What are the basic types or categories of financial instruments?
1. Cash; 2. Evidence of an ownership interest in an entity; 3. Contracts that result in an exchange of cash or ownership interest in and entity that: 1. Imposes on one entity a contractual obligation (liability); and 2. Conveys to a second entity a contractual right (asset).
1. Cash and cash equivalents; 2. Accounts receivable; 3. Investments in debt or equity securities; 4. Ownership interest in a partnership, joint venture, or other entity; 5. Option contracts (with favorable terms); 6. Futures and forward contracts (with favorable terms); 7. Swap contracts (with favorable terms).
What are the categories of financial liabilities identified under International Financial Reporting Standards (IFRS)?
1. Financial liabilities measured at fair value with changes reported through profit/loss, including: 1. Liabilities held for trading; 2. Derivatives (that are liabilities); 3. Financial liabilities for which the fair value option is elected. 2. Other liabilities.
What are the categories of financial assets identified under International Financial Reporting Standards (IFRS)?
1. Financial assets measured at fair value with changes reported through profit/loss; 2. Loans and receivables; 3. Instruments held to maturity (other than loans and receivables); 4. Instruments available for sale.
Under International Financial Reporting Standards (IFRS), how is an impairment of a financial asset determined and reported?
Under IFRS, an impairment loss is determined as the difference between the carrying amount of the asset and its recoverable amount. The amount of any impairment loss is recognized in current income.
How are financial assets that are classified as "Loans and Receivables" measured and reported under International Financial Reporting Standards (IFRS)?
Financial assets classified as "Loans and Receivables" under IFRS are measured at amortized cost, with related interest and amortization recognized in current income.
What must be disclosed about each significant concentration of credit risk?
1. Information about the common activity, region, or economic characteristic that identifies the concentration; 2. The maximum (gross) amount of loss due to the credit risk; 3. The entity's policy of requiring collateral or other security to support financial instruments subject to credit risk; 4. The entity's policy of entering into master netting arrangements to reduce the credit risk associated with financial instruments.
List the disclosure requirements for financial instruments where it is practicable to estimate fair value.
1. Fair Value; 2. Related carrying amount; 3. Whether instrument/amount is an asset or liability.
Define "market risk"
Market risk is the possibility of loss from changes in market values due to changes in economic circumstances, not necessarily due to the failure of another party to perform.
If it is not practicable to estimate the fair value of a financial instrument, what must be disclosed?
1. The reasons why it is not practicable to estimate fair value and 2. Information pertinent to estimating fair value, such as carrying amount, effective interest rate, maturity date, etc.
Define "credit risk".
Credit risk is the possibility of loss from the failure of another party (or parties) to perform according to the terms of a contract.
What is the "notional" amount element of a derivative instrument?
A specified unit of measure (e.g., number of shares of stock, pounds or bushels of a commodity, number of foreign currency units, etc.).
What is an embedded derivative?
An embedded derivative is a portion of, or term in, a contract (host contract that is not itself a derivative) that behaves like a derivative.
How is the value or settlement amount of a derivative determined?
By the multiplication (or other calculation) of the notional amount and the underlying.
What is the "underlying" element of a derivative instrument?
A specified price, rate, or other variable (e.g., a stock price, interest rate, currency exchange rate, etc.).
A risk management strategy that involves using offsetting (or counter) transactions or positions.
What are the three basic elements of a derivative?
1. One or more underlying and one or more notional amounts; 2. Requires no initial net investment; 3. Terms require or permit a net settlement.
List the four different possible uses of derivatives.
1. Derivatives not used as a hedge; 2. Fair value hedges; 3. Cash flow hedges; 4. Foreign currency hedges.
What conditions determine that a derivative will not be treated as a hedge for accounting purposes?
A derivative is not treated as a hedge for accounting purposes when: 1. It is not designated as a hedge, but is entered into for speculative purposes; or 2. It does not qualify as a hedge under accounting requirements.
How are changes in the fair value of derivatives that are not used for hedging purposes treated?
1. An adjustment to the carrying value of the derivative instrument; 2. Recognition of the related gain/loss in current income.
Define a "fair value hedge".
