Liabilities and equity

IFRS 32 gives an idea of the principles of reflecting financial instruments in accounting and reporting. What are these instruments and how to classify them in interpretation IFRS 32- you will learn from our material.

What is a financial instrument?

Financial instruments in the international regulations are assigned 3 standards:

IFRS 32 " Financial instruments: presentation";
IFRS 39 Financial Instruments: Recognition and Measurement;
IFRS 7 Financial Instruments: Disclosures.

All of these standards decipher the term “financial instrument” (FI) as an agreement under which:

one company acquires a financial asset (FA);
another company has a financial liability (FO) or an equity instrument (EA).

The standard lists what assets and liabilities are included in FA, FI and DI.

FA is:

money;
DI from another company;
an agreement in which the firm’s own DI (non-derivative or derivative) will be used in the calculations;
the right (provided for in the contract) to receive money or other FI from another company or to exchange FA or FI with another company on favorable terms.

FO is:

the obligation arising from the contract to transfer money (or other financial assets) to another company or to exchange financial assets or financial assets with another company on unfavorable terms;

an agreement under which settlements can be made by one’s own DI (derivative or non-derivative).

A DI is an agreement that confirms the right to a residual interest in the assets of a firm after deducting all its liabilities.

IFRS 32 extends its effect:

on the classification of FI as FA, FI and DI from the point of view of the issuer;
classification of dividends, interest, profits and losses;
conditions for mutual settlement of FA and FO.

The provisions of this standard are mandatory for use by all firms in relation to all types of financial statements (except for those specifically specified in clause 4 IAS 32).

Liabilities and equity

The standard determines that the issuing company of a financial statement is obliged, upon its initial recognition, to classify it (or its component parts) as a financial statement, financial statement or financial statement. The classification is based on:

the essence of contractual relations;

definitions of FO, FA and DI.

Since in some cases it may be difficult to distinguish between FD and DI, the standard clarifies this nuance separately. When deciding whether FI is FI or DI, it is necessary to check the simultaneous compliance with the following 2 conditions:

FI does not contain a contractual obligation to transfer money (or other FA) to another company, or to exchange FA (or FI) with another company on conditions unfavorable for the issuer;
calculations for this FI are carried out using their own DI (non-derivative or derivative).

The simultaneous fulfillment of both conditions means that it is possible to classify the FI as a CI.

Resaleable instruments

FI with the right to resell is the obligation of the issuer (provided for by the contract) to redeem or redeem this FI for money (or in exchange for another FI) when the holder exercises this right.

As an exception, the standard allows the classification of such a FI as a DI if it has a combination of the following properties:

provides its holder with the right to a share of net assets (NA) upon liquidation of the company;
does not have priority over other claims on the assets of the company upon its liquidation and does not require prior conversion into another instrument - this means that the FI belongs to a class of instruments subordinated to all other classes of instruments (CI);
all FIs from CIs have the same characteristics (for example, all FIs of a given class must provide for the right to resell them, and the same formula (method) for calculating redemption or redemption is used for all of them);
The FI does not provide for any other obligation (except for that provided for in the repurchase agreement or its repayment for money) to transfer money or another FA to another company (or to exchange FA or FI on unfavorable terms) and, at the same time, this FI does not constitute an agreement that is regulated by the firm’s own DI - the issuer;
The total expected cash flows of the FI during its period of operation are determined based on profit or loss, the change in recognized NA, or the change in the fair value (FV) of the firm's recognized and unrecognized NA.

To classify a FI as a DI, the presence of the above characteristics is not enough - the issuer of this FI cannot have any other FI (or other agreement) that:

provides for total cash flows, changes in the firm's recognized NAV, or changes in the fair value (FV) of the firm's NAV (recognized and unrecognized);

leads to a significant limitation or fixation of residual income for FI holders with the right to resell.

In certain situations, the standard prohibits a firm from classifying puttable FIs as DIs (paragraph 16B IFRS 32).

When does the obligation to transfer your net assets to another company arise?

The obligation to transfer private equity (or their share) to another company upon liquidation of the company may be provided for by some financial institutions. This obligation arises due to:

the inevitability of the liquidation procedure of the company (for example, a company with a limited period of activity);
that the FI holder has the right to make a decision on liquidation.

There is an exception to the circumstances described above: a FI with a specified obligation in relation to a private equity upon liquidation is classified as a private financial entity if it has the following characteristics:

The FI gives its holder the right to a proportionate share in the private equity of the company upon its liquidation. The proportion is determined by dividing the NA into shares of equal size and then adjusted (the resulting value is multiplied by the number of shares available to the FI holder);
FI belongs to a CI, which means that it does not have priority over other claims on the assets of the company upon its liquidation and does not require conversion into another instrument before it is classified as a CI;
all FIs related to CIs must contain a provision regarding the identical contractual obligation of the issuing company to transfer a proportional share of its private equity shares upon liquidation.

The standard introduces additional and clarifying nuances to the above conditions (clause 16D IFRS 32).

Compound financial instruments

The standard introduces the concept of “composite FI” and considers it in relation to non-derivative instruments.

IMPORTANT! Non-derivative FIs are simple forms of contracts, the value of which is comparable to the value of the contractual obligation.

Examples of non-derivative FIs include:

credit and loan agreements;
bills;
bonds;
stock.

In relation to non-derivative FI, the standard requires an analysis of its conditions in order to recognize its constituent parts (components) - such elements are subject to separate classification as DF, FA or DI.

An example of such a compound FI is a bond that can be converted by its holder into a certain number of common shares of the company. Such a FI is considered a 2-component firm, consisting of:

FO (agreement on the transfer of money or other FA);
DI (a call option that gives its holder the right, during a specific time period, to convert it into a certain number of ordinary shares).

With regard to composite financial statements, the standard provides a rule according to which a company in its statement of financial position (OFP) presents separately the debt and equity components of the financial statements.

In this regard, the question of correct assessment of the components of a composite FI arises. To do this, the initial book value of the FI is distributed as follows:

a calculation is made: the amount calculated separately for the debt component is subtracted from the CV of the whole FI;
the calculation result is allocated to the equity component;
the value of the derivative elements (other than the equity component) embedded in the composite FI is included in the debt component.

After all calculations the identity must be satisfied

BS FI = BS DEBT + BS DOL,

FI BS - total book value of FI;

BS DEBT and BS DOL - the book value of the debt and equity component of FI

respectively.

No gain or loss arises when these components of a financial statement are initially recognized separately.

Are treasury shares recognized as part of financial instruments?

A company's own DI (SDI) is not recognized by FIs. In this case, the reason for their ransom does not play any role. In this situation, the standard requires the cost of treasury shares to be deducted from the firm's equity capital (EC).

There is only one exception to the above requirement: if we are talking about the firm retaining its private information on behalf of other persons (in the presence of an agency relationship). In this case, such FIs are not included in the company’s general physical financial statements.

The standard determines that a company does not have the right to recognize in profit (loss) the result of the following transactions with private financial assets:

sale;
release;
cancellation.

Such CDIs may be acquired and held by the firm itself (or other members of the consolidated group). The remuneration paid (received) in this situation is recognized directly as part of the insurance system.

Information about treasury shares is disclosed in the general financial statement or in the notes to the financial statements.

To study issues of reporting according to domestic rules, use the materials on our website:

;

How to account for interest and dividends related to a financial instrument?

In accordance with clause 35 IFRS 32 FI-related dividends, interest and gains and losses are recognized as income or expense in profit or loss.

The standard prescribes:

Amounts distributed to DI holders should be taken into account directly as part of the insurance company;
expenses on a transaction related to the insurance company are included in the reduction of the insurance company.

For example, non-cumulative preferred shares are subject to mandatory redemption in exchange for cash after 3 years, and dividends on them are paid at the discretion of the firm until the date of such redemption. Such a FI is considered composite, in which the debt component is equal to the present value of the repayment amount.

In this case:

amortization of the discount on this component is classified as interest expense and recognized in profit (loss);
Dividends paid are allocated to the equity component and are recognized as a distribution of profit (loss).

However, if part of the dividends is not paid, but is added to the redemption amount (based on a change in the underlying variable - for example, a commodity) - the entire FI is a liability, and all dividends are classified as interest expense.

Offsetting financial assets and liabilities

The standard determines that FA and FO are subject to offset with the presentation of a net amount in the FPP only if the company:

has a currently valid legal right to such set-off; And
intends to simultaneously implement the FA and execute the FO, or carry out settlements on a net basis.

It is impossible to offset a transferred asset and its corresponding liability if the accounting reflects the transfer of an asset that does not meet the criteria for derecognition.

Results

IFRS 32 is dedicated to one of the most complex accounting elements - financial instruments. Information about a firm's financial assets and liabilities, as well as its equity holdings, is of high value to users of financial statements because it helps them reliably assess the firm's financial position, results of operations, and cash flows.

IFRS 32 and 39 apply to all financial instruments except:

§ interests in subsidiaries and associated companies, as well as in joint ventures, which are accounted for in accordance with IFRS 27 “Consolidated and Individual Financial Statements”, IFRS 28 “Investments in Associates” and IFRS 31 “Joint Arrangements”;

§ rights and obligations under leases to which IFRS 17 Leases applies; however, rent receivable recognized on the lessor's balance sheet is subject to IAS 39's consideration of derecognition;

§ rights and obligations under insurance contracts, except for financial instruments that take the form of insurance contracts (or reinsurance contracts), but under which a significant share of financial risks is transferred, as well as derivative instruments embedded in insurance contracts, to which the provisions of IFRS 39 apply;

§ assets and liabilities of employers under pension plans to which IFRS 19 “Employee Benefits” applies;

§ financial guarantee agreements, including letters of credit, which provide for payments in the event that the debtor is unable to make timely payment;

§ agreements during the merger of companies that provide for compensation based on future events.

Definitions

Financial instrument is any contract that simultaneously creates a financial asset for one company and a financial liability or equity instrument for another.

Financial asset is any asset that is:

§ in cash;

§ the right to claim funds or other financial assets from another company under a contract;

§ the contractual right to exchange financial instruments with another company on potentially favorable terms;

§ an equity instrument of another company;

§ contracts in which the bank uses its own equity instruments as the means of payment under the contract for the purpose of receiving or providing a different number of shares, the value of which is fixed or equal to an amount determined on the basis of changes in the underlying variable.

Financial obligation is any obligation that is:

§ a contractual obligation to provide funds or other financial asset to another company or to exchange financial assets or financial liabilities with another company on potentially unfavorable terms;

§ an agreement for which the means of payment will or may be the bank's own equity instruments, if the agreement is either a non-derivative instrument under which the bank may have an obligation to provide a varying number of its own equity instruments, or a derivative instrument that will be settled in some way, other than exchanging a fixed number of financial assets for a fixed number of own equity instruments.

Equity instrument- is any agreement confirming the right to the share of a company's assets remaining after deducting all its liabilities.

fair value- an amount of funds sufficient to purchase an asset or fulfill a liability when making a transaction between well-informed parties who really want to complete such a transaction and independent of each other.

Derivative instrument is a financial instrument that meets the following conditions:

§ its value changes as a result of a change in an interest rate, the value of a security, the price of a commodity, an exchange rate, an index of prices or rates, a credit rating or credit index, or another variable (sometimes called an “underlying”);

§ its acquisition requires a small initial investment compared to other contracts, the rate of which reacts in a similar way to changes in market conditions;

§ calculations for it are carried out in the future.

Classification of financial assets

According to IAS 39, financial assets must be included in one of the following categories:

1. financial assets measured at fair value with changes in fair value recognized as profit or loss;

2. financial assets available for sale;

3. loans and receivables;

4. investments held to maturity.

The category of financial assets measured at fair value through profit or loss includes two subcategories. The first includes any financial asset that is accounted for upon initial recognition as a financial asset that is measured at fair value with changes in fair value recognized as profit or loss. The second category includes financial assets held for trading. All derivatives (other than those classified as hedging instruments) and financial assets that are purchased or held for sale in the near future or that have recent transactions that indicate an expectation of profit in the short term are financial assets held for trading.

