The document outlines the reporting, measurement, and recognition of financial instruments, highlighting their importance in financial reporting and stakeholder decision-making. It covers various measurement methods, including fair value, historical cost, and amortized cost, while detailing the accounting treatments for initial and subsequent recognition, de-recognition, and lease transactions. Additionally, it discusses tax reporting, including current and deferred tax implications, emphasizing the need for transparency and consistency in financial statements.

1. Reporting Financial Instruments:
Measurement and Recognition

2. Introduction to Reporting Financial Instruments
Definition: Financial instruments are contracts
that create a financial asset for one entity and a
financial liability or equity instrument for
another.
Examples:
oDerivatives (e.g., futures, options, swaps)
oEquities (e.g., stocks, shares)
oLoans and receivables
oDebt securities (e.g., bonds, debentures)

3. Aspects/Importance of Reporting Financial Instruments
 Importance in financial reporting:
o Crucial for accurate representation of an entity's financial position
o Impacts key financial metrics and ratios
o Essential for stakeholder decision-making
 Key aspects of reporting:
o Measurement: Determining the value at which instruments are
recorded
o Recognition: When and how instruments are included in financial
statements
 Regulatory framework:
o Governed by accounting standards (e.g., IFRS 9, ASC 815)
o Aims to ensure consistency and comparability across entities

4. Measurement of Financial Instruments - Fair Value
 Definition: Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.
 Key characteristics:
o Market-based measurement
o Reflects current economic conditions
o Considers the perspective of market participants
 Measurement techniques:
o Market approach: Using prices and other relevant information from market
transactions
o Income approach: Converting future amounts to a single current discounted
amount
o Cost approach: Amount required to replace the service capacity of an asset

5. Fair Value Contd.
 Advantages:
o Provides up-to-date valuation
o Enhances transparency and comparability
o Reflects the true economic value of instruments
 Challenges:
o Can lead to volatility in financial statements
o Difficulty in determining fair value for illiquid or complex
instruments
o Potential for manipulation in the absence of active markets
 Fair value hierarchy:
o Level 1: Quoted prices in active markets
o Level 2: Observable inputs other than quoted prices
o Level 3: Unobservable inputs

6. Measurement of Financial Instruments - Historical Cost
Definition: Historical cost is the original purchase price or
transaction value of a financial instrument.
Key characteristics:
oBased on actual transaction price
oRemains constant over time (unless impaired)
oObjective and verifiable
Applications:
oOften used for held-to-maturity investments
oApplicable to certain loans and receivables
oUsed for some non-trading liabilities

7. Historical Cost Contd.
 Advantages:
o Simplicity in measurement and record-keeping
o Provides stability in valuation over time
o Less prone to manipulation compared to fair value
 Limitations:
o May not reflect current market conditions
o Can lead to outdated valuations for long-held instruments
o Limits comparability between entities or instruments acquired at different
times
 Impairment considerations:
o Regular assessment for potential impairment required
o Write-downs necessary if recoverable amount is less than carrying amount
 Disclosure requirements:
o Often need to disclose fair value in notes to financial statements

8. Measurement of Financial Instruments - Amortized Cost
 Definition: Amortized cost is the amount at which the financial asset or liability is
measured at initial recognition, minus principal repayments, plus or minus
cumulative amortization.
 Key components:
o Initial recognition amount
o Principal repayments
o Cumulative amortization using the effective interest method
 Applicable instruments:
o Loans and receivables
o Held-to-maturity investments
o Non-trading financial liabilities
 Calculation process:
o Determine effective interest rate at initial recognition
o Apply rate to carrying amount to determine interest income/expense
o Adjust for any premium or discount amortization

9. Amortized Cost Contd.
 Advantages:
o Reflects the true economic yield of the instrument over its life
o Smooths out the impact of premiums or discounts
o Provides a systematic approach to revenue/expense recognition
 Considerations:
o Regular impairment assessment required for assets
o Changes in estimated cash flows may require recalculation
o Complexity in dealing with variable rate instruments
 Financial statement presentation:
o Balance sheet: At amortized cost
o Income statement: Interest income/expense based on effective
interest rate

10. Measurement Contd. - Mark-to-Market Accounting
Definition: Mark-to-market accounting involves measuring
financial instruments at their current market value and
recognizing any changes in value in the financial statements.
Key characteristics:
oReflects current market prices
oApplies primarily to trading securities and derivatives
oResults in immediate recognition of gains or losses
Application areas:
oFinancial institutions' trading portfolios
oHedge accounting for certain derivatives
oInstruments classified as "fair value through profit or loss"

11. Mark-to-Market Accounting Contd.
 Advantages:
o Provides up-to-date view of financial position
o Enhances transparency for investors
o Aligns with risk management practices in financial institutions
 Challenges:
o Can lead to earnings volatility
o Difficulty in valuation during market illiquidity
o Potential for manipulation in the absence of active markets
 Regulatory considerations:
o Subject to specific accounting standards (e.g., IFRS 13, ASC 820)
o Requires robust valuation policies and procedures
o May have capital adequacy implications for financial institutions

