FINANCIAL

INSTRUMENTS
“ROADMAP”
Prepared by BIANCA NEL CA (SA)
COPYRIGHT NOTICE

Copyright © CA Campus

These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part
of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any
electronic or other means including the making of photocopies thereof, without the express prior written
consent of the proprietor, CA Campus.

No individual may share any CA Campus content or material with any other person.

The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report
their details to:
• UNISA
• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons
from registering as chartered accountants (SA), as such actions constitute a gross transgression of
ethical principles, which is a violation of the code of professional conduct of SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer
 FOR USE BY CA CAMPUS STUDENTS ONLY

IAS 32 => PRESENTATION

IFRS 9 => RECOGNITION IFRS 7 => DISCLOSURE

FINANCIAL ASSET FINANCIAL LIABILITY FINANCIAL LIABILITY

1. Financial Asset 1. @Amortisation TYPE MEASUREMENT
2. Financial Liability => @Amortisation
2. FV - P/L Exception
Held for trading FV through P/L
3. Equity FV - P/L @ FV on initial recognition FV gain/loss due to credit risk =OCI
4. Compound Instrument 3. FV - OCI
(IFRS [Link]) Remaining FV gain/loss = PL
5. Treasury shares Contingent cons. (IFRS 3) FV through P/L
*Pref shares FINANCIAL ASSETS
* Derivatives
STEP 1 STEP 2 STEP 3 STEP 5: SUBS MEASUREMENT
* Interest/Dividends/Loss/Profit
Business Model Classification Measurement
How do I determine if instrument issued Collecting contractual cash flows FA @ Amortised Cost FIN ASSET @ FV THROUGH OCI
(solely payments of principal & amortised EffectInterest FINANCIAL ASSET FINANCIAL LIABILITY MANDATORY ELECTED
financial liability or/and equity instrument?
interest) cost income = P/L Amount initially Amount initially FV adjustm => M2MR OCI account
Is there a contractual obligation to deliver cash/financial
Collecting contractual cash flows FA @ FV OCI FV recognised recognised gain/loss OCI Derecognition
assets?
(solely payments of principal & (debt Gain/Loss = OCI (FV + transaction (FV - transaction Derecognition => =>Cum FV
interest AND SELLING of FA instruments) costs) costs) FV gain/losses gain/losses in
YES NO
(bonds)) - Principal repayments in equity/OCI equity via OCI =
Investment in equity instruments FA @ FV OCI FVGains/Losses + Cumulative amortisation => transferred to NEVER
The contract Will the contract be settled in
NOT HELD for trading AND = OCI (M2MR = = Gross carrying P/L subsequently
= Financial entity's
election ito IFRS [Link] (bonds) Subsequent) amount Impairment transferred/reclassi
Liability own equity instruments?
Investment in equity instrument - Loss allowance losses fied to P/L
NOT HELD FOR TRADING OR FV = Amortised costs and foreign Dividends received
YES NO
Investment in equity instrument FA @ FV P/L Gains/Losses = The following recognised in P/L: exchange diff = = designated as FV
HELD FOR TRADING OR P/L 1. Interest using effective interest recognise in P/L through OCI are
number of number of shares
Irrevocable election to measure FA method [NOT OCI] recogn in P/L when
shares to be to be issued- NOT equity at FV on initial recognition 2. Foreign exchange gains/losses entity's right to
issued - >FIXED or liability 3. Expected receive PMT
>VARIABLE STEP 4 TRANSACTION COSTS credit losses
CLASSIFICATION INITIAL MEASUREMENT and reversals
Financial Equity Fin A/L @ FV ->P/L @ FV (expense trans. costs)
Liability Fin A/L @FV -> OCI FIN LIABILITY @ FV THROUGH P/L
@ FV + transaction costs
Fin A @ amortised costs Financial liabilities ELECTED/
* Reclassification Fin L @ amortised costs @ FV - transaction costs DESIGNATED into this category
=> SUBSEQUENT CHANGES should be separated into
CREDIT LOSS? EXPECTED CREDIT LOSS MODEL 1. FV changes due to changes in CREDIT RISK of issuer
Impairment DIFFERENCE = PV Initial recognition - FA &at end of Recogn 12 month Calculate interest using effective interest (=RECOGNISED in OCI & accumulated in equity)
1. Simplified of Expected cash reporting period if no significant expected credit losses rate calculated on gross CA i.e. CA before 2. Other risk => P/L
approach shortfalls increase in credit risk adjusm of any loss allowance.
2. Lifetime At reporting date there is a Recogn lifetime
significant increase in credit risk expected credit losses
expected Valuation technique
At reporting date the financial asset Recogn lifetime Calculate interest using the effective
3. General = is credit impaired expected credit losses interest calculated on amortised cost i.e. [day 1 gains/losses]
3 Stage CA after adjustm of any loss allowance *Recognise in P/L Derecognition: IFRS 9.B.3.2.1

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 FOR USE BY CA CAMPUS STUDENTS ONLY

IFRS 9 => RECOGNITION

IAS 32 => PRESENTATION IFRS 7 => DISCLOSURE
A B
1. Financial Asset
= Fin = Fin
2. Financial Liability
3. Equity Asset Liability/
4. Compound Instrument 1. Calc FV of instrument at initial recogn
Equity
5. Treasury shares 2. Calc PV of liability component based on
*Pref shares market related rates
NB! 3. FV of instrument less PV of liability
* Derivatives
Issuer * Interest/Dividends/Loss/Profit component = Equity component
i.e. balancing figure
• Authorised
NB!! Transaction costs - allocated to
MEET ALL 3: NEW CO (PTY) LTD share capital
liability & equity in proportion
1. value changes in response to change *Share register • Issued share
in a specified ............. (the ‘underlying’) capital
2. no initial/SMALL net investment Pref Shares:
3. it is settled at a future date Cumulative vs Non-Cumulative
Redeemable vs Non-redeemable

Derivative
Financial
Instrument

How do I determine if instrument issued

financial liability or/and equity instrument?
Is there a contractual obligation to deliver cash/financial
assets?

YES NO

The contract Will the contract be settled in

= Financial entity's
Liability own equity instruments?