Available-for-sale financial assets includes any non-derivative financial instruments that are classified on initial recognition as available-for-sale financial assets. Available-for-sale financial assets are recognized in the balance sheet at fair value. Changes in fair value are recognized directly in equity in the statement of changes in equity, excluding interest on available-for-sale financial assets, impairment losses and foreign exchange differences. Any resulting gains or losses recognized in equity are recognized as profit or loss on derecognition of the available-for-sale financial asset.

Loans and receivables Non-derivative financial assets with fixed or determinable payments are considered issued or received if they are not quoted in an active market, are not held for trading and are not classified on initial recognition as assets measured at fair value through profit or loss, or available for sale. Loans and receivables for which the owner cannot recover substantially all of the original investment, unless due to a deterioration in credit quality, are classified as available for sale. Loans and receivables are stated at amortized cost.

Investments held to maturity- financial assets with fixed or determinable payments that the bank has the intention and ability to hold to maturity, unless they meet the definition of loans and receivables and unless they are classified at initial recognition as assets measured at fair value with changes in fair value recognized. as profit or loss or available for sale.

Investments held to maturity are stated at amortized cost.

If, during the current financial year or two previous financial years, the bank sold a portion of its held-to-maturity investments (other than a sale of an insignificant amount or a sale due to a special event of an extraordinary nature that the bank could not have prevented), all other held-to-maturity investments of the bank must classified as available for sale.

Application. Application Guidance of IAS 32 Financial Instruments: Presentation

International Financial Reporting Standard (IAS) 32
"Financial instruments: presentation of information"

With changes and additions from:

1 [Deleted]

2 The purpose of this Standard is to establish the principles by which financial instruments are presented as liabilities or equity and by which financial assets and financial liabilities are offset. This standard applies to the issuer's classification of financial instruments as financial assets, financial liabilities and equity instruments; classification of related interest, dividends, losses and other income; and the conditions under which financial assets and financial liabilities are subject to offset.

Information about changes:

3 The principles set out in this Standard complement the principles for recognition and measurement of financial assets and financial liabilities in IFRS 9 Financial Instruments and the disclosure principles in IFRS 7 Financial Instruments: information disclosure".

Scope of application

Information about changes:

4 This Standard should be applied by all entities to all types of financial instruments except:

Information about changes:

(a) interests in subsidiaries, associates or joint ventures accounted for in accordance with IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and joint ventures." However, in some cases, IFRS 10, IAS 27 or IAS 28 require or permit an entity to account for interests in subsidiaries, associates or joint ventures using IFRS 9. In such cases, organizations shall apply the requirements of this standard. Entities shall also apply this Standard to all derivatives that relate to interests in subsidiaries, associates or joint ventures;

(b) the rights and obligations of employers under employee benefit plans to which IAS 19 Employee Benefits applies.

Information about changes:

(d) insurance contracts as defined in IFRS 4 Insurance Contracts. However, this Standard applies to derivatives embedded in insurance contracts if IFRS 9 requires an entity to account for them separately. In addition, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies IFRS 9 in recognizing and measuring those contracts, but shall apply IFRS 4 if the issuer elects in accordance with paragraph 4(d) of IFRS ( IFRS) 4 apply when recognizing and measuring IFRS 4;

Information about changes:

(e)financial instruments within the scope of IFRS 4 because they include a non-guaranteed opportunity to receive additional benefits. The issuer of such instruments is exempt from applying paragraphs 15 to 32 and AG25 to AG35 of this Standard to these characteristics in relation to the distinction between financial liabilities and equity instruments. However, all the requirements of this standard apply to these instruments. In addition, this Standard applies to embedded derivatives (see IFRS 9);

(f)financial instruments, contracts and obligations arising in share-based payment transactions to which IFRS 2 Share-based Payment applies, except

(i) contracts within the scope of paragraphs 8 to 10 of this Standard to which this Standard applies;

8 This Standard shall apply to those contracts for the purchase or sale of non-financial items that can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments. The exception is contracts entered into and held for the purpose of receiving or delivering a non-financial item in accordance with the entity's expected purchasing, selling or consumption needs. However, this Standard shall apply to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 5A of IAS 39 Financial Instruments: Recognition and Measurement.

9 There are various ways in which a net settlement may be made in cash or another financial instrument, or by exchange of financial instruments, in a contract to buy or sell a non-financial item. These include:

(a) authorization by the terms of the contract for either party to settle net in cash or another financial instrument, or by exchange of financial instruments;

(b) cases where the possibility of net settlement in cash or another financial instrument, or by exchange of financial instruments, is not clearly determined by the terms of the contract, but the entity has a practice of net settlement of similar contracts with cash or another financial instrument, or by exchange of financial instruments (either by concluding a netting agreement with the counterparty, or by selling the agreement before its execution or expiration);

(c) the entity has a history of working with similar contracts to receive delivery of an asset and sell it within a short period after delivery in order to profit from short-term price fluctuations or dealer markups; And

(d) the ability to quickly convert the non-financial item that is the subject of the contract into cash.

The agreement to which clauses apply. (b) or (c) is not entered into for the purpose of receiving or delivering the non-financial item in accordance with the entity's expected purchasing, selling or consumption needs and is therefore within the scope of this Standard. Other contracts to which paragraph 8 applies are reviewed to determine whether they have been entered into and are being performed for the purpose of receiving or delivering a non-financial item in accordance with the entity's expected purchasing, selling or consumption needs and, therefore, whether they are within the scope of application of this standard.

10 A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments in accordance with paragraph 9(a) or (d), is within the scope of this Standard. . Such a contract cannot be entered into for the purpose of receiving or delivering a non-financial item in accordance with the entity's expected purchasing, sales or consumption needs.

11 The following terms are used in this standard with the meanings specified:

Financial instrument is a contract that results in a financial asset for one enterprise and a financial liability or equity instrument for another.

Financial asset is an asset that is

(a) in cash;

(b) an equity instrument of another entity;

(i) receive cash or other financial asset from another entity; or

(ii) exchange financial assets or financial liabilities with another entity on terms that are potentially beneficial to the entity; or

(d) a contract that will or may be settled by delivery of its own equity instruments and is

(i) a non-derivative for which the entity will receive, or may be required to receive, a variable number of its own equity instruments; or

(ii) a derivative that will or may be settled other than by exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For these purposes, rights, options or warrants to acquire a fixed number of an entity's own equity instruments for a fixed amount of any currency are equity instruments if the entity offers those rights, options or warrants on a pro rata basis to all of its holders who are members of the same class of non-operating equity interests. tools owned by the company. Also for these purposes, own equity instruments impose an obligation on the entity to deliver to another party a pro rata share of the entity's net assets only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, which are contracts to receive or deliver own equity instruments at a future date.

Financial obligation is an obligation that is:

(a) a contractual obligation

(ii) exchange financial assets or financial liabilities with another entity on terms that are potentially unfavorable to the entity; or

(b) a contract that will or may be settled by delivery of its own equity instruments and is

(i) a non-derivative for which the entity will deliver, or may be required to deliver, a variable number of its own equity instruments; or

(ii) a derivative that will or may be settled other than by exchanging a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For these purposes, an entity's own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose an obligation on the entity to deliver to another party a proportionate share of the entity's net assets only on liquidation, and that are classified as equity instruments. instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts to receive or deliver own equity instruments at a future date.

As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the characteristics and satisfies all of the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.

Equity instrument- this is an agreement confirming the right to a residual share in the assets of the enterprise remaining after deducting all its liabilities.

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 (see IFRS 13 Fair Value Measurement).

Resaleable instrument is a financial instrument that gives the holder the right to sell the instrument back to its issuer for cash or other financial assets, or that automatically returns to its holder upon the occurrence of an uncertain future event, the death or retirement of the instrument holder.

Information about changes:

12. The following terms are defined in Appendix A of IFRS 9 or paragraph 9 of IAS 39 Financial Instruments: Recognition and Measurement and are used in this Standard with the meanings specified in IAS 39 and IFRS 9 :

Amortized cost of a financial asset or financial liability

Derecognition of a derivative instrument

Effective interest rate method

Financial guarantee agreement

Financial liability at fair value through profit or loss

Firm commitment

Predicted operation

Hedging effectiveness

Hedged item

Hedging instrument

Intended for trade

Standard procedure for buying or selling

Transaction costs.

13 In this Standard, the terms “contract” and “contractual” refer to an agreement between two or more parties that has clear economic consequences that the parties have little or no ability to avoid, usually because the law provides for the enforcement of such consequences. agreements in court. Agreements, and therefore financial instruments, can take different forms and do not necessarily have to be in writing.

14 In this Standard, the term “enterprise” refers to individuals, partnerships, joint stock companies, trusts and government entities.

Presentation of information

15 The issuer of a financial instrument shall, on initial recognition, designate the instrument or its constituent parts as a financial liability, a financial asset or an equity instrument, in accordance with the content of the contract and the definitions of a financial liability, a financial asset and an equity instrument.

16 When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument only if it satisfies both conditions (a) and (b) below:

(a) the instrument does not contain a contractual obligation:

(i) transfer cash or other financial asset to another entity; or

(ii) exchange financial assets or financial liabilities with another entity on terms potentially unfavorable to the issuer;

(b) if the instrument will or can be settled by delivery of the issuer's own equity instruments, it is:

(i) a non-derivative for which the issuer has no contractual obligation to deliver a variable number of its own equity instruments; or

(ii) a derivative that will be settled by the issuer only by exchanging a fixed amount of cash or other financial asset for a fixed number of its own equity instruments. For these purposes, rights, options or warrants to acquire a fixed number of an entity's own equity instruments for a fixed amount of any currency are equity instruments if the entity offers those rights, options or warrants on a pro rata basis to all of its holders who are members of the same class of non-operating equity interests. tools owned by the company. In addition, for these purposes, the issuer's own equity instruments do not include instruments that have all the characteristics and conditions of paragraphs 16A and 16B or paragraphs 16C and 16D, or instruments that are contracts for the receipt or delivery of the issuer's own equity instruments at a future date.

A contractual obligation, including an obligation arising from a financial derivative, that will or may result in the receipt or delivery of the issuer's own equity instruments, but does not satisfy conditions (a) and (b) above, is not an equity instrument. As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the characteristics and satisfies all of the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.

Resaleable instruments

16A A puttable financial instrument includes a contractual obligation by the issuer to repurchase or redeem the instrument in exchange for cash or another financial asset upon exercise of the put option. As an exception to the definition of a financial liability, an instrument that includes such a liability is classified as an equity instrument if it has the following characteristics:

(a) Entitles the owner to a pro rata share of the net assets of the business in the event of its liquidation. The net assets of a business are those assets that remain after deducting all other claims on its assets. The proportionate share is determined by:

(c) All financial instruments in a class subordinate to all other classes of instruments have identical characteristics. For example, they must all have a putback right, and all instruments in a given class must use the same formula or other method of calculating the putback or redemption price.

(d) Apart from the issuer's contractual obligation to repurchase or redeem the instrument in exchange for cash or another financial asset, the instrument does not include any other contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another enterprise on terms that are potentially unfavorable to the enterprise; The instrument is also not a contract that is or can be settled out of the entity's own equity instruments as set out in subparagraph (b) of the definition of financial liability.

(e)The total expected cash flows attributable to the instrument over the life of the instrument depend primarily on profit or loss, changes in recognized net assets, or changes in the fair value of the entity's recognized and unrecognized net assets over the life of the instrument (except any consequences that this tool leads to).

16B To classify an instrument as an equity instrument, in addition to having all of the above characteristics, the issuer must not have any other financial instrument or contract that involves:

(b) the substantive consequences of limiting or fixing residual income for holders of the instruments

with the right of resale.

paragraph 16A, providing terms similar to the terms of an equivalent contract that might be entered into between a party other than the owner of the instrument and the issuing entity. If an entity cannot determine whether this condition is met, it shall not classify the puttable instrument as an equity instrument.

Instruments or components of instruments that impose an obligation on an entity to deliver to another party a proportionate share of the net assets of the entity only upon liquidation

16C Some financial instruments include a contractual obligation by the issuing entity to deliver to another entity a proportionate share of its net assets only on liquidation. A liability arises because the probability of liquidation is high and is beyond the control of the entity (for example, an entity with a limited life) or the probability of liquidation is low but the holder of the instrument is given a choice. As an exception to the definition of a financial liability, an instrument that includes such a liability is classified as an equity instrument if it has the following characteristics:

(i) dividing the net assets of the enterprise on its liquidation into units of equal size; And

(ii) multiplying this amount by the number of units held by the owner of the financial instrument.