12. Recognition of Financial Instruments - Initial Recognition
 Definition: Initial recognition is the process of recording a financial instrument
in the entity's financial statements for the first time.
 Timing of recognition:
o When the entity becomes a party to the contractual provisions of the
instrument
o Usually coincides with trade date or settlement date
 Measurement at initial recognition:
o Generally at fair value
o For instruments not at fair value through profit or loss, include transaction
costs
 Key considerations:
o Identifying the appropriate classification of the instrument
o Determining if there are any embedded derivatives
o Assessing whether the transaction price represents fair value

13. Initial Recognition Contd.
 Treatment of transaction costs:
o For instruments at fair value through profit or loss: Expensed
immediately
o For other instruments: Added to or deducted from initial carrying
amount
 Day one gains or losses:
o Recognized only if fair value is evidenced by a quoted price or based
on observable market data
o Otherwise, deferred and recognized over the life of the instrument
 Documentation requirements:
o Purpose and nature of the instrument
o Terms and conditions
o Initial measurement and classification decisions

14. Recognition of Financial Instruments - Subsequent Recognition
 Definition: Subsequent recognition refers to the ongoing accounting
treatment of financial instruments after their initial recognition.
 Classification categories (IFRS 9):
o Financial assets: • Amortized cost • Fair value through other
comprehensive income (FVOCI) • Fair value through profit or loss
(FVTPL)
o Financial liabilities: • Amortized cost • Fair value through profit or loss
 Factors influencing classification:
o Business model for managing the asset
o Contractual cash flow characteristics of the instrument
 Measurement approaches:
o Amortized cost: Using effective interest method
o Fair value: With changes recognized in profit or loss or OCI

15. Subsequent Recognition Contd.
 Reclassification considerations:
o Allowed for financial assets if business model changes
o Generally not permitted for financial liabilities
 Impairment assessment:
o Required for instruments at amortized cost and FVOCI
o Based on expected credit loss model
 Hedge accounting implications:
o May affect measurement and recognition if instrument is designated in a
hedge relationship
 Disclosure requirements:
o Fair value information
o Nature and extent of risks arising from financial instruments

16. De-recognition
 Definition: De-recognition is the removal of a previously recognized
financial asset or financial liability from an entity's balance sheet.
 Criteria for de-recognition of financial assets:
o Expiration of contractual rights to cash flows
o Transfer of rights to receive cash flows
o Transfer of substantially all risks and rewards of ownership
 De-recognition of financial liabilities:
o When the obligation is discharged, cancelled, or expires
o Substantial modification of terms (generally, change in PV of cash flows
> 10%)
 Partial de-recognition:
o When only a portion of the asset is transferred
o Requires allocation of carrying amount based on relative fair values

17. De-recognition Contd.
 Continuing involvement:
o When entity retains some risks and rewards
o May result in partial de-recognition or continued recognition
 Accounting treatment:
o Recognize gain or loss on de-recognition
o Difference between carrying amount and consideration received/paid
 Collateralized borrowing:
o When transfer doesn't qualify for de-recognition
o Treat as a secured borrowing
 Disclosure requirements:
o Nature of transferred assets not derecognized
o Nature of continuing involvement in derecognized assets

18. Overview of Lease Transactions
 Definition: A lease is a contract that conveys the right to use an asset for a period of
time in exchange for consideration.
 Key parties:
o Lessor: Owner of the asset
o Lessee: User of the asset
 Types of leases:
o Operating leases
o Finance leases (also known as capital leases)
 Key components of a lease:
o Lease term
o Lease payments
o Discount rate (implicit rate or incremental borrowing rate)
o Residual value guarantees

19. Lease Transactions Contd.
 Accounting standards:
o IFRS 16 or ASC 842
o Focus on 'right-of-use' model for lessees
 Impact on financial statements:
o Balance sheet: Recognition of right-of-use assets and lease liabilities
o Income statement: Depreciation and interest expense (finance lease) or
single lease expense (operating lease)
o Cash flow statement: Classification of payments
 Importance in financial analysis:
o Affects key ratios (e.g., debt-to-equity, return on assets)
o Impacts assessment of company's financial position and performance

20. Dealer Leases
 Dealer leases are lease transactions initiated by entities engaged in the business of selling
or leasing goods.
 Characteristics:
o Often part of the entity's primary business model
o Can involve both new and used assets
o May include maintenance or other services
 Types of dealer leases:
o Operating leases
o Finance leases
 Accounting considerations for lessors:
o Revenue recognition at lease commencement
o Cost of sales recognition
o Treatment of initial direct costs
 Manufacturer or dealer profit:
o Recognized at lease commencement for finance leases
o Spread over lease term for operating leases

21. Dealer Leases Contd.
Residual value considerations:
oGuaranteed vs. unguaranteed residual value
oImpact on profit recognition and risk assessment
Presentation in financial statements:
oGross investment in lease (finance leases)
oAssets subject to operating leases
Disclosure requirements:
oNature of leasing activities
oVariable lease payments
oResidual value risk management