YES NO

number of number of shares

shares to be to be issued- NOT equity
issued - >FIXED or liability
>VARIABLE

Financial Equity
Liability

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 FOR USE BY CA CAMPUS STUDENTS ONLY

IAS 32 => PRESENTATION IFRS 9 => RECOGNITION

IFRS 7 => DISCLOSURE

FINANCIAL ASSET
1. @Amortisation FINANCIAL LIABILITY
2. FV - P/L => @Amortisation
Exception
3. FV - OCI FV - P/L

FINANCIAL ASSETS
INITIAL STEP 5: SUBS MEASUREMENT
STEP 1 STEP 2 STEP 3 FINANCIAL LIABILITY
Business Model Classification Measurement
TYPE MEASUREMENT
Collecting contractual cash flows FA @ Amortised Cost
Held for trading FV through P/L
(solely payments of principal & amortised EffectInterest
@ FV on initial recognition FV gain/loss due to credit risk =OCI FIN ASSET @ FV THROUGH OCI
interest) cost income = P/L
(IFRS [Link]) Remaining FV gain/loss = PL MANDATORY ELECTED
Collecting contractual cash flows FA @ FV OCI FV
Contingent cons. (IFRS 3) FV through P/L FV adjustm => M2MR OCI account
(solely payments of principal & (debt Gain/Loss = OCI
gain/loss OCI Derecognition
interest AND SELLING of FA instruments)
Derecognition => =>Cum FV
(bonds))
FV gain/losses gain/losses in
Investment in equity instruments FA @ FV OCI FVGains/Losses =
in equity/OCI equity via OCI =
NOT HELD for trading AND OCI (M2MR =
=> transferred to NEVER
election ito IFRS [Link] (bonds) Subsequent)
FINANCIAL ASSET FINANCIAL LIABILITY P/L subsequently
Investment in equity instrument
Amount initially Amount initially Impairment transferred/reclassi
NOT HELD FOR TRADING OR FV
recognised recognised losses fied to P/L
Investment in equity instrument FA @ FV P/L Gains/Losses =
(FV + transaction (FV - transaction and foreign Dividends received
HELD FOR TRADING OR P/L
costs) costs) exchange diff = = designated as FV
Irrevocable election to measure FA
- Principal repayments recognise in P/L through OCI are
at FV on initial recognition
+ Cumulative amortisation [NOT OCI] recogn in P/L when
= Gross carrying entity's right to
amount receive PMT
STEP 4 TRANSACTION COSTS - Loss allowance
CLASSIFICATION INITIAL MEASUREMENT = Amortised costs
Fin A/L @ FV ->P/L @ FV (expense trans. costs) FIN LIABILITY @ FV THROUGH P/L
The following recognised in P/L:
Fin A/L @FV -> OCI Financial liabilities ELECTED/
@ FV + transaction costs 1. Interest using effective interest
Fin A @ amortised costs method DESIGNATED into this category
Fin L @ amortised costs @ FV - transaction costs 2. Foreign exchange gains/losses => SUBSEQUENT CHANGES should be separated into
1. FV changes due to changes in CREDIT RISK of issuer
3. Expected
(=RECOGNISED in OCI & accumulated in equity)
credit losses
2. Other risk => P/L
and reversals

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 FOR USE BY CA CAMPUS STUDENTS ONLY

IAS 32 => PRESENTATION IFRS 9 => RECOGNITION

IFRS 7 => DISCLOSURE

FINANCIAL ASSET FINANCIAL LIABILITY

1. @Amortisation => @Amortisation
2. FV - P/L Exception
FV - P/L
3. FV - OCI

* Reclassification IMPAIRMENT CREDIT LOSS?

Trade receivables [TR], Financial assets that are Other DIFFERENCE = PV
contract asset [IFRS 15] & originated or purchased Financial Assets of Expected cash
Lease receivables [IFRS 16] credit impaired shortfalls
Simplified Lifetime expected General
approach approach approach
Entity is NOT required to Credit risk very HIGH on
determine whether credit initial recognition.
risk has increased
significantly since initial FA purchased/originated = EXPECTED CREDIT LOSS MODEL
recognition of financial credit impaired at initial Initial recognition - FA &at end Recogn 12 month Calculate interest using
asset. recognition. of reporting period if no expected credit effective interest rate
significant increase in credit risk losses calculated on gross CA
TR & contract assets that Credit adjusted effective i.e. CA before adjusm of
DO NOT contain a interest rate used on At reporting date there is a Recogn lifetime
any loss allowance.
significant financing amortised cost of FA significant increase in credit risk expected credit
component. losses
When calculating the At reporting date the financial Recogn lifetime Calculate interest using
Loss allowance measured at credit adjusted effective asset is credit impaired expected credit the effective interest
an amount equal to lifetime interest rate = entity losses calculated on amortised
expected credit losses. estimates expected cash cost i.e. CA after
flows and expected credit adjustm of any loss
TR, contract assets & Lease losses. allowance
receivables that
DO contain a significant At each reporting date
financing component. entity recognise a loss
allowance equal to
Entity chooses accounting lifetime expected credit
Valuation technique
policy to measure loss losses
[day 1 gains/losses]
allowance at amount equal
*Recognise in P/L
to lifetime expected credit
losses

Derecognition: IFRS 9.B.3.2.1

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 FINANCIAL
INSTRUMENTS
LECTURE EXAMPLES
Prepared by BIANCA NEL CA (SA)
COPYRIGHT NOTICE

Copyright © CA Campus

These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part
of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any
electronic or other means including the making of photocopies thereof, without the express prior written
consent of the proprietor, CA Campus.

No individual may share any CA Campus content or material with any other person.

The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report
their details to:
• UNISA
• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons
from registering as chartered accountants (SA), as such actions constitute a gross transgression of
ethical principles, which is a violation of the code of professional conduct of SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer
 Important Characteristics of Preference shares:
• Cumulative (ordinary owners cannot receive a dividend until a preference dividend is declared) vs Non-cumulative (not entitled to an
arrear dividend)
• Participating (fixed dividend plus remaining share of distributable profits) vs Non-participating (share of profit is restricted to the
fixed percentage dividend)
• Redeemable (redeemed out of e.g. profits or proceeds or issue of new shares) vs Non-redeemable
• Normally do not carry a vote except where the preference dividend is in arrears and remains unpaid
• Our focus is on equity instruments preference shares (consolidated in terms of IFRS 10 in the same way as ordinary shares)
• Financial liabilities preference shares are not consolidated, related dividends treated as interest. These dividends have no effect on
the consolidation process.

Example 1 – Redeemable preference shares (Descriptive Accounting)

Company A issued preference shares of R1 000 000 that are redeemable in 20.18. The
annual preference dividend of R120 000 (R1 000 000 x 12%) is cumulative. All unpaid
preference dividends are accumulated for future declarations or until the redemption in
20.18.

