Acct 6280 Topic 8- Ifrs

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U. S. GAAP financial instrument is defined as

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Cash, evidence of ownership interest in an entity a contract that both:

1) imposes on one entity a contractual obligation to deliver cash for another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second entity

2) conveys to one entity a right to do either of the following receive cash or another financial instrument from the first entity or exchange and other financial instruments on potentially favorable terms with the first entity.

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US GAAP defines a financial liability as

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A contract that imposes on one entity obligation to do either of the following one deliver cash or another financial instrument to second entity or exchange other financial instruments on potentially unfavorable terms with the second entity

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US GAAP defines an equity instrument as

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Under US GAAP is not well defined. By reference to ASC 320 – 10–20 investment debts and equity securities glossary and equity security as a security representing an ownership interest in an entity (e.g. common , preferred or other capital stock) or the right to acquire ( e.g. warrants rights and call options ) or dispose of ( e.g. put options ) an ownership interest in an entity at fixed or determinable prices.

equity overall overview and background equity is to find as residual interest in assets of an entity that remain after deducting its liabilities.

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Under IFRS a financial instrument is defined as

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Any contract that gives rise to our financial assets one entity and I financial liability or equity instruments of another

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Under IFRS a financial liability is defined as

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Any liability that is one a contractual obligation to deliver cash from other financial assets another entity or to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavorable to the entity or to a contract that will or maybe settled in entities on equity instrument and is a non-derivative for which the entity is maybe obliged to deliver a variable number of entities own instruments

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Under IFRS a.m. equity instrument is defined as

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Any contract that evidences a residual interest in the assets of entity after deducting all of its liability. This includes common shares and certain preferred shares

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Classification recognition and measurement US GAAP and IFRS

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Financial instruments must be classified as debt or equity in the balance sheet.Liability and equity hybrid financial instruments can be very complex and require a great deal of judgment to evaluate all characteristics of the underlying instrument.Instruments that require settlement with a variable number of shares establish a debtor/creditor relationship and thus are treated as liabilities.This is even if the legal form is preferred stock those that require settlement with a fixed number of shares generally establish more of a shareholder relationship and are thus treated as equity.IFRS is similar to US GAAP, although preferred stock is referred to as preference shares.

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US GAAP classification is addressed on an instrument by instrument basis

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The legal form often dictates the classification, that is, a bond or loan is in debt and preferred or common stock is equity.ASC 480 requires that specific instruments be classified as liabilities, even if they are stock and even if they have characteristics of both debt and equity.Some examples of instruments that must be accounted for as debt include mandatorily redeemable shares .Instruments that must be redeemed or repaid using a variable number of shares.Instruments requiring an entity to repurchase its own stock for cash or other assets.

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IFRS classification starts with the definitions.

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The focus is on whether there is contractual obligation to deliver cash other assets for a variable number of entities on chairs if such obligation exists a liability exist this is applied to all instruments whether they are loans or bonds preferred or common stock. Unless the entity has an unconditional right to avoid delivering cash or other financial assets, it is a liability.

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Bifurcation of hybrid financial instruments – US GAAP

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Hybrid financial instruments are not split into debt and equity components unless certain conditions are met, as may be the case with instruments that include embedded derivatives, conversion features, redemption features, etc.

Careful analysis is required on an individual instrument by instrument basis to determine if bifurcation is appropriate.Related debt issuance costs are recorded and amortized over the life of the liability

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Bifurcation of hybrid financial instruments – IFRS

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The liability in a quick and penance are determined as follows :The liability component is calculated as the net present value of all potential contractual future cash flows as market interest rates at the time of issuance.The difference between the proceeds from the offering and the net present value calculated above is the equity component.This component is included in equity generally under a heading of other capital reserves.

Issuance costs are also bifurcated by determining the fair value of the components and applying the percentage issuance costs.Liability component insurance costs are offset directly to the balance of the liability component.Equity component insurance costs are charged equity generally under the heading of "other capital reserves. "

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Classification, recognition and measurement of stock or shares the settlement options that are contingent upon another event – US GAAP

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These financial instruments are not classified as liabilities until the instruments are mandatorily redeemable for example, a share may become redeemable certain future events happens (such as a consumer price index rising above a certain point). This future event is uncertain.When the contingency resolves itself in the future (i.e. occurs or not), the instrument is reassessed to see if the liability exists. If it does, and amount equaling the fair value of the liability is reclassified from equity to liability.

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Classification, recognition and measurement stock or shares with settlement options that are contingent upon another event – IFRS

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These instruments are recognized as liabilities if the issuer does not have an unconditional right to avoid delivering cash or another financial asset.

There are certain limited situations when such instruments would not be classified as liabilities (IAS 32, paragraph 25)

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Classification, recognition and measurement stock or shares with settlement options that are contingent upon another event – IFRS

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These instruments are recognized as liabilities if the issuer does not have an unconditional right to avoid delivering cash or another financial asset.

There are certain limited situations when such instruments would not be classified as liabilities (IAS 32, paragraph 25)