 other Definitions (39.9) derecognition Taking off the balance sheet Transaction costs Incremental cost which are directly attributable to the acquisition, issue or disposal of a financial asset

30 Definition hedginginstrument (39.9) Designated derivative or non-derivative financial asset, whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item

31 Definition hedginginstrument (39.9) underlying Financial asset or liablitiy Firm commitment Highly probable forecast Net Investment in a foreign operation Hedge effectiveness Degree to which changes in the fair value or cash flow of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument

32 embedded Derivates ( ) Component of a hybrid instrument Financial instrument has also a nonderivative component Cash flow of the embedded derivatives vary in a way similar to a stand-alone derivative Separate recognition, when the embedded derivative is not dependent on the nonderivative

33 Recognition and derecognition ( ) recognition (39.14) only when the entity becomes a party to the contractual provisions of the financial instrument derecognition (39.15 ff) Only when (39.17) Contractual rights to the cash flows from the financial asset expire or Transfer of a financial instrument

34 derecognition ( ) transfer (39.18) Transfers the contractual rights to receive the cash flows of the financial asset Retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement No obligation to pay without cashinflow Financial asset may not be sold No delays with the cash flows

35 derecognition (39.20) Transfer of all material risks and rewards derecognition No Transfer of all material risks and rewards continued recognition If uncertain If control gets lost, derecognition If control stays, continued recognition

36 derecognition (39.26) Total derecognition Difference of Carrying amount and Total of Proceeds and Any cumulative gain or loss recognised directly in equity Through P/L

37 derecognition (39.29) If there is No transfer Continued recognition as a fin.instr. Consideration received to be recognised as a financial liability All income and expenses out of the fin instr through P/L

38 transfers ( ) If continued recognition No offsetting of fin assets and liabilities No offsetting of income and expenses out of this fin instruments The transferee still has to recognise the collateral

39 Trade date settlement date (39.38) Regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting

40 Derecognition of a fin. liability ( ) Only if is discharged, cancelled or expires Gains and losses through P/L

41 Initial measurement ( ) Initial measurement for fin. Assets or liabilities Fair value If amortised cost, then with transaction costs Trade date settlement date Fair value ist to be recognised form trade day on

42 Subsequent measurement ( ) measurement P/L At fair value through P/L Loans and receivables Fair value Amortised cost yes yes Held to maturity Amortised cost yes Available for sale Fair value no

43 Subsequent measurement ( ) Fair Value except: Loans and receivables Held to maturity Financial instruments without a far value which is calculated reliable

44 Subsequent measurement fin.liabilities Amortised cost + effective interest rate method except: At fair value through P/L Liablilities because of a not realised derecognition

45 reclassifications ( ) At fair value through P/L no reclassification possible HTM to AFS direct in equity Reclassification possible since 4th quarter of 2008

46 Gains and Losses ( ) At fair value P/L at Categorie 1 Direkt in equity (in changes in equity) cat IV AFS Amortised cost At derecognition and impairment P/L

47 impairment ( ) Tested annually (objective evidence) Recognition at amortised cost Future cash flows discounted at effective interest rate At cost (no Fair Value applicable) discount of the future at market rate of a similar financial asset (no reversal) measurement AFS P/L at financial liability reversal through P/L at equity instrument reversal direct in equity

48 disclosures (IFRS 7.7) An entity shall disclose information that enables users of its financial statments to evaluate the significance of financial intruments for its financial position and performance

49 Disclosures balance sheet (IFRS ) Categories either in balance sheet or notes At fair value through profit and loss At initial measurment classified Held for trading Held to maturity

50 Disclosures balance sheet (IFRS ) Loans and receivables Financial Instruments available for sale Financial liabilities at fair value Designated at initial measurement Held for trading Financial liabilities at amortised cost

51 Disclosures balance sheet (IFRS ) At fair value through profit and loss Highest credit risk Amount how similar instruments meet this value Change in value because of impairment Changes of the fair value since first recognition

52 Disclosures balance sheet (IFRS ) Financial liabilities at fair value Changes in fair value based on marketrisk or credit risk Difference between liability and payment (disagio) Methods of measurement

53 Disclosures balance sheet (IFRS ) changes in measurment Fair value changed to cost (or amortised cost) cost (or amortised cost) to Fair Value Effect and explanation

54 Disclosures balance sheet (IFRS ) derecognition, if there was no total derecognition Nature of the financial instrument Remaining risks Carrying amounts of the continued recognised fin assets or liabilities Measurement of the continued involvement Carrying amount of the initial asset

