Analyzing Financial Reporting: IFRS, Securities, and Their Effects

This report provides a detailed analysis of the impact of different classes of securities on financial statements, focusing on the International Financial Reporting Standards (IFRS). The report examines the effects of debt securities, equity securities, and derivatives on the balance sheet, income statement, and cash flow statement. It explores how debt financing influences financial ratios and the overall risk profile of a business. The report also discusses how equity issuance affects the statement of cash flow and the balance sheet. Furthermore, it addresses the accounting issues associated with derivatives, including embedded derivatives and hedge accounting, and how these instruments are reported at fair value on the balance sheet. The analysis includes a review of relevant financial ratios and the implications of these securities for financial analysts, financiers, and the overall financial health of a company. References from various authors are included to support the analysis.

Running head: INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards
University Name
Student Name
Authors’ Note

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Appraisal of effect of different classes of securities on content of financial reports
Effect of debt security on financial statements
Debt financing refers to total amount of debt that a specific company employs has an
influence on financial statement specifically, balance sheet. Particularly, balance sheet exerts
impact on associations between different components of assertions of balance sheet. In
essence, financial analysts, financiers as well as bankers depend to a specific extent on the
assertion of balance sheet to ascertain then entire profile of risk of the business (Levi &
Segal, 2015). In this connection it can be said that an augmentation in debt can indicate
towards the fact that a firm is advancing towards unstable financial base.
Important financial ration can be considered to be an objective manner to reflect the
association between financial assertion elements with one another. Alterations in the ration of
the company can represent analysts as well as financiers that a corporation is headed in a
specific direction, depending on whether specific ratio is improving with time or declining.
Alterations in the total amount of debt a specific corporation has shall influence many of
financial ratios, depending on the factors for which debt is necessarily issued (Hussain &
Scott, 2015). As such, debt can also be utilized to retire other forms of debt, purchase assets
or else pay expends.
Debt to asset ratio enumerated by way of dividing total debt of the company by the assets
possessed by the company. For instance, in case if a corporation has around $10000 as debt
and $20000 as assets, then debt to asset ratio can be calculated to be 0.5:1. This case shows
that if a corporation increases the debt to purchase more amounts of assets, the entire ratio
alters, although the increase gets added to both numerator as well as denominator.

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Debt to equity ratio reflects the amount of financing of the company that comes particularly
from debt as well as shareholders (Hull & Basu, 2016). As such, this specific distinction is
significant because in case if a business enterprise becomes insolvent, then debt needs to be
recompensed before payments can be made to shareholders of the firm. In essence, a
corporation that bears huge amount of debt in comparison to equity can be considered to be
less probable to deliver return to financiers than a less leveraged corporation. As said by this
ratio is enumerated by dividing whole debt by total shareholders’ equity on the assertion on
balance sheet (Hoyle et al., 2015). Identical to instance in the previous segment, an
enhancement in the total amount of debt leads to degradation of this specific ratio,
irrespective of the way debt is utilized.
For a specific business enterprise, debt is equivalent to leverage. In several cases, leverage
can be considered to be a significant tool to assist a business enterprise expand as well as
grow. In this regard it can be said that higher the debt of a firm is, the less able the company
becomes to make alterations in the current strategy or else operations (Hopper & Bui, 2016).
This is because lenders primarily position limitations on business firms. In case if the
interests as well as payment for principal are not necessarily made according to the
agreement, a business can encounter the risk of losing assets or even encountering bankruptcy
(Gupta, 2017). Keeping track of balance sheet can be considered to be an important tool for
corporation to review the leverage.
Effect of equity security on financial statements
A company might issue equity for diverse reasons. Equity can be issued for a period of
medium term, long term or else to finance a significant expansion (Gitman et al., 2015). At
the time when a company issues equity, this specific amount of money appears in the
statement of flow of cash along with assertion of balance sheet represents cash acquired along

