Classification of financial instruments manufacturing enterprises

Thís article examínes the procedure of classíñcation of ñnancíal ínstruments under IFRS. Pecutiatities of classífication and reclassífication of financíal assets and ñnancíal liabilities by categoties, classes. Dísclosed to the order of classífication of fínancíal mstruments on a busmess model that was selected by the management of mdustríal enterprises.

Over the past twenty years the world market of ñnancíal mstruments íncreased sígmficantly not only quantitatively, but also qualítatívely, gíven theír íncreasmg complexíty. Now the enterprise ís not límíted to the use of tradítíonal techníques, such as cash and cash equívalents, long-term ínvestments and loans and receívables, but all the more ínclíned to complícated mechanísms of risk management usíng derivatives (from the Engtish "derivative" ís derived), í.e., derivative ñnancíal mstruments and the series of mterconnected ñnancíal mstruments.

The 2008-2009 crísís had a strong ímpact on all spheres of human actívíty. The negative ímpact of the crísís ín varyíng degrees, been exposed to many companíes all sectors of the economy. The theme of the global ñnancíal crísís was one of the most ímportant topícs díscussed at the London summít of G-20 ín April 2009. On the sídelínes of the summít, experts was subjected to the strongest críticísm of the mternational ñnancíal reporting standards (IFRS), on the basís of whích the financíal statements of many companíes.

However the objective of ñnancíal statements, prepared under IFRS, ís not the salvation of the company from the mfluence of the global economíc crísís ín all íts manífestatíons. Thís statement applíes to all reporting regardless of whether ít ís made ín accordance wíth IFRS, national standards of a particular state or U.S. GAAP (U.S. generally accepted accounting príncíples). To reduce the negative ímpact of the crísís on the financíal and economíc actívíties of the company wíll allow effective management of financíal risks, whích can't act wíthout timely and qualíty ínformatíon. The presence of ñnancíal statements, prepared under IFRS, ís not an absolute índícator of stable and successful ñnancíal posítíon of the company, and does not protect from ínfluence of consequences of the world fínancíal- economíc crísís. However, only ñnancíal statements prepared ín accordance wíth IFRS, contaíns ínformatíon that ís useful to perform forecasting and financíal risk management [1, p.3].

Logícal presented the actions of the IASB, whích began and stīll ís actively workíng on ímprovíng ínternatíonal standards, ín particular IFRS 9 Fínancíal ínstruments (IFRS 9). Thís standard contaíns the procedure of analysís and measurement of fínancíal assets and liabilities and replaces a large part of IAS 39 Fínancíal mstruments: recognítíon and measurement" (IAS 39). It IAS 39 one of the most complex and often critícíze the professíonal communíty standards. Refmmg IFRS 9 as the project has acquíred a specíal status, because the standard work by experts as the IASB and the body that prepares the American standards. These organizations have gone through convergence and approxímatíon its standards, whích requíred close cooperatíon.

Kazakhstan, as an índependent state, actívely integrating ínto the ínternatíonal communíty, adopting ínternatíonal best practices, íncludíng ímplementíng IFRS. In the Law "On accounting and fínancíal reporting" dated 28.02.2007 year fíxed able to use for the purposes of accounting IFRS [2].

Legal regulation of operations wíth fínancíal ínstruments ín the Repubtic of Kazakhstan is carried out by dífferent normative-legal acts acting on the territory of the country and strict observance of whích is mandatory.

Havíng studíed hístory the accounting of financíal ínstruments we came to the conclusíon that the cívíl code was ín thís kínd of "píoneer", sínce beíng adopted ín 1994, for the fírst time at the legíslatíve level, strengthened the requírements for financíal ínstruments ín the Repubtic of Kazakhstan.

In the early 90-ies of accounting was ín a state of an embryo, whíle ín world practice have long operated ín IAS 25, "Accounting for ñnancíal ínvestments", whích was adopted on 1 January 1985, the then Commíttee on IFRS. In IFRS 25 was consídered all types of financíal ínvestments as securities and ínvestment property, where these assets are consídered as assets of the same type wíth the same characteristics. From here, select a classification for the accounting of thís asset was quíte common - the ínvestments are dívíded ínto short term and long term, dependíng on the íntentíons of companíes. Specíñc requírements for the separation of short-term ínvestments to long-term, but íntends companíes, IFRS 25 was not consídered. Moreover, thís division of fínancíal ínvestments was part of the generally accepted concepts of accounting of assets, which were divided into the current of up to one year and not current in excess of one year, i.e. the long-term.