Classification
The preference shares, although equity instruments (shares) in legal form, have the
substance of a debt instrument (loan).
Company A has a contractual obligation to deliver cash in the form of
- preference dividends and;
- preference share capital.
Company A does NOT have an unconditional right to avoid paying the annual preference
dividends and the preference share capital on the specified future dates (IAS 32.18(a)).
=> redeemable preference shares should be classified as a financial liability by Company A.

Example 2 – Non-redeemable preference shares (Descriptive Accounting)

Company A issued non-redeemable preference share capital of R1 000 000. The annual
preference dividend of R120 000 (R1 000 000 x 12%) is cumulative and is payable at the full
discretion of Company A.

Classification
When preference shares are non-redeemable, the appropriate classification is determined
by the other rights that attach to them (IAS 32.AG26).
Company A is able to avoid paying the annual preference dividends and the preference
share capital in terms of the contractual terms and conditions of the non-redeemable
preference shares (IAS 32.19). Definition of FL: Present obligation due to past
event = lead to outflow of FEB. Recognition criteria.

Therefore, the contract cannot be classified as a financial liability.

Also, when preference dividends on non-redeemable preference shares, whether
cumulative or non-cumulative, are at the discretion of the issuer, the shares should be
classified as equity instruments (IAS 32.AG26).
=> non-redeemable shares should be classified as an equity instrument by Company A.

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Example 3– Contingent settlement provisions (Descriptive Accounting)

Construct Ltd issues debentures that are convertible into ordinary shares after three years
IF the revenue of Construct Ltd increases by more than 8% per annum. If the increase in
revenue is less than 8% per annum, Construct Ltd will redeem the debentures in cash.
Based on historical figures an 8% per annum increase in revenue is likely.

Classification
The increase in Construct Ltd's revenue is beyond the control of both Construct Ltd and the
debenture holders. There is also no indication that an 8% annum increase in revenue is
abnormal or unlikely. Hence Construct Ltd does not have an unconditional right to avoid
the redemption of the debentures in cash.
In light of the above, the debentures should be classified as a financial liability from
Constructs Ltd's perspective.

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 STEPS: [Who's records?]
Example 4– Accounting for compound financial instruments 1. FV at initial date
2. PV calc of LIABILITY
(Descriptive Accounting)
3. Equity: 1 - 2

Griffin Ltd issues 2 000 convertible bonds on 1 January 20.12. The bonds have a three-year term and
are issued at fair value and a face value of R1 000 per bond, giving total proceeds of R2 000 000.
Interest is payable annually in arrears at a nominal annual interest rate of 6% per annum. Each bond
is convertible at the option of the holder into a fixed number of ordinary shares at any time up to
maturity. On 1 January 20.12, a market-related discount rate for a basic three-year debt instrument
for Griffin Ltd is 10% per annum. On 31 December 20.12, it seemed very likely that the holder will
exercise his right to convert the bonds into a fixed number of ordinary shares in the next two
months. However, by 31 December 20.14, the holder had not exercised this right and the bonds
were settled in cash by Griffin Ltd.

Component Calculation Amount

Financial liability component (FV = 2 000 000; PMT = 120 000; n = 3; i = 10%; PV = ?) 1 801 052
Equity component Balancing figure 198 948
Total proceeds 2 000 000
Amortisation schedule of financial liability component – 1 January 20.12
Effective Capital Amortisation of Amortised
Date Cash flow
interest repayments difference cost balance
1 January 20.12 – 1 801 052 1 801 052
31 December 20.12 120 000 180 105 60 105 1 861 157
31 December 20.13 120 000 186 116 66 116 1 927 273
31 December 20.14 2 120 000 192 727 – 2 000 000 72 727 –
Total 558 948 558 948 – 2 000 000 198 948

The journal entries to account for convertible bonds in the Dr Cr

financial statements of Griffin Ltd will be as follows: Party has the option to
convert.
Cash (SFP) 2 000 000
Equity (SCE) 198 948 Financial component= issuer’s
Financial liability at amortised cost (SFP) 1 801 052 obligation to make scheduled
1 January 20.12 Recognition of convertible bonds (split accounting) payments of interest and
principle to the holder exists
Effective interest expense (P/L) (1 801 052 x 10%) 180 105 as long as instrument is not
Financial liability at amortised cost: bonds (SFP) 60 105 converted.
Cash (SFP) (2 000 000 x 6%) 120 000
Equity component is the
31 December 20.12 Subsequent measurement of bonds at amortised cost
value given to conversion
Effective interest expense (P/L) 186 116 option attached to
Financial liability at amortised cost: bonds (SFP) 66 116 convertible instrument.
Cash (SFP) (2 000 000 x 6%) 120 000
The likelihood that
31 December 20.13 Subsequent measurement of bonds at amortised cost conversion option will be
Effective interest expense (P/L) 192 727 exercised does not impact
((180 105 + 60 105)x10%) classification of liability and
equity component of
Financial liability at amortised cost: bonds (SFP) 72 727
convertible instrument.
Cash (SFP) (2 000 000 x 6%) 120 000
31 December 20.14 Subsequent measurement of bonds at amortised cost
Financial liability at amortised cost: bonds (SFP) 2 000 000
Cash (SFP) 2 000 000
31 December 20.14 Settlement of bonds

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Example 5 – Financial assets held to collect contractual cash flows
(Descriptive Accounting)

Construct Ltd acquired 10 000 10% R1 000 bonds as a means to generate steady cash flow
on a monthly basis in order to help fund its operations. The investment policy of the entity is
established by key management personnel. The policy indicates that if the Moody’s credit
rating of a financial asset decreases below A3, the risk of not collecting the required cash
flows becomes too high and the asset must be disposed of. At year end, the bonds were
rated at Baa1, a rating below A3, and were disposed of.

Assessment of business model

Construct Ltd acquired the bonds within a business model whose objective is to hold assets
in order to collect contractual cash flows in order to fund its operations. The objective of an
entity’s business model may be to hold financial assets in order to collect contractual cash
flows even though it might not hold all of those instruments to maturity because, e.g., the
financial assets no longer meets the entity’s investment policy (IFRS 9.B4.1.3). Therefore,
the disposal of the bonds at year end does not affect Construct Ltd’s business model to
collect contractual cash flows. => Financial Asset @ Amortised Costs

Example 6 – financial assets held for trading cash flows through sale of assets
(Descriptive Accounting)

Construct Ltd acquired 10 000 10% R1 000 bonds. The bonds will be allocated to a portfolio
of bonds that are managed together, with the objective of generating a profit from short-
term fluctuations in the market price of the bonds. The objective of the portfolios managed
by Construct Ltd is established by the key management personnel. At year end, Construct
Ltd still held all of the bonds.

