Section 10: Financial Instruments (AASB1061_04-26)

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Section 10 applies to financial assets and financial liabilities that are basic financial instruments and other financial instruments commonly held by Tier 3 entities, and that are not addressed by another section of this Standard. These financial instruments include: 

(a) cash and cash equivalents; 

(b) trade and other receivables (‘debtors’); 

(c) security bonds (eg residential bonds); 

(d) term deposits; 

(e) government and listed corporate bonds; 

(f) units held in managed investment schemes, unit trusts and similar investment vehicles; 

(g) ordinary shares and non-convertible preference shares held in listed or unlisted entities, including preference shares redeemable for a known amount of cash or the cash equivalent of their share of the investee’s net assets; 

(h) trade and other payables (‘creditors’); and 

(i) loans.

Loans may be amounts borrowed or amounts lent. The loan may be provided on interest-bearing or interest-free terms, or on terms that create leverage. 

An entity applying this Standard shall apply the recording, measurement, presentation and transition requirements of AASB 9 Financial Instruments and other applicable Australian Accounting Standards, and the relevant disclosure requirements of AASB 1060, to the following financial instruments: 

(a) unlisted purchased debt instruments (eg unlisted corporate bonds and unlisted convertible notes); 

(b) acquired equity instruments other than ordinary shares and non-convertible preference shares; 

(c) financial guarantee contracts; and 

(d) derivative financial instruments (eg interest rate swaps and forward exchange contracts).

An entity applying this Standard shall not: 

(a) separately record any embedded derivatives; 

(b) record a commitment to provide a loan at a below-market interest rate; or 

(c) notwithstanding paragraph 10.4, apply the hedge accounting requirements in AASB 9 to its financial assets and financial liabilities.

An entity shall record a financial asset or a financial liability when and only when: 

(a) cash is received; or 

(b) the entity otherwise becomes a party to the contractual provisions of the instrument.

An entity is a party to the contractual provisions of a financial instrument when, for example: 

(a) the entity has the legal right to receive cash from a debtor following the transfer of goods or services; 

(b) the entity lends money to a borrower under a loan arrangement; 

(c) the entity acquires equity instruments; 

(d) the entity receives funds under a loan arrangement or bank overdraft facility; or 

(e) the entity is legally obligated to pay for goods or services received from a supplier.

Subject to paragraphs 10.9 and 10.10, when a financial asset or financial liability is initially recorded, an entity shall measure it at its fair value (which excludes transaction costs). Transaction costs and upfront fees incurred are expensed immediately.

Trade and other receivables shall be initially measured at the transaction price. Guidance on the recording of any related revenue is set out in Section 20.

A concessional loan shall be initially measured at its transaction price. A concessional loan is a loan that has significantly below-market terms and conditions principally to enable the reporting entity to further its objectives.

After initial recording, an entity shall measure financial assets and financial liabilities as follows: 

(a) financial assets held to generate both income and a capital return for the entity (including all investments in equity instruments) shall be measured at fair value, except when paragraph 10.12 applies; 

(b) all other financial assets shall be measured at cost less any accumulated impairment losses; and 

(c) all financial liabilities shall be measured at cost.

Notwithstanding paragraph 10.11(a), an entity shall discontinue measuring an investment in an unlisted equity instrument at fair value when the variability in the range of reasonable fair value measures is significant, and the probabilities of the various measures cannot be reasonably assessed. Such instruments shall be measured at cost less any accumulated impairment losses. In these instances, the carrying amount of the instrument on the date its fair value was last reliably determinable shall be regarded as its cost. An entity shall resume measuring an investment in an unlisted equity instrument at fair value when these conditions are no longer relevant. A change in the measurement of an investment in the circumstances described in this paragraph is not a change in accounting policy.

Changes in the fair value of financial assets held to generate both income and a capital return for the entity shall be presented in profit or loss unless the entity makes an irrevocable election, on the initial recording of the first asset in a class of financial assets, to present changes in the fair value of that class of financial assets in other comprehensive income. When an entity presents changes in the fair value of financial assets in other comprehensive income, those changes shall not subsequently be transferred to profit or loss. 

The cost of a financial asset or financial liability as at each reporting date (before any reduction, directly or through the use of an allowance account, for impairment) is the net total of the following amounts: 

(a) the amount at which the financial asset or financial liability is measured at initial recording; 

(b) minus any repayments of the principal; and 

(c) plus or minus any prepayments or overdue payments of interest.

