Initial Measurement Of Financial Assets And Financial Liabilities Accounting Essay

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INTRODUCTION

International Financial Reporting Standards (IFRS) are principles-based Standards, Interpretations and the Framework (1989) adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS).

PURPOSE OF THE FRAMEWORK

This Framework sets out the concepts that underlie the preparation and Presentation of financial statements for external users. The purpose of the Framework is to:

(a) assist preparers of financial statements in applying Accounting Standards and in dealing with topics that have yet to form the subject of an Accounting Standard;

(b) assist the Accounting Standards Board in the development of future Accounting Standards and in its review of existing Accounting Standards;

(c) assist the Accounting Standards Board in promoting harmonisation of regulations, accounting standards and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by Accounting Standards;

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(d) assist auditors in forming an opinion as to whether financial statements conform with Accounting Standards;

(e) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Accounting Standard

(f) provide those who are interested in the work of the Accounting Standards Board with information about its approach to the formulation of Accounting Standards.

The financial position of an enterprise is primarily provided in the Statement of Financial Position. The elements include:

Asset.

Liability

Equity

Scope

The Framework deals with:

(a) the objective of financial statements;

(b) the qualitative characteristics that determine the usefulness of information provided in financial statements;

(c) definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) concepts of capital and capital maintenance

What is a Financial Instrument?

The financial statements, in order to arrive at reasoned conclusions, should be analysed either with references to the financial statements of other enterprises or from the past records of the company. To analyse such statements financial instruments are being used, these are:

financial asset

Equity or liability

In the next section of the presentation we are going describe the differences between the equity and liability.

Common Examples of Financial Instruments

cash

demand and time deposits

commercial paper

accounts, notes, and loans receivable and payable

debt and equity securities.

asset backed securities such as collateralised mortgage obligations, repurchase agreements, and securitised packages of receivables

derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.

Section I: Basic Definition Of Financial Assets

An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets. Unlike land and property--which are tangible, physical assets--financial assets do not necessarily have physical worth.

Section II: Initial measurement of financial assets and financial liabilities

When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

Section III: Financial Liability $ Financial Equity

Financial Liability

A financial liability is a contractual responsibility and duty to deliver cash or another financial

In other words Liability is a debt that we have to repay and its our duty to pay it within the specified time period. 

For example if someone have borrowed money from other person or bank or any financial institution then repaying this borrowed amount is the liability on the part of the borrower and this amount is repayable in the form a liquid cash with interest as decided by the two parties or as per the rules and regulations of banking. The borrowed amount is called loan, it may be short term or long term.

A short term loan is a loan for a period of one year or less and a long term loan is a loan for a longer period may be for 10 years and more.

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In case we borrowed the money to purchase the car, but amount that we borrowed or took as a loan is less than the value of the car. Then we have made equity in the car.  When you assess the monetary value of an asset, you consider the difference between the monetary value and the amount owed against the asset as equity.  The more equity you can establish with your assets, the more comfortable your life becomes.  This is why we strive for adequate cash assets when we begin to reach retirement age.

But the most important aspect is that someone should noly take loan when they know that they will be able to repay it within the specified time period. Basically, an individual takes loans or borrows money to purchase those things that he cannot afford to buy.

Classification of Financial Liabilities

IAS 39 recognises two classes of financial liabilities

Financial liabilities at fair value through profit or loss

Other financial liabilities measured at amortised cost using the effective interest method

The category of financial liability at fair value through profit or loss has two subcategories:

Designated. a financial liability that is designated by the entity as a liability at fair value through profit or loss upon initial recognition

Held for trading. a financial liability classified as held for trading, such as an obligation for securities borrowed in a short sale, which have to be returned in the future

Financial Equity

In accounting and finance, a business enterprise cannot possibly start its commercial activities without having its own resources technically called Equity. It means a specified amount of money needed to start a business. Equity is the claim that the investors can make after all the liabilities are paid on their part. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for, the positive remainder is deemed the owner's interest in the business.

The equity is basically the invested capital in commencing of the business, if liabilities are higher then one have to first let go off with them and then distribute the left out amount of equity amongst the investors.

This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital or simply, equity.

Measurement principles: The measurement proposals will apply to all financial assets and liabilities carried at amortised cost.

The key terms are:

Amortised cost

Effective Interest Rate