Assessment of business model

The bonds meet the definition for financial assets held for trading as, on initial recognition,
they are 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
(IFRS 9. Appendix A).
Therefore, even though the bonds will generate contractual cash flows (coupon interest
income and repayment of the principal amount), the bonds are not held within a business
model to collect the contractual cash flows (IFRS 9.B4.1.6). the fact that Construct Ltd still
held all of the bonds at year end does not negate the bond meeting the held for trading
definition. => Financial Asset @ FV through P/L

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Example 7 – calculating the effective interest and amortised cost (Descriptive Accounting)

Seraphim Ltd acquired 1 000 R100 12% per annum corporate bonds on 1 January 20.12 at
their fair value of R98 000. Transaction costs of R500 were incurred. The bonds pay interest
annually on 31 December, and the capital is settled at maturity on 31 December 20.14.
Seraphim Ltd has a financial year end of 31 December. The bonds are held within a business
model to collect contractual cash flows [Financial Asset@ Amortised costs].

Solution
The expected cash flows arising from the bonds constitute the receipt of annual interest
and the capital amount on maturity. These cash flows are discounted over the expected life
of the financial asset. Transaction costs are included in present value since they will be
amortised over the life of the bonds. [FA @ Amortised costs + Transaction Costs]

Effective interest rate

Effective interest rate:12,631% per annum
(PV = –98 500 (98 000 + 500); PMT = 12 000; FV = 100 000; N = 3; I = ?)

Gross carrying amount (amortised cost of bonds before adjusting for a loss allowance) at
31 December 20.13

The gross carrying amount of the bonds as at 31 December 20.13 amounts to R99 439. This
is evident from the following amortisation schedule:
Gross
Cash Effective Capital Amortisation
Date carrying
flow interest repayments of difference
amount
1 January 20.12 – 98 500 98 500
31 December 20.12 12 000 12 442 442 98 942
31 December 20.13 12 000 12 498 498 99 439
31 December 20.14 112 000 12 561 – 100 000 561 –
Total 37 500 37 500 – 100 000 1 501

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Example 8 – Financial assets at fair value through other comprehensive
income (mandatory) (Descriptive Accounting)

Construct Ltd acquires 10 000 bonds on 1 January 20.13 at R3 per bond. Transaction costs amounted
to R1 500 and were paid by Construct Ltd. [FA@FV through OCI + Transaction Costs]
The coupon interest on the bonds amounts to R12 000 per annum, receivable on 31 December. The
effective interest on the bonds amounted to R13 500 for 20.13. The entity holds the bonds to collect
contractual cash flows and, when an opportunity arises, it will sell the bonds to re-invest the cash in
other financial assets with a higher return. Therefore, both collecting contractual cash flows and
selling the bonds are integral in achieving the business model objective. The market value of the
bonds at year end (31 December 20.13) is R5,50 per share. These bonds were sold on 2 January
20.14 at the fair value of R5,60 per bond for cash.

2 Jan 20.14
1 Jan 20.13 31 Dec 20.13
[10 000 x R3]+R1 500 [10 000 x R5.5] - R31 500 [10 000 x R5.60] - R55 000
= R31 500 = R55 000 - (R31 500 + 1 500) = R56 000 - R55 000
= R1 000
= R22 000

Reclassify the FV gain to P/L

Journal entries Dr Cr
1 January 20.13 R R
Financial asset at fair value through OCI: bonds (SFP) 31 500
Bank (SFP) [(10 000 x 3,00) + 1 500] 31 500
Initial recognition of bonds at fair value
Bank (SFP) 12 000
Interest income (P/L) 13 500
Financial asset at fair value through OCI: bonds (SFP) 1 500
Recognition of 20.13 interest income
Financial asset at fair value through OCI: bonds (SFP) 22 000
Fair value gain (OCI) [(10 000 x 5,50) – (31 500 + 1 500) ] 22 000
Investment remeasured to fair value in other comprehensive income
2 January 20.14
Financial asset at fair value through OCI: bonds (SFP) 1 000
Fair value gain (OCI) [(10 000 x 5,60) – 55 000] 1 000
Re-measure investment on date of derecognition to fair value
* 31 500 + 1 500 + 22 000 + 1 000 = 56 000
Bank (SFP) 56 000
Financial asset at fair value through OCI: bonds (SFP) 56 000*
Sell share investment for cash
Fair value gain (OCI) 23 000
Fair value gain (reclassification loss (P/L) 23 000
NB!! Reclassify the Fair Value gain (OCI) to profit or loss

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 Example 9 – Financial assets at fair value through other comprehensive
income - investment in equity instruments (designated) (Descriptive Accounting)

Company A acquired 10 000 ordinary shares in a listed company on 1 November 20.13. The shares
are not held for trading but were acquired with a long-term view. The directors of the company
NB!! irrevocably elected at initial recognition to classify this investment as at fair value through other
comprehensive income. The shares were purchased at R3,00 per share. Transaction costs amounted
to R1 500 and were paid by the purchaser. [FA@FV through OCI + Transaction Costs]
The market value of the shares at year end (31 December 20.13) is R5,50 per share. These shares are
sold on 2 January 20.14 at the fair value of R5,60 per share for cash.

NB!! It is the accounting policy of the company to reclassify the cumulative balance gain or loss in the
mark-to-market reserve to retained earnings when the financial asset is derecognised.