(b) The instrument belongs to a class of instruments subordinate to all other classes of instruments. To include a tool in such a class:

(i) must not have any priority over other claims on the assets of the enterprise on its winding up, and

(ii) need not be converted into another instrument before it is included in a class of instruments subordinate to all other classes of instruments.

(c) All financial instruments in a class subordinate to all other classes of instruments must have an identical contractual obligation on the issuing entity to deliver a proportionate share of its net assets on liquidation.

16D To classify an instrument as an equity instrument, in addition to having all of the above characteristics, the issuer must not have any other financial instrument or contract that involves:

(a) total cash flows that depend primarily on profit or loss, changes in recognized net assets, or changes in the fair value of the entity's recognized and unrecognized net assets (excluding any consequences resulting from the instrument or contract), and

(b) the effect of limiting or substantively fixing residual income on holders of puttable instruments.

For purposes of applying this condition, an entity shall not treat non-financial contracts with the holder of the instrument described in paragraph 16C as having terms that are similar to the terms of an equivalent contract that might be entered into between a party other than the instrument holder and the issuing entity. If an entity cannot determine whether this condition is met, it shall not classify the instrument as an equity instrument.

Reclassification of puttable instruments and instruments that impose an obligation on the entity to deliver to another party a proportionate share of the entity's net assets only upon liquidation

16E An entity shall designate a financial instrument as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D from the date on which the instrument has all the characteristics and satisfies the conditions in those paragraphs. An entity shall reclassify a financial instrument as of the date on which the instrument ceases to meet all of the characteristics or satisfy all of the conditions in these paragraphs. For example, if an entity redeems all of its issued non-puttable instruments and some puttable instruments remaining outstanding have all the characteristics and satisfy all of the conditions in paragraphs 16A and 16B, the entity shall reclassify those puttable instruments as as equity instruments from the date on which the entity redeems all instruments without the right to resell.

16F An entity shall account for the reclassification of an instrument in accordance with paragraph 16E as follows:

(a) An entity shall reclassify the equity instrument as a financial liability on the date on which the instrument ceases to meet all the characteristics or satisfy all of the conditions in 16A and 16B or paragraphs 16C and 16D. The financial liability shall be measured at the fair value of the instrument at the date of reclassification. An entity shall recognize in equity any difference between the carrying amount of the equity instrument and the fair value of the financial liability at the date of reclassification.

(b) An entity shall reclassify a financial liability as an equity liability on the date on which the instrument has all the characteristics and satisfies the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. The equity instrument should be measured at the carrying amount of the financial liability at the date of reclassification.

No contractual obligation to deliver cash or another financial asset (paragraph 16(a))

17 Except as described in paragraphs 16A and 16B or paragraphs 16C and 16D, the essential feature of a financial liability that distinguishes it from an equity instrument is the existence of a contractual obligation on one party to the financial instrument (the issuer) to transfer cash or another financial asset to the other party ( owner), or exchange financial assets or financial liabilities with the owner on terms potentially unfavorable to the issuer. Although the owner of an equity instrument may be entitled to receive a proportionate share of dividends or other distributions from capital, the issuer has no contractual obligation to make such distributions because it cannot be required to transfer the cash or other financial asset to another party.

18 The classification of a financial instrument in an entity's statement of financial position is determined by its content and not its legal form. The content usually matches the legal form, but not always. Some financial instruments have the legal form of capital but are liabilities in substance, while others may combine features of both equity instruments and financial liabilities. For example:

(a) a preference share that requires redemption by the issuer for a fixed or determinable amount on a fixed or determinable date in the future, or gives the holder the right to require the issuer to redeem the instrument on or after a specified date at a fixed or determinable price, is a financial liability;

(b) a financial instrument that gives its holder the right to return the instrument to the issuer in exchange for cash or another financial asset (“puttable instrument”) is a financial liability except for instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. A financial instrument is a financial liability even when the amount of cash or other financial asset is determined by reference to an index or other item that may increase or decrease. The ability of the holder to return the instrument to the issuer in exchange for cash or another financial asset means that the puttable instrument meets the definition of a financial liability, except for instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. For example, mutual funds, unit trusts, partnerships and some cooperative entities may give their shareholders or members the right to redeem their shares from the issuer at any time for cash, resulting in the classification of the shareholders' or members' interests as financial liabilities other than instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. However, classification of an instrument as a financial liability does not prohibit the use of item titles such as “net assets attributable to unitholders” and “change in net assets attributable to unitholders” in the financial statements themselves of an entity that has no contributed capital (for example, some mutual and mutual funds, see Illustrative Example 7), or using additional disclosures to show that the aggregate holdings of their members include items such as capital reserves that meet the definition of capital and puttable instruments that do not (see illustrative example 8).

19 If an entity does not have an absolute right to avoid delivering cash or another financial asset to settle a contractual liability, the liability meets the definition of a financial liability except for instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D . For example:

(a) a limitation on the entity's ability to satisfy a contractual obligation, such as the unavailability of foreign currency or the need to obtain regulatory approval for payment, does not relieve the entity of its contractual obligations or terminate the holder's contractual right in the instrument;

(b) a contractual obligation that is contingent on the other party to the transaction exercising its right to repayment is a financial liability because the entity does not have an unconditional right to avoid the transfer of cash or another financial asset.

20 A financial instrument that does not expressly provide for a contractual obligation to deliver cash or another financial asset may establish one implicitly through terms and conditions. For example:

(a) the financial instrument may contain a non-financial liability that must be settled if, and only if, the entity fails to make a distribution or settle the instrument. If an entity can avoid transferring cash or another financial asset only by settling a non-financial liability, then the financial instrument is a financial liability;

(b) a financial instrument is a financial liability if its terms specify that, upon settlement, the entity will transfer

(i) either cash or other financial asset; or

(ii) its own shares, the value of which will significantly exceed the amount of cash or other financial asset.

Although the entity does not have an express contractual obligation to deliver cash or another financial asset, the amount to be settled in shares is such that the entity will settle in cash. In either case, the owner is essentially guaranteed to receive an amount that is at least equal to the cash settlement amount (see clause 21).

Settlement in the entity's own equity instruments (paragraph 16(b))

21 A contract is not an equity instrument merely because it may give rise to the receipt or transfer of the entity's own equity instruments. An entity may have a contractual right or obligation to receive or transfer an amount of its own shares or other equity instruments that is modified so that the fair value of the entity's own equity instruments to be received or transferred is equal to the amount of the contractual right or obligation. In this case, the amount of the right or obligation stipulated by the contract may be a fixed amount or an amount that changes, partially or fully, depending on changes in a variable other than the market price of the enterprise’s own equity instruments (for example, an interest rate, quotes of a commodity or financial instrument). Two examples of such contracts are: (a) a contract for the delivery of an entity's own equity instruments with a total value of CU100, and (b) a contract for the delivery of an entity's own equity instruments with a total value equal to the value of 100 ounces of gold. Such a contract is a financial liability of the enterprise, even though the enterprise must or can settle it by delivery of its own equity instruments. It is not an equity instrument because the entity uses a variable number of its own equity instruments to settle the contract. Accordingly, the agreement does not certify the right to a residual share in the assets of the enterprise remaining after deducting all its liabilities.

22 Except as provided in paragraph 22A, a contract that will be settled by an entity by transferring (or receiving) a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument. For example, a written stock option that gives the counterparty the right to buy a fixed number of shares of a business at a fixed price or in exchange for bonds of a fixed principal amount is an equity instrument. Changes in the fair value of a contract resulting from fluctuations in market interest rates that do not affect the amount of cash or other asset to be paid or received or the number of equity instruments to be received or delivered when the contract is settled do not prevent the contract from being classified as an equity instrument. Any consideration received (such as the premium received for an option or warrant issued on the entity's own shares) is charged directly to equity. Any consideration paid (such as the premium paid for an option purchased) is deducted directly from equity. Changes in the fair value of an equity instrument are not recognized in the financial statements.

22A If the entity's own equity instruments to be received or transferred by the entity on settlement of the contract are puttable financial instruments that have all the characteristics and satisfy the conditions in paragraphs 16A and 16B, or instruments that impose an obligation on the entity to deliver to another party proportionate share of the net assets of the enterprise only upon its liquidation, which have all the characteristics and satisfy the conditions provided for in paragraphs 16C and 16D, this agreement is a financial asset or financial liability. This includes a contract that will be settled by an entity by giving or receiving a fixed amount of its own equity instruments in exchange for a fixed amount of cash or another financial asset

Information about changes:

23 Except as set out in paragraphs 16A and 16B or paragraphs 16C and 16D, a contract containing an entity's obligation to acquire its own equity instruments for cash or another financial asset gives rise to a financial liability equal to the present value of redemption (eg the present value of the execution of a forward repurchase agreement, the exercise price of an option or other redemption amount). This is true even if the contract itself is an equity instrument. One example is an entity's obligation to purchase its own equity instruments for cash under a forward contract. The financial liability is initially recognized at the present value of the redemption amount and is reclassified from equity. Subsequently, the financial liability is measured in accordance with IFRS 9. If the contract expires without performance, the carrying amount of the financial liability is reclassified to equity. An entity's contractual obligation to purchase its own equity instruments gives rise to a financial liability at the present value of the redemption amount, even if the obligation to purchase is conditional on another party exercising its right to demand redemption (for example, a written put option giving the other party the right to sell the entity its own equity instruments at a fixed price).

24 A contract that will be settled by an entity by giving or receiving a fixed amount of its own equity instruments in exchange for a variable amount of cash or another financial asset is a financial asset or financial liability. An example of such a contract is a contract in which an entity must transfer 100 of its own equity instruments in exchange for an amount of cash equal to the value of 100 ounces of gold.

Contingent repayment provisions

25 A financial instrument may provide for the entity to deliver cash or another financial asset, or to settle it in another manner characteristic of a financial liability, upon the occurrence or non-occurrence of uncertain future events (or uncertain circumstances) that are beyond its control. neither the issuer nor the holder of the instrument, such as changes in a stock index, consumer price index, interest rate, tax requirements, or the issuer's future revenues, net income or the issuer's liability-to-equity ratio. The issuer of such an instrument does not have an unconditional right to avoid delivering the cash or other financial asset (or settling it in another manner characteristic of a financial liability). Therefore, this instrument is a financial liability of the issuer unless

(a) the part of a settlement provision that may require settlement in cash or another financial asset (or in another manner characteristic of a financial liability) is not unique;

(b) the issuer of such an instrument may be required to be settled in cash or another financial asset (or in another manner characteristic of a financial liability) only if the issuer is liquidated; or

Payment options

26 If a financial derivative gives one party the right to choose how it will be settled (for example, the issuer or holder may choose to settle net in cash or by exchanging shares for cash), then it is a financial asset or financial liability. unless all calculation options result in the financial instrument being classified as an equity instrument.

27 An example of a derivative financial instrument with settlement options that is a financial liability would be a stock option, the net settlement of which, depending on the choice of the issuer, can be made in cash or by exchanging treasury shares for cash. Similarly, certain contracts to buy or sell non-financial items in exchange for an entity's own equity instruments are within the scope of this Standard because they may be settled by delivery of the non-financial asset or by net settlement in cash or another financial instrument (see points 8-10). Such contracts are financial assets or financial liabilities, but not equity instruments.

Combined financial instruments (see also paragraphs AG30–AG35 and illustrative examples 9–12)

28 The issuer of a non-derivative financial instrument shall review the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments in accordance with paragraph 15.

29 An entity separately recognizes components of a financial instrument that (a) create a financial liability of the entity and (b) give the holder of the instrument an opportunity to decide whether to convert it into an equity instrument of the entity. For example, a bond or similar instrument that can be converted by the owner into a specified number of shares of a business's common stock is a compound financial instrument. From an enterprise's perspective, such an instrument has two components: a financial liability (a contractual agreement to provide cash or another financial asset) and an equity liability (a call option that gives the holder the right, within a specified period of time, to convert it into a specified number of ordinary shares of the enterprise). The issuance of such an instrument has substantially the same economic effect as the simultaneous issuance of an equity instrument with a call option and warrants to purchase common shares or the issuance of an equity instrument with a detachable share purchase warrant. Accordingly, an entity always presents the liability and equity components separately in the statement of financial position.