The hedge of exposure to changes in fair value of a recognized asset, recognized liability, or an unrecognized firm commitment from a particular risk.
What is the formal documentation required at the inception of a fair value hedge?
1. The hedging relationship; 2. The objective and strategy for undertaking the hedge; 3. Identification of the hedging instrument; 4. Nature of the risk being hedged; 5. How effectiveness of the hedge will be assessed.
List the conditions under which an "unrecognized firm commitment" exists.
When an entity enters into a contract to buy or sell but has not yet booked the transaction.
What are the accounting requirements for a change in the fair value of a fair value hedging instrument and the asset, liability, or firm commitment being hedged?
1. Adjusting carrying amount of the derivative and hedged item to fair value; 2. Recognizing gains/losses from revaluing the derivative and the hedged item in current income.
Define a "cash flow hedge".
The hedge of an exposure to variability (changes) in the cash flow associated with a (recognized) asset, liability, or a forecasted transaction due to a particular risk.
How are changes in the fair value of derivatives used to hedge cash flows treated?
Each period the change in fair value of the derivatives is used to: 1. Adjust the derivative instrument to fair value; 2. Recognize in other comprehensive income an amount equal to the change in present value of expected cash flows of the hedged item; 3. Recognize any difference between change in fair value and change in present value of expected cash flows in current income.
Define a "forecasted transaction"
A forecasted transaction is a planned or expected transaction for which there is not yet either a firm commitment or any rights or obligations established.
What are the conditions necessary for a forecasted transaction to be the hedged item in a cash flow hedge?
The forecasted transaction is: 1. Specifically identified as a single transaction or group of individual transactions with the same risk exposure; 2. Probable of occurring; 3. With an external party (with limited exceptions); 4. Capable of affecting cash flows and earnings; 5. Not for acquisition of an asset or incurrence of a liability accounted for at fair value with the change reported in current income.
Identify five (5) kinds of foreign currency exposure that may be hedged.
1. Forecasted foreign-currency-denominated transactions; 2. Unrecognized foreign-currency-denominated firm commitments; 3. Foreign-currency-denominated recognized assets or liabilities; 4. Investments in AFS Securities; 5. Net investments in foreign operations.
Define "foreign currency hedge".
The hedge of an exposure to changes in the dollar value of assets or liabilities (including certain investments) and planned transactions that are denominated (to be settled) in a foreign currency.
What should disclosures for derivatives designated as fair value hedges distinguish between?
Fair value hedges, cash flow hedges, hedges of investments in foreign operations, and other derivatives.
List the required disclosures for derivatives designated as fair value hedges.
1. Net gain/loss recognized in earnings and where net gain/loss is reported in the financial statements; 2. Net gain/loss recognized in earnings from hedged firm commitments that no longer qualify for hedge treatment.
What is a participating interest?
It is a relationship between one entity (commonly the transferor) with an interest in an entire financial asset and other entities that have an ownership interest in that financial asset. For the relationship to be a participating interest, the interest of all parties must be in an entire financial asset and those interests must have the same priorities and be proportional to ownership with respect to cash flows. Further, the pledging or exchanging of the asset can occur only if all parties agree.
What are the three basic concepts that underlie accounting for transfers of assets and servicing of assets?
Financial assets and liabilities can be disaggregated into components becoming separate assets/liabilities.
What is the control determination concept?
The determination of whether or not a party transferring a financial asset has surrendered control over the asset.
What are the basic criteria for transfer of control over a financial asset?
1. The transferred asset has been isolated from the transferor and its creditors; 2. Each transferee has the right to pledge or exchange the asset received; 3. The transferor does not maintain effective control over the transferred assets.
Describe the accounting treatment for a transfer of a financial asset if criteria for surrender of control are met.
The criteria for surrender of control must be met and either: 1. An entire asset transferred; or 2. A component of an asset that qualifies as a participating interest is transferred.
For transfers of financial assets that are appropriately either a sale or secured borrowing with pledge of security, what are the basic guidelines for accounting treatment?
Basic accounting guidelines: 1. Derecognize a transferred asset or portion thereof that qualifies as a sale; 2. Continue to recognize a transferred asset or portion thereof (i.e., a retained interest) that does not qualify as a sale; 3. Recognize any assets or liabilities that result from the transfer.