1 Jan 20.13 31 Dec 20.13 2 Jan 20.14

[10 000 x R5.60] - R55 000
[10 000 x R3]+R1 500 [10 000 x R5.5] - R31 500
= R31 500 = R56 000 - R55 000
= R55 000 - R31 500
= R1 000
= R23 500

Transfer the accumulated M2MR

to RE

Journal entries Dr Cr
1 November 20.13
Financial asset at fair value through OCI: shares (SFP) 31 500
Bank (SFP) [(10 000 x 3,00) + 1 500] 31 500
Initial recognition of investment at fair value
31 December 20.13
Financial asset at fair value through OCI: shares (SFP) 23 500
Mark-to-market reserve (OCI) [(10 000 x 5,50) – 31 500] 23 500
Investment remeasured to fair value in other comprehensive income
2 January 20.14
Financial asset at fair value through OCI: shares (SFP)
[(10 000 x 5,60) – 55 000] 1 000
Mark-to-market reserve (OCI) 1 000
Re-measure investment on date of derecognition to fair value
*31 500 + 23 500 + 1 000 = 56 000
Bank (SFP) 56 000
Financial asset at fair value through OCI: shares (SFP) 56 000
Sell share investment for cash
Mark-to-market reserve (SCE) 24 500
Retained earnings (SCE) 24 500
NB! Transfer the accumulated profit in the mark-to-market reserve to retained earnings

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Example 10 – Expected credit losses (Descriptive Accounting)

ABC Ltd provided XYZ Ltd with a loan of R1 000 000 at interest of 8% per annum. The interest and
loan are repayable after three years. ABC Ltd classifies the loan receivable as a financial asset at
amortised cost.
ABC Ltd estimates that the loan and initial recognition has a probability of default (PD) of 0,5% over
the next 12 months. At reporting date, ABC Ltd determines that there has not been a significant
increase in credit risk of the loan since initial recognition and the PD remained unchanged at 0,5%.
ABC Ltd determines that 25% of the gross carrying amount of the loan will be lost if the loan
defaults.

Loss allowance

Initial Recognition: END of 3 years

How to measure the expected

What will the lifetime expected credit loss be IF
credit loss [loss allowance]? LOAN DEFAULTS?
An amount equal to a 12-month expected
credit loss using the 12-month
probability of default of 0,5%. 99,5% probability What will the loss allowance for 12-m expected
that no default
credit losses be?

EXPECTED CREDIT LOSS MODEL

Initial recognition - financial assets Recognise 12 month Calculate interest using the effective interest
and at end of reporting period if no expected credit rate calculated on gross carrying amount i.e.
significant increase in credit risk losses carrying amount BEFORE adjustment of any loss
allowance.
At reporting date there is a Recognise lifetime
significant increase in credit risk expected credit
losses
At reporting date, the financial asset Recognise lifetime Calculate interest using the effective interest
is credit impaired expected credit calculated on the amortised cost i.e. carrying
losses amount AFTER adjustment of any loss allowance

On initial recognition, ABC Ltd measures the loss allowance at an amount equal to a 12-month
expected credit loss using the 12-month probability of default of 0,5%. Implicit in that calculation is
the 99,5% probability that there will be no default. The lifetime expected credit loss on the loan
amounts to R250 000 (R1 000 000 x 25%). Therefore, the loss allowance recognised for 12-month expected
credit losses is R1 250 (0,5% x R250 000). Since there was no significant increase in credit risk of the loan
since initial recognition and the probability of default has remained unchanged on reporting date,
the loss allowance at reporting date remains equal to the 12-month expected credit losses of
R1 250.

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Example 11

SCENARIO 1: CREDIT LOSSES BASIC EXAMPLE [Source: Descriptive Accounting]

Retail Ltd acquired 1 000 R100 12% per annum corporate bonds issued by Telecom Ltd on 1 January
20.15 at fair value. The bonds are redeemable by Telecom Ltd on 31 December 20.17 at a premium
of 5%. Coupon interest is annually payable to Retail Ltd. On 1 January 20.15, Retail Ltd estimates that
if Telecom Ltd were to default, the expected cash flows will be as follows:
Contractual Expected Cash shortfall Determine the credit losses?
Date
cash flow (A) cash flow (B) (A – B) All cash shortfalls expected over the life of the
31 December 20.15 12 000 12 000 – corporate bonds are included in the
31 December 20.16 12 000 10 000 2 000 measurement of the credit losses. Total
31 December 20.17 12 000 10 000 2 000 undiscounted credit losses R10 000.
31 December 20.17 105 000 99 000 6 000

SCENARIO 2: LIFETIME AND 12-MONTH EXPECTED CREDIT LOSSES EXAMPLE [Source: Descriptive Accounting]

Retail Ltd acquired 1 000 R100 12% per annum corporate bonds issued by Telecom Ltd on
1 January 20.15 at fair value. The bonds are redeemable by Telecom Ltd on 31 December 20.17 at a
premium of 5%. Coupon interest is annually payable to Retail Ltd. The effective interest rate of the
corporate bonds is 13,4611% per annum. The reporting date is 31 December 20.15.
On 1 January 20.15, Retail Ltd estimates that if Telecom Ltd were to default, the expected cash
flows will be as follows:
Contractual Expected Credit
Date
cash flow cash flow loss
31 December 20.15 12 000 12 000 –
31 December 20.16 12 000 10 000 2 000
31 December 20.17 12 000 10 000 2 000
31 December 20.17 105 000 99 000 6 000

On 31 December 20.15, Retail Ltd determines that the probability that Telecom Ltd will default within
the next 12 months after reporting date is 2%.

OPTION 1
If assessment of credit risk on 31 December 20.15 indicated that credit risk of corporate bonds has
INCREASED significantly since initial recognition, the loss allowance will equal lifetime expected
credit losses. (On 31 December 20.15 and determined as follows:)
Present value of contractual cash flows
(FV = 105 000; PMT = 12 000; n = 2; i = 13,4611%, PV = ?) R101 461
Present value of expected cash flows
(FV = 99 000; PMT = 10 000; n = 2; i = 13,4611%; PV = ?) R93 484
Lifetime expected credit losses R7 977
OPTION 2
If assessment of credit risk on 31 December 20.15 indicates that credit risk of the corporate bonds
has NOT increased significantly since initial recognition, loss allowance will equal the 12-month
expected credit losses. (On 31 December 20.15 and determined as follows:)
Discounted lifetime expected credit losses(calculated above) R7 977
Probability of default 2%
12-month expected credit losses (2% x R7 977) R160

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Example 12 – Financial assets @ amortised cost – credit impaired(Descriptive Accounting)

Retail Ltd acquired 1 000 R100 12% per annum corporate bonds issued by Telecom Ltd on
1 January 20.15 at fair value. The bonds are redeemable by Telecom Ltd on 31 December 20.17 at a
premium of 5%. Coupon interest is annually payable to Retail Ltd. The effective interest rate of the
corporate bonds is 13,4611% per annum. The reporting date is 31 December 20.15.
The bonds were classified as a financial asset measured at amortised cost.

