IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

appropriate even if the entity were to set aside funds in a trust to repay the liability (so-called in–

substance defeasance).

5.2.2 If a financial liability is repurchased (e.g., when an entity repurchases in the market a bond

that it has issued previously), derecognition is appropriate even if the entity plans to reissue the

bond in the future. If a financial liability is repurchased or redeemed at an amount different from its

carrying amount, any resulting extinguishment gain or loss is recognized in profit or loss .

5.2.3 An extinguishment gain or loss is also recognized if an entity exchanges the original finan–

cialliability for a new financial liability with substantially different terms or substantially modifies

the terms of an existing financial liability. In those cases, the extinguishment gain or loss equals the

difference between the carrying amount of the old financial liability and the initial fair value (plus

transaction costs) of the new financial liability. An exchange or modification is considered to have

substantially different terms if the difference in present value of the cash flows under the old and

new terms is at least 10%, discounted using the original effective interest rate of the original debt

instrument.

Case Study 5

This case illustrates the application of the principle for derecognition offinancial liabilities.

Facts

(a) A put option written by Entity A expires.

(b) Entity A owes Entity B $50,000 and has set aside that amount in a special trust that it will not

use for any purpose other than to pay Entity B.

Required

Evaluate the extent to which derecognition is appropriate in each of the above cases.

Solution

(a) Derecognition is appropriate because the option liability has expired. Therefore, the entity no

longer has an obligation and the liability has been extinguished.

(b) Derecognition is not appropriate because Entity A still owes Entity B $50,000. It has not ob–

tained legal release from paying this amount.

6. MEASUREMENT

6.0.1 The term "measurement" refers to the determination of the carrying amount of an asset or

liability in the balance sheet. The measurement requirements in lAS 39 also address whether gains

and losses on financial assets and financial liabilities should be included in profit or loss or recog–

nized directly in equity.

6.0.2 The next sections discuss these aspects of measurement of financial assets and financial

liabilities:

• Initial measurement (measurement when a financial asset or financial liability is first recog–

nized).

• Subsequent measurement (measurement subsequent to initial recognition). This subsection

also discusses how to determine cost, amortized cost, and fair value.

• Impairment (adjustments to the measurement due to incurred losses).

6.0.3 The measurement of an asset or liability may also be adjusted because of a designated

hedging relationship. Hedge accounting is discussed later in this chapter.

6.1

Initial Measurement

6.1.1 When a financial asset or financial liability is recognized initially in the balance sheet, the

asset or liability is measured at fair value (plus transaction costs in some cases).

Fair value

is the

amount for which an asset could be exchanged, or a liability settled, between knowledgeable, will–

ing parties in an arm's-length transaction. In other words , fair value is an actual or estimated trans–

action price on the reporting date for a transaction taking place between unrelated parties that have

adequate information about the asset or liability being measured.