Traditional accounting, ensuring the needs of manufacturing companies, as a rule, is directed to the accrual of income and correlation of them with costs. Hence, the main accounting conceptual framework is the recognition of income and expenses in the period in which they arise or are incurred.

Data universally accepted concept, which is based on the cost accounting insufficient for accounting for financial assets and financial liabilities. In particular:

• accounting based on the recognition of the transition of all benefits and risks of ownership of the asset - this system is suitable for business transactions, where the benefits and risks associated with a particular asset or liability, divided up and distributed to various stakeholders;
• certain derivative financial instruments (such as options) have little initial cost or didn't have. In traditional accounting, based on the concept of original historic cost, these financial instruments were neoteny or recorded incorrectly. I.e. if the initial cost of the operation is zero, the account it won't find its reflection. The cost of financial assets and financial liabilities is virtually irrelevant for operation of the risk management framework [3].

From the appropriate classification of financial instruments directly determine the order of their registration, in particular, the initial and subsequent measurement. It is therefore very important in the classification of financial instruments, to give preference to the economic nature of transactions with financial instruments, rather than their legal form. That is, to what purpose were issued or purchased and what is their function. Critical here is the opinion of company management, and professional judgment accountant. However, this is not always possible, and therefore leads to an incorrect reflection of financial instruments accounting. Mostly it concerns their classification according to categories, as well as the recognition and evaluation in one of the selected company business model. These problems have become apparent during the global financial crisis in 2008-2009. Financial statements of such companies misled its users, often leading to wrong economic decisions.

Studying and analyzing the provisions of IAS relating to the accounting for financial instruments, in particular IFRS 9, we came to the conclusion that the amendments that were introduced by the experts of the Council for IFRS in the accounting for financial instruments aim is to ensure that the accounting for operations with financial instruments coincided with the approaches of the company's management on the use of the asset in its financial and economic activities and have been taken into account the characteristics of the asset. Therefore, the main criterion that distinguishes one approach to accounting from the other, there is the business model of the company for the management of these assets. A financial instrument is a contract where one party occurs financial asset and the other financial liability or an equity instrument. The same definition of a financial instrument in paragraph 1 of article 128-1 gives the civil legislation of the Republic of Kazakhstan, namely, a financial instrument is money, securities, including derivative securities, derivatives and other financial instruments, in the result of transactions in which at the same time appears in the same organization financial asset and the other a financial liability or equity instrument [4].

So after looking at various sources definition of the term "financial instruments", we can conclude that a financial instrument is the "coin", which has two sides: on the one Issuer, and on the other, the investor or lender.

Financial instruments are divided into:

• financial assets;
• financial liability, or
• equity instruments [5].

From here to financial assets include the following assets:

• cash and cash equivalents;
• cash or other financial assets, which may be required under the contract from the other side (e.g. accounts debt);
• the right under the agreement to exchange financial instruments with another entity on the potentially favorable terms (for example, investments in bonds);
• equíty ínstrument of another party (for example, ínvestments ínto shares);
• a contractual agreement whích wíll or may be executed private equíty ínvestments.

Accordmg to the Standard plan of accounts of book keepíng (heremafter - TPS BOO) № 185 from g. ñnancíal assets are recognízed on the followmg maín groups of synthetic accounts: 1000 "Cash", 1100 "Shortterm financíal ínvestments", 2000 "a Long-term financíal ínvestments" [6].

However, the financíal assets do not ínclude assets such as:

• physícal assets, such as ínventoríes, fixed assets and assets leased;
• íntangíЫe assets;
• expenses advances, whích assume the future availability of goods, works or servíces [7].

These assets are non-financíal as they do not lead to the exístíng right to receíve cash or other fínancíal assets, despíte the fact that create the poss^^^y to generate cash ínflows or other assets.

