j.Financial instruments
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
Financial assets are classified into four categories, which in turn determine the form of recognition and valuation of financial assets and liabilities: “Financial assets at fair value through profit or loss”, “investments held-to-maturity”, “financial assets available-for-sale” and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined by the Company’s management upon initial recognition. The Company generally only has financial assets at fair value through profit or loss and loans and receivables and other investments held to maturity.
In the consolidated statement of financial position, financial assets are classified into current and noncurrent, depending on whether their maturity is less than/equal to or greater than 12 months.
Financial assets at fair value through profit or loss
Financial assets are classified at fair value through profit or loss when the financial asset is held for trading or it is designated as fair value through profit or loss. A financial asset is classified as held for trading if:
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It has been acquired principally for the purpose of selling it in the near term; or |
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On initial recognition, it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or |
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It is a derivative (except those designated as hedging instruments or that is a financial guarantee). |
Financial assets at fair value through profit of loss are recorded at fair value, recognizing in results any gain or loss arising from their remeasurement. The gain or loss recognized in results includes any dividend or interest earned from the financial asset and is recorded in interest expense or income in the consolidated statements of income and other comprehensive income.
Loans and accounts receivables
Loans and receivables are non-derivative financial assets that have fixed or determinable payments that are not quoted in an active market. After initial recognition, loans and receivables are measured at amortized cost using the effective interest method.
Amortized cost means the initial amount recognized for a financial asset or liability plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount and the amount at maturity, less any reduction (directly or through a reserve) for impairment or bad debt.
Other held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets, with fixed or determinable payments and fixed maturity dates that the Company intends and is able to retain until maturity, which is after three months from the date of acquisition. Subsequent to initial recognition, held-to-maturity investments are valued at amortized cost using the effective interest method less any impairment loss.
Impairment of financial assets
Financial assets other than financial assets at fair value through profit or loss are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
For other financial assets, objective evidence of impairment could include:
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Significant financial difficulty of the issuer or counterparty; or |
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Breach of contract, such as a default or delinquency in interest or principal payments; or |
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It becoming probable that the borrower will enter into bankruptcy or financial reorganization; or |
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The disappearance of an active market for that financial asset because of financial difficulties. |
The carrying amount of the financial asset is reduced directly by the impairment loss, except for trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are recorded in results. Changes in the carrying amount of the allowance account are recognized in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through results to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed the amortized cost if would not have recognized the impairment.
Derecognition of financial assets
On derecognition of a financial asset in its entirety, the difference between the asset´s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in results.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value through profit or loss, or other financial liabilities based on the substance of contractual arrangements.
Financial liabilities at fair value through profit or loss
Financial liabilities are classified at fair value through profit or loss when the financial liability is (i) for the contingent consideration that would be paid by the acquirer as part of a business combination covered by IFRS 3 (Business Combinations), (ii) held for trading or (iii) designated at fair value through profit or loss.
A financial liability is classified as held for trading if:
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It has been acquired principally for the purpose of repurchasing it in the near term; or |
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On initial recognition it is part of a portfolio of identified financial instruments that are managed together for which there is evidence of a recent pattern of making short-term profits, or |
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It is a derivative that accounting purposes does not comply with requirements to be designated as a hedging instrument. |
A financial liability other than a financial liability held for trading or a contingent transaction to be paid by owner as part of a business combination, may be designated as at fair value through profit or loss upon initial recognition if:
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Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or |
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The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or |
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It forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at fair value through profit or loss. |
Financial liabilities at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in results incorporates any interest paid on the financial liability and is included in the interest expense in the consolidated statement of income and other comprehensive income.
Other financial liabilities
Other financial liabilities, including loans, bond issuances and debt with lenders and trade creditors and other payables are valued initially at fair value, represented generally by the consideration transferred, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method.
Derecognition of financial liabilities
The Company derecognizes financial liabilities when, and only when, the obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in results.
Effective interest method
The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest income or cost over the relevant period. The effective interest rate is the rate that exactly discounts future cash receivable or payable (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instrument, or (where appropriate) a shorter period, to the carrying amount of the financial asset or liability on its initial recognition. When calculating the effective interest rate, all cash flows must be estimated (for example, prepayment, and the like) except for future credit losses. The calculation must include all commissions and payments or receipts between the parties to the financial instrument, including other premiums or discounts.
Offsetting of financial assets and liabilities
Offsetting of financial assets and liabilities in the consolidated statement of financial position only occurs for accounts receivable and payable arising in transactions that contractually, or by law, have established a right of setoff and for which the Company has the intention to pay a net amount or to realize the asset and pay the liability simultaneously.