04. FI: Recog & Measurement

Question 1

What are financial assets

Answer 1

• Cash
• Contractual obligation to receive cash
• Contractual right to exch fin assets/lia on favourable terms
• Equity instrument in another entity

Question 2

What are financial liabilities?

Answer 2

• Contractual obligation to deliver cash

- Contractual obligation to exch Fin Ass/Lia on unfavourable terms

Question 3

What is an equity instrument?

Answer 3

Residual interest in net assets entity without any contractual obligations

Question 4

What are the 2 types of preference shares? and how are they shown in acc?

Answer 4

Redeemable - at option of SH, entity has obligation so shown as financial liability

Irredeemable - entity has no obligation, so show within equity (UNLESS there is a mandatory obligation to pay a div, in which case treat as fin lia)

Question 5

What are convertible instruments and how are they dealt with in fin acc?

Answer 5

• Have features of both equity & fin lia
• Need to split components
  a) FV of fin lia -> Present value of amount repayable
  b) Equity = diff between entire instrument and fin lia above
• After initial recog, equity amount remains unchanged until end of life of instrument

Question 6

What is the ‘service of finance’?

Answer 6

Interest
Dividends
Gains and losses from disposal of FI

Question 7

How is the presentation of service of finance determined?

Answer 7

Follows presentation of fin assets giving rise to them

• If FI shown as equity - show servicing of finance as dividend
• CIf show as fin ass/lia, servicing finance is shown as finance cost or interest income

For convertible instruments, the servicing of finance is deemed to be belong to the financial liability component

Question 8

What are the 2 categories of financial liability?

Answer 8

Fin liability through FVPL - has to meet criteria
> Held for trading, acquire for purposes of repurchasing in ST. Includes all unfavourable derivatives

Amortised cost (anything else)

Question 9

How should financial liability be recognised?

Answer 9

• Recog when entity enters into contractual provisions
• Initially recog @ FV, taking into account whether needs discounting to PV (e.g. if convertible debt)

Treatment of transaction costs depends on if FVPL (exp to P&L) or amortised cost (deduct trans costs from initial FV)