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Overview of Financial Instruments and AASBs

1. Discuss the recognition for financial instruments including financial asset, financial liabilities and equity instruments according to relevant AASBs.

2. Discuss the measurement of finical instruments according to related to relevant AASBs.

3. Identify different types of financial instruments available in the chosen company.

4. Provide at least one example of each type of financial instrument available in the chosen company and specify recognition and measurement of that financial instrument.

5. Discuss the potential impact of the adoption of new AASB 9 on assets, liabilities, financial performance and one of selected financial ratios

According to the current accounting standard AASB 9, the financial instruments are identified as the classification of the financial assets and the measurement models. The financial instrument is depicted to be a contract which is giving rise to the financial asset as well as on entity is found to be showing the development of the financial liability. The financial assets are found to be including the appropriate management of the cash. The equity instrument is depicted to be another instrument which is involved in providing an appropriate contractual right for receiving the cash and another financial asset from another entity (Jones, 2013)a. It is used for exchanging the financial liabilities with other entities which are found to be potentially favorable and also the entity is focusing on the development of the financial assets. The financial assets are including the cash at the banks, deposits, trade receivables and the other loans as well as the bonds. Apart from this, the derivatives and the other equity interests are found to be dependent on the swapping options as well as the contracts are prepared for showing the improvement in the swapping processes. The focus on making the measurement of the models for the financial assets are carried out which is enabled of showing the appropriate recognition of the fair values for the organization and also is found to be directly impacting the attributes as the acquisition of the financial assets are seen. For this reason, the classification of the financial assets, as well as the cash flow characteristics, are found to be dependent on the business model by which the measurement of the financial assets can be easily carried out (Shapiro, 2014). 

Apart from this, the contractual cash flow characteristics test is depicted to be dependent on the identification of the Cash flows by which the sole payment of the principle and the interests related to the principal amount is explained with considering the appropriate variability in the contractual tests. The changes in the equity prices are depicted to be showing the exposure to the risks as the volatility is identified and the exposures are identified which are found to be changed in the form of the equity prices. The focus on measuring the instruments related to the subject is essential as it is helping in showing the features linked with the study and also it is focusing on the development of the distribution of the recovery processes (Horngren, Sundem and Elliott, 2014). The cost of the investment and the return achieved on the implementation of the equity instruments are depicted to be showing the focus on the classification of the financial stability. The designing of the equity instruments are made which will enable to focus on making the improvement of the equity opportunities and also is surrounding the appropriate consideration of the business processes. The selection of the equity instrument is depicted to be used in the AASB 9 are representing the appropriate identification of the objectives and due to this reason, it is beneficial for carrying out the activities in an appropriate way (Khan and Jain, 2007).

Measurement of Financial Instruments under AASBs

The measurement of the financial instruments with relevant to the AASBs are provided in the following points:-

  • AASB 7 Financial Instruments: Disclosure: It is found to be stating the significance of the financial instruments for the purpose of financial positioning and the performance. The measurement process is carried out by categorizing the financial position as well as it is found to be offsetting the financial liabilities and the assets (Needles and Powers, 2012). The allowances are also included for positioning the credit losses and also the compound financial instruments can be properly positioned with including the embedded derivatives.
  • AASB 9 Financial Instruments: It is helping in defining the new classification model so that the positioning of the financial assets, as well as the liabilities, can be easily made and also it is surrounding the appropriate development of the asset on one entity. The inclusion of the contractual rights and the financial assets enables the organization to receive the assets by including all the entities (Britton and Waterston, 2013).
  • AASB 13 Fair Value Measurement: The changes in the focus on the fair representation of the values present in the financial instruments are targeted and also it is aiming at making the changes in the financial positions. The processing of the fair value measurement is depicted to be surrounding the appropriate measurement of the activities. The enhancement of the activities is surrounding the fair representation of the activities as found to be surrounding the study (Shim and Siegel, 2008).
  • AASB 132 Financial Instruments: Presentation: The AASB132 is incorporating the whole processes with including all the interpretations by which the enhancement of the activities can be easily made. The incorporation of the activities is surrounding the appropriate development of the accounting standards by which the measurement of the activities can be easily made (Porter and Norton, 2017).
  • AASB 139 Financial Instruments: Recognition and Measurement: The recognition of the financial instrument measurement is carried out which is surrounding the appropriate development of the study as well as the accounting processes can be easily carried out. The incorporation of the international financial reporting standards can be easily made which will enable to focus on attaining the activities in an appropriate way (Rayman, 2013).

The Commonwealth Bank of Australia consists of the financial instruments that represent 5 percent of the total liabilities and 17 percent of the total assets. The financial instruments that are held at the fair value consist of the derivative liabilities and assets, available for the sale securities, life investment contracts, and bills discounted (Annual Report, 2017). The derivative financial instruments are referred to the contracts of which the value is being derived from the underlying index, price or other variables. It consists of the future options, interest rate, forward rate agreement, credit swaps, currency, and equity. The derivative is being entered into for hedging or trading purpose. The initial recognition, losses or gains are recognized in the profit or loss statement. The derivatives are being used for managing the exposures to foreign currency, interest rate, credit and commodity risk consisting of exposures that arise from the forecast transactions. The derivatives are being classified as the hedge for hedging or held for training. The held for the trading derivatives are the contracts that are being entered for meeting the needs of the customers and undertaken positioning activities and undertake market making (Shim, Siegel and Shim, 2012). The hedges derivatives are referred to the instruments that are held for the purpose of risk management. The management of the exposures is the main aim of the organization. The hedge relationship consists of the cash flow hedges, net investment hedges and the fair value hedges.