22. Operating Leases
 An operating lease is a lease that does not transfer substantially all the risks and rewards
incidental to ownership of an asset.
 Accounting treatment for lessor:
o Asset remains on lessor's balance sheet
o Depreciation of leased asset over its useful life
o Lease income recognized on a straight-line basis (or another systematic basis)
 Accounting treatment for lessee (under new standards):
o Recognize right-of-use asset and lease liability
o Single lease expense recognized, typically on a straight-line basis
 Initial direct costs:
o Capitalized and amortized over the lease term (lessor)
o Included in the initial measurement of the right-of-use asset (lessee)
 Presentation in financial statements:
o Lessor: Leased assets presented according to their nature
o Lessee: Right-of-use asset and lease liability presented separately or disclosed

23. Operating Leases Contd.
 Disclosure requirements:
o Future minimum lease payments
o Contingent rents recognized as income/expense
o General description of significant leasing arrangements
 Advantages and challenges:
o Simpler accounting treatment compared to finance leases
o May be preferred for shorter-term or lower-value assets
o Requires judgment in lease classification

24. Finance Leases
 A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an asset.
 Criteria for classification as finance lease:
o Transfer of ownership at end of lease term
o Lessee has option to purchase asset at bargain price
o Lease term is for major part of asset's economic life
o Present value of lease payments amounts to substantially all of the asset's fair value
o Leased asset is of specialized nature
 Accounting treatment for lessor:
o Derecognize the leased asset
o Recognize lease receivable (net investment in the lease)
o Recognize selling profit or loss (for manufacturer/dealer lessors)
 Accounting treatment for lessee:
o Recognize right-of-use asset and lease liability
o Depreciate right-of-use asset
o Recognize interest expense on lease liability

25. Finance Leases Contd.
 Initial measurement:
o At the lower of fair value of leased asset and present value of minimum lease
payments
 Subsequent measurement:
o Lessor: Allocate finance income over lease term using effective interest method
o Lessee: Reduce lease liability by lease payments made, less finance charges
 Presentation in financial statements:
o Lessor: Present lease receivable
o Lessee: Present right-of-use asset and lease liability
 Disclosure requirements:
o Carrying amount of net investment in lease
o Unearned finance income
o Maturity analysis of lease payments receivable/payable

26. Sale and Leaseback Transactions
 A sale and leaseback transaction involves the sale of an asset by the owner
and the leasing back of the same asset.
 Purpose:
o Generate cash from existing assets
o Improve balance sheet metrics
o Potentially achieve tax benefits
 Key considerations:
o Whether the transfer qualifies as a sale under IFRS 15/ASC 606
o Classification of the leaseback (operating vs. finance)
o Fair value of the asset vs. sale price
 Accounting implications:
o If transfer is a sale: Recognize sale and leaseback
o If transfer is not a sale: Account for as a financing transaction

27. Sale and Leaseback Transactions Contd.
 Gain or loss recognition:
o Limited to the amount relating to the rights transferred to the buyer-
lessor
 Measurement of right-of-use asset:
o Proportion of previous carrying amount relating to right of use
retained
 Off-market terms:
o Adjust sale price to fair value
o Account for difference as prepaid rent or additional financing
 Disclosure requirements:
o Material sale and leaseback transactions
o Terms and conditions of sale and leaseback arrangements

28. Reporting Income Tax
 Definition: Process of recognizing current and future tax consequences in
financial statements
 Components: Current tax and deferred tax
 Objectives: Accurate representation of tax obligations, alignment with
accounting profit
 Governing standards: IAS 12 or ASC 740
 Key principles: Recognition, measurement, and disclosure of income taxes
 Total tax expense: Sum of current and deferred tax
 Effective tax rate: Total tax expense divided by accounting profit
 Key disclosures: Tax rate reconciliation, unrecognized deferred tax assets
 Comprehensive income: Tax related to items recognized outside profit or
loss
 Consolidated accounts: Consideration of different tax rates in group entities

29. Current Vs Deferred Tax
 Current Tax
 Definition: Tax payable or recoverable for current period
 Calculation: Based on taxable profit and applicable tax rates
 Recognition: As liability (payable) or asset (recoverable)
 Measurement: Expected amount to be paid or recovered
 Presentation: Separate current tax assets and liabilities on balance sheet
 Disclosure: Reconciliation between tax expense and accounting profit
 Deferred Tax
 Definition: Future tax consequences of temporary differences
 Types: Deferred tax assets and liabilities
 Recognition criteria: Probable future taxable profit, reversal of differences
 Measurement: Using tax rates expected to apply when differences reverse
 Presentation: Classified as non-current on balance sheet
 Key areas: Depreciation differences, provisions, tax losses carried forward

30. Challenges and Considerations in Tax Reporting
 Tax law changes: Impact on current and deferred tax calculations
 Uncertain tax positions: Recognition and measurement principles
 Valuation allowances: Assessing recoverability of deferred tax assets
 Global operations: Transfer pricing, foreign tax credits, multiple
jurisdictions
 Disclosure requirements: Increasing complexity and detail required
 Future developments: Potential changes in international tax frameworks