10 Financial assets and financial liabilities

Question 1

What is the financial instrument definition?

Answer 1

A financial instrument is a contract gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Question 2

What are some examples of financial asset is?

Answer 2

• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another final asset
• A contractual right to exchange financial assets or liabilities on favourable terms

Question 3

What are some examples of financial liability is?

Answer 3

• A contractual obligation to reliever cash or another financial asset
• A contractual obligation to exchange financial assets or liabilities on unfavourable terms

Question 4

How should financial liabilities be recorded?

Answer 4

Amortised costs

Fair value through profit or loss

Question 5

What is the accounting treatment for amortised financial liabilities?

Answer 5

They are initially recognised at fair value (normally the proceeds received) less costs

Then they are subsequently measured at amortised costs:
Interest charged to P/L using effective date
Cash payments are deducted

Question 6

What is a compound instrument?

Answer 6

One that has characteristics of both a financial liability and equity

Question 7

What does IAS32 specify that compound instruments must be split into?

Answer 7

A liability component

A equity component

Question 8

What is the liability component made up of?

Answer 8

Present value of cash repayments, discounted using the market rate for non convertible bonds

Question 9

How is the equity component made up?

Answer 9

Difference between cash received and the liability component at the issue date

Question 10

How can investments in shares be treated?

Answer 10

FVPL or FVOCI

Question 11

How is investment in shares through the profit and loss recognised?

Answer 11

Fair value (costs to SPL)

Revalue at each reporting date with gain or loss in SPL

Question 12

How is investment in shares through the other comprehensive income recognised?

Answer 12

Fair value plus costs

Revalue at each reporting date with gain or loss in OCI

Question 13

How is investment in shares through the profit and loss hold for?

Answer 13

Held for trading purposes

Question 14

How is investment in shares through the other comprehensive income hold for?

Answer 14

Not held for short term trading and designation is made

Question 15

What are the three ways under IFRS 9 you can classifying debt investments?

Answer 15

1 amortised cost
2 fair value through OCI
3 fair value through P/L

Question 16

With investments in debt, is the asset is measured at amortised cost, what are the conditions?

Answer 16

1 hold the asset to maturity to collect contractual cash flows
2 contract terms that are solely repayment of principles and interest of the principle amount outstanding

Question 17

With investments in debt, is the asset is measured at fair value through OCI, what are the conditions?

Answer 17

1 both collect contractual cash flows but to increase returns by SELLING the asset
2 contract terms that are solely repayment of principles and interest of the principle amount outstanding

Question 18

When can a financial liability be derecognised?

Answer 18

When the obligation is extinguished

Question 19

When can financial liability be extinguished?

Answer 19

Is discharged, cancelled or expires

Question 20

Where is the different between consideration transferred and the carrying amount recognised?

Answer 20

Profit and loss

Question 21

When should an asset be deregonised?

Answer 21

When the contractual rights to the cash flows expire

Transfers substantially all the risks and rewards to another party

Question 22

What is factoring with recourse?

Answer 22

Refundable

Sell receivables to debt factoring (risks and rewards not transferred

Question 23

What is factoring without recourse?

Answer 23

Non refundable (or to a maximum)

Question 24

How is factoring with recourse treated?

Answer 24

Receivables not derecognised, treat proceeds as a loan

Question 25

How is factoring without recourse treated?

Answer 25

Receivables derecognised treat proceeds as a reduction in receivables

Question 26

What does IAS 32 deal with?

Answer 26

Financial instruments: presentation

Deals with the classification of financial instruments and their presentations in the statements

Question 27

What does IFRS 7 deal with?

Answer 27

Financial instruments: disclosures

How financial statements are measured and when they should be recognised

Question 28

What does IFRS 9 deal with?

Answer 28

Financial instruments

Deals with the disclosure of financial instruments in financial statements

Question 29

How is amortised cost calculated?

Answer 29

Initial value + effective interest - interest paid

Question 30

How are irredeemable preference shares classified?

Answer 30

Equity