This website uses cookies to ensure you have the best experience. Learn more

Accounting For Financial Instruments Essay

2485 words - 10 pages

Accounting for Financial Instruments: Valuation and Reporting
Samuel Kifle*,
K.V. Siva Prasad and*
K.Lakshmana Rao*


The valuation and Reporting of financial instruments receive special attention in the course of Financial Reporting. The paper discusses the initial measurement, subsequent recognition of gain and losses on the financial instruments and their balance sheet presentation as prescribed by Accounting Standards of The institute of chartered Accountants of India (AS 30, 31 and 32), UK’s reporting standard and the International Reporting Standards.


*Research ...view middle of the document...

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

One additional important definition is the finance cost which is defined by FRS as the difference between the net proceeds of an instrument and the total amount of the payments (or other transfers of economic benefits) that the issuer may be required to make in respect of the instrument.


It seems that there is a lack of consensus on the appropriate accounting treatment of financial instruments. The conventional financial accounting and reporting imply the use of cost method for these financial instruments too. However with some exceptions, standard setters seem to be moving towards the market value approach, especially in respect of derivatives. For instance the Institute of Chartered Accountants of India asserts that financial assets and liabilities should initially be recognized at their fair value. The current fair value of a financial instrument on initial recognition is normally the transaction price (i.e., the fair value of the consideration given or received). However, if part of the consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated, using a valuation technique. For example, the fair value of a long-term loan or receivable that carries no interest can be estimated as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. Any additional amount lent is an expense or a reduction of income unless it qualifies for recognition as some other type of asset.

In the view of Financial Instruments Joint Working Group (JWG) published in 2000, it was expressed that virtually all financial instruments should be measured at fair value and that virtually all gains and losses arising from changes in fair value should be recognized in the profit and loss account. The US Financial Accounting Standards Board require derivatives to be shown at market value while the IAS 39, Financial Instruments: Recognition and Measurement would require all derivatives and other financial instruments held for trading, together with any financial assets that are available for sale, to be measured at fair value.

Underlying the definition of fair value is a presumption that an entity is a going concern without any intention or need to liquidate, to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Fair value is not, therefore, the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale. However, fair value reflects the credit quality of the instrument.

Those who advocate the use...

Other Papers Like Accounting for Financial Instruments

Financial Assessments Essay

1266 words - 6 pages “The European Union (EU) Parliament mandated the adoption of IFRS to improve the integration of capital markets”(Cormier et. al., 2009) in 2005, and this “adoption has made IFRS the most widely accepted financial accounting model in the world” (Paananen et. al, 2009). Therefore, it is no surprise that the two German auto makers, Daimler and BMW that have been selected for this report follow IFRS, and their two latest annual reports date back to

Acounting Standards Board Essay

1176 words - 5 pages pronouncements, and how a Master’s of Science in Accountancy program can prepare a student for a professional life within the field that will likely be affected by both boards. The History and Relationship of the IASB and FASB In 1973 both the FASB and International Accounting Standards Committee (IASC) were formed. FASB was created with the mission to establish and improve standards of financial accounting and reporting that foster financial reporting

Annual Report

3560 words - 15 pages equity instruments in a public market – hold assets in a fiduciary capacity for outsiders. • Tier 2 entities will be required to apply recognition, measurement and presentation requirements with substantially reduced disclosures. Research School of Accounting and Business Information Systems 34 9.1. Scope and objectives of financial reporting • SAC 2: The objective is to provide relevant and reliable information to assist users to make

Accounting Report

2075 words - 9 pages This is a report of about accounting that will look at two financial statements of King Charles Fittings, income statement and the statement of the financial position, a short report and commentary of accounting bodies listing their similarities and differences . King Charles Fittings Income Statement for the year ended 31 December 2013 £ £ 000 000

Internationa Accounting

880 words - 4 pages listed companies to provide financial statements using IFRS’s (International Financial Reporting Standards developed by the IASB). Formed in 1973, the IASC has developed how financial reporting is performed worldwide in a short period of time. The IASC then compromised of a set of part time volunteers from 13 countries who were responsible for setting accounting standards. However, in 1997 the IASC concluded that “to perform its role effectively