On 1 January 20.15, Retail Ltd estimates that if Telecom Ltd were to default, the expected cash flows
will be as follows:
Contractual Expected Credit
Date
cash flow cash flow loss
31 December 20.15 12 000 12 000 –
31 December 20.16 12 000 10 000 2 000
31 December 20.17 12 000 10 000 2 000
31 December 20.17 105 000 99 000 6 000

On 1 January 2015 Retail Ltd determines the 12-month expected credit losses on the bonds as
R150.
Recognise LIFETIME expected
credit loss = Interest BEFORE
adjustment of loss allowances

On 31 December 20.15 and 31 December 20.16, the credit risk increased significantly since initial
recognition.

In addition, the corporate bonds became credit impaired on these dates.

The lifetime expected credit losses amounted to the following: Recognise LIFETIME expected
Reporting date Lifetime expected credit losses credit loss = Interest AFTER
31 December 20.15 7 977 adjustment of loss allowances

31 December 20.16 7 051

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 1 Jan 20.15 31 Dec 20.15 31 Dec 20.16

On initial date: NO credit impairment Risk increased significantly =>

expected = recognise 12-month expected CREDIT IMPAIRED
credit losses [R150]

Assuming all contractual cash flows for 31 Dec 20.15&20.16 were received, journal entries will be as follows:
1 January 20.15 Dr Cr
Financial asset at amortised cost: bonds (SFP) 100 000
Cash (SFP) 100 000
Recognition of 1 000 R100 12% bonds at fair value
Expected credit loss (P/L) 150
Loss allowance on bonds (SFP) 150
Recognition of 12-month expected credit losses
31 December 20.15
Cash (SFP) 12 000
Financial asset at amortised cost: bonds (SFP) (balancing) 1 461
Effective interest income (P/L) (100 000 x 13,4611%) 13 461
CREDIT IMPAIRED:
Subsequent measurement of bonds
Recognise LIFETIME
Expected credit loss (P/L) (7 977 – 150) 7 827 expected credit loss
Loss allowance on bonds (SFP) 7 827 = Interest AFTER
Recognition of lifetime expected credit losses adjustment of loss
allowances
Total expected credit losses recognised to date: R7 977
31 December 20.16
Cash (SFP) 12 000
Financial asset at amortised cost: bonds (SFP) (balancing) 1 658
Effective interest income (P/L)
[(100 000 + 1 461 – 7 977 loss allowance20.15) x 13,4611%) 12 584
Loss allowance on bonds (SFP) (7 977 x 13,4611%) 1 074
[Measure negative asset @ YE @ effective interest rate]
Subsequent measurement of bonds
Loss allowance on bonds (SFP) 2 000
Expected credit loss (P/L) (7 051 – (7 977 + 1 074)) 2 000
Recognition of lifetime expected credit losses

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Assuming that a default occurs a 31 December 20.17 and Retail Ltd only receives R10 000 in coupon
interest and R99 000 as the capital redemption amount, the journals will be as follows:

31 December 20.17
Cash (SFP) 10 000
Financial asset at amortised cost: bonds (SFP) 3 881
Effective interest income (P/L)
[(100 000 + 1 461 – 7 051 loss allowance 20.16) x 13,4611%) 12 932
Loss allowance on bonds (SFP) (7 051 x 13,4611%) 949
Subsequent measurement of bonds
Cash (SFP) 99 000
Financial asset at amortised cost: bonds (SFP)
(100 000 + 1 461 + 1 658 + 3 881) 107 000
Impairment loss (P/L) 8 000
Redemption of corporate bonds
Loss allowance on bonds (SFP) (7 051 + 949) 8 000
Expected credit loss (P/L) 8 000
Reversal of allowance for expected credit losses

Notes:
• Interest revenue recognised: calculated using original effective interest on amortised cost of
bonds.
• Amortised cost = gross carrying amount minus the loss allowance.
• The loss allowance is discounted over remaining term of financial asset at original effective
interest rate.
• On redemption of the bonds:
impairment loss of R8 000 incurred since the coupon interest and redemption amount were not
paid in full to Retail Ltd. The coupon interest was underpaid by an amount of R2 000 (R12 000 –
R10 000) and the redemption amount was underpaid by R6 000 (R105 000 – R99 000).
• On derecognition of the loss allowance account of R8 000, the total expected credit losses
recognised in profit or loss over the life of the financial asset amounting to R5 977
(R150 + R7 827 – R2 000) is not completely reversed.
The difference of R2 023 (R1 074 + R949) remaining in profit or loss is the unwinding of the
interest of the loss allowance account.

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Example 13 – IFRS 7 = DISCLOSURE (Unisa 2017 FAC4863/TL103)

SCENARIO 1 [STATEMENT OF CHANGES IN EQUITY]:

The following details were included in Aseon Ltd's trail balance for the year ended
30 September 20.12:
Opening balance for
- Ordinary Share Capital = R3 000 000
- Retained earnings = R2 340 000
- profit for the year = R3 535 648
- other comprehensive income = R331 352 => Mark-to-market reserve [you should be able to
calculate this from information provided in the question]
- Issue of preference shares = R1 400 000
- Issue of convertible debentures = Pre tax amount of R196 046; Post tax = R141 153 [you should be
able to calculate this from information provided in the question]

Disclose the Statement of Changes in Equity for the year ended 30 September 20.12 for Aseon Ltd.
The total column and comparative figures are not required.

Step 1: Include the SCE template [remember to add additional columns such as convertible
debentures equity component and M2MR]
Step 2: Calculate all amounts to be disclosed {opening balances will normally be provided however
you need to know how to calculate this.}
Step 3: Transfer calculations from step 2 to SCE template [step 1]

Ordinary Preference Retained Convertible Mark-to

share share capital earnings debentures market
capital equity reserve
component
R R R R R
Balance at 3 000 000 - 2 340 000 - -
1 October 20.11
Total comprehensive income for the year
- profit for the year - - 3 535 648 - -
- other - - - - 331 352
comprehensive
income
Issue of preference - 1 400 000 - - -
shares
Issue of - - - 141 1532 -
convertible
debentures
Balance at 3 000 000 1 400 000 5 875 648 141 153 331 352
30 September
20.12

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 SCENARIO 2 [Investment in listed bonds]:

On 1 July 20.13 Exclusive Bikes Ltd invested in listed bonds in Dollar Dreams Ltd. On this
date Exclusive Bikes Ltd estimated the 12-month expected credit losses on the bonds at an
amount of R35 000. The bonds were purchased on the following terms:
Maturity date 30 June 20.16
Coupon interest rate 6% per annum
Interest payment date 30 June
Nominal value per bond R12 000
Number of bonds purchased 150
Redemption value At nominal value

The coupon interest payments have been received by Exclusive Bikes Ltd on time on
30 June 20.14.