30 The allocation of the liability and equity components of a convertible instrument is not revised because of a change in the likelihood of realizing the conversion option, even though it may appear that exercise of the option has become economically beneficial to some holders of the instrument. Owners will not necessarily act in the expected manner because, for example, the tax consequences of such a conversion may differ from one owner to another. Moreover, the probability of conversion will change from time to time. An entity's contractual obligation to make future payments remains outstanding until it is converted, the instrument matures, or some other transaction occurs.

Information about changes:

33 If an entity buys back its own equity instruments, those instruments (“treasury shares”) must be deducted from equity. No gain or loss arising on the purchase, sale, issue or cancellation of the entity's own equity instruments shall be recognized in profit or loss. Such treasury shares may be acquired and held by the entity itself or by other members of the consolidated reporting group. The consideration paid or received must be recognized directly in equity.

34 The amount of treasury shares repurchased from shareholders shall be disclosed separately in the statement of financial position or in the notes in accordance with IAS 1 Presentation of Financial Statements. An entity discloses information in accordance with IAS 24 Related Party Disclosures if the entity buys back its own equity instruments from related parties.

Information about changes:

Interest, dividends, losses and gains (see also paragraph AG37)

35 Interest, dividends, losses and gains relating to a financial instrument or its component classified as a financial liability shall be recognized as an expense or income in profit or loss. Funds distributed to owners of equity instruments must be recognized by the organization directly as part of capital. Capital transaction costs should be charged as a reduction in capital.

35A. Income taxes relating to distributions to holders of equity instruments and capital transaction costs must be accounted for in accordance with IAS 12 Income Taxes.

36 The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses and other income associated with the instrument are recognized as expense or income in profit or loss. Therefore, dividend payments on shares that are fully recognized as a liability are classified as an expense, similar to interest on bonds. Similarly, gains and losses associated with the extinguishment or refinancing of financial liabilities are recognized in the income statement, while the extinguishment or refinancing of equity instruments is reported as changes in equity. Changes in the fair value of an equity instrument are not recognized in the financial statements.

37 An entity normally incurs various costs when issuing or acquiring its own equity instruments. These costs may include registration and other statutory fees, fees to lawyers, auditors and other professional advisors, and printing and stamp duties. Capital transaction costs should be charged as a deduction to capital to the extent that they are additional costs attributable directly to the capital transaction and which could have been avoided in the absence of such a transaction. The cost of a capital transaction that is terminated without completion is recognized as an expense.

38 Transaction costs associated with the issue of the combined instrument are allocated to the liability and equity components in proportion to the distribution of proceeds. Transaction costs associated with the implementation of two or more transactions (for example, when issuing shares simultaneously with the implementation of procedures for listing shares of another issue on the stock exchange) are allocated between these transactions on a reasonable basis, which should be consistently applied when carrying out similar transactions.

39 The amount of transaction costs charged as a reduction in equity for the period is disclosed separately in accordance with IAS 1.

40 Dividends classified as an expense may be presented in the statement(s) of profit or loss and other comprehensive income, either with interest on other liabilities or as a separate line item. In addition to the requirements of this Standard, the disclosure of interest and dividends is also subject to the requirements of IAS 1 and IFRS 7. In some cases, because of the differences between interest and dividends with respect to issues such as tax deductibility, it is advisable to disclose them separately in the statement(s) of profit or loss and other comprehensive income. Disclosure of tax consequences is made in accordance with IAS 12.

41 Gains and losses attributable to changes in the carrying amount of a financial liability are recognized as income or expense in profit or loss even if they relate to an instrument containing a right to a residual interest in the assets of the entity in exchange for cash or another financial asset ( see paragraph 18(b)). IAS 1 requires an entity to present the gain or loss arising from the remeasurement of that instrument separately in the statement of comprehensive income itself when such presentation is relevant to explain the entity's results of operations.

Information about changes:

42 A financial asset and a financial liability shall be offset, and the statement of financial position shall report the net amount, if and only if the entity:

(a) has a currently enforceable right to set off the recognized amounts; And

(b) intends to settle on a net basis or to realize the asset and settle the liability simultaneously.

When accounting for a transfer of a financial asset that does not meet the derecognition criteria, an entity shall not offset the transferred asset and the corresponding liability (see IFRS 9 paragraph 3.2.22).

Information about changes:

43 This Standard requires the reporting of financial assets and financial liabilities on a net basis when this reflects the entity's expected future cash flows from settlements of two or more separate financial instruments. When an entity has the right and intention to receive or pay a net amount, it essentially has only one financial asset or one financial liability. In other cases, financial assets and financial liabilities are presented separately based on their characteristics as resources or liabilities of the entity. An entity shall make the disclosures required by paragraphs 13B to 13E of IFRS 7 for recognized financial instruments within the scope of paragraph 13A of IFRS 7.

44 Offsetting recognized financial assets and financial liabilities and reporting their net amount differs from derecognition of a financial liability or asset. While offsetting does not result in the recognition of a gain or loss, derecognition of a financial instrument not only results in the derecognition of a previously recognized item from the statement of financial position, but may also result in the recognition of a gain or loss.

45 Right of set-off is the legal right of a borrower, whether contractually or otherwise, to pay off or cancel all or part of the amount due to the creditor by setting off against it the amount due from the creditor. In the event of an emergency, a borrower may have a legal right to apply the amount due from a third party against the amount due to the lender, provided that there is an agreement between the three parties clearly establishing the borrower's right to set off claims. Since the right of set-off is a legal right, the conditions under which the right is exercised may vary from jurisdiction to jurisdiction and the laws applicable to the relationship between the parties must be taken into account.

46 The existence of a legally enforceable right to offset a financial asset and a financial liability affects the rights and obligations associated with the financial asset and financial liability and may affect an entity's exposure to credit and liquidity risk. However, the existence of such a right, in itself, does not provide sufficient grounds for offset. In the absence of an intention to exercise this right or to make a simultaneous settlement, the amount and timing of future cash flows remain unchanged. Where an entity intends to exercise its right or settle simultaneously, presenting the asset and liability on a net basis better reflects the amount and timing of expected future cash flows and the risks to which those flows are exposed. The intention of one or both parties to settle on a net basis without the existence of a corresponding legal right is not a sufficient basis for set-off, since the rights and obligations associated with the individual financial asset and financial liability remain unchanged.

47 An entity's intention to settle certain assets and liabilities may be influenced by its normal business practices, financial market requirements and other circumstances that may limit its ability to settle net or settle simultaneously. If an entity has a right of set-off but does not intend to either net or realize the asset while satisfying the liability, the effect of that right on the credit risk to which the entity is exposed is disclosed in accordance with paragraph 36 of IFRS 7.

48 Simultaneous settlement of two financial instruments can occur, for example, through a clearing house in an organized financial market or in an exchange directly between the parties to the transaction. Under these conditions, the cash flows are essentially equivalent to a single net amount and there is no exposure to credit or liquidity risk. In other cases, an entity may settle two instruments by receiving and paying separate amounts, exposing credit risk for the entire amount of the asset or liquidity risk for the entire amount of the liability. Such risks may be significant, although relatively short-lived. Accordingly, the sale of a financial asset and the settlement of a financial liability are considered simultaneous only when the transactions occur at the same time.

49 The conditions listed in paragraph 42 are not generally satisfied, and set-off is usually not appropriate when

IFRS 32 and IFRS 39 Financial instruments

International Financial Reporting Standards (IFRS; International Financial Reporting Standards) - a set of documents (standards and interpretations) regulating the rules for the preparation of financial reporting necessary for external users to make economic decisions regarding the enterprise.

IFRS, unlike some national reporting rules, are standards based on principles rather than on rigidly written rules. The goal is that in any practical situation, drafters can follow the spirit of the principles, rather than trying to find loopholes in clearly written rules that would circumvent any basic provisions. Among the principles: the accrual principle, the principle of going concern, prudence, appropriateness and a number of others.

The purpose of this work is to consider in detail IFRS 32 “Financial Instruments - Presentation” and IFRS 39 “Financial Instruments - Recognition and Measurement”.

Financial instruments constitute a significant part of the assets and liabilities of many organizations, especially credit institutions. Financial instruments play a leading role in ensuring the efficient functioning of financial markets. Over the past three decades, the market for financial instruments has grown significantly, both quantitatively and qualitatively; its development was accompanied by the emergence of more and more new types of financial instruments, including derivatives. In modern conditions, banks and companies are not limited to using traditional primary instruments, resorting to complex risk management tools where interrelated financial instruments are actively used.

In response to the development of financial markets, the IFRS Committee developed International Financial Reporting Standards (IAS) 32 and 39. Moreover, the first draft standard on financial instruments, issued in the early 90s of the last century, addressed the issues of presentation and disclosure of information on financial instruments together with issues of their recognition and evaluation. Due to their complexity, these questions have been divided into two standards (IAS 32 and IAS 39, respectively). International Standards 32 and 39 have been revised and updated numerous times since their publication.

The differences between standards 32 and 39 are determined by their different scope of application. Thus, IFRS 32 “Financial Instruments: Disclosure and Presentation” considers the classification of financial instruments (into financial assets, financial liabilities and equity instruments), some aspects of the recognition of financial instruments in financial statements (for example, dividing them into a liability element and an equity element), netting of financial instruments and related interest, dividends, profits and losses, and also establishes disclosure requirements for all types of financial instruments and the risks associated with them in the notes to the financial statements. On the contrary, IFRS 39 “Financial Instruments: Recognition and Measurement” addresses the issues of recognition (derecognition) of financial assets and financial liabilities, their classification, the procedure for the initial and subsequent measurement of various groups of financial assets and financial liabilities, as well as the most complex issues - special accounting for hedging.

IFRS 32 Financial Instruments - Presentation

Based on the general situation, the following can be noted:

National Financial Reporting Standard 32 “Financial Instruments: Presentation of Information” (NFRS 32) (hereinafter referred to as the Standard) was developed in order to implement the Main Directions of the Monetary Policy of the Republic of Belarus for 2007, approved by the Decree of the President of the Republic of Belarus dated November 30, 2006.

The requirements established by this Standard are mandatory for execution by the National Bank of the Republic of Belarus, banks and non-bank financial institutions of the Republic of Belarus established in accordance with the legislation (hereinafter referred to as banks).

The purpose of this Standard is to define:

a) requirements applied when classifying financial instruments into financial assets, financial liabilities, and equity instruments;

b) principles for presenting financial instruments as financial liabilities or own equity instruments in financial statements;

c) principles of recognition and presentation in financial statements of interest income, dividends, other income and expenses related to financial instruments;

d) the circumstances under which financial assets and financial liabilities are offset upon recognition.

For the purposes of this Standard, the following terms have the following meanings:

financial instrument- a security or agreement, as a result of which a financial asset simultaneously arises in one organization and

a financial liability or equity instrument of another entity;

financial asset- an asset that is:

b) the right to receive funds or other financial assets from another organization under a security or agreement (hereinafter referred to as the agreement);

c) the right to exchange financial assets or financial liabilities with another organization under an agreement on terms that are favorable to the bank;

d) an equity instrument of another legal entity;

e) an agreement, regardless of whether it is a derivative instrument or not, the settlement of which is carried out or can be carried out by receiving a variable (non-fixed) number of the bank’s own equity instruments;

financial liability- an obligation that is:

the obligation to provide another organization in accordance with the agreement with funds or other financial assets;

the obligation to exchange financial assets or financial liabilities with another organization in accordance with the agreement on terms that are unfavorable for the bank;

an agreement, regardless of whether it is a derivative instrument or not, the settlement of which is or may be carried out by transfer of a variable (non-fixed) number of the bank’s own equity instruments;

equity instrument- an agreement that confirms the right to a share in the capital of a legal entity;

own equity instrument- equity instrument issued by the bank (common (ordinary) and preferred shares);

complex financial instrument- a financial instrument that contains both an element of financial liability and an element of capital;

organization- a general term that includes legal entities (banks, non-banking financial organizations, commercial organizations, non-profit organizations, government bodies), individual entrepreneurs and individuals;

fair value- the amount for which it is possible to exchange assets or settle obligations between knowledgeable parties who are willing to make such a transaction and independent of each other.

