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MASB 24 FINANCIAL INSTRUMENT: DISCLOSURE & PRESENTATION

MASB 24 FINANCIAL INSTRUMENT: DISCLOSURE & PRESENTATION. FINANCIAL ASSETS FINANCIAL LIABILITY EQUITY INSTRUMENT. DEFINITION. FINANCIAL INSTRUMENT Any contract that give rise to BOTH a financial asset of the enterprise and financial liability OR equity of ANOTHER enterprise. DEFINITION.

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MASB 24 FINANCIAL INSTRUMENT: DISCLOSURE & PRESENTATION

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  1. MASB 24 FINANCIAL INSTRUMENT: DISCLOSURE & PRESENTATION FINANCIAL ASSETS FINANCIAL LIABILITY EQUITY INSTRUMENT

  2. DEFINITION FINANCIAL INSTRUMENT • Any contract that give rise to BOTH a financial asset of the enterprise and financial liability OR equity of ANOTHER enterprise

  3. DEFINITION FINANCIAL ASSET • Cash • Contractual right to receive cash or another financial asset from another enterprise • Contractual right to exchange financial instrument with another enterprise under condition that potentially favourable; or • Equity instrument of another enterprise

  4. DEFINITION • EQUITY INSTRUMENT • any contract that evidences a residual interest in the assets of an enterprise after deducting all of its liabilities

  5. DEFINITION FINANCIAL LIABILITY Any liability that is a contractual obligation • To deliver cash or another financial asset to another enterprise; or • To exchange financial instruments with another enterprise under condition that are potentially unfavourable

  6. REPORTING REQUIREMENT FOR FINANCIAL LIABILITY • COMPANIES ACT 1965 • To disclose separately long term and short term • Debentures • Bank loans and overdraft • Liabilities ( other than debentures , bank loans and overdraft) • Other amounts borrowed without security • Disclose the details of the contractual terms

  7. REPORTING REQUIREMENT FOR FINANCIAL LIABILITY FRS 101 • Long term liabilities should be disclose separately • Any provision • Non-current interest bearing liabilities • Additional line item (as required by standard)

  8. 1. BOND • LONG TERM CONRACT under which a borrower agrees to make payments of interest and principal on specific dates to the holder of the bond • Commonly called loanstock • Long term debt issued by an enterprise to raise funds • The contract is called BOND INDENTURE

  9. Types of bond • Treasury bonds • Corporate bonds • Municipal bonds • Foreign bonds

  10. Term used • PAR VALUE: stated face value of the bond • COUPON (INTEREST) RATE : coupon payment • MARKET INTEREST RATE: effective market rate • MATURITY DATE: date on which the par value must be repaid (redeemed)

  11. Issues in accounting for bond. • Recognition and measurement of the amounts of liability and cost that should be reflected in Balance Sheet and Income Statement because bond can be issued • At Par, • At Discount; or • At Premium and also • They can be converted into ordinary shares

  12. IAS 39:Recognition and measurement • Initial recognition: cost = FV of the consideration received • Subsequent measurement : at amortised cost • Gain and losses : credit or charged to IS

  13. Bond Valuation n Vb= ∑ interest + Redemption sum t =1 (1+ r )t (1+ r )n = interest (PVIFA r , n) + Principal (PVIF r , n) PVIFA = present value interest factor anuity r = market interest rate t = year n = number of years

  14. Entries : Issuance at par Coupon Interest rate = market rate • At issuance Dt cash RM xxx Cr Bond RM xxx 2) Payment of interest Dt. Interest expense RM xxx Cr. Cash/payable RM xxx 3) At redemption date Dt. Bond RM xxx Cr. Cash RM xxx

  15. Issuance at discount • Issued for less than par value • Coupon Interest rate < market rate • Issue at discount when the issuer wishes to avoid paying high coupon rate • The discount is the difference between the par value and the issue price of the bond • The discount of the bond should be amortised over the term of the bond as an interest cost (borrowing cost) • The total interest expense is equal to the effective yield on the bond (market interest rate)

  16. journal entries : Issuance at discount • At issuance Dt cash RM xxx Dt Discount on bond RM xx Cr Bond RM xxx 2) Payment of interest Dt. Interest expense RM xxx Cr. Discount on bond RM xxx Cr. Cash/payable RM xxx • At redemption date Dt. Bond (par value) RM xxx Cr. Cash RM xxx

  17. Issuance at premium • Issued for more than par value • Coupon Interest rate > market rate • Issue at premium when the issuer wishes to attract investors to subscribe for the bond by offering higher coupon rate • The premium is the difference between the par value and the issue price of the bond • The premium on the bond should be amortised over the term of the bond

  18. Journal entries : Issuance at premium • At issuance Dt cash RM xxx Cr Premium on bond RM xx Cr Bond RM xxx 2) Payment of interest Dt. Interest expense RM xxx Dt. Premium on bond RM xxx Cr. Cash/payable RM xxx • At redemption date Dt. Bond (par value) RM xxx Cr. Cash RM xxx

  19. Method of Amortisation of discount and premium • Straight line method • Amortisation = amount of discount or premium over years to maturity • Interest expense = coupon interest +/- amortisation

  20. Method of Amortisation of discount and premium • Effective interest rate method • For interest to reflect effective borrowing cost of the issuer • Amortisation = effective Interest - coupon interest • Effective interest = effective rate * carrying amount • Coupon interest = coupon rate * par value • If the different between carrying value and par value of the bond is significantly material, IAS 39 prescribes that the 2nd method should be used

  21. Example • Illustration 1: issuance at par • Illustration 2: issuance at discount- amortisation using straight line method • Illustration 3 and 4: issuance at discount- amortisation using effective interest rate method • Illustration 5: issuance at premium

  22. Cost of Bond • Cost incurred to acquire/issue the bond • How to account for it? • Expense by charging IS, or • Reduce related bond liability, or • Deferred by amortise it over term of bond • Practicability (materiality): • Immaterial – charged in IS as an expense • Material – deferred, not appropriate to write off immediately

  23. Classification and presentation of premium and discount • Discount : • Debit balance but does not satisfy asset definition • Premium: • Credit balance but does not satisfy liability or equity definition

  24. Views • Bond liability presented at its PAR value • Premium and discount presented separately • Adv: reflect the amount at maturity • Bond liability presented at its CARRYING value • Discount : reduction to PAR value • Premium : Addition to PAR value • Adv: avoids debits / credits balance not satisfying assets and liability definition

  25. Appropriate presentation • Presented at CARRYING amount with disclosure of • PAR value • Related discount/premium • Deferred transaction costs

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