Significance Financial Instruments Closure â€Myassignmenthelp.Com

Question: Discuss About The Significance Financial Instruments Closure? Answer: Introduation The IFRS structure determines two capital concepts; a financial concept of capital and a physical concept of capital. Financial concept of capital is the concept which is related to companys net assets and equity, whereas a physical concept of capital is a concept in which capital is related to the entitys productivity capacity (Bauer, O'Brien and Saeed, 2014). Further description of this concept is enumerated as below: Financial capital maintenance A financial concept of capital is the concept which is related to companys net assets and equity (van Mourik, 2014). While using a financial concept of capital, profit generation is only made if the net assets financial amount, during the ending period is larger than the beginning period of net assets, further is adjusted only for any distribution which was made to the owners at that the period. The major consideration provided by the users regarding the financial statements is with the financial capital maintenance of the company. This concept is supported by following two equations: Assets Liabilities = Equity Opening equity (net assets) + Profit Distributions = Closing equity (net assets) Physical capital maintenance A physical concept of capital is a concept in which entitys capital is based all upon on the production capacity, regarded on its output units. While using a physical concept, income is generated only if the entitys physical production capacity during ending period is more than the productivity during the beginning period, adjustment regarding any distributions will be paid to the owners at that period, or an increase in equity capital (McNeil, Frey and Embrechts, 2015). The major consideration provided by the users regarding the financial statements is with the productive capability maintenance of the company. A financial concept of capital must be implemented when the financial statement users is concerned about the capital investment maintenance or the purchasing capacity of the capital investment. A physical concept of capital must be implemented when the financial statement users is concerned about the entitys physical production capacity, and current value accounting. Profits are generally more during the implementation of the financial concept of capital as compared to the physical concept of capital, all because of inflation. The new and revised AASB 9 integrated the IASBs comprehensive work mentioned in Phase 1 of its project for the replacement of IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement) categorization and considerations of financial assets and liabilities. In addition to this, IASB comprehended its project on de-recognition of financial instruments (Bamber and McMeeking, 2016). This Standard is inclusive of requirements for the categorization and consideration of financial instruments, also the requirements of recognition and de-recognition for financial instruments. AASB 9 (issued in 2009) had only considered the requirements for the classification and measurement of financial assets which is consequential from the initial part of Phase 1 of the IASBs project which has objective to replace IAS 39 (AASB 139). AASB 9 Financial Instruments basically changes the means by which financial instruments are categorized and considered (inclusive of the measurements of provisions for impairment), and it also establishes extra flexibility in order to apply hedge accounting in a wider range of the activities of risk management (McMeeking and Bamber, 2015). This new and revised standard is likely to have wide consequences for entities across various industries, not just those in the sector of financial services. Current needs; Financial instruments will be shown on the basis of net approach only is an entity has an authorized enforceable right to compensate and aims to settle down on a net basis or recognize instruments at once. New and revised guidance Right to begin should be made available for balancing applicable rules Right is not conditional on future events The right should be legally enforceable in the regular course of business, bankruptcy, insolvent or default events. Before that there were four categories in accordance with AASB 139: first is the identification of fair value by PL, Second held to maturity, third loans and receivables and fourth financial assets for sale. AASB 9 contains two categories of financial assets which are Amortised cost and Fair value. In order to make an investment in equity tools, the amortised cost will not be applied, and the category of fair value category is applicable (Tahat and et al., 2016). According to this category, profit and loss of fair value are known in PL unless it is an element of hedging affiliation or its an equity tool investment (not for the trading purpose) and the company has made permanent elections to show profit and losses on that investment regarding other comprehensive income. If a company makes permanent elections for the equity instruments purchase, profits and losses must be realized in gain or loss. Once the election shows profit and loss in other comprehensive income, then it should be done the date of acquisition, it is significant for the business management to make a consideration of the policies and options of accounting previously for any purchases (McDonough and Shakespeare, 2015). While the election is completed on the basis of the item by item, mostly companys gives priority to the blanket policy choice, in which profit and loss on each investment will be presented in equity instruments in other comprehensive income. Left companies require to state choice on the basis of a case by case on the date of acquisition. For this purpose, the election is permanent and has no chance of change regarding assets life. Whilst AASB 9 allow firms to make permanent election to show profits and loss made on investments will be presented in equity instruments in other comprehensive income, it decreases instability in the total net gain for many and reduce the apparent instability in accounting for financial assets which are available for sale as per AASB 139 (Byrne, 2014). S Ltd has obtained total shares of $150,000 in Willett Ltd on the date 1 July 2015. The share showed the worth $170,000 on 30 June 2016. On 1 November 2016, S Ltd sold these shares for $200,000. Current AASB 139 treatment 2016 2017 $ $ Other income 0 50,000 Net Profit 0 50,000 Other comprehensive income 20,000 (20,000) Total Comprehensive income 20,000 30,000 Under AASB 9, the accounting implications, if S Ltd has used the permanent election to show profit and losses on that investment in other comprehensive income are as follows: AASB 9 OCI treatment 2016 2017 Other income $0.00 $0.00 Net Profit $0.00 $0.00 Other comprehensive income $20,000.00 $30,000.00 Total Comprehensive income $20,000.00 $30,000.00 Under AASB 9, the accounting implications if S Ltd had used no election are as follows. AASB 9 PL treatment 2016 2017 Other income $20,000.00 $30,000.00 Net Profit $20,000.00 $30,000.00 Other comprehensive income $0.00 $0.00 Total Comprehensive income[2] $20,000.00 $30,000.00 References Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a comment on the IASB Conceptual Framework project.Accounting in Europe,11(2), pp.211-217. van Mourik, C., 2014. The equity theories and the IASB conceptual framework.Accounting in Europe,11(2), pp.219-233. McNeil, A.J., Frey, R. and Embrechts, P., 2015.Quantitative risk management: Concepts, techniques and tools. Princeton university press. Bamber, M. and McMeeking, K., 2016. An examination of international accounting standard-setting due process and the implications for legitimacy.The British Accounting Review,48(1), pp.59-73. McMeeking, K.P. and Bamber, M.A., 2015. An examination of international accounting standard-setting due process and the implications for legitimacy. Tahat, Y.A., Dunne, T., Fifield, S. and Power, D.M., 2016. The impact of IFRS 7 on the significance of financial instruments disclosure.Accounting Research Journal,29(3), pp.241-273. McDonough, R.P. and Shakespeare, C.M., 2015. Fair value measurement capabilities, disclosure, and the perceived reliability of fair value estimates A discussion of Bhat and Ryan (2015).Accounting, Organizations and Society,46, pp.96-99. Byrne, L.T., 2014. Accounting for Financial Instruments: Difficulties with Fair Value Measurement and Reporting.