Financial Instruments & Investments

• Investments play a key role in wealth management and value creation in the financial world.
• Investments are financial assets that generate earnings or income for their owners and can be stocks, bonds, real estate, mutual funds, and other financial instruments.
• The main goal when investing in assets is to boost an individual's, company's, or entity's capital or net worth; it can provide returns via capital gains, interest, dividends, and other methods of income generation.
• Investing entails taking risks and managing these risks effectively is essential for reaching a balance between security and performance.
• A financial instrument is a contract that leads to a financial asset for one entity and a financial liability or equity instrument for the other party (S11.3).
• A contract involves two or more parties with clear economic effects that are generally legally binding.

Dynamics of Recognition of Financial Instruments

• For one party, cash is considered a financial asset.
• For another party, cash is treated as equity contributions.
• Cash in foreign currency is a financial asset.
• A foreign supplier can be a debt.
• Banks are considered financial assets.
• Whereas, account holders have liability.
• Accounts receivable are financial assets matched by current liabilities for suppliers.
• Financed accounts receivable are financial assets; suppliers have long-term debt.
• Uncollectible accounts are financial assets
• Equity contributions can be investments in shares.
• Equity contributions can be investments in associates.
• Equity contributions can be investments in joint ventures.
• Investments in bonds are financial assets offset by bonds payable.
• Investments in preferred shares are equity contributions
• Investments in ordinary shares are equity contributions.
• Other financial assets include contracts in progress.
• The ability to receive cash or another financial asset from another entity is a contractual right.
• The ability to exchange financial assets or liabilities with another entity under potentially beneficial terms is a contractual right.

Financial liability

• A contractual obligation exists to deliver cash or another financial asset to another entity.
• A contractual obligation exists to exchange financial assets or financial liabilities with another entity under potentially unfavorable conditions.
• A contract will or may be settled in the entity’s own equity instruments.
• The entity is or may be required to receive a variable number of its own equity instruments.
• The entity 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.

Equity Instrument

• Is a contract that evidences a residual interest in the assets of the entity after deducting all of its liabilities.
• Section 11 of the NIIF for pymes provides directives specific to the recognition, measurement and presentation of financial instruments.

Key issues covered in Section 11 of NIIF for PYMES

• It establishes categories for financial instruments like financial assets, financial liabilities, and equity.
• Describes when and how financial instruments should initially be recognized in financial statements.
• Provides details on how to measure financial instruments at amortized cost, fair value, or using the effective interest rate method.
• Sets forth the requirements for presenting financial instruments in financial statements, including balance sheet classification and how changes in fair value should be presented.
• Prescribes information disclosure requirements, including financial risk details.
• Section 12 of the NIIF for PYMES offers specific guidance on how small and medium-sized businesses should handle somewhat more complex or combined financial instruments in their financial statements.
• Compound financial instruments have features of both equity and debt.
• These instruments incorporate elements granting rights to shareholders or owners, as well as financial obligations.
• Include redeemable or convertible preferred shares that combine debt and equity characteristics.

Concept, Classification and Financial Instruments

• Investments involve allocating financial resources, such as money, to acquire assets with the aim of generating financial returns in the future.
• The main goal of investments is to grow capital, to generate income, or both, over time, and can be temporary or permanent.
• Financial investments entail deploying resources to acquire assets with the aim of generating profits, establishing economic connections, or fulfilling legal mandates.

"Investment"

• The use of resources for the purchase of assets via which the amount of the investment is anticipated to be recovered, plus some value for profitability.
• Investments enable organizations to maintain their resources in motion and not idle in bank accounts.

Classification of Financial Investments

• Financial investments are classified as investments in debt instruments or equity instruments.

Investments in Debt Securities

• The entity issuing the instruments typically returns the resource to the investor through capital and interest repayments.
• The investor becomes the issuer's creditor.
• This investment type aligns with Section 11 of the NIIF for PYMES.
• Its amortized cost matches the initial investment value plus accrued returns calculated using the effective rate of interest model.
• Debt securities are generally classified as financial instruments.
• On the other hand, equity investments allow participation in the issuing entity's equity.
• Equity investments begin upon investment in the issuing company's equity to gain business profits and the right to a share of residual assets if the company is liquidated.
• To categorize these investments, verify the investor's stake in the issuer’s equity.
• A participation less than 20% is classified as a financial instrument, measured at fair value with changes in profit.
• if the stake exceeds 20%, and the entity lacks decision-making power, classify the investment as an associate.
• An investment in an associate exists when a stake is between 20% and 50%. Initially, recognize at cost and subsequently measure: at cost, at fair value, or via the equity participation method.
• Joint ventures are contractual agreements where multiple parties undertake economic activity under shared control.
• Accounting policy elections are allowed between the cost model, the participation method, or the fair value model.
• A joint operation involves members of an arrangement having joint liability, entitling them to assets and obligating them for liabilities. The recognition of income and expenses follows contractual terms.
• A controlled entity requires consolidation as of December 31, per section 9 of the International Standard for SMEs.

Generally, investments include:

• Ordinary and preferred shares (corporations and similar entities)
• Ownership interests in social entities (limited and collective partnerships)
• Equity securities
• Equity and commercial paper investments

Short-term Investments

• Represent temporary cash investments in easily sold instruments like bonds, notes, and stocks.
• highly liquid investments are easily converted to cash, typically within three months.

Short-Term Fixed Income Securities

• Encompass government-issued bonds and promissory notes maturing in under a year, with a fixed interest rate that may contain CDT, commercial papers, among others.

Securities Held to Maturity

• These are fixed-income investments held from inception to maturity and are measured at amortized cost.

Financial Instruments

• Are defined by the international norm documents that confer the right or obligation to deliver or receive cash or other financial assets.
• NIC 32 defines them as a contract that gives the right to a financial asset in one entity.

Initial Measurement

• Initially measured at acquisition cost in the transaction in addition to other costs like fees, commissions, etc
• The initial cost is the fair value established by the stock exchange if the instrument is listed on the stock market or exchange.

Subsequent Measurement

• Fair value with changes in the income statement.
• At amortized cost, is subject to being maintained until maturity and includes specifics for principal and interest cash flow payments under contract.