ipsas 29—financial instruments: recognition and measurement - IFAC

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FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT No. The condition that “the holder would not recover substantially all of its recognized investment” is not satisfied if the terms of the combined instrument permit, but do not require, the investor to settle the combined instrument in a manner that causes it not to recover substantially all of its recognized investment and the issuer has no such right. Accordingly, an interest-bearing host contract with an embedded interest rate derivative with such terms is regarded as closely related to the host contract. The condition that “the holder would not recover substantially all of its recognized investment” applies to situations in which the holder can be forced to accept settlement at an amount that causes the holder not to recover substantially all of its recognized investment. C.11 Embedded Derivatives: Reliable Determination of Fair Value If an embedded derivative that is required to be separated cannot be reliably measured because it will be settled by an unquoted equity instrument whose fair value cannot be reliably measured, is the embedded derivative measured at cost? No. In this case, the entire combined contract is treated as a financial instrument held for trading (IPSAS 29.14). If the fair value of the combined instrument can be reliably measured, the combined contract is measured at fair value. The entity might conclude, however, that the equity component of the combined instrument may be sufficiently significant to preclude it from obtaining a reliable estimate of the entire instrument. In that case, the combined instrument is measured at cost less impairment. Section D: Recognition and Derecognition D.1 Initial Recognition D.1.1 Recognition: Cash Collateral Entity B transfers cash to Entity A as collateral for another transaction with Entity A (e.g., a securities borrowing transaction). The cash is not legally segregated from Entity A’s assets. Should Entity A recognize the cash collateral it has received as an asset? Yes. The ultimate realization of a financial asset is its conversion into cash and, therefore, no further transformation is required before the economic benefits of the cash transferred by Entity B can be realized by Entity A. Therefore, Entity A recognizes the cash as an asset and a payable to Entity B while Entity B derecognizes the cash and recognizes a receivable from Entity A. D.2 Regular Way Purchase or Sale of a Financial Asset D.2.1 Trade Date vs. Settlement Date: Amounts to be Recorded for a Purchase How are the trade date and settlement date accounting principles in the Standard applied to a purchase of a financial asset? 1179 IPSAS 29 IMPLEMENTATION GUIDANCE PUBLIC SECTOR
FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT The following example illustrates the application of the trade date and settlement date accounting principles in the Standard for a purchase of a financial asset. On December 29, 20X1, an entity commits itself to purchase a financial asset for CU1,000, which is its fair value on commitment (trade) date. Transaction costs are immaterial. On December 31, 20X1 (financial year-end) and on January 4, 20X2 (settlement date) the fair value of the asset is CU1,002 and CU1,003, respectively. The amounts to be recorded for the asset will depend on how it is classified and whether trade date or settlement date accounting is used, as shown in the two tables below. Balances December 29, 20X1 Settlement Date Accounting Held-to-maturity investments carried at amortized cost IPSAS 29 IMPLEMENTATION GUIDANCE 1180 Available-for-sale assets remeasured to fair value with changes in net assets/equity Assets at fair value through surplus or deficit remeasured to fair value with changes in surplus or deficit Financial asset – – – Financial liability – – – December 31, 20X1 Receivable – 2 2 Financial asset – – – Financial liability – – – Net assets/equity (fair value adjustment) Accumulated surplus or deficit (through surplus or deficit) January 4, 20X2 – (2) – – – (2) Receivable – – – Financial asset 1,000 1,003 1,003 Financial liability – – – Net assets/equity (fair value adjustment) Accumulated surplus or deficit (through surplus or deficit) – (3) – – – (3)
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ipsas 29—financial instruments: recognition and measurement - IFAC

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