A fínancíal habílíty ís any contractual obfigation that:

• to transfer cash or another fínancíal asset to a thírd party (for example, payables);
• to exchange financíal ínstruments wíth another entíty on potentially unfavorable condítíons (for example, bonds íssued);
• a contractual agreement whích wíll or may be carried out íts own equíty fínancíal ínstruments of the company.

Accordmg to the SCC BOO financíal liabilities are recogmsed on the followmg maín groups of synthetic accounts: 3000 "Short-term fínancíal liabilities", 4000 "Long-term financíal liabilities" [6].

Fínancíal ínstruments are: such oblígatíons that are ín fact non-contractual (e.g. tax);

• operating lease;
• contractual oblígatíons and rights that are assocíated wíth non-fínancíal assets, the calculation of whích ís not the same as on financíal ínstruments.

Accordmg to IAS 39, financíal assets are classífíed as:

• avaílable-for-sale;
• carried at faír value, wíth such change on the profit or loss;
• loans and receívables;
• ínvestments held-to-maturíty [5].

We formulate the followmg characteristics of the above categories fínancíal ínstruments:

1. financíal assets or financíal liabilities classífíed as avaílable for sale are:

• purchased or receíved for the purpose of sale or repurchase ín the near future;
• as a result of the ímplementatíon of the ímtial recogmtion, are part of a joíntly managed portfolío of ídentifíed fínancíal ínstruments, where the recent transactions lead to the recogmtion of profits ín the short term; or
• derivative financíal ínstruments (except those that ís a financíal guarantee contract).

1. classífied by the company as financíal assets or financíal liabilities measured at full faír value, reflecting changes ín profit or loss (heremafter - OPS). The company can apply thís classífícation when thís provídes ínformatíon that corresponds to the príncíple of relevance ín connection wíth the fact that:

• termínate or sígníficantly reduces the ínconsístent use of the príncíples of recogmtion or measurement (often called the "accounting díscrepancy"), whích otherwíse would have occurred ín the measurement fínancíal assets or fínancíal liabilities or recognízíng related to them and profit and loss statement usíng one of the many databases; or
• ín accordance wíth a documented strategy (polícy) fínancíal risk management or ínvestment strategy management group of fínancíal assets or a group of financíal liabilities carried out under full faír value, and key members of the admmístrative staff, such as: Dírector General and the Board of Dtiectors of the company, provídes ín-house ínformatíon about thís group, created on the same basís.

In accordance wíth paragraphs 9-11 and B4 IFRS 7 Fínancíal ínstruments: dísclosures (IFRS 7), the company should dísclose mformation about financíal assets and financíal liabilities classífied ín the category of financíal mstruments carried at faír value wíth reflection ín SDA [7].

financíal mstruments ín the form of ínvestments held until maturity are non - derivative financíal assets wíth fixed or determínable payments and fixed maturity, whích the company holds or íntends to hold to maturity, other than:

• -assets classífíed by the company as measured at faír value, reflecting changes ín SDA, after theír mítial recogmtion;
• -assets that are classífíed by the company as avaílable for sale; and
• assets that are the loan or receivable.

1. loans and receívables are non - derivative financíal assets wíth fixed or determmable payments that are not quoted ín an active market, ín addítíon:

• assets for whích the company has the íntentíon to ímplement ímmedíate or ín the near future, classífíed as held for tradíng, and those assets, whích the company recognízes as carried at faír value wíth reflection ín the servíce delívery organízatíon;
• -assets classífíed by the company as avaílable for sale; and
• -assets, a sígníficant portion of the mítial ínvestment ís not recoverable from the owner, unless the owner ís deteriorating credítworthíness, and whích shall be classífíed as avaílable for sale. If the share purchased ín a group of assets that are not loans or receívables, ít does not apply to thís category of fínancíal mstruments as loans or receívables.

IFRS 13 "Faír value", establíshes the príncíples of mítial and subsequent measurement at fati value, mcludmg the measurement of financíal mstruments at faír value.

All financíal liabilities are classífíed as "measured subsequently at amortised cost usíng the effective ínterest method.

Exceptions to the General rule ínclude:

• -financíal liabilities carried at faír value through SDA (derivative financíal mstruments);
• -fínancíal guarantees;
• -commítments to extend credít at a rate below market.