Financial Instruments

2529 words - 11 pages IFRS\AASB 9 will impact on the accounting for financial instruments in financial statements? 2.Contrast analysis of IAS\AASB 139 and IFRS\AASB 9 2.1 Shortcomings and criticisms of IAS\AASB 139 AASB 139 Financial Instruments: Recognition and Measurement is an Australian Equivalent International Financial Reporting Standard (AIFRS) applicable to financial years beginning on or after 1 January 2005. AASB 139 requires financial assets


443 words - 2 pages knowledge of generally accepted accounting principles, because it more closely resembles personal financial management. Although credit and other fiscal instruments are used in some cases by individuals in their personal matters, most people generally manage personal financial statements on a cash basis. This method is effective for an individual, or perhaps a very small business with a small number of accounts and minimal transactions to record

Benefits and Challenges..Fair Value Accounting

2543 words - 11 pages Accounting Standards Board are recognized to be much more “principles” based and is not specific as to what account categories are affected. Instead, it is written in a manner that essentially says, “if it requires or permits “FVA” this is how you deal with it. IFRS 13 is the latest standard available on “FVA”. It is a huge step in aligning itself with the FASB in terms of definitions and layout. For the most part, financial instruments are

Advanced Corporate Reporting

666 words - 3 pages 2. Rules-based accounting adds unnecessary complexity, encourages financial engineering and does not necessarily lead to a ‘true and fair view’ or a ‘fair presentation’. Discuss Rules-based accounting has not worked in practice. The present U.S. system does not produce accurate reporting. This has made standards longer and complicated and has led to arbitrary criteria for accounting treatments that allows companies to structure

Currency Hedging

685 words - 3 pages , but IASB has issued two standards to help further explain this procedure. The International Accounting Standards IAS 32 and 39 help to give further direction for the proper accounting of derivative financial instruments. IAS 32 defines a “financial instrument” as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”.[4] Therefore, a forward contract or option would

Gaap Paper

1205 words - 5 pages Procter & Gamble Financial Statement Analysis Most people think of financial statements as a tool only used by accountants and financial experts, but over the years they have grown to become a powerful tool in analyzing the financial health of organizations for anyone who is interested. According to Ruhl & Smith (2013), the motivation behind the joint FASB/IASB conceptual framework was to make accounting information useful and the two

Related Essays

Accounting For Leases – Financial Versus Operational Leases Impacts On Financial Statements And On Financial Analysis

877 words - 4 pages Course: Financial Accounting Theme 1: "Accounting for leases – Financial versus Operational Leases impacts on financial statements and on financial analysis." "Accounting for leases – Financial versus Operational Leases - impacts on financial statements and on financial analysis" A lease is a contractual agreement between two parties for the hire of an asset. The lessee – user of the asset – will pay a lease rent to the lessor

Fair Value Accounting And The Gfc

1821 words - 8 pages the actions of the IASB and IPSASB promptly by forming the Financial Instruments Project Advisory Panel to provide input to the AASB on preparing submissions to the IASB and to meet requests for information from the IASB as part of its response to the global financial crisis. They participated in a number of IASB research projects, lead and IASB” project team on extractive activities accounting” (Australian Accounting Standards Board, 2009, p. 5

Pas Compilation Essay

1653 words - 7 pages Philippine Accounting Standards PAS | Title | Effective Date | PAS 1 | Presentation of Financial Statements [superseded by PAS 1 (Revised)] | 01/01/05 | | Amendment to PAS 1: Capital Disclosures | 01/01/07 | PAS 1 (Revised) | Presentation of Financial Statements | 01/01/09 | | Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation | 01/01/09 | | Amendments to PAS 1: Presentation of

Subprime Crisis And Fair Value Accounting

940 words - 4 pages they were recorded under historical cost method. Therefore, fair value accounting was one of the tools that communicated the effects of bad decisions and was not the reason why the crisis took place. The IFRS provides a free choice between fair value accounting and historical cost accounting to firms for non-financial assets. The firms should forecast their values based on only one the accounting methods. Fair value accounting for non- financial