Under what conditions is the transfer of a financial asset treated as a secured borrowing with the pledge of collateral?
The transfer of a financial asset is treated as a secured borrowing with pledge of collateral when either: 1. The criteria for surrender of control are not met; or 2. A portion (component) of a financial asset that is not a participating interest is transferred.
How is the gain or loss on the transfer of a financial asset (or portion thereof) treated as a sale determined?
The gain or loss is measured as the difference between the proceeds received from the sale and the carrying value of the asset (or portion thereof) sold. Proceeds of the sale include any assets obtained and (less) any liabilities incurred in the transfer.
List the accounting requirements for the purchase of financial assets by the transferee.
1. Writing on all assets obtained and liabilities incurred; 2. Measuring all assets and liabilities at fair value.
What are the requirements for accounting for the transfer of a financial asset as a sale by the transferor?
1. Write off asset sold (or portion thereof); 2. Write on assets obtained and liabilities incurred; 3. Measuring assets and liabilities at fair value; 4. Recognizing gain/loss on the sale in current earnings.
If a portion of a financial asset is sold and another portion retained, how is the amount to be initially recognized for each portion determined?
The carrying value of the entire asset (pre-transfer) is allocated between the portion sold and the portion retained based on their relative fair values at the date of transfer.
Under what conditions will a transferor write off (and a transferee recognize) a non-cash financial asset transferred as collateral in a secured borrowing?
When the transferor has defaulted under the terms of the contract and is no longer entitled to redeem the pledged asset. In that case, the transferor will write off the financial asset and the transferee will recognize the financial asset (collateral).
What does the appropriate accounting for the transfer of a non-cash financial asset as collateral in a secured borrowing depend on?
1. Whether secured party has the right to sell or repledge the collateral; 2. Whether debtor has defaulted.
Under what conditions will the transfer of a financial asset be treated as a secured borrowing with pledge of collateral?
The transfer of a financial asset will be treated as a secured borrowing in either of the following cases: 1. The transfer is of an entire financial asset, but control has not been surrendered; 2. The transfer is of a portion or component of a financial asset that does not meet the conditions of being a participating interest.
What methods may a holder use to measure a servicing asset or a servicing liability after initial recognition?
Subsequent to initial recognition, a servicing asset or servicing liability may be measured at either: 1. Amortized in proportion to and over the period of estimated net income or net loss; or 2. At fair value, with changes in fair value recognized in current income.
In either case, a servicing asset should continue to be assessed for impairment.
True or False: When estimated future revenues are not expected to be as much as expected costs of servicing the assets, as reflected in fair value, a servicing liability results.
True. A servicing liability results.
At what amount are separate servicing assets and servicing liabilities initially recognized?
At fair value at the date of separation from a transferred financial asset or at date of acquisition.
What condition results in a servicing asset?
Estimated future revenues are expected to exceed estimated costs of servicing the assets, as reflected in fair value.
What are some major disclosure requirements for a transferor that transfers financial assets in a securitization treated as a sale?
For securitized financial assets accounted for as a sale, disclose information for each major type about: 1. Accounting policies; 2. Characteristics of the securitizations and gain/loss on assets securitized; 3. Key assumption used in measuring fair value at securitization and sensitivity of those measures to changes in key assumptions.
What are some major disclosure requirements for a transferee in a secured borrowing with pledge of collateral?
1. Policy for requiring collateral; 2. For collateral that it is permitted to sell or replete: 1. Information about sources and uses of collateral; 2. Fair value; 3. Portion of such collateral that has been sold or repledged.
If a debtor is released as being primarily responsible for a liability but becomes secondarily responsible for the liability, what should be its accounting related to that change?
It will: 1. Derecognize the original liability and the consideration paid for release; 2. Recognize at fair value any liability associated with being secondarily liable for the obligation; 3. Recognize a gain or loss as the difference between the original liability written off and the consideration paid plus the fair value of the secondary liability.
Under what conditions will a debtor write-off (derecognize) a liability?
The debtor pays the creditor and is relieved of its obligation for the liability. OR The debtor is legally released from being the primary obligator under the liability either by the creditor or by law/courts.