Subsequent reclassification of ñnancíal baHUties are ππtially recognízed at faír value through SDA ímpossíble. In accordance wíth IFRS 7, the company, to classífy ñnancíal ínstruments ínto classes. However, IFRS 7 does not províde a specíñc fist of classes of fínancíal assets and liabilities. In thís standard ís establíshed, that class must contaín ñnancíal assets or financíal baHUties of the same nature and wíth ídentícal characteristics, and that classes necessarily verified by carryíng articles. Classes of fmancíal mstruments ís not the same as the category of fínancíal mstruments. Categories defined ín the relevant IFRS and described above. Unlíke categories, classes are defined at a more detaíled level and are reconcíled to the accounting balance sheet. The level of detaíl for the class depends on specíficíty of actívíty of the company.

Below ís a table where the experts of the IASB has allocated classes of fmancíal assets and liabilities that are recommended for use ín accounting. Once classification fínancíal ínstrument, the company must adhere to thís classification. Reclassification, í.e. the translation of financíal mstruments from one category to another, ís allowed only subject to certaín rules, whích are described below.

There are followíng rules of transfer of fínancíal assets between categories:

1. fínancíal assets at faír value through SDA: reclassification of prevíously selected category ís not permítted. The company ís prohíbíted to transfer a financíal ínstrument from thís category to another, or to transfer other tool ín thís category, ín the period of production or possessíon of thís tool.
2. to translate financíal mstruments from the "held to maturity" to "avaílable for sale": ít ís allowed, ín case of change of opportumty or desíre to be ímpractícal theír future classíficatíon as ínvestments held until theír maturity date, you need to transfer them to the category "avaílable for sale" and make theír revaluation at faír value.
3. to transfer fínancíal mstruments out of the "avaílable for sale" ín the "held to theír maturity date": ít ís allowed, ín case of opportunítíes or mtentions, or ín specíal cases when ít ís ímpossíble to continue to evaluate relíably the faír value, or as a result of what has expíred "two fínancíal years after termínatíon of recognítíon by category, ís logícal to evaluate a financíal ínstrument at íts amortised cost.
4. translate from "loans and receívables" ín the "avaílable for sale": ít ís forbídden, as ín thís category to classífy any fínancíal assets that meet the criteria category at rnmal recognítíon, ín accordance wíth IAS 39.
5. to transfer from the avaílable-for-sale "loans and receívables": ít ís forbídden, because the characteristic of the category "loans and receívables" means that a fínancíal ínstrument that ís referred to the category "avaílable for sale" at rnmal recognítíon ís not maybe ín the future, be referred to the category "loans and receívables", ín accordance wíth paragraph 9 of IAS 39 [9, p.44].

IFRS 9 to transfer from one category to another need ín rare cases but may not be transferred to the category "at faír value wíth reflection ín íts changes through SDAS and out of her. Fínancíal mstruments, whích were transferred from category "held to theír maturity date", because of a change ín Arnctionafity or mtentions recognízed as ímplementatíon, as thís category ís now "líquídated". In the case when the remaíníng mstruments for two years are transferred to the category "avaílable for sale", then ít becomes the most common reclassification due to the "liquidation" of thís category. In such cases, fínancíal mstruments are subject to revaluation at faír value, and formed as a result of a revaluation, the dífference ís recognísed ín equíty.

Thus, IFRS 9 "Fínancíal mstruments" sets the príncíples of preparation and presentation of fínancíal reporting ín respect of a financíal asset and a fmancíal Hab^ty that would be presented to the users of the fínancíal statements ís appropriate for the nature and useful ínformatíon that enables these users to measure the magnítude of the amounts and the tímíng and uncertam future cash ínflows and outflows of the company.

Reclassification ís applíed prospectively. Any prevíous gaíns or losses, or the mterest ís not adjusted. If the asset reclassífied ín the category at faír value, the faír value ís determmed at the date of reclassíficatíon. The dífference between the carryíng amount and faír value ís recognísed ín profit or loss. If the asset reclassífied ín the category carried at amortized cost, faír value wíll be íts carryíng amount at the date of reclassification.

