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Financial liabilities at fair value through profit or loss - measurement
A financial liability at fair value through profit
or loss is a financial liability that meets either
of the following conditions.
| a) |
It is classified as held for
trading. A financial liability is classified
as held for trading if it is: |
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i) |
acquired or incurred principally
for the purpose of selling or repurchasing it
in the near term; |
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ii) |
part of a 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;
or |
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iii) |
a derivative (except for a derivative that
is a designated and effective hedging instrument). |
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| b) |
Upon initial recognition it is
designated by the entity as at fair value through
profit or loss [IAS39R.9]. |
Financial liabilities at fair value through profit
or loss are measured at fair value at each balance
sheet date . Derivatives
are liabilities when they have negative fair value,
that is, when settlement would require the entity
to make a payment to the counter-party.
Gains and losses arising from changes in the fair
value of financial liabilities at fair value through
profit or loss are recognised in the income statement
immediately. The rules for hedge accounting are
followed if a derivative liability qualifies as
an effective hedging instrument .
All other financial liabilities - measurement
All other financial liabilities, including short-term
and trade payables, are measured at amortised cost
. When a liability
is first issued, its amortised cost is usually the
issue proceeds net of transaction costs. This amount
is adjusted over the life of the liability, so that
the carrying amount at maturity is the amount repayable
at maturity.
For short-term non-interest bearing liabilities,
such as trade payables and accrued expenses, the
face amount, the proceeds of issuance and the amortised
cost are effectively the same. For interest-bearing
liabilities, for which the amount repayable at maturity
equals the issue proceeds and on which no material
transaction costs are incurred, the face amount
and the amortised cost are effectively the same.
The amortised cost of a liability is calculated
as follows:
| a) |
the amount at which the liability
was first recognised (normally the issue proceeds
net of transaction costs); plus |
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| b) |
interest calculated using the
effective interest method (see below); less |
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| c) |
any cash payments made (principal and interest). |
If the liability is issued at a premium or discount
or transaction costs are incurred on its issuance,
the premium, discount, or transaction costs are
amortised over the life of the liability using an
effective interest method. The effective interest
method calculates the interest rate that is necessary
to discount the stream of principal and interest
cash flows to the initial issue proceeds. That rate
is then applied to the carrying amount at each reporting
date to determine the interest expense for the period
.
Financial liabilities denominated in a foreign
currency are re-measured using the exchange rate
applicable at each balance sheet date. Changes in
value arising from changes in foreign exchange rates
are recognised in the income statement in the current
period . A
non-derivative foreign currency financial liability
may, in some limited circumstances, be designated
as a hedging instrument, in which case the hedge
accounting rules are followed .
Changes in classification of financial liabilities
IFRS allows transfers between the various categories
of financial assets in some limited circumstances.
Classification of financial liabilities is based
solely on the nature of the liabilities, and thus
it is difficult to imagine the circumstances in
which a change in classification might arise. The
standard specifically prohibits reclassification
into and out of the financial liabilities at fair
value through profit or loss category [IAS39R.50].
Derecognition of financial liabilities
A financial liability (trading or other) is removed
from the balance sheet when it is extinguished,
that is when the obligation is discharged, cancelled
or expired. The condition is met when the liability
is settled by paying the creditor or when the debtor
is released from primary responsibility for the
liability either by process of law or by the creditor
.
The difference between the amount paid to extinguish
the liability and the carrying amount of the liability
is a gain or loss that is included in the income
statement. Gains and losses arising from redemption,
settlement or early payments are not extraordinary
items but are included as a component of finance
income or expense [IAS39R.39].
In-substance defeasance
Payment to a third party including a trust (sometimes
called "in-substance defeasance") does
not by itself relieve the debtor of its primary
obligation to the creditor in the absence of legal
release . Hence, an in-substance
defeasance does not result in the liability being
removed from the balance sheet.
Buy-back of liabilities
Management of an entity may buy back publicly-traded
debt, for example when the debt is trading at a
significant discount to the face amount because
of concerns about credit or country risk. Where
there is a third party payment agent, management
may be forced to pay the agent, who will then pay
the funds to the bond-holders after commission and
fees. In this case, the bond liability is removed
from the balance sheet only when the bond-holders
are paid and the entity is legally released from
its obligation. Alternatively, the bonds may include
a clause allowing cancellation on presentation of
the bonds after payment of fees and expenses, in
which case the bond liability is removed from the
balance sheet when the bonds are presented and cancelled.
Replacement and restructuring of debt
Management will frequently negotiate with the entity's
bankers or bond-holders to cancel existing debt
and replace it with new debt on different terms.
For example, an entity may decide to cancel its
high-interest fixed-rate debt, pay a fee or penalty
on cancellation, and replace it with variable-rate
debt. IAS 39R provides guidance on how to distinguish
between a settlement of the debt with the debt being
replaced by new debt, and a restructuring of existing
debt.
The distinction is based on whether or not the
new debt has substantially different terms from
the old debt. Terms are substantially different
if the present value of the net cash flows under
the new terms is at least 10% different from the
present value of the remaining cash flows under
the original debt discounted using the original
effective interest rate of the old debt. This distinction
is important for gain or loss recognition. If the
old debt has been settled and replaced by new debt
(i.e. the new debt has substantially different terms
from the old debt), a gain or loss is recognised
in the income statement for the difference between
the carrying amount of the old debt and the fair
value of the new debt, less any associated costs
or fees. Conversely, if the old debt has been restructured
(i.e. the new debt does not have substantially different
terms from the old debt), the old debt continues
to be recognised and no gain or loss arises. Any
costs or fees incurred on restructuring the debt
adjust the debt's carrying amount and are amortised
to the income statement over its remaining life
[IAS39R.AG62].
Presentation and disclosure
Financial statements shall include all of the disclosures
required by IAS 32R or IFRS 7 that apply to financial
liabilities.
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