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with the equity. Nevertheless, issuance of particularly equity does not necessarily have an
effect on the income statement.
Equity is essentially ownership in a specific firm. This might be membership interests in a
Limited Liability Corporation, partnership interests in a particular partnership as well as stock
in a business enterprise (Fraser et al., 2015). At the time when a company issues equity,
capital is raised for providing finances form working capital or else for attainment of growth.
Income Statement:
The income statement reflects the outcomes of operational performance of the corporation.
This includes company’s sales, expends along with profits. Essentially, the payback on equity
is acquired from profits of the company, therefore, the information provided on specifically
income statement can be considered to be very expensive (Ehrhardt & Brigham, 2016). This
represents the way the company generated sales and generated profit. In essence, net income
is the main indicator of the level of profitability.
Balance Sheet
The balance sheet statement represents assets/resources owned by a company, liabilities that
the company owed to the creditors as well as debtors along with obligations the company has
to the owners. In essence, accounting equation states that assets equal liabilities together with
owner’s equity (Donohoe, 2015). This necessarily governs the balance sheet of the company.
Thus, at the time when company issues equity, this equity issuance has the need to influence
both assets as well as liabilities. Fundamentally, equity that company issue augments equity
amount of the owner by stock issued amount and enhances cash amount, along with
resources/asset and by accepted funds amount.
Cash Flow Statement

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The cash flow assertions registers the way companies engage in various company engages in
cash. In addition to this, cash flow statement is arranged into three different sections namely
operating, investing as well as financing (Chang et al., 2016). In essence, the financing
segment is the place where it tracked all the financing actions, counting loans, principal
payments, equity issuance as well as distributions. At the time when corporation issues
equity, it is important to register the cash accepted in the transaction involved in this case and
document it.
Effect of derivatives on financial statements
Derivatives in financial statements rely on the underlying risk that gets hedged. There are
certain issues that can be associated to the derivative financial instruments that cause
exclusive accounting issues (Butler et al., 2015). Accounting for particularly embedded
derivatives, specifying qualifying criteria for hedge and presenting disclosures regarding
financial instruments as well as derivatives are the reporting issues.
As rightly indicated by Brooks (2015), a derivative can be regarded as a financial security
with a specific value that is dependent upon or deduced from an underlying asset else wise
group of assets. The price of derivative instruments is necessarily ascertained by movements
in the underlying assets. Common underlying asset takes in stocks, commodities, interest
rates, bonds as well as market indexes. Again, derivatives are enumerated as well as reported
particularly at fair value on specifically the balance sheet. Again, gains as well as losses are
reported directly in net earnings (Brigham et al., 2016). Nevertheless, derivatives utilized in
cash flow hedges are primarily accounted for particularly at fair value on the balance sheet,
but gains else wise losses are registered in equity as fraction of other complete earnings.
Direct credit exposure can be said to be limited to the net variance between the enumerated
amounts to be accepted and disbursed if there exists any. This kind of variance that reflects

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fair value of the derivative instruments is represented on balance sheet. In essence, companies
get exposed to credit associated losses in the event of non-performance by the counterparties
to these parties. The company necessarily controls credit risk of financial agreements by
means of credit approvals, limits as well as monitoring problems (Bhattacharya & Londhe,
2014). It does not anticipate any counterparties to these contracts. In essence, the company
controls the risk of credit of financial contracts through various methods. Different derivative
instruments and
Company possesses derivative financial instrument particularly in interest rate swap contracts
and rate lock contracts. These derive value from various underlying rates of interest. Many of
the derivative financial instruments are primarily with the own customers of the company. In
addition to this, transactions also involve both credit as well as market risk (Acharya & Ryan,
2016). Particularly, the notional amounts are not necessarily reflected as direct credit
exposure. Principally, this direct credit exposure is restricted to the net variance between the
enumerated amounts to be accepted as well as paid. This specific variance that reflects the
fair value of the derivative instruments is represented in the balance sheet statement of the
corporation in other assets/liabilities.

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