Accordmg to the content of the agreement on mítial recognítíon, ín the result of íssue of the fínancíal ínstrument, the need for classíficatíon eíther as a liability or as equíty. Some fínancíal mstruments beíng, ín essence, the oblígatíon to have the legal form of an equíty ínstrument. A vívíd example ís the preference share. Hence, the accountant must admít to a fmancíal ínstrument under íts economíc entity. In practice, very often have problems wíth correct mterpretation of the economíc sense of the fmancíal ínstrument, as more and more complícated becomíng a "multi-storey".

To solve thís problem, you must use the syntax and semantic approaches to the correct mterpretation of the essence of fínancíal mstruments, whích are described ín the works of such foreígn scíentísts- theorísts, as Hendriksen AS and van Breda F They consídered the theory of accounting as language, assumíng that the search for solutions to any problems you should ask the followíng questions about "language", hís words and phrases: What ís the effect of the word to the hstener? 2). What meaníng, íf any, are the words? 3). Form íf the words logícal reasoníng? The answers to these questions are only a part of the doctrine of "language". The semantics (from lat. semantics) - the study of the meamng of "language", the syntax (from lat. syntactics) - grammar or logíc "language" [10, p.19]. Take the example of preferred shares, whích clearly demonstrates the objective need ín the applícatíon of the above approaches. Preference shares, redeemable, should not be classífíed as equíty, as there ís a contractual obligation to transfer financial assets (e.g. cash) to their holders. Hence, preferred shares are financial obligation.

Preferred stock, the terms of issue of which provides for their unconditional redemption by the Issuer or give the holder the right to require the Issuer to redeem a promotion, it corresponds to the concept of a financial liability, and allows us to classify them as such, even though according to their legal nature they are the equity instrument. An equity instrument is any contractual agreement that enshrines the right to a proportional part of the company's assets that remain as a result of deducting all of its liabilities. Hence, if a financial instrument contains an equity component and a component of a financial liability, then the data of its components must be identified and presented in the financial statements separately [11, s].

If the result of a contractual agreement can't be transmitted or received its own equity instruments of the company, then such agreement is not an equity instrument.

A financial liability occurs when there

• contractual obligation to transfer cash or another asset or to exchange financial assets or liabilities on potentially unfavorable conditions;
• non-derivative instrument, which is required or may be necessary to send ambiguous number of its own equity instruments;
• derivative, which can be or will be made repayment not issue a fixed number of own equity instruments, and in any other way.

Equity instrument occurs when there is:

• non-derivative instrument that requires or may require the transfer of a fixed number of its own equity instruments;
• a derivative that will or may be settled by the issue of a fixed number of its own equity instruments.

For the purposes of correct classification of the financial instrument as a financial liability or equity specialists of the IASB offer a "decision tree" which illustrates the algorithm of the decision, whether the instrument is a financial liability or equity instrument in accordance with figure 2 [9, p.27].

IAS 32 defines principles for differentiation classification of a financial instrument as a liability or equity. While this classification is mainly determined by its economic substance, not legal form. An instrument is a liability if the Issuer is obliged or may be obliged to transmit to the holder either cash or another financial asset. This distinguishes liabilities from capital. The instrument is classified as equity when it represents a residual interest in the net assets of the Issuer.

In the classification of a financial instrument as a liability or equity must consider all the relevant characteristics.

For example:

• in case when the Issuer has an obligation to reacquire the financial instrument, such an instrument is a liability;
• a financial instrument is a liability, where the Issuer does not have an unconditional right to avoid payments in the case when neither the Issuer nor the holder may not choose the way of redemption of such instrument in cash or other form, as this is beyond their control [9, p.24].

The accounting treatment of dividends, interest, profits and losses in SDA is based on the classification of financial instruments. Such financial result, which refers to a financial instrument (or component)that are classified as a financial liability should be reflected as income or expense in profit or loss. Dividends accrued on preferred shares must be recognized in accounting as financial expense and not as profit distribution. The revenues are distributed between the owners of the equity instrument is directly debited to the account equity. Hence, these dividends must be reflected in the statement of changes of equity, but not in the SDAS. Profit or loss that is associated with the process of refinancing or maturity of a financial instrument, must be attributed to the profit and loss or equity, depending on the classification of such instrument.

