Section 12

Other Financial Instrument Issues

 Overview
• Scope of Sections 12
• Accounting policy choice
• Initial recognition of financial assets and liabilities
• Initial measurement
• Subsequent measurement
• Impairment of financial instruments measured at cost or
amortized cost
• Disclosures
 Scope
• Section 12 applies to other, more complex financial instruments
and transactions. If an entity enters into only basic financial
instrument transactions then Section 12 is not applicable.
However, even entities with only basic financial instruments
shall consider the scope of Section 12 to ensure they are
exempted.
Scope
Scope
Scope
 Examples

1. Entity A, a company manufacturing bicycles, purchased on 1 November 20X1 a new

machine from an overseas supplier. The new machine`s cost is expected to pay the full
amount on 31 January 20X2, at which time, Entity A is contractually required to pay
the manufacturer FCU10,000, the full price of the machine. Entity A is concerned about
the effect on its cash flow of fluctuating exchange rates. Consequently, on 1 November
20X1 it also entered into a forward contract with Bank B to receive FCU10,000 in
exchange for CU5,000 on 31 January 20X2.

2. Entity A, a company manufacturing bicycles, purchases a subsidiary, which

manufactures scooters, from Entity B. Entity A pays CU50,000 on the date of
acquisition and agrees to pay a further CU50,000 to Entity B two years later if the
subsidiary meets specified performance targets (i.e. the second CU50,000 is contingent
consideration). It is expected that the subsidiary will meet those targets throughout the
two years.
 Initial Recognition
• An entity shall recognize a financial asset or a financial liability
only when the entity becomes a party to the contractual
provisions of the instrument.
• A forward contract within the scope of Section 12 under
paragraph 12.5, such as a firm commitment to buy or sell non-
financial items that can be net settled, is recognized as an asset or
a liability on the commitment date, rather than on the date on
which settlement takes place.
 Initial Measurement

When a financial asset or financial

liability is recognized initially, an
entity shall measure it at its fair value,
which is normally the transaction
price.
 Subsequent measurement
• At the end of each reporting period, an entity shall measure all financial instruments

within the scope of Section 12 at fair value and recognize changes in fair value in

profit or loss, except as follows: equity instruments that are not publicly traded and

whose fair value cannot otherwise be measured reliably, and contracts linked to such

instruments that, if exercised, will result in delivery of such instruments, shall be

measured at cost less impairment.

• An entity shall not include transaction costs in the initial measurement of financial

assets and liabilities that will be measured subsequently at fair value through profit or

loss. If payment for an asset is deferred or is financed at a rate of interest that is not a

market rate, the entity shall initially measure the asset at the present value of the future

payments discounted at a market rate of interest.

 IMPAIRMENT OF FINANCIAL
INSTRUMENTS MEASURED AT COST
OR AMORTIZED COST

• An entity shall apply the guidance on impairment of a

financial instrument measured at cost in section 11 to
financial instruments measured at cost less impairment
in accordance with this section.
 DISCLOSUR
ES
• An entity applying this section shall make all of the disclosures
required in Section 11 incorporating in those disclosures financial
instruments that are within the scope of this section as well as
those within the scope of Section 11.
prepared by Redwan , Hassen and Kib
ruysfaw