This Standard applies to contracts for the purchase or sale of non-financial assets (except for precious metals - for the National Bank of the Republic of Belarus), the settlement of which is made in cash on a net basis or other financial instruments or through the exchange of financial assets and financial liabilities. This Standard does not apply to contracts entered into for the purpose of acquiring and further using non-financial assets.

When recognizing the classification of financial instruments, the following aspects are disclosed:

On initial recognition, the bank classifies a financial instrument as a financial liability, a financial asset or its own equity instrument in accordance with the subject matter of the contract and the definitions of “financial liability”, “financial asset” and “treasury equity instrument”.

It should also be noted that the Bank recognizes, measures and derecognises financial assets and financial liabilities, including complex financial instruments, in accordance with the requirements of IFRS 39.

There are some peculiarities in the presentation of individual financial instruments in financial statements.

Some financial instruments may have the legal form of their own equity instrument but be financial liabilities in economic substance, while others may combine both the characteristics of their own equity instruments and financial liabilities. For such financial instruments, the bank additionally provides relevant information in the notes to the financial statements by disclosing it based not so much on their legal form, but rather on their economic content.

A financial instrument is a financial liability if the bank is given the opportunity to choose a settlement method: by providing cash or other financial assets, or its own equity instruments, the value of which significantly exceeds the amount of cash or other financial assets.

A financial instrument is a financial liability or a financial asset, respectively, that has a contractual right to receive or an obligation to deliver a variable number of its own equity instruments that have a value equivalent to the amount of the contractual rights or obligations.

A financial instrument is classified as a financial liability if the method of repayment of the financial instrument depends on the outcome of future uncertain events (circumstances) beyond the control of both the issuing bank and the owner of the financial instrument.

When presenting a complex financial instrument, the bank allocates its carrying amount into the elements of financial liability and equity. In this case, the capital element includes the value remaining after deducting the fair value of the financial liability (the fair value of which can be reliably measured) from the value of the complex financial instrument.

When the elements of a complex financial instrument are presented separately in financial statements, income and expenses do not arise.

Income and expenses associated with the issue of a complex financial instrument are presented as elements of a financial liability and equity in proportion to the distribution of proceeds.

The presentation of the elements of a complex financial instrument in the notes to the financial statements remains unchanged until the obligations under it are settled.

When presenting dividends, interest and other income and expenses in the income statement and/or in equity, consideration must be given to the classification and presentation of the financial instrument as a financial liability or an equity instrument. Thus, dividends on preference shares classified as financial liabilities are presented in the income statement.

Income and expenses for the issue, acquisition, repurchase, sale of own equity instruments are presented in capital.

Expenses on transactions in own equity instruments that do not take place are presented in the income statement.

IFRS 39 Financial Instruments - Recognition and Measurement

The purpose of IFRS No. 39 “Financial Instruments: Recognition and Measurement” is to establish principles for the recognition and measurement of financial assets.

Definitions related to recognition and measurement

Amortized cost of a financial asset or financial liability- the amount at which financial assets or liabilities are measured at initial recognition, less payments of principal, reduced or increased by the amount of cumulative amortization, using the effective interest method, of the difference between cost and maturity, and less the amount of the reduction (directly or through the use of an allowance account) for impairment or bad debts.

Effective interest rate method -A method of calculating the amortized cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and allocating interest income or interest expense over the relevant period. Effective interest rate- the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity must calculate the cash flows taking into account all the contractual terms of the financial instrument (for example, prepayment rights, call options and similar options), but must not take into account future credit losses. The calculation includes all fees and amounts paid or received by the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Derecognition- exclusion of a previously recognized financial asset or financial liability from the balance sheet of an enterprise.

fair value- the amount for which an asset can be exchanged or an obligation fulfilled in a transaction between knowledgeable, willing parties in an independent manner.

Standard procedure for buying or selling- the purchase or sale of a financial asset under a contract whose terms require delivery of the asset within a period of time established by the rules or agreements accepted in the relevant market.

Transaction costs- additional costs directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. Incremental costs are costs that would not have arisen if the entity had not acquired, issued or sold the financial instrument. .

Derivative instrument- is a financial instrument or other contract that has the following characteristics: its value is subject to change due to fluctuations in interest rates, security rates, exchange rates, price or rate indexes and other variables; there is no need for initial investment to purchase it; calculations for it will be made in the future.

classification by purpose - for sale: acquired for sale or repurchase in the short term; part of a portfolio of identifiable financial instruments; derivative instrument (except if the derivative instrument is a hedging instrument);

Financial assets must be determined on initial recognition at fair value through profit or loss, except for investments in equity instruments for which fair value is not reliably measured.

Embedded derivativeis a component of a complex financial instrument that affects cash flows. A derivative that is attached to a financial instrument but is contractually transferred independently of that instrument is not an embedded derivative but a separate financial instrument. Conditions for separating an embedded derivative from the host contract:

the economic characteristics and risks of the embedded derivative are not interrelated with the economic characteristics and risks of the host contract;

the individual instrument meets the definition of a derivative.

This standard applies to all types of financial instruments. The exceptions are:

interests in subsidiaries, associated organizations and joint ventures;

the rights and obligations of employers under employee benefit plans;

rights and obligations under lease agreements;

rights and obligations that arose under insurance contracts;

financial guarantee agreements (including letters of credit and other loan repayment guarantees);

agreements on contingent consideration in business combinations;

loan obligations that are not repaid by offsetting counterclaims in cash or other financial instruments.

Based on the above, we can conclude that correctly accounting for financial instruments is not a simple task that requires the development of a certain approach and thinking. In order to reflect a particular financial instrument, it is necessary to understand the nature of the financial instrument and the purpose for which it was acquired.

List of used literature

financial international reporting standard

1. Electronic source of the Internet - be5.biz;

Electronic source of the Internet - pravobi.info;

Electronic source of the Internet - ru.wikipedia.org;

On initial recognition of a financial instrument on the balance sheet, according to IAS 32, the issuer of the financial instrument must classify it (or its elements) based on the content of the contract as either a liability or equity. At the same time, as mentioned above, some financial instruments have the legal form of an equity instrument, but are essentially liabilities.
If a financial instrument does not contain a contractual obligation by the issuer to transfer funds (another financial asset) or exchange the instrument for another on potentially unfavorable terms, then it is an equity instrument. In addition, an equity instrument may be a derivative instrument (swap, warrant), which will be repaid by the issuer by exchanging a fixed amount of cash or a financial asset for a fixed number of its own equity instruments.
Many financial instruments, especially derivatives, often contain both the right and the obligation to exchange them. Such rights and obligations, in accordance with Standard 32, should also be reflected simultaneously in both assets and liabilities of the balance sheet. For example, in a forward contract, one party promises to pay $200,000 in 90 days, and the other party promises to provide $200,000 worth of bonds at the interest rate fixed at the date of the contract. Each party hopes for a change in market prices for bonds in its favor. The buyer and seller have both obligations to transfer and rights to receive the relevant financial instrument on fixed terms. Rights and obligations under such derivative instruments must be reflected separately in the balance sheet.
A financial asset and a financial liability can only be offset under certain circumstances:

if there is a legally established right (for example, in an agreement), to offset financial assets recognized in the balance sheet against financial liabilities;
if the company has the ability and intention to make settlements in pursuance of the transaction for the balance amount of mutually opposite financial instruments;
when the company intends to simultaneously realize a financial asset and pay off financial liabilities, and this intention is feasible in the current circumstances of the transactions.

Offsetting is possible for accounts receivable and payable or bank accounts with debit and credit balances.
If, in accordance with the established requirements, the issuer classifies a financial instrument issued by it as a financial liability, then the interest, dividends, losses and profits relating to it should be reflected in the income statement as expenses or income.
Expenses incurred by the issuer in the form of interest and dividends on equity instruments are charged directly to the debit of the capital account.
Interest (dividends) on preferred shares, which are inherently a financial liability, are accounted for as an expense rather than as a distribution of profits. Such dividends are recognized in the income statement separately from dividends on equity instruments.
The issuer of a complex financial instrument containing both a liability and an equity element must classify the component parts of the instrument separately. Such a complex financial instrument for the issuer could be, for example, a bond convertible into ordinary shares. This instrument consists of two elements: a financial liability (a contractual agreement to provide cash or other financial assets) and an equity instrument (a call option that gives the bondholder the right, within a specified period of time, to convert the instrument into ordinary shares issued by the issuer).
One of two methods can be used to calculate the carrying amount of complex financial instruments.

Allocating to a more difficult to value equity instrument the amount remaining after deducting the value of the liability from the value of the entire instrument. Thus, the carrying amount of a financial liability is first determined by discounting the stream of future interest and principal payments at the prevailing market interest rate for a similar liability. The remainder attributable to the equity instrument (the option to convert into ordinary shares) is determined by subtracting the value of the financial liability from the value of the compound instrument.
Valuing the liability element and the equity element separately and resolving them to be equivalent to the value of the instrument as a whole. This method requires the use of complex option pricing models, such as the Black-Scholes model.

EXAMPLE
On January 1, 2000, the company issues 2,000 convertible bonds with a par value of $1,000. Interest is paid annually at a nominal interest rate of 6%. The prevailing market interest rate on the date of issue of the bonds was 9%. The bonds are due to be repaid on December 31, 2002.
Let's determine the value at which the bonds will be reflected in the company's financial statements upon initial recognition using the first method.
1. Current value of the principal amount of debt to be repaid in 3 years:
2000 x $1000 x (1: (1 + 0.09)3 = 2,000,000 x 0.772 = $544,000.
2. Present value of interest: 2,000,000 x 0.06 x 2.531 (cumulative discount rate over 3 years) = $303,720.
Cumulative rate = 1: (1 + 0.09)1 + 1: (1 + 0.09)2 + 1: (1 + 0.09)3 = 2.531.
3. Total liability component: $1,544,000 + 303,720 = $1,847,720.
4. The par value of the issued bonds is 2000 x 1000 = $2,000,000.
5. Capital component (as the difference between the par value of the issued obligations and the liability component) = $152,280.
Therefore, the issuer must report convertible bonds at initial recognition as follows: the obligation to repay the bond (shown as liabilities) in the amount of $1,847,720 and the option to convert (shown in equity) in the amount of $152,280.

When the method of settlement of a financial instrument depends on the outcome of future uncertain events beyond the control of the issuer, the instrument must be classified as a liability.
For example, a company issues bonds that it promises to repay in shares if the market price of the bonds exceeds a certain level. Another example: a company issues shares, the terms of redemption of which depend on the level of its future income (if the company does not achieve a certain level of income by a certain point in time, then it undertakes to exchange its shares for bonds), etc.
IFRS 32 pays considerable attention to the issues of disclosing information about the financial instruments it uses in its financial statements. Such disclosure (partly mandatory, and partly recommended) is necessary for users of financial statements to understand the impact of on-balance sheet and off-balance sheet financial instruments on the financial position of the company, the results of its operations, and the movement of its cash flows.
Companies are encouraged to disclose information about the significance of financial instruments in their activities, the risks associated with them and their controls, and the business interests that these financial instruments serve. It is recommended to disclose the following types of risks associated with financial instruments:

currency risk (associated with changes in foreign currency exchange rates);
interest rate risk (associated with changes in interest rates);
market risk (associated with changes in market prices);
credit risk (or risk of bad debt);
liquidity risk or cash risk (the risk that a company will be unable to meet its obligations), cash flow risk (for example, the risk associated with floating rate debt instruments).

IFRS 32 encourages companies to disclose the information above in addition to what the company is required to disclose.
The company must necessarily disclose its goals and policies for managing financial risks, including the hedging policy for the main types of transactions for which it is used. For each class of financial assets, financial liabilities and equity instruments, whether recognized or not, the following must be disclosed in the notes to the financial statements:

information about the value and nature of financial instruments;
conditions that may affect the magnitude of future cash flows, their direction and distribution over time;
accounting policies and methods for recognizing instruments on the balance sheet, as well as methods for valuing financial instruments (for example, for financial instruments carried at fair value, the carrying amount may be determined based on quoted market prices, independent estimates, discounted future cash flow analysis or other methods, which should be disclosed in the notes to the financial statements).