Transaction costs arising from the issue of a compound financial instrument are allocated on its debt and equity components in proportion to the allocation of proceeds. In other words, the classification of these articles is a reflection of the classification of basic element. Companies that pay dividends on financial instruments are required to apply the provisions of IAS 33 "Earnings per share" [12, p.48].

According to IAS 1 "Presentation of financial statements (IFRS 1), total own shares in the possession of the company are disclosed separately in the statement of financial position or in the notes [13]. If a company buys its own shares from a related party, in the financial statements must be submitted information required by IAS 24 Disclosures about related party (hereinafter - IFRS 24) [14]. In accordance with IAS 32 bond is a financial tool. Purchase bonds classified investor as financial assets and notes issued by the Issuer classified as financial liabilities. Evaluation and accounting of bonds is carried out in accordance with the requirements of IAS 39. The bonds are included in the category of financial instruments held to maturity, as debt securities, according St civil legislation.

In accordance with the Law of the Republic of Kazakhstan "On paper circulation in the Republic of Kazakhstan" dated April 28, 1997 №97-1, bill - payment document is strictly prescribed form containing unilateral unconditional monetary obligation [15]. There are different types of notes: a simple (solo), a bill (the bill), commercial, discount etc.

The list of literature:

1. 1.Эндрю Вайалс "МСФО (IFRS) 9 "Финансовые инструменты": первый опыт применения". Бюллетень KPMG "Международные стандарты финансовой отчетности", декабрь 2009г.
2. 2.Закон Республики Казахстан "О бухгалтерском учете и финансовой отчетности" № 234 от 28.02.2007г. (с последними изменениями и дополнениями)
3. Диплом по международной финансовой отчетности: Курс лекций/под ред. Фила Бредбери. Тэддингтон: "Издательство "Экаунтэнси Тьюишн Сентр Лимитед" ("Accountancy Yuition Centre Limited")", 2012. - С.3606
4. Гражданский кодекс Республики Казахстан (общая и особенная части) от 27.12.1994г. (с последними изменениями и дополнениями)
5. МСФО (IАS) 39 "Финансовые инструменты: признание и оценка": пер. с англ. - М: "Аскери- АССА", 2014. - 1051с.
6. Типовой план счетов бухгалтерского учета. Приказ МФ РК № 185 от 23.05.2007г.
7. Нургалиева Р.Н. Финансовый учет-2: Учебник. - Караганда: КЭУ, 2012. - 340с.
8. МСФО (IFRS) 7 "Финансовые инструменты: раскрытие информации": пер. с англ. - М: "Аскери- АССА", 2014. - 1051с.
9. МСФО (IАS) 32/39 Первоначальное признание. Часть 1: Учебно-практическое пособие для специалистов в области бухгалтерского учета и отчетности. - М: ЗАО "ПрайсвотерхаузКуперс Аудит", 2013. - 101с.
10. Хендриксен Э.С., Ван Бреда М.Ф. Теория бухгалтерского учета: Пер. с англ./ Под ред. проф. Я.В. Соколова. - М.: Финансы и статистика, 2000. - 576с.
11. Шеримбетов А.Д. "Применение семантического и синтактического подхода к толкованию финансовых инструментов". Материалы Республиканской научно-практической конференции студентов, магистрантов, докторантов и молодых ученых "Молодежь и глобальные проблемы современности" Том 3. - Караганды: "Болашак-Баспа", 2014г. - 273с.
12. Шулдякова Г. Учет привилегированных акций при расчете прибыли на акцию в условиях объединения компаний. Журнал "МСФО ББ". Алматы: "Издательство БИКО", №1, 2014. - 80с.
13. МСФО (IAS) 1 "Представление финансовой отчетности": пер. с англ. - М: "Аскери-АССА", 2014. - 1051с.
14. МСФО (IAS) 24 "Раскрытие информации о связанных сторонах": пер. с англ. - М: "Аскери- АССА", 2014. - 1051с.
15. 15.Закон Республики Казахстан "О вексельном обращении в Республике Казахстан" №97-1 от 28 апреля 1997 года (с последними изменениями и дополнениями)