On 30 June 20.14 Exclusive Bikes Ltd assessed the credit risk of the bonds in order to
estimate the expected credit losses at reporting date. During this assessment the directors
of Exclusive Bikes Ltd obtained information that Dollar Dreams Ltd was in financial distress.

Exclusive Bikes Ltd determines that the credit risk of the bonds increased significantly since
recognition of the bonds and that the bonds are credit impaired on 30 June 20.14.
Consequently Exclusive Bikes Ltd measures the lifetime expected credit losses on
30 June 20.14 at R125 000.

On 1 July 20.14 Dollar Dreams Ltd renegotiated the terms of the bond with the directors of
Exclusive Bikes Ltd and the future cash flows of the bonds were amended, effectively from
1 July 20.14, as follows:

Coupon interest rate 5% per annum

Maturity date 30 June 20.18
The modification of the cash flows of the bond contract does not result in the derecognition
of the bonds.

On 30 June 20.15 Exclusive Bikes Ltd determines that the credit risk of the bonds has still
increased significantly since initial recognition and measures the lifetime expected credit
losses on this date at an amount of R165 000. The bonds remained credit-impaired on this
date.
The market-related rate applicable to the bonds was 6,8% per annum on the date the bonds
were purchased and 7% per annum on 1 July 20.14. Exclusive Bikes Ltd correctly classified
the investment in bonds as a financial asset measured at amortised cost in terms of IFRS 9
Financial Instruments.

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Additional information
• The directors of Exclusive Bikes Ltd decided to early adopt IFRS 9 Financial Instruments
with effect from 1 July 20.13.
• Assume all amounts are material.

REQUIRED
With reference to the investment in the listed bonds, disclose the changes in the loss
allowance (allowance for expected credit losses) of the bonds in the financial statements of
Exclusive Bikes Ltd for the year ended 30 June 20.15 in terms of IFRS 7.35H and the
illustrated example contained in IFRS 7.IG20B. Comparative information is required.

EXECUTIVE BIKES LTD

NOTES TO THE YEAR ENDED 30 JUNE 20.15
14. LISTED BONDS - LOSS ALLOWANCE
12-month Lifetime
expected credit expected credit
losses losses
(credit impaired)
R R
Loss allowance at 1 July 2013 -
New bonds originated 35 000
Transferred to credit impaired financial assets (35 000) 35 000
Changes in risk parameters 90 000
Loss allowance at 30 June 2014 125 000
Changes in risk parameters 40 000
Loss allowance at 30 June 2015 - 165 000

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 FAQ:
What is defined as MONETARY ITEMS?

Monetary item = defined as units of currency held and a right to receive or an obligation to deliver a
fixed or determinable number of units of currency
All other assets and liabilities are non-monetary items.
The following are examples: Monetary items:
• Pensions and other employee benefits to be paid in cash
• Provisions that are to be settled in cash
• Cash dividends that are recognised as a liability
• A contract to receive a variable number of entity's own equity instruments in which the fair value
to be received equals a fixed number of units of currency Non-monetary items:
• Amounts prepaid for goods/services
• Goodwill
• Intangible assets
• Property, plant and equipment
• Provisions that are to be settled by the delivery of a non-monetary asset Lets' apply this to the
definition of an intangible asset: An intangible asset is an
- identifiable
- non-monetary asset
- without physical substance
Therefore, when you link this to units of currency held and right to receive (or an obligation to
deliver) units or currency = an intangible asset cannot be a monetary item.

How do we treat transaction costs when share capital is issued?

Refer to IAS 32.35: Interest, dividends, losses and gains relating to a financial instrument or a
component that is a financial liability shall be recognised as income or expense in profit or loss.
Distributions to holders of an equity instrument shall be recognised by the entity directly in equity.
Transaction costs of an equity transaction shall be accounted for as a deduction from equity.

I am not comfortable with the deferred tax consequences of financial instruments.

Refer to Descriptive Accounting, 21st Edition, page 575 for a detailed example in terms of the
deferred tax consequences of financial instruments.

What happens with the EQUITY portion in EXAMPLE 4 once converted into cash?

Refer to IAS 32. AG 32: On conversion of a convertible instrument at maturity, the entity
derecognises the liability component and recognises it as equity. The original equity component
remains as equity (although it may be transferred from one-line item within equity to another).
There is no gain or loss on conversion at maturity.

Based on this, I will suggest that we transfer the amount of EQUITY to Retained earnings, as the
standards indicate that we may transfer from one-line item within equity to another, however no
gain or loss can be recognised.

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 What is the difference between coupon rate, interest rate & effective interest rate?

Let’s work through a few basic definitions to ensure you are comfortable with this.

1) The coupon rate is calculated on the face value of the bond which is being invested.
The coupon rate is decided by the issuer of the bonds to the purchaser.
You need to identify this from both entities: issuer and purchaser.
Issuer will pay the coupon rate and purchaser will receive the coupon rate on the asset.

2) The interest rate is calculated considering on the basis of the riskiness of lending the
amount to the borrower.
The interest rate is decided by the lender.

3) The effective interest rate is the true rate of interest earned. It can also mean the market
interest rate.

Please refer to EXAMPLE 7 above for explanation purposes:

Seraphim Ltd acquired 1 000 R100 12% per annum corporate bonds on 1 January 20.12 at their fair
value of R98 000.
Effective interest rate:12,631% per annum
(PV = –98 500 (98 000 + 500); PMT = 12 000; FV = 100 000; N = 3; I = 12.631%)
In the example above the 12% is based in THIS specific bond from this specific entity.
The Effective interest rate of 12.631% is the rate that this bond will have in the market.

Let’s look at the journals: The actual CASH FLOW will be the R12 000, being the R100 x 1000 x 12%
The interest in the P/L will be based on the EFFECTIVE interest rate of the 12.631%.
In the records of Seraphim:
Dr. Bank = actual INCOME on the bond R12 000
Cr. Interest INCOME (P/L) = effective interest rate amount = R12 442
Dr. Financial Asset (balance) R422

Why do we recognise the balance of R422 to the asset?

I see this as the value of the increase in asset, due to the effective interest rate amount increasing.

