The Challenge
When a company put its surplus cash reserves for investment in shares and bonds for returns, what will be the impact to the company’s financial performance when the market fell sharply soon after its investment? Can the company hold on its position not to sell at a loss so as not to reflect such loss?
Accounting for financial instruments is the most complex area of financial reporting. We will examine what factors that will influence the choice of appropriate accounting treatment and share the knowledge and confidence to provide a satisfactory response.
The Accounting Standards
There are 4 Standards that deal with accounting for financial instruments which are devoted to the recognition, measurement, presentation and disclosure:
FRS 32: Financial Instruments: Presentation
FRS 39: Financial Instruments: Recognition and Measurement
FRS 107: Financial Instruments: Disclosures
FRS 109: Financial Instruments
FRS 32 Financial Instruments: Presentation was issued by the CCDG in January 2003 and was operative for financial statements covering periods beginning on or after 1 October 2000. This Standard was revised in July 2004 and supersedes FRS 32 Financial Instruments: Disclosure and Presentation issued in January 2003. Consequential amendments were made in September 2004 and January 2006.
The Standard provides the framework for presentation and classification of financial instruments into financial assets, financial liabilities, and equity instruments, related interest and dividends. The focus point of FRS 32 is the distinction between debt and equity instruments from the perspective of the issuer which requires an issuer of a financial instrument to classify the financial instrument, or its component parts, as a financial liability or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument.
FRS 39 Financial Instruments: Recognition and Measurement was issued by the CCDG in May 2003 and was operative for financial statements covering periods beginning on or after 1 January 2005. This Standard was first revised in July 2004. A second revision was made in September 2004 and supersedes FRS 39 issued in July 2004. A third revision was made in March 2005. A fourth revision was made in August 2005. A fifth revision was made in January 2006. Consequential amendments were made in June 2005 and January 2006.
The Standard contains all the key principles for recognition and measurement of financial instruments other than equity that form the backbone of our study. It contains the measurement rules applicable to initial recognition and at each subsequent reporting date for financial instruments belonging to individual categories of financial assets and financial liabilities, and provides framework for recognising impairment and applying hedge accounting.
FRS 107: Financial Instruments: Disclosures applies to companies incorporated or foreign companies registered under the Companies Act, that have been admitted to the official list of a securities exchange in Singapore and have not been removed from that official list, for annual periods beginning on or after 1 January 2007. All other entities incorporated or registered in Singapore shall apply this FRS for annual periods beginning on or after 1 January 2008. Earlier application is encouraged.
The Standard enhances disclosure of financial instruments to enable users of financial statements to evaluate the significance of financial instruments held by a company, the nature and extent of risks arising from such instruments and how those risks are managed.
FRS 109 Financial Instruments was issued as Singapore equivalent on 11 December 2014, which is effective for annual periods beginning on or after 1 January 2018, with early application permitted. FRS 109 supersedes FRS 39 Financial Instruments: Recognition and Measurement upon implementation.
The Standard prescribes the principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. These principles complement the presentation principles for financial instruments as liabilities or equity in FRS 32 Financial Instruments: Presentation, and the disclosure requirements in FRS 107 Financial Instruments: Disclosures.
Revisit to Presentation of Financial Statements (FRS 1)
FRS 1 Presentation of Financial Statements was published in March 2008 and replaces the previous version of the standard of the same title which was issued in 2003 and subsequently amended. The revised version is mandatory for annual periods beginning on or after 1 January 2009. The Standard was most recently amended by Improvements to FRSs issued in June 2009.
The standard prescribes the basis for presentation of general purpose financial statements to ensure comparability both with an entity’s financial statements of previous periods and with the financial statements of other entities. The Standard sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their contents.
The Standard was revised in 2008 and the main changes from the 2003 version required:
- presentation of all non-owner changes in equity either in one statement of comprehensive income or in two statements (i.e. an Income Statement and a Statement of Comprehensive Income).
- presentation of a statement of financial position (a balance sheet) as at the beginning of the earliest comparative period when an accounting policy is applied retrospectively or there is a retrospective restatement
- disclosure of income tax relating to each component of other comprehensive income, and
- disclosure of reclassification adjustments (i.e. “recycling”) relating to components of other comprehensive income.
The revised Standard also changes the titles of the financial statements. In addition to the new statement of comprehensive income described above, the balance sheet becomes the “statement of financial position” and the cash flow statement becomes the “statement of cash flows”. However, the use of these new titles in financial statements is not mandatory.
Source: IFRS, 10 July 2018