F2 Financial Instruments FOCUS

Because there is a mandatory obligation to pay a fixed dividend, making them function more like debt.

Ordinary shares have no fixed obligation for payment, so they are equity; preference shares with fixed dividends or repayment obligations are liabilities.

Debit bank and credit financial liability, because despite being shares in legal form, the mandatory payment makes them debt in substance.

As a finance cost (in profit & loss), not as dividends.

It is an instrument with both a liability component and an equity component—for example, a convertible bond that can be repaid or converted into shares.

Use split accounting

Dr bank as normal,
calculate how much is a liability By finding the present value of the future payments (interest and principal) discounted at the market rate assuming no conversion. This means multiplying the principal by the interest rate given on sale of the bonds, then discounting using the rate of interest for similar debt without conversion right.

Then calculate the equity amount as the balancing figure

Split accounting
Initial measurement at fair value ie present value of interest payments and principal is the debt portion
reminder that makes up to the amount received equals the equity

subsequesnt measurement at amortised costs

Because actual conversion does not happen until a future date; the initial split only involves valuing the liability and using the rest as equity.

They are measured at fair value, usually the transaction price minus any transaction costs.

At full fair value. Costs are expensed to P&L

Debit the bank with the net proceeds received and credit the liability with the net proceeds after deducting transaction costs.

Fair value through the profit & loss (P&L) account, and 2) Amortised cost.

The majority (about 90-99%) are measured at amortised cost.

It is used when liabilities are held for trading purposes, such as derivatives.

They are accrued at the end of the year and recorded in the P&L account. If paid, the bank account is credited and the liability is reduced.

Each year you will add on the interest charge calculated using the carying balance times the effective interest rate, then deduct the payment which is the NOMINAL value of the shares times the coupon rate.

Headline value of a debenture / bond. Can also be described as the nominbal value.

Minimum interest repayment per annum based on par values

If the loan is issued at a discount, the cash amount received from the loan is less than the par value

Date of repayment of capital element of loan a.k.a the maturity date

Extra amount repayable at redemption date based on par values

The rate of interest that spreads the total finance costs, including discounts, premiums and coupon rate repayments, across the life of the loan at a constant rate.

Equity financial asset
Debt financial asset

At fair value. If FVTPL costs are expensed to P&L. If FVTOCI or amortised costs expenses are added to the asset

FVTPL or FVTOCI

If planning to trade/sell the classify as FVTPL

Business model is to hold until redemption
Contractual cashflow passed

the debt financial asset still earns interest income and will receive coupon rate interest repayments. the interest income is calculated based upon the figures as if the debt financial asset were classified at amortised cost. the revalued fair value amounts do not affect the interest income

always through FVPL

Bonds that pay a fixed rate of interest to infinity. They have no redemption date

A bond that will be either paid back at par value or at a premium at a specified date