An entity shall use valuation techniques that maximise the use of relevant observable inputs when measuring the fair value of investments in equity instruments that do not have a quoted price. In limited circumstances, the cost of an equity instrument might be an appropriate estimate of the instrument’s fair value. This may be the case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range.

Indicators that the cost of an equity instrument that does not have a quoted price might not be representative of its fair value include: 

(a) the transaction to acquire the financial asset was between related parties. (However, the price in a related party transaction might be used as an input into a fair value measurement if the transaction was conducted at market terms); 

(b) the transaction occurred under duress or the seller was forced to accept the sales price in the transaction because the seller was experiencing financial difficulty; and 

(c) there has been one or more significant developments or unexpected changes since the equity instruments were acquired, in: 

(i) the investee’s operating performance, strategy or economic environment (eg market demand for its outputs); or 

(ii) valuations implied by the overall market (eg due to changes in market interest rates).

The fair value of a quoted equity instrument can always be measured reliably. Cost is never the best estimate of fair value for investments in quoted equity instruments.

Dividends are recorded as amounts receivable and income in profit or loss only when: 

(a) a dividend payable to the entity for a determinable amount has been declared; and 

(b) publicly available information does not indicate that the dividend might not be collectible.

Interest income and interest expense is measured by reference to the financial instrument’s contractual interest rate.

At the end of each reporting period, an entity shall assess whether there is objective evidence of impairment of any financial assets measured at cost. If there is objective evidence of impairment, the entity shall record an impairment loss in profit or loss immediately. An entity shall assess financial assets for impairment either individually or grouped on the basis of similar credit risk characteristics.

Objective evidence that a financial asset, or group of assets, is impaired includes observable data that come to the attention of the entity about the following loss events: 

(a) significant financial difficulty of the issuer or obligor; 

(b) a breach of contract, such as a default or delinquency in interest or principal payments; 

(c) the entity, for economic or legal reasons relating to a debtor’s financial difficulty, granting to the debtor a concession that the entity would not otherwise consider; 

(d) it has become probable that the debtor will enter bankruptcy or other financial reorganisation; or 

(e) a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recording of those assets, even if the decrease cannot yet be identified with individual financial assets in the group, such as adverse national or local economic conditions or adverse changes in industry conditions.

Other factors may also be evidence of impairment, including significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the debtor or issuer operates.

An entity shall measure an impairment loss for a financial asset measured at cost as the difference between the asset’s carrying amount and the estimated future cash flows receivable.

An entity shall cease to record a financial asset only when either: 

(a) the contractual rights to the cash flows from the financial asset expire or are settled; or 

(b) the entity otherwise loses control of the financial asset.

An entity shall cease to record a financial liability only when it is extinguished. A financial liability is extinguished when the obligation specified in the contract is discharged or cancelled or expires.

A modification of the terms of a financial liability or an exchange of a debt instrument for a different debt instrument shall be treated as an extinguishment of the original financial liability. 

An entity shall disclose the carrying amount of each of the following categories of financial assets and financial liabilities as at the reporting date, in total, either in the statement of financial position or in the notes: 

(a) financial assets measured at fair value through profit or loss; 

(b) financial assets measured at fair value through other comprehensive income; 

(c) financial assets measured at cost less any accumulated impairment losses; and 

(d) financial liabilities.

An entity shall disclose additional information that enables users of its financial statements to evaluate the significance of each individually significant loan payable or loan receivable for its financial position and performance. Such information would normally include the terms and conditions of the loan arrangement (such as interest rate, maturity and any restrictions that the arrangement imposes on the entity).

An entity shall disclose the total carrying amount of financial assets measured at a fair value that is based on a quoted price in an active market for an identical asset. 

When an entity has pledged financial assets as collateral for liabilities or contingent liabilities, it shall disclose the following: 

(a) the carrying amount of the financial assets pledged as collateral; and 

(b) the terms and conditions relating to its pledge.

For loans payable recorded as at the reporting date for which a breach of terms (including a default of principal, interest, sinking fund, or redemption terms) has not been remedied by the reporting date, an entity shall disclose the following: 

(a) details of that breach; 

(b) the carrying amount of the related loans payable as at the reporting date; and 

(c) whether the breach was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue.

An entity shall disclose the following items of income, expense, gains or losses: 

(a) income, expense, gains or losses, including changes in fair value, recorded on: 

(i) financial assets measured at fair value through profit or loss; 

(ii) financial assets measured at fair value through other comprehensive income; 

(iii) financial assets measured at cost less any accumulated impairment losses; and 

(iv) financial liabilities; 

(b) total interest income and total interest expense; and 

(c) the amount of any impairment loss for each class of financial asset.