ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Financial Instruments - Transactions costs - Notes ^{8 / 10}

There will usually be brokers’ fees etc to pay and how you deal with these depends on the category of the financial instrument...

For everything else they get added/deducted to the opening balance.

So if it is an asset - it will increase the opening balance

If it is a liability - it will decrease the opening balance

Nb. If a company issues its own shares, the transaction costs are debited to share premium

Illustration 1

A debt security that is held for trading is purchased for 10,000. Transaction costs are 500.

• The initial value is 10,000 and the transaction costs of 500 are expensed.

Illustration 2

A receivable bond is purchased for £10,000 and transaction costs are £500.

• The initial carrying amount is £10,500.

Illustration 3

A payable bond is issued for £10,000 and transaction costs are £500.

• The initial carrying amount is £9,500.

Note: With the amortised cost categories, the transaction costs are effectively being spread over the length of the loan by using an effective interest rate which INCLUDES these transaction costs

Illustration: Transaction costs

An entity acquires a financial asset for its offer price of £100 (bid price £98)

IFRS 9 treats the bid-offer spread as a transaction cost:

1. If the asset is FVTPL

   The transaction cost of £2 is recognised as an expense in profit or loss and the financial asset initially recognised at the bid price of £98.

2. If the asset is classified as amortised cost

   The transaction cost should be added to the fair value and the financial asset initially recognised at the offer price (the price actually paid) of £100.

Treasury shares

It is becoming increasingly popular for companies to buy back shares as another way of giving a dividend. Such shares are then called treasury shares

Accounting Treatment

1. Deduct from equity

2. No gain or loss shown, even on subsequent sale

3. Consideration paid or received goes to equity

Illustration

Company buys back 10,000 (£1) shares for £2 per share. They were originally issued for £1.20

• Dr RE 20,000 Cr Cash 20,000

  The original share capital and share premium stays the same, just as it would have done if they had been bought by a different third party