IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 25/ Financial In struments: Recognition and Measurement (l A S 39)

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6.1.2 Since fair value is a market transaction price, on initial recogniti on fair value generally is assumed to equal the amount of consideration paid or received for the financial asset or financi al liability. Accordingly, lAS 39 specifies that the best evidence of the fair value of a financial in– strument at initial recognition generally is the transaction price. An entity may be able to overcome that presumption based on observable market data: in other words, if there is a difference between the transaction price and fair value as evidenced by comparison with other observable current mar– ket transacti ons in the same instrument or based on a valuation technique incorporating only ob– servable market data, an immediate gain or loss on initial recognition results . Recent Developments IASB currently has a project on its agenda to develop new and improved guidance on fair value measurements. The objectives of this project are to establish a single source of guidance for all fair value measurements required by IFRS, clarify the definition of fair value and related guidance in order to more clearly communicate the measurement objec tive, and enhance disclosures about fair value. However, this project will not extend requirements for the use of fair value measurements. 6.1.3 Transaction costs may arise in the acquisition, issuance, or disposal of a financial instru– ment. Transaction costs are incremental costs, such as fees and commissions paid to agents, advis– ers, brokers and dealers ; levies by regulatory agencies and securities exchanges; and transfer taxes and duties . Except for those financial assets and financial liabiliti es at fair value through profit or loss, transaction costs that are directly attribut able to the acqui sition or issue of a financial asset or financial liability are capitalized (i.e., they are added to fair value and included in the initial mea– surement of the financial asset or financial liability and expensed over the life of the item, when impairment occurs, or on derecognition, as appropriate ). Transaction cost s are expensed immedi– ately for financial assets or financia l liabilities measured at fair value, because the payment of transaction costs does not result in any increase in future economic benefits to the entity (i.e., you cannot sell a financial asset at a higher price because you have paid transac tion costs). Example Entity A purchases 100 shares of Entity B with a quoted price of $124 f or at total consideration of $12,400. In addition, Entity A incurs transaction costs in the form of broker f ees of $100 to acquire the shares. Entity A classifies the shares as at fa ir value through profit or loss. In this case, Entity A would make these journal entries on initial recognition: Dr Financialassets at fair value through profit or loss 12,400 Dr Fee expense 100 Cr Cash 12,500 (To recognize acquisition of 100shares atfair value of$12,400) If Entity A had classified the shares of Entity B as ava ilable f or sale (i.e.. a category for which changes in fair value are not recognized in profit or loss), the transaction costs would have been in– cluded in the initial measurement ofthe fi nancial asset: DrAvailable-far-sale financial asset 12,500 Cr Cash 12,500 (To recognize acquisition of 100shares at fair value plus transaction costs of$ 12,500) The same requirements apply to fi nancial liabilities. For instance, if Entity A issues bonds fo r total proceeds of $17, 100 and incurs transaction costs of $300 in issuing the bonds, it would make these journal entries, assuming the bonds are not measured at fa ir value throu gh p rofit or loss: Dr Bonds 16,800 Cr Cash 16,800 (To recognize issuance of bondsfor net proceeds of$16,800) 6.1.4 There may be a difference between the fair value and the consideration received or paid for related-party transactions or transactions where the entity expects to obtain some other benefits. If there is a difference between the consideration paid or received and the initial amount recognized for the financial asset or financial liability, that difference is recognized in profit or loss (unless it qualifi es as some other type of asset or liability).