55 Disclosures balance sheet (IFRS collateral ) Carrying amount for given collaterals Collaterals held Fair value of collateral Fair value of collateral sold Impairment to financial assets

56 Disclosure balance sheet (IFRS ) Allowance account for credit losses If there is impairment, recorded in a seperate account rather than directly reducing the carrying amount reconciliation of the changes Defaults and breaches Carrying amount of loans payble in default at reporting date, if remidied, terms of loans have been renegotiated

57 Disclosures P/L, Equity (IFRS 7.20) Presentation of Net gains or losses of At fair value through P/L Available for sale (separate presentation in changes in equity) Held to maturity Loans and receivables Financial liabilities at amortised cost

58 Disclosures P/L, equity (IFRS 7.20) Total interest income and expenses fees income expenses Interest income on impaired financial assets Impairment expenses of each category

59 Other disclosures Accounting policies in general (IFRS 7.21) Measurement basis

60 Fair Value disclosures (IFRS ) For each class of fin.instr. fair value Methods and assumptions for fair values No disclosure of fair values if Carrying amount is close to Fair value (loans and receivables) Non quoted equity instruments (description of the measuring problem) At fiduciary agreements if fair value is not measurable

61 Riskreporting (IFRS ) Risk on financial instruments + risk policies Qualitative disclosures How far ist the entity exposed to such risks Objectives, policies and processes for managing the risk and the methods used to measure the risk Any changes from the previous period

62 Riskreporting (IFRS ) Quantitative disclosures For each class If material Riskconcentration Creditrisik (for each class) Maximum credit risk (without collaterals) Description of collaterals Information about the credit quality of financial assets that are neither due or impaired Carrying amount of Financial Instruments terms renegotiated

63 Riskreporting (IFRS ) Financial assets that are either past due or impaired Age analysis Analysis of the impaired financial assets Collateral or other credit enhancements collateral Nature and carrying amount of such assets In not transferable into cash policies for disposals

64 Riskreporting (IFRS ) Liquidity risk Maturityanalysis for financial liabilities Description of how this risk is managed Marketrisk Sensitivity analysis For each type of market risk Methods and assumptions Changes in methods If not represantative, then description why not

65 Hedging Hedged items Transactions, obligations Portfolio

66 Hedging Fair value hedges eg loan with fixed interst rate (against interest risk) Cashflow hedges Risks of foreign exchange rates for revenues Changes in commodity prices Swap contracts for interestrisks Hedge of a net investment in a foreign operation

67 Hedging General requirements Begin: description of riskapproach and objectives Hedge should be highly effective High probability of meeting the planned effect Effectiveness is measurable Hedging is measured permanently

68 Hedging Fair value hedge Recognition of gains and losses via P/L Underlying is to be corrected (eg fin.liability)

69 Hedging Cash flow hedging Gains/losses if effective Direct in equity ( IAS 39-reserve ) in changes in equity presented Ineffectiv P/L if derivate Accounting rules if non derivative (depends on category) If hedged cash flow is realised transfer of reserve into P/L

70 Hedging disclosures Description of objectives of mangement Other informations Description of the hedge Description of the Financial Instruments Nature of hedged risks Expected transactions

71 Hedging dislosures IAS 39 Reserve Carrying amount of the period Transfer into P/L Transfer with realisation of the hedged item

72 Hedging Hedging (IFRS ) For each hedge Description of the hedges Description of the financial instruments used for hedging purposes Description of the hedged risk

73 Hedging (IFRS 7.23) Cash flow hedges Expected date of cash flows Descripiton of planned hedges Recognised hedges at closing date (direct in equity) Transfers equity to P/L Transfer to cost of an asset

74 Hedging (IFRS 7.34) Gains and losses of fair value hedges at Hedging Instrument at underlying non effective CF Hedges in P/L recognised Non effective Hedges at net investments into foreign operations in P/L

75 IAS 37 provisions provisions Contingent liabilities Contingent receivables

76 IAS 37 provisions recognition Decrease in value of an asset or existing liability at closing date will be probably be proved in future Reliable estimates for the expenses Obligation against a third party

77 IAS 37 provisions measurement best estimate Amount which will be necessary to settle the liability Experience of the managment in such cases Information after balance sheet date Same probability average value No hidden reserves!

78 IAS 37 provisions Measurement Present value If amount material Pre tax interst rate Future events Offsetting against assets only if fixed together with liability (insurance)

79 IAS 37 provisions No provisions for deferring expenses restructuring Formal plan Planned actions Already started Provision for losses out of fixed contracts obligation No administrative or other general cost in calculation

80 provisions IAS 37

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