In cases where financial instruments have a significant impact on the financial position of the company, their contractual terms should also be disclosed, for example:

details of the principal or nominal amount on which future payments are based;
the date of payment due date, expiration of the contract or the deadline for its execution;
the rights of the parties to early execution of a transaction on a financial instrument;
rights to convert a financial instrument, the amounts and timing of future cash receipts and payments, interest rates or dividends;
the existence and amount of collateral held or granted.

If the presentation of a financial instrument on the balance sheet differs from its legal form, the company must explain the nature of the instrument in the notes to the financial statements. In addition, disclosure of the structure of complex derivatives is required.
Required disclosures include information about the existence of interest rate risk, including contractual repricing or maturity dates and the effective interest rates used (if the appropriate method is used).
If there are a significant number of financial instruments exposed to interest rate risk, they can be grouped by maturity (changes in their price (book value)) in the periods following the reporting date:

within 1 year;
separately by period for each year for 1-5 years;
more than 5 years.

Information about the company's exposure to credit risk must be disclosed, including:

the size of the maximum credit risk per borrower, excluding the value of collateral;
presence of significant concentrations of credit risk.

In the reporting of commercial banks, this requirement is reflected in the form of relevant standards.

Recognition and measurement of financial assets and liabilities in IFRS 39, comparison with Russian practice

A company's financial assets and liabilities are recognized (recorded) on its balance sheet only when the company enters into a contractual relationship with another party for those financial instruments. Planned transactions for which there are no binding contractual relationships at the reporting date cannot be recognized in the company's balance sheet.
From this rule it follows that all contractual rights and obligations of a company in relation to financial instruments, including those related to derivative instruments, must be recognized on its balance sheet as assets or liabilities.
In cases where we are not talking about financial instruments, but about firm agreements for the purchase or sale of goods or services, the entry of two or more companies into contractual relations with each other is a necessary, but not sufficient condition for the recognition of assets or liabilities in the balance sheets of these companies . For such recognition, it is necessary for at least one of the parties to perform the appropriate actions under the contract (payment for goods or services or shipment of goods and provision of services).
An exception is a forward contract, in which the recognition of assets or liabilities in the balance sheets of companies that have entered into such an agreement occurs until the moment of action under the contract. A forward contract is, as stated above, a commitment by one party to buy or sell to another party a financial instrument or commodity at a specified date in the future at a predetermined price. This liability, according to IAS 39, is recognized as an asset or liability on the date the obligation to purchase or sell arises, and not on the date it is settled (the exchange actually occurs). When concluding a forward contract, the fair value of the rights of claim (delivery of an instrument or product) and obligations (to pay for it in a fixed amount) often coincide for both parties, so the net value of the forward contract is zero. Assets and liabilities are recognized in the balance sheets of both the buyer and the seller at the time the contract is concluded in the same amounts, even if the net value of the contract is zero. Moreover, each party to the contract is exposed to price risk, which is the subject of the contract. Over time, the fair value of the contract may become a net asset or liability. This depends on various factors, including: changes in the value of money over time, the exchange rate of the underlying instrument or the price of the commodity that is the subject of the forward contract, and others.
If the purchase of financial assets by a company is of a regular nature (i.e., it is a so-called standard transaction), then, in accordance with IFRS 39, the acquired financial assets are allowed to be recognized in the balance sheet both on the date of the transaction and on the date of settlement. The procedure for recognizing financial assets selected and recorded in the accounting policy must be applied throughout the entire reporting period. In this case, the transaction date is the day when the organization assumes an obligation to purchase a certain financial asset. On this day, the financial instrument to be received (in an asset) and the obligation to pay for it (in a liability) are recognized in accounting (and, accordingly, in the balance sheet).
The settlement date is the day on which the financial instrument stipulated by the contract was actually transferred to the organization. In this case, the asset is recognized in the balance sheet at the fair value established for the period from the date of the transaction to the date of recognition of this financial instrument in accounting.
Transactions on sales of financial assets, even those of a regular nature, are allowed to be recognized in accounting and reporting only on the date of settlement.
Derecognition of a financial asset (or part of it) should occur when the entity loses control over the contractual rights that form the content of the financial asset. This may occur when the contractual terms are fulfilled by the counterparty, the rights of claim expire, or the company waives its rights in relation to a given financial asset.
When control of an asset is transferred, it is considered sold. However, if the transfer of an asset does not involve derecognition (i.e. it continues to be held on the company's balance sheet), then the company transferring the asset records the transaction as a secured loan.
A financial asset that is derecognised from the balance sheet must be written down at its carrying amount. The difference between the carrying amount of an asset (or part of an asset) transferred to another party and the amount received (or receivable) for that asset, plus any revaluation of the asset to its fair value (previously recognized in equity) is recorded in profit and loss account.
In some cases, a company may not sell the entire asset, but only part of it, for example, either the principal amount of a debt or interest on bonds. Another example is the sale of a portfolio of receivables while retaining the right to profitably service the debt for a fee, resulting in the servicing right being recognized as an asset (the right to service loans is an intangible asset under IAS 38).
If an entity transfers part of a financial asset to others while retaining another part, the carrying amount of the financial asset should be allocated between the remainder and the part sold in proportion to the fair value of the related items on the date of sale. Profit or loss must be recognized based on the proceeds of the portion sold. In those rare cases where the fair value of the remaining portion of an asset cannot be determined reliably, it is not determined at all and is assumed to be zero. The full carrying amount of the financial asset is assigned to the part sold. Gain or loss is recognized as the difference between revenue and the total (before sale of part) carrying amount of the financial asset, adjusted by the amount previously written off to equity for its revaluation at fair value.
A company should write off a financial liability from its balance sheet (derecognize it) when it is repaid, i.e. fulfilled (the debtor has paid the creditor), canceled legally (either in court or by the creditor itself) or its validity period (established statutory limitation period) has expired. In addition, cancellation is considered to be the replacement of an existing obligation with another obligation with significantly different conditions.
If the borrower and the lender exchange any debt instruments with significantly different terms from the previous agreement, then, according to IAS 39, this fact should be qualified as the repayment of the old debt and the recognition of a new financial instrument.
The difference between the carrying amount of a liability (or part of a liability) extinguished or transferred to another party, taking into account accumulated amortization, and the amount of repayment should be included in net profit or loss for the reporting period.
In accordance with IAS 39, financial assets and financial liabilities are initially measured at cost, which is assumed to be the fair value of the consideration paid (received) for them. Costs incurred in completing the transaction are included in the initial cost of the financial instrument.
The issuance or acquisition of equity instruments generally involves associated costs (registration fees and other regulatory fees; amounts paid to lawyers, accountants, professional advisors; printing costs, etc.) that are charged directly to the reduction of equity. Costs incurred for capital transactions, which for some reason could not be carried out, should be charged to expenses of the current period (in the income statement).
The initial cost of a financial instrument measured at fair value deviates from it in one direction or another over time under the influence of market and other factors. At the same time, fair value can be determined quite accurately if there is a published price of a financial instrument on the open market (market price is the best analogue of fair value); the debt instrument has a rating assigned by an independent rating agency; when using special models, the initial data for the implementation of which is obtained from active markets (for example, the Black-Scholes model). It is not difficult to determine the fair value of a financial instrument even when the range of values of estimated indicators of its value is insignificant.
If market prices are difficult to reliably determine, fair value is determined by other generally accepted methods (by discounting future cash payments or receipts using prevailing market interest rates for similar instruments, price-to-earnings ratios and other methods).
The subsequent measurement of financial assets depends on their actual classification into the four categories discussed in section 4.1. After initial recognition, assets are measured either at fair value or at amortized costs (cost) (Table 1).

Table 1. Reflection and subsequent (after initial recognition) measurement of financial instruments in accounting and reporting

Initial estimate Actual costs (fair value) Actual costs (fair value) Actual costs (fair value) Actual costs (fair value)Subsequent measurement Amortized cost using the effective interest method Amortized cost using the effective interest method Fair value or cost Fair valueGain or loss recognized - - Interest and dividends are recognized in profit or loss, fair value revaluation is recognized in equity Revaluation is recognized in profit or lossDepreciation charge Charged to profit and loss account Charged to profit and loss account - -Impairment Charged to profit or loss Charged to profit or loss The loss is written off from equity and charged to profit or loss -

Types of financial instruments	Loans and receivables not held for trading	Investments held to maturity	Available-for-sale financial assets	Financial assets or liabilities at fair value through profit or loss
Reflection in reporting
Reflection in accounting

These rules do not apply to financial instruments used as hedging instruments.
Let us consider in more detail, based on the above diagram, how transactions with various types of financial assets are reflected in accounting.
Under IAS 39, investments, other than held-to-maturity investments, are measured at fair value with changes in fair value recognized, depending on the nature of the investment and/or the accounting policy chosen, through profit or loss (in the relevant financial statement) or directly on own funds accounts.
Gains on revaluation of financial assets measured at fair value through profit or loss (held for trading) should be recognized directly in profit or loss for the reporting period.
Available-for-sale assets may include both equity and debt securities, both market-priced and unquoted. Gain (loss) arising on the revaluation of a financial asset carried at fair value (having a market value) is charged to equity in the statement of capital flows. The capital account (the revaluation account for investment securities available for sale) must maintain a gain or loss until the financial asset is sold, redeemed or otherwise disposed of, or until it is determined to be impaired. When such a moment occurs, the resulting profit (loss) will need to be included in the profit or loss of the reporting period.
When equity investments and related derivatives do not have quoted market prices and fair value is otherwise difficult to determine, those available-for-sale instruments should be carried at cost.
For debt securities held for sale, interest calculated using the effective interest method is recognized in the income statement. Dividends on an existing equity instrument are recognized in profit or loss when the entity's right to receive payment is established.
Thus, both groups of financial assets discussed above are accounted for at fair value (both are inherently trading, but have different maturities and are acquired for different purposes).
Depending on the type of financial instruments (debt or equity) included in the above groups, revaluation profit or loss is determined differently. Thus, for shares assessed at fair value (classified in both the first and second groups), the amount of profit or loss will be equal to the difference between the fair value of the financial instrument at the date of revaluation and its book (purchase) value.
For bonds measured at fair value, the amount of gain or loss from revaluation is determined slightly differently: the fair value of the financial instrument at the date of revaluation minus the carrying (purchase) value, and minus the amortization of the premium (or adding the amortization of the discount).
Recall that for debt instruments, fair value is the sum of the present values of all expected future coupon or interest payments on the debt instrument and its par value, discounted at the current effective interest rate (the market rate at the date of revaluation). Amortized cost is the same present value, but obtained by discounting not at the current effective interest rate, but at the original effective interest rate.
In this case, a premium is a negative difference between the par value and the purchase price of securities, and a discount is, accordingly, a positive difference. Premium amortization is defined as the amortized cost of the financial instrument at the end of the previous period minus its amortized cost at the end of the current period. Accordingly, the discount amortization is the amortized cost at the end of the current period minus the amortized cost at the end of the previous period. Thus, both the premium and the discount are gradually (during the period of stay of financial instruments on the credit institution’s balance sheet in one or another of their portfolios) amortized (transferred) to the bank’s income and expenses.

EXAMPLE
On March 1, the credit institution purchased bonds with a nominal value of 10,000 rubles at a price of 10,300 rubles (i.e., the premium paid was 300 rubles), and on March 31, it revalued the securities at fair value, which amounted to 10,450 rubles. The amount of premium depreciation according to calculations for March was 30 rubles.
In the example given, the amount of revaluation of financial assets will be: 10,450 - 10,300 - 30 = 120 rubles (positive revaluation).

The amount of interest (coupon) income on trading debt securities (accounted for at fair value through profit or loss and available for sale) must be calculated taking into account the effective interest rate.
The amount of accrued interest (coupon) income for the period is determined as: coupon interest accrued at the nominal rate, minus premium amortization or plus discount amortization for the period.
In this case, the accrued coupon interest is equal to: the par value of the securities x the annual coupon rate: the number of accrual periods.
If securities are purchased at their face value, then the coupon rate is considered to be equal to the market rate.
When debt financial instruments are purchased at a premium or discount, both coupon and effective interest rates take part in the calculation of interest income.

