Please Use This Basic Examples and Explanation to Beter Understand the Topic of Financial

Dear students;

Please use this basic examples and explanation to beter understand the topic of financial instruments. We only focus on 2 categories of financial assets.

These examples illustrate the difference in disclosure and recognition of different category of financial assets.

FINANCIAL ASSETS:

3 Categories of financial assets:

-At fair value through profit or loss (held for trading/speculative purposes)

Measurement: Fair value, excluding transaction costs

Fair value gain/loss – disclose in SOCI under “profit or loss” (other income/expenses)

-At fair value through other comprehensive income (not-held for trading)

Measurement: At fair value + transaction costs

Fair value gain/loss – Disclose in “other comprehensive income” in SOCI and accumulated in Mark-to-market reserve in the statement of changes in equity.

-At amortised cost (not applicable in FAC2601)

Examples:

50 000 shares in Bulls Ltd @ R 50 000. Transaction costs R 1000.Shares trade on JSE and market value at year end were R3 per share. These shares are held for speculative purposes.

-Identify category: At fair value through profit or loss

-Measurement:Fair value (Excl transaction cost)

-Initial recognition: R 50 000

- Year end @ fair value:

50 000 shares x R 3 = R 150 000

Fair value adjustment on year end: R 150 000 – R 50 000 = R 100 000.

Disclosure:

-Recognise the fair value adjustmentin “profit or loss” in SOCI and profit before tax note

-Investments will disclosed at fair value under Current assets in the Statement of Financial Position

Example 2

50 000 shares in Bulls Ltd @ R 50 000. Transaction costs R 1000.Shares trade on JSE and market value at year end were R3 per share. This investment was designated as not-held for trading.

-Identify category :At fair value through other comprehensive income

-Measurement : Fair value (Incl transaction costs)

-Initial recognition : R 50 000 + R 1000 = R 51 000

-Measurement at year end @ fair value:

50 000 shares x R 3 = R 150 000

-Fair value adjustment: R 150 000 – R 51 000 =

R 99 000.

Disclosure:

-Recognise the fair value adjustmentin “other comprehensive income” in SOCI and mark-to-market reserve in SOCE

-Investmentswill be disclosed at fair value under Non-current assets in the Statement of Financial Position