The adoption of the new AASB will impose a significant impact on the liabilities, assets, financial performance and financial ratios of the organizations. AASB 9 will introduce an ‘expected credit loss model, revised classification, measurement requirements and model and hedge accounting rules as per the Commonwealth Bank of Australia. AASB 9 is expected that the credit loss model will replace the existing incurred losses model need for recognizing the impairment. It needs the organization for recognizing the credit loses which will be based on the forward unbiased looking information. AASB need the recognition of the credit losses with the application approach of three stages. If financial assets do not face the increase in the credit risk and the provision equivalent to twelve months is expected recognition of credit losses (Annual Report, 2017). If the financial assets face the credit risk then the provision will be equivalent to the lifetime full expected loss is needed. The expected credit losses are the weighted amounts identified by examining the possible results and taking into account the past events, time value of money, the forecast of the economic conditions and current conditions.  The implementation of the AASB 9 will impose a significant impact on the accounting treatments (Holton, 2012).

Case Study: Commonwealth Bank of Australia

AASB 9 will replace the measurement and classification in AASB 139 that will classify the financial assets on the basis of the business model to manage the financial assets and the contractual flow of cash will represent payments of interests and payments. The financial assets will be classified at the amortized cost as the financial assets, financial assets through the profit or loss at the fair value. The nontrading equity instruments will be estimated at the fair value. The impact can also be seen in the financial ratios such as the debt to equity. The balance between the debt and equity can also be affected due to the introduction of AASB9. AASB 9 would change the hedge accounting with the introduction of the principle-based approach for effective hedge testing and increase the eligibility of hedge items and hedge instruments. The adoption of the hedge accounting model which will form newly is optional (PwC, 2017). Under AASB139, the current hedge accounting can continue for applying the till the IASB accomplish the accounting for the risk management projects. The new hedge accounting need of the group will be applied from 1 July 2018. The values of the financial items in the assets and liabilities will be affected due to the implementation of AASB 9. It is considered to be a major concern for the management team of Commonwealth Bank of Australia. It will change the accounting treatment. The accountants and auditors have to follow the accounting standards in order to ensure the appropriate depiction of the financial position of the organization (Wolf, 2010).


The Commonwealth Bank of Australia has been in progress for the implementation of AASB 9. It is not practical for the disclosure of the financial impacts till the program of implementation is further reliable and advanced estimation of the impacts. AASB 15 consisting of the revenue from the contracts with the customers has introduced the model for the revenue recognition which is based on the control of the products and services transferred to the customers. AASB 16 consisting of leases will amend the leases accounting. The lessees would need for bringing all the leases on the financial position statement as the difference between finance leases and operating leases has been removed (PwC, 2018). The accounting of lessor largely remains unchanged. AASB 17 consists of the insurance contracts have introduced the measurement approached for the accounting of the insurance contracts. It consists of the building block approach for contracts of long-term, premium allocation approach for a contract of short terms and variable free approach for the contracts of directing participating. The contract level is to be lower which is expected under the current practices. The implementation of AASB 9 will impose a significant impact on the financial liabilities, equity instrument and financial assets of the bank (Gowthorpe, 2008). The management of the bank needs to deal with the impacts that will occur due to the application of AASB9.

References

Annual Report (2017). Annual Report. [online] Commbank.com.au. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed 24 May 2018].

Britton, A. and Waterston, C. (2013). Financial accounting. Harlow: Financial Times Prentice Hall.

Holton, R. (2012). Global finance. London [u.a.]: Routledge.

Horngren, C., Sundem, G. and Elliott, J. (2014). Introduction to financial accounting. Harlow: Pearson Education Limited.

Jones, M. (2013). Accounting. Hoboken: John Wiley Inc.

Khan, M. and Jain, P. (2007). Financial management. New Delhi: Tata McGraw-Hill.

Needles, B. and Powers, M. (2012). Financial accounting. Mason, OH: South-Western Cengage Learning.

Porter, G. and Norton, C. (2017). Financial accounting. Boston, MA: Cengage Learning.

PwC (2017). New standard - Financial instruments. [online] PwC. Available at: https://www.pwc.com.au/ifrs/new-standard-financial-instruments.html [Accessed 24 May 2018].

PwC (2018). New standard - Financial instruments. [online] PwC. Available at: https://www.pwc.com.au/ifrs/new-standard-financial-instruments.html# [Accessed 24 May 2018].

Rayman, R. (2013). Accounting Standards. Hoboken: Taylor and Francis.

Shapiro, A. (2014). Multinational financial management. Hoboken (NJ): J. Wiley.

Shim, J. and Siegel, J. (2008). Financial management. Hauppauge, N.Y.: Barron's Educational Series.

Shim, J., Siegel, J. and Shim, J. (2012). Financial accounting. New York: McGraw-Hill.

Wolf, M. (2010). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.

Gowthorpe, C. (2008). Financial analysis. Oxford: CIMA.

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