International Financial Reporting Standards_guide.pdf

Chapter 17 Financial Instruments: Recognition and Measurement (IAS 39) 195
held for trading and that are available for sale) and fair value liabilities are adjusted to reflect
current fair value. Such adjustments are often made on a daily basis.
17.3.6 Amortized cost is the amount at which the financial asset or financial liability is
measured at initial recognition
■ minus any principal repayments;
■ plus or minus the cumulative amortization of the premiums or discounts on the instrument,
and fees and costs that are an integral part of the effective interest rate; and
■ minus any reduction for impairment or lack of collectability.
The amortization calculation should use the effective interest rate (not the nominal rate of
interest).
17.3.7 The effective interest rate is the rate that discounts the expected future cash flows
on the assets to zero. The effective interest is not necessarily equal to the coupon received.
For example, if an instrument is issued at a discount the effective interest rate will take that
discount into account, while the coupon received would be based on the contractual interest.
The effective interest rate will be different from the contractual or coupon rate if the instrument
is issued or redeemable at a premium or discount or there are fees or income that must
be included in the effective interest rate.
17.3.8 Trade or settlement date accounting arises when an entity chooses to recognize the
purchase of an instrument in its financial statements on either (a) the date when the commitment
arises from the transaction (trade date), or (b) the date that the liability is settled (settlement
date). Most treasury accountants prefer trade date accounting, because that is when the
risks and rewards of ownership transfer—and when marking to market commences in any
case (regardless of whether the asset has already been recognized in the statement of financial
position).
17.3.9 Total return is the actual return achieved on financial assets and the amount used to
assess the performance of a portfolio; it includes income and expenses recorded in the profit
and loss account (for example, interest earned, realized gains and losses) and unrealized
gains and losses recorded in profit and loss or other comprehensive income (for example, fair
value adjustments to available-for-sale securities).
Hedging
17.3.10 A fair value hedge hedges the exposure to changes in fair value of a recognized
asset or liability or an unrecognized firm commitment (for example, changes in the fair value
of fixed-rate bonds as a result of changes in market interest rates).
17.3.11 A cash flow hedge hedges the exposure of cash flows related to a recognized asset
or liability (for example, future interest payments on a variable-rate bond), or to a highly
probable forecast transaction (for example, an anticipated purchase or sale of inventories).
17.3.12 The hedge of a net investment in a foreign operation hedges the exposure related
to changes in foreign exchange rates on an investment in a foreign operation.