EXAMPLE
On April 1, 2005, the bank purchased debt trading securities at a price of 110,000 rubles. The par value of the securities is 100,000 rubles. The coupon rate is 12% per annum. On June 31, the bank accrued interest income, while the amortization of the premium for calculations for April - June amounted to 1,300 rubles.
The scheme for calculating interest income on securities can be presented as follows (Table 2).
Since premium amortization is defined as the amortized cost of a financial instrument at the end of the previous period minus its amortized cost at the end of the current period, the amortized cost at the end of the current period can be determined from this definition. It will be equal to 108,700 rubles (110,000 - 1300).
Hence the interest income is equal to: 1700 rubles (3000 - 1300).
On June 31, interest income will be reflected by the posting:
DEBIT - accrued interest receivable - 3000 rubles;
CREDIT - paid premium on trading securities - 1300 rubles;
LOAN - interest income - 1700 rubles.

Table 2. Calculation of interest income and amortized cost of trading securities

Because the definition of financial assets at fair value through profit or loss (i.e., those primarily held for trading) is based on the original purpose for their acquisition, the standard does not permit reclassifications of those assets into other categories or other categories into the same category. . As for financial assets held to maturity and available for sale, they are rarely transferred from one category to another. The most common is the reclassification of held-to-maturity assets as a result of a change in intention or ability to hold them to maturity into the available-for-sale group. In this case, the reclassification of the item is treated as a sale, the entire category of held-to-maturity financial assets is considered “destroyed,” and all other items in the category of held-to-maturity financial assets must be reclassified as available-for-sale for two years. The consequence of this transfer is the revaluation of assets at fair value and the attribution of the resulting difference to equity.
As for derivative financial instruments, they are initially recognized at cost (the cost of their acquisition) and subsequently at fair value. The exception is for derivatives whose underlying position is an unquoted equity instrument and/or whose fair value cannot be reliably measured and is therefore measured at cost until settlement. However, such exceptions should rarely be allowed under IAS 39 because it is assumed that the fair value of the instruments can be obtained using market values of similar instruments or using special models.
To avoid carrying derivatives at fair value, companies often “embed” them into host contracts that are otherwise accounted for (at cost, remeasured using equity accounts). In order to prevent such violations, IFRS requires that an embedded derivative instrument be separated from the host contract and accounted for in accordance with IAS 39, unless the economic parameters of this instrument are not closely related to the corresponding parameters of the host contract.
Financial obligations After initial recognition, an entity must measure at amortized costs. The exception is financial liabilities intended for trading and initially included in this category.
Financial liabilities held for trading include:

derivative liabilities that are not accounted for as hedging instruments
obligations of the seller to transfer securities or other financial assets borrowed by the seller in short sales;
financial obligations undertaken with the intention of redeeming them in the near future;
financial liabilities that form part of a portfolio of specific instruments that are managed together (are homogeneous) and for which there is evidence that a profit has actually been earned in the most recent short-term period.

As with financial assets, an entity has the right to designate a financial liability as at fair value through profit or loss on initial recognition. There are no restrictions regarding such a voluntary determination, but it cannot be canceled subsequently, i.e. the obligation can no longer be transferred to another category.
Gains (losses) on financial assets and liabilities carried at amortized cost are recognized in the reporting period only when the financial asset or liability is either derecognized (for example, sold) or is impaired, including through amortization.
Thus, depending on the assignment of certain financial assets or liabilities to their individual classification categories, the financial result (profit or loss) of the reporting period also changes.
All assets other than those measured at fair value through profit or loss are subject to impairment. If there is a possibility of impairment, then the company must accrue an allowance for impairment of assets.
When it is probable that a company will not be able to collect the full amount of debt (principal and interest) on loans issued, receivables, and held-to-maturity investments (i.e., assets carried at depreciable cost), the creation of a reserve is similar to the creation of provision for loans discussed in section 4.6, i.e. as the difference between the carrying amount of the asset and the value of future cash flows expected from the use of the asset, discounted at the original effective interest rate. However, cash flows associated with short-term receivables are generally not discounted.
For financial assets in the form of unquoted equity instruments (available for sale) and carried at cost, the amount of the impairment loss is determined as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows calculated using the current market interest rate specified for similar financial assets. Such an impairment loss, with its subsequent possible reduction, is not subject to recovery in the profit and loss accounts, unlike the first case (for a debt instrument available for sale, the recovery of the value of which can be objectively related to an event that occurred after the loss was recognized, the loss can be compensated through the control center).
For financial assets carried at fair value, the amount of impairment must be calculated for those available-for-sale financial assets for which such impairment is recognized directly in equity.
If the fair value of such instruments falls below the initial cost of acquisition, there is a loss. If there is a loss and at the same time facts of impairment of financial assets are revealed (for example, significant financial difficulties of the issuer, violations of contract terms, etc., discussed in section 4.6), the entire amount of loss previously accumulated during the revaluation of this asset and attributed to capital accounts must be included in debit of the profit and loss account of the reporting period.
This loss is the difference between the cost of acquiring the asset (less principal and amortization) and the current fair value less any impairment loss on the asset previously recognized in net profit or loss. However, if in subsequent periods the fair value of impaired debt instruments increases, then the impairment losses are subject to reversal, and the reversed amount is recognized in profit or loss.
Under IFRS, derivative financial instruments, including forward transactions, are measured at fair value through profit or loss. Therefore, derivative financial instruments are not tested for impairment and no provisions are created for them.
The main differences that exist in information disclosure according to Russian and international standards at the moment are as follows.
Since in domestic practice there is still no division of financial liabilities into debt and equity financial instruments, elements of capital calculated according to Russian standards may in some cases not satisfy the requirements for recognizing them as components of capital under IFRS 32 (for example, some types of preferred shares), and should be classified as financial liabilities.
The reporting of Russian banks does not yet distinguish between the concepts of reserves associated with the impairment of assets (for example, a reserve for possible losses on loans or for the impairment of securities, the formation of which is regulated by IFRS 39 and 36) and reserves-liabilities arising, for example, in cases of litigation proceedings or planned restructuring of the organization (regulated by IFRS 37). In the first case, the provision is an adjustment to the carrying amount of the asset, and in the second it represents a liability. Differences in the content of these concepts lead, accordingly, to the use of different methods for their assessment, recognition and disclosure in reporting.
According to IFRS 37, a provision liability is recognized only if three criteria are simultaneously met:

the entity has a current obligation (legal or constructive) as a result of past events;
it is probable that an outflow of resources will be required to settle the obligation;
a reliable estimate of the amount of the liability can be made.

Regulation 232-P does not contain clear criteria for recognizing reserve liabilities and a reserve can be recognized even when the management of a credit institution has an intention, and not a current obligation, to incur expenses, which is contrary to IFRS.
IFRS 39 requires financial assets and financial liabilities to be recognized (that is, shown on the balance sheet) from the time the bank becomes a party to the financial asset/liability contract (or equity instrument). In Russian practice, there are no such requirements and a significant amount of financial assets and liabilities are recorded in off-balance sheet accounts, which in some cases can significantly distort the structure of the bank’s assets and liabilities.
Currently, financial assets and liabilities are reflected by credit institutions in accordance with the Regulation of the Central Bank of the Russian Federation No. 205-P “On the rules of accounting in credit institutions located on the territory of the Russian Federation.” At the same time, only some securities are taken into account at market value (which is the best indicator of fair value). Other financial instruments are accounted for at the cost of their acquisition/issue. This is contrary to IAS 39, which requires fair value to be determined for all categories of financial instruments (at least at initial recognition of the instruments).
The current economic situation in Russia is still characterized by a rather limited volume of financial transactions on the market and the absence of a full-fledged active market for financial instruments. In this regard, determining the fair value of financial instruments is often difficult for banks. In addition, even in the organized securities market that exists today in Russia, market quotations may not reflect the fair value of financial instruments that could be determined in the markets of developed countries. In this situation, credit institutions may be able to manipulate the value of financial instruments and, most importantly, the value of their equity capital (including revaluation items of certain assets accounted for at fair value). It should also be taken into account that banks have relative freedom as to whether changes in the fair value of financial assets will be recognized in the income statement or as part of shareholders' equity. This may affect the comparability of the financial statements of different credit institutions.
Thus, the application of the concept of “fair value” and the reliability of its assessment are quite problematic in Russian conditions today.

Hedging (hedged items and hedging instruments)

In IFRS 39 under hedging refers to the use of derivatives and, in some cases, non-derivative financial instruments to offset part or all of the changes in fair value or cash flows of the hedged items, i.e. the protected financial instruments. Such changes can arise for various reasons: under the influence of market conditions, exchange rate fluctuations, as a result of changes in the financial position of counterparties and other objective factors.
Hedged item may be any asset or liability recognized on the balance sheet, a firm commitment, agreements not yet entered into and transactions with a high probability of their completion, a net investment in a foreign company, or a group of the above items.
Thus, not only financial, but also non-financial assets (liabilities) can be hedged (protected) items. The latter are usually protected either from currency risks or from aggregate risks in general, since establishing the impact of currency risks is not as difficult as the impact of a large number of other types of risks.
Although loans and receivables and held-to-maturity investments are treated the same (at amortized cost), the former can be hedged against interest rate risk while the latter cannot. This is because the classification of an investment as held-to-maturity implies that it is held to maturity regardless of changes in the fair value of the investment itself or its cash flows, which in turn are associated with changes in interest rates. Investments held to maturity can be hedged against currency and credit risks.
Assets (liabilities) with the same level of risk for hedging purposes can be combined into appropriate groups. In this case, only those of the above-listed objects that arise as a result of relations with a party external to the organization hedging the risks are subject to hedging.
Hedging instrument is a specified derivative or (in a limited number of cases) other financial asset or liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of the specified hedged item. Losses on the hedged item are offset to some extent by gains from changes in the fair value of the hedging instrument. Both of them are reflected simultaneously and in the same amount in the profit and loss account. As a result, the result of hedging is revealed - net losses or net gains on the transaction.
Most derivative financial instruments, except options, can act as hedging instruments. The latter can be used for these purposes only when the sale of one option is combined with the purchase of another (even one embedded in a non-derivative financial instrument).
Derivative financial instruments are almost always carried on the balance sheet at fair value, while non-derivative financial instruments can be carried at both fair value and amortized costs. If the fair value of a financial asset or liability cannot be determined reliably, it is not permitted to be used as a hedging instrument. The exceptions are those non-derivative instruments carried at amortized cost that are denominated in a foreign currency. They can be used to hedge the currency risk of the entire instrument or the currency element of a non-derivative that can be reliably measured. If these instruments are measured at fair value, then changes in it, as is known, are reflected in the capital account.
The advantage of hedge accounting is that gains and losses on any component of the hedge until the end of the hedge can be recognized in equity rather than in the income statement. This eliminates the impact of market fluctuations in such components on the income statement over the life of the hedge. Only at the end of the hedge period is the net gain or loss included in the income statement.
An entity cannot use its own equity securities as hedging instruments because they are not financial assets or financial liabilities of the entity.
Hedging effectiveness is the extent to which the hedging instrument will offset potential changes in fair value or cash flows attributable to the risk being hedged. Moreover, the success of hedging is determined not by the absolute value of the profit that the hedge brings, but by the extent to which this profit compensates for the financial result of the hedged item.
The standard identifies three main hedged item: fair value hedge; cash flow hedges and hedges of net investments in foreign companies. However, hedging transactions can only be carried out when the following certain conditions are met (hedging rules, called hedge accounting):

the company's risk management objectives and hedging strategy are set out in the company's official documentation;
hedging is used only when there is a high probability of its effectiveness (the estimated profitability of hedging is from 80 to 125%), and this effectiveness can be assessed with a sufficient degree of reliability;
ineffectiveness of hedging transactions is recognized immediately in profit or loss;
there is a high probability of a transaction with a high risk of changes in cash flows that is subject to hedging;
regular assessment of hedging should confirm its high effectiveness throughout the reporting period;
Hedged items must meet the definitions of assets and liabilities to be recognized on the balance sheet.

