Demystifying GRAP 104 on Financial Instruments: Scope and Definitions

Exclusions from scope

·       Forward contracts to buy or sell an acquiree not under common control.

·       Contractual rights and obligations arising from non-exchange revenue transactions to which GRAP 23 on Revenue from Non-Exchange Transactions applies.

·       Statutory receivables as defined in GRAP 108 on Statutory Receivables.

·       Rights and obligations to which GRAP 32 on Service Concession Arrangements: Grantor applies.

No specific inclusions relating to these instruments.

Rights and obligations arising under insurance contracts within the scope of the IFRS Accounting Standard(s) on insurance. (other than those listed in the specific inclusions).

Issuer’s rights and obligations arising under an insurance contract that meets the definition of a financial guarantee contract.

Loan commitments:

·       Designated as financial liabilities at fair value through surplus or deficit.

·       Settled net in cash or by delivering or issuing another financial instrument.

·       Commitments to provide a loan at a below market interest rate, including concessionary loans.

·       Impairment, derecognition, presentation and disclosure of :

–          Lease receivables recognised by a lessor.

–          Finance lease payables recognised by a lessee.

Derivatives that are embedded in leases and presentation and disclosure of embedded derivatives separated from a lease.

Definition

Interpretation

Contracts are evidenced by the following three criteria:

a)     contracts involve willing parties entering into an arrangement;

b)     the terms of the contract create rights and obligations for the parties to the contract, and those rights and obligations need not result in equal performance by each party; and

c)     performance and remedy for non-performance are enforceable by law.

The characteristics that are important for assessing whether an instrument is a financial instrument or not are as follows:

·       The arrangement is contractual rather than a statutory arrangement (i.e. those that arise from legislation, regulation or equivalent).

·       One party to the transaction has a financial asset, and the other party to the transaction has either a financial liability or a residual interest (”equity”).

A financial asset is:

a)     cash;

b)     a residual interest of another entity; or

c)     a contractual right to:

         i.       receive cash or another financial asset from another entity; or

        ii.       exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity.

Some aspects to consider:

·       Cash – “cash” may take many forms, such as in an entity’s bank account, monetary instruments (e.g. cheques, postal orders) and physical cash (notes and coins).

·       For an asset to be a financial asset, the transaction must be settled through the receipt of cash or another financial asset and not through the receipt of goods or services.

A financial liability is any liability that is a contractual obligation to:

a)     deliver cash or another financial asset to another entity; or

b)     exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.

For a liability to be a financial liability, the transaction must be settled through the payment of cash or another financial asset and not through the provision of goods or services.