FA at FV through OCI will be recognsied:

Dr. Expected credit loss (P/L)
Cr. Expected credit loss reserve [OCI]

FA at FV through PL:
Dr. Expected credit losses (P/L)
Cr. Allowance for expected credit losses (SFP)

FA at amortised cost:
Dr. Expected credit losses (P/L)
Cr. Allowance for expected credit losses (SFP)

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What is the difference between Example 8 and Example 9?

Example 8 is a financial asset at FV through OCI (mandatory)

vs
Example 9 is a financial asset at FV through OCI (designated)

In both examples there is transaction costs of R1 500 AT INITIAL RECOGNITION:

Example 8: Example 9:
1 Jan 20.13 [10 000 x R3]+R1 500
[10 000 x R3]+R1 500 = R31 500
= R31 500

EXAMPLE 8: will fall within the second business model: Collecting contractual cash flows (solely
payments of principal & interest AND SELLING of FA (bonds))
EXAMPLE 9: will fall within the third business model: Investment in equity instruments NOT HELD
for trading AND election ito IFRS [Link] (bonds)

FINANCIAL ASSETS
STEP 1 STEP 2 STEP 3
Business Model Classification Measurement
Collecting contractual cash FA @ FV OCI FV
flows (solely payments of (debt Gain/Loss = OCI
principal & interest AND instruments) EXAMPLE 8
SELLING of FA (bonds))
Investment in equity FA @ FV OCI FV Gains/Losses = OCI (M2MR
instruments NOT HELD for = Subsequent)
trading AND election ito IFRS EXAMPLE 9
[Link] (bonds)

When you look at EXAMPLE 8, very similar to a FA at amortised COST, a FA at amortised cost is we
use the EFFECTIVE INTEREST RATE.
EXAMPLE 8 is technically a FA at amortised cost as the business model is to RECEIVE INTEREST AND
WHEN OPPORTUNITY SELL.
Refer to the second journal where we recognise INTEREST INCOME of R13 500.
The coupon interest on this FA is R12 000, therefore a DIFFERENCE of R1 500. [This is NOT the same
as per the transaction costs and this R1 500 in NOT in Example 9, example 9 only has the
transaction costs.]

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 FOR USE BY CA CAMPUS STUDENTS ONLY

Have the following documents OPEN as you work through your standard:
1. FI – Lecture Notes
2. FI – Revision page
3. Actual standard – IAS 32/IFRS 9

Extract of REVISION page:

IAS 32 Extract of IAS 32 content page

You should have worked through the LECTURE notes and recordings BEFORE you start this process.
It will provide you with some knowledge in terms of what is important and what not.

Open the content page. Add your flag to identify that this is IAS 32.
Use another color flag to flag the important sections in IAS 32 that you want to flag. [Maybe a smaller flag]
Remember, when you work [read] through the standard, HIGHLIGHT bolded words with one color and the
explanations within, normally the paragraphs below that, with another color.
Highlight the words as per the lecture notes, ONLY the important words.
Not everything. Your textbook should work for you!
This process will take you quite some time to complete, hence the importance of first working through the
notes provided, to give you some guidance in terms of the standard.

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 FOR USE BY CA CAMPUS STUDENTS ONLY
Have the following documents OPEN as you work through your standard:
1. FI – Lecture Notes
Extract of REVISION page: IFRS 9 2. FI – Revision page
3. Actual standard – IAS 32/IFRS 9

You should have worked through the LECTURE notes and recordings BEFORE you start
this process. It will provide you with some knowledge in terms of what is important
and what not. Open the content page. Add your flag to identify that this is IFRS 9.

Add a different color flag to indicate the sub sections, for example:
3. Recognition and derecognition, 4. classification and 5. measurement.
Within each sub section, briefly read through the paragraphs, identify WHAT is
important before you start highlighting.
Make use of one color for bolded words, important words, then use another color to
highlight explanations/details if needed. Decide on these colors BEFORE you start and
adapt as and when needed.
For example: Use GREEN for Financial ASSETS and ORANGE for Financial Liabilities,
think, positive and choose a color and think negative (liability) and choose a color.
Stick to these colors, when you highlight sections in terms of financial assets use the
ONE color and for financial liabilities use the ONE color throughout the standard.
When there are certain important sections that you know you tend to forget, make
use of RED and underline those sections with RED.
Again, ONLY highlight/underline KEY WORDS and not everything.

PLEASE remember:

You need to consider studying the REVISION pages of Financial Instruments, I know it is difficult to
remember everything, therefore you have your textbooks with you. From a timing point of view, if

N/A
you know at least some of the principles you will save time in a test or exam. There is not sufficient
time in the test/exam to work through your standard for the first time.
Therefore, it is worth your time now to do this properly NOW.

NOTE: if the financial instruments standards are difficult for you, consider reading through it FIRST
before you start to highlight.

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 FOR USE BY CA CAMPUS STUDENTS ONLY

How to highlight FI - Business Models

STEP 1: include a FLAG at section 4.1 Chapter 4, Classification.

Write on the flag either Business Model (BM), try to use BM and you need to know that this is the
Business Models.

STEP 2: Open the REVISION pages of Fin Instruments, identify colours to use for the different
business models. As you highlight/underline the different models, stick to the allocated colours.
This way when you open your textbook your eyes will be able to identify with which one you are
busy with and you should be able to read this easier.

When there is additional rules or difficult rules that you tend to forget within the paragraphs, make
use of either RED or PINK, and stick to these colours throughout the standard.
Don’t mix the colours to much, stick to your allocated colours as planned.

In the example below, for example all items (identification/business model/classification/initial &
subsequent measurement) make use of GREEN for everything relating to the financial assets at
amortised costs. Then for all items relating to Financial asset @ FV through OCI (debt instruments)
make use of YELLOW and so forth.

FINANCIAL ASSETS

STEP 1 STEP 2 STEP 3

Business Model Classification Measurement

Collecting contractual cash flows FA @ Amortised Cost GREEN

(solely payments of principal & amortised
interest) cost EffectInterest
income = P/L

Collecting contractual cash flows FA @ FV OCI FV YELLOW

(solely payments of principal & (debt
interest AND SELLING of FA instruments) Gain/Loss = OCI
(bonds))

Investment in equity instruments FA @ FV OCI FVGains/Losses

PURPLE
NOT HELD for trading AND = OCI (M2MR =
election ito IFRS [Link] (bonds) Subsequent)

Investment in equity instrument

NOT HELD FOR TRADING OR
BLUE
FV
Investment in equity instrument
HELD FOR TRADING OR FA @ FV P/L Gains/Losses =
P/L
Irrevocable election to measure FA
at FV on initial recognition

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