Hedging of transactions carried out within a group of companies is not permitted, since internal transactions are eliminated during consolidation, leaving the company dealing with itself. However, where intragroup hedging transactions are used as a means of entering the market through an intercompany treasury center, IAS 39 provides specific guidance on what needs to be done to properly account for the hedge.
Hedging may also be carried out not in accordance with hedging rules (i.e., without taking into account special requirements and hedging conditions). However, in such situations, the company must record any resulting gains or losses directly in the income statement rather than in equity, which is only permitted under hedge accounting.
A hedging instrument is not derecognised when it is rolled over or when one hedging instrument is replaced by another. But this must be declared in the organization's documented hedging methodology.
Fair value hedges is carried out to protect against losses that may arise when the fair value of an asset (liability) recognized in the balance sheet or its certain share, or an unrecognized firm agreement (share) changes. The financial result (gain or loss) on the revaluation of a hedging instrument carried at fair value must be recognized immediately in profit or loss. The same applies to the financial result arising from the revaluation of the hedged item, which is always charged to the profit and loss account, even if under normal conditions (not during a hedge) changes in the fair value measurement are written off to equity or the item is generally measured at actual costs . How a fair value hedge is implemented is shown in the example.

EXAMPLE
On June 30, 2004, a commercial bank issued debt instruments for $10,000,000 at a fixed interest rate of 7.5% per annum (for a period of 6 months). At the same time, the bank is concerned about possible changes in the value of the obligation, so on the same day it entered into an interest rate swap agreement. A swap contract is a type of forward contract in which the parties agree to make a series of future exchanges of amounts of money, one calculated using a floating interest rate and the other using a fixed interest rate. (Each party hopes that market conditions will be favorable to it.)
Thus, the bank now deals with variable rates. As the rate of return in the market changes, the fair value of the fixed rate debt instrument and the value of the swap will change. You can consider them as one synthetic instrument (debt + swap). At the same time, the company's cash flows change depending on the influence of the market on this instrument, but its total value remains unchanged.
The fair value of the liability from July 1 to December 31 was $10,125,000, i.e., it increased (because the liability was in demand in the market). In the same period, the LIBOR rate (i.e., market interest rate - floating, negotiated) was 6%.
The difference between the original cost of the debt obligation of $10,000,000 and its cost of $10,125,000 = $125,000 is the fair value of the swap, which is an asset because it gives the bank the right to pay 6% per annum for 7.5% (exchange of assets on favorable terms ).
Thus, when the payment deadline arrives, the payment exchange scheme will look like this (Fig. 1).

Fig.1. Payment exchange scheme between the bank, the buyer of its obligations and the party to the swap transaction

The bank's cash flows will look like this (Table 3).

Table 3. Calculation of the bank’s cash flows when hedging the fair value of debt instruments issued by it

The reflection of the hedging transaction discussed above using a swap transaction is presented in the form of a double entry in Fig. 2.

Fig.2. Recording hedging transactions using a swap transaction as a double entry

Thus, the bank paid the creditor on its debt obligations in the amount of $375,000 for only $300,000, i.e., it had an outflow of funds in the amount of only $300,000, and $75,000 was offset by the swap transaction.

Cash flow hedging- this is a hedge of specific risks associated, for example, with future interest payments on a debt obligation with a variable interest rate or with an expected purchase or sale transaction, etc.
If the hedging conditions are met throughout the reporting period, the standard assumes that the profit (loss) on the hedging instrument is divided into two parts. A portion is allocated to a hedging instrument whose effectiveness has been established (confirmed by calculations of effectiveness) and is charged to equity accounts in the statement of changes in equity. The part of the adjustment amount not confirmed by efficiency calculations is written off to the profit and loss account.
The effective portion attributable to equity is determined as the lesser of the cumulative gain or loss on the hedging instrument accumulated since the inception of the hedge or the cumulative change in the fair (discounted) value of the expected cash flows of the hedged item since the inception of the hedge. The remaining gain or loss on a hedging instrument that is not effectively hedged is recognized in profit or loss.
However, there are no rules for assessing effectiveness and ineffectiveness. The decision on this issue must be made by the company. The methodology should be set out in the formal hedging documentation. In practice, this technique can be quite complex.
If a hedge of a forecast transaction results in the recognition of a non-financial asset or non-financial liability on the balance sheet, or the forecast transaction of a non-financial asset (liability) takes the form of a firm arrangement that meets the requirements of fair value hedge accounting, then the entity shall record in its accounting policies one of the following options: financial results when hedging:

the amount of the adjustment allocated to equity in the hedge is transferred to the profit or loss account in the period in which income or expenses on the instrument are recognized (for example, depreciation, costs of sales, etc.); if it is expected that the entity will subsequently not be able to recover all or part of the loss on the instrument, then only the amount that is not expected to be recovered is credited to the profit and loss account;
The amount of the hedge adjustment charged to equity is debited from that account and included in the original or other carrying amount of the recognized financial asset or liability.

If a forecast transaction results in the recognition of a financial asset or financial liability in the balance sheet, the gains or losses previously recognized in equity are transferred to profit or loss in the period in which the asset acquired or liability assumed affects profit or loss (interest interest is recognized). interest income or expenses); if it is assumed that the loss (all or part of it) will not be compensated within the next few periods, then the corresponding amount is transferred to the profit and loss account.
Example 4.6 illustrates a cash flow hedge for a forward contract (an obligation to buy or sell a commodity or financial asset at a specified price at a specified time in the future). The price of a forward contract is equal to the difference between the current value of the object of the contract (the “spot” price) and the price established in the contract).

EXAMPLE
On September 30, the company signed an agreement to purchase equipment in the future for the amount of 1,000,000 Swiss francs. The spot rate (the price specified in the contract) on September 30 was 2.5 Swiss francs per 1 euro.
To reduce the risk of a possible change in the exchange rate in the future, the company enters into a forward agreement on the same day to purchase Swiss francs for dollars at a rate of 2.5 Swiss francs per $1.
On December 31, the market exchange rate for the euro is 2.4 Swiss francs.
(recognized as an asset) is:
1000,000: 2.4 = 416,667 euros.
1000,000: 2.5 = 400,000 euros. / 16,667 euros.
On March 30, the equipment was purchased by the company. The exchange rate is 2.3 Swiss francs per 1 euro.
Fair value of a forward contract is (Fig. 3):
1,000,000: 2.3 = 343,783 euros.
1,000,000: 2.5 = 400,000 euros. / 34,783 euros.

Fig.3. Recording hedging transactions using a forward contract as a double entry

All amounts for other hedging transactions written off to equity are recognized in profit or loss if the resulting financial instrument is sold or otherwise affects the financial performance of the entity.
Hedging a net investment in a foreign company is carried out in the same way as a cash flow hedge, i.e. the effective part of the adjustment is written off to capital accounts. The remaining part is transferred to profit and loss accounts, as positive or negative exchange rate differences.
Net investment in foreign activities is expressed by the company's share of net foreign assets.
As stated above, under IAS 39, a transaction can only be accounted for as a hedge if the hedge is effective. There are several mandatory hedge effectiveness tests that must be performed both prospectively and retrospectively.
Prospective testing of effectiveness should be performed at the inception of a hedge transaction and at each subsequent reporting date during the life of the hedge. The test results must demonstrate that the entity's expected changes in the fair value or cash flows attributable to the hedged item were almost entirely (ie, substantially 100%) offset by changes in the fair value or cash flows of the hedging instrument.
Retrospective testing of effectiveness is performed at each reporting date during the life of the hedge in accordance with the methodology specified in the documentation of the hedge transaction. Test results should show high effectiveness of the hedging relationship (in the range of 80-125%). In this case, the effectiveness of the hedge is regularly and immediately reflected in the income statement.
Hedge accounting must be discontinued when any of the following events occur:

the hedging transaction fails the effectiveness test;
the hedging instrument is sold, terminated or exercised;
final settlement has been made for the hedged position;
the hedging relationship is cancelled;
In a cash flow hedge, the hedged forecast transaction will not occur.

IFRS 39 allows you to simultaneously take into account financial results from changes in the value of the hedged item and changes in the value of the financial instrument used for hedging, while Bank of Russia regulations do not yet provide for consideration of hedging as a single operation, and require separate accounting for changes in the value of the hedged item and a hedging instrument.

Disclosures in IFRS 39

Carrying out transactions with financial instruments is accompanied by corresponding financial risks, therefore, the disclosure of information in the reporting of banks and companies is intended to help its users in correctly assessing the degree of exposure of the bank (company) to financial risks as a result of such transactions.
In the notes to the statements, it is necessary to disclose the methods and assumptions used in assessing the fair value of financial assets and financial liabilities reflected at fair value, separately for their largest classes (formed according to such characteristics as, for example, recognition or non-recognition in the balance sheet, methods for determining fair value, etc.).
It is also necessary to specify how gains and losses resulting from changes in the fair value of available-for-sale financial assets carried at fair value are accounted for after initial recognition: whether they are charged to net profit or loss for the period or directly to equity until sold. financial asset.
Additional disclosures relate to hedging matters, specifically a description of the company's financial risk management policies and objectives, including its hedging policies for each major class of expected transaction.
For example, when hedging risks associated with future sales, the description should indicate the nature of the risks being hedged, the approximate number of months (years) of expected future sales covered by the hedge, and the approximate percentage of the transaction value of sales for the period under review.
For fair value hedges, cash flow hedges, and hedges of a net investment in a foreign company, the following information is separately disclosed:

description of the hedge;
a description of the financial instruments designated as hedging instruments and their fair value at the reporting date;
the nature of the risks being hedged.

When hedging expected transactions, the following are disclosed:

planned timing of expected transactions;
the expected timing of inclusion of financial results on them in the calculation of net profit or loss.

If the gain or loss on derivatives and non-derivative financial instruments designated as cash flow hedges is recognized directly in equity (in the statement of changes in equity), the following must be disclosed in the explanatory note:

periods when transactions are expected to be carried out;
the timing of the expected impact of transactions on earnings;
a description of any transaction that was previously accounted for as a hedge but is expected to no longer occur;
the amount recognized in equity in the current period;
the amount of profit (loss) written off from capital accounts and included in net profit or loss for the reporting period; The amount written off from equity and included in the cost or other carrying amount of an asset or liability in a hedged expected transaction during the current period.

If a gain (loss) on the remeasurement of the fair value of available-for-sale financial assets (not related to the hedging process) has been recognized directly in equity in the statement of changes in equity, the following disclosures are made:

the amount recognized in the equity accounts in the current period;
the amount of profit (loss) written off from capital accounts and included in net profit or loss for the reporting period.

If the fair value of financial assets (investments in unquoted equity instruments) cannot be measured reliably and they are carried at cost, the following should be included:

an indication of this fact along with a description of the assets;
their book value; and an explanation of why their fair value cannot be measured reliably;
where possible, the range of fair value measurements;
any gain/loss arising on the sale of such assets;
significant assumptions and methods used to determine fair value (based on market prices or special valuation techniques).

When fair values are determined based on valuation techniques, the following are disclosed:

assumed fair value level assumptions in the absence of available market prices;
the sensitivity of the assumptions made in determining the cost (where applicable);
the change in fair value recognized in profit or loss for the reporting period.

Significant items of income, expenses, gains and losses on financial assets and financial liabilities, whether included in net income or loss or as part of equity, should be disclosed, including:

total interest income and total interest expense on financial assets (liabilities) not measured at fair value;
on financial assets available for sale, gains (losses) recognized in equity, as well as amounts transferred from equity to profit during the reporting period;
interest income accrued on impaired financial assets.

For transferred financial assets that cannot be derecognised (for example, a repurchase agreement), or for cases where the entity continues to be involved in the securitized financial assets, the following is provided:

a detailed description of the assets, including a description of the collateral;
the nature of ongoing participation;
the volume of such transfers/transactions;
information about remaining risks.

In addition, IFRS 39 provides for other specific disclosures, in particular regarding:

reasons for reclassifying financial assets from the category recorded at cost (amortized) cost to the category recorded at fair value;
impairment losses for each significant class of financial assets;
accepted or used as security for collateral;
the carrying amounts of financial assets and financial liabilities classified as “held for trading” and measured at fair value through profit or loss;
financial liabilities recorded at fair value through profit or loss: the amount of changes in fair value that are not attributable to changes in the benchmark interest rate and the difference between the carrying amount and the amount that the entity is required to pay under the terms of the contract;
the presence of multiple embedded derivatives whose values are interdependent in the combined instrument, together with effective rates for the liability component;
defaults of principal (interest) on loans and any other violation of loan agreements that allow the lender to demand immediate repayment of the instrument.