ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
bond issue, its bonds have a lower coupon than if they were not secured by a
government guarantee. This is because the guarantee lowers the risk profile of
the bonds for investors. The guarantee fee could be determined by using the
credit spread between what the coupon rate would have been had the issue not
been backed by a government guarantee and the rate with the guarantee in
place. Where a fair value is obtainable either by observation of an active
market or through another valuation technique, the entity recognizes the
financial guarantee at that fair value in the statement of financial position and
recognizes an expense of an equivalent amount in the statement of financial
performance. When using a valuation technique that is not based on
observation of an active market an entity needs to satisfy itself that the output
of any model is reliable and understandable.
AG97. If no reliable measure of fair value can be determined, either by direct
observation of an active market or through another valuation technique, an
entity is required to apply the principles of IPSAS 19 to the financial
guarantee contract at initial recognition. The entity assesses whether a
present obligation has arisen as a result of a past event related to a
financial guarantee contract whether it is probable that such a present
obligation will result in a cash outflow in accordance with the terms of the
contract and whether a reliable estimate can be made of the outflow. It is
possible that a present obligation related to a financial guarantee contract
will arise at initial recognition where, for example, an entity enters into a
financial guarantee contact to guarantee loans to a large number of small
enterprises and, based on past experience, is aware that a proportion of
these enterprises will default.
Subsequent Measurement of Financial Assets (paragraphs 47 and 48)
AG98. If a financial instrument that was previously recognized as a financial
asset is measured at fair value and its fair value falls below zero, it is a
financial liability measured in accordance with paragraph 49.
AG99. The following example illustrates the accounting for transaction costs on the
initial and subsequent measurement of an available-for-sale financial asset.
An asset is acquired for CU100 plus a purchase commission of CU2.
Initially, the asset is recognized at CU102. The end of the reporting period
occurs one day later, when the quoted market price of the asset is CU100. If
the asset were sold, a commission of CU3 would be paid. On that date, the
asset is measured at CU100 (without regard to the possible commission on
sale) and a loss of CU2 is recognized in net assets/equity. If the availablefor-sale
financial asset has fixed or determinable payments, the transaction
costs are amortized to surplus or deficit using the effective interest method.
If the available-for-sale financial asset does not have fixed or determinable
payments, the transaction costs are recognized in surplus or deficit when the
asset is derecognized or becomes impaired.
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IPSAS 29 APPLICATION GUIDANCE
PUBLIC SECTOR