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CIMA - F2 > 10. Financial Instruments > Flashcards

10. Financial Instruments Flashcards

1
Q

What is a financial instrument?

A

Any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument of another entity

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2
Q

What is the entry to record a financial asset?

A

Dr Fin Asset

Cr Cash

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3
Q

What is the entry to record a financial liability?

A

Dr Cash

Cr Fin Lib

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4
Q

Should a financial instrument be recorded according to its substance or legal form?

A

Substance

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5
Q

Are redeemable preference shares classified as financial liabilities or equity instruments?

A

Financial liabilities

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6
Q

Are cumulate (redeemable and non redeemable) preference shares classified as financial liabilities or equity instruments?

A

Financial liabilities

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7
Q

What are compound instruments?

A

Those which show characteristics of both equity and financial liabilities e.g. convertible debt

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8
Q

How do we separate compound instruments?

A
  • The PV of future cash flows of the liability component

- The remainder of issue proceeds in equity

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9
Q

How will the carrying amount of the liability portion of a compound instrument change from one year to the next?

A

C/f amount + interest accrued - interest paid

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10
Q

What are all financial instruments initially measured at? (UNLESS)

A

Fair Value (+/-) transaction costs (UNLESS the asset/liability is held at FVTPL)

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11
Q

How do transaction costs impact fair value of financial instruments (assets v liabilities)?

A

Assets - ADD

Liabilities - REMOVE

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12
Q

What are the 3 key types of financial asset?

A
  1. Equity instrument (shares) in another company
  2. Cash or receivables
  3. A derivative standing at a gain
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13
Q

What are the 3 key types of financial liability?

A
  1. Payables or debenture loans
  2. Redeemable preference shares
  3. A derivate standing at a loss
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14
Q

What are the 3 key types of equity instrument?

A
  1. A company’s own shares
  2. Share options
  3. Irredeemable preference shares
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15
Q

What is the most common example of a compound instrument?

A

Convertible debt

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16
Q

How are debt instruments, held purely for the collection of contractual cash flows and not for resale, subsequently measured?

A

At amortised cost

Asset c/f + Effective Interest - Interest Received

17
Q

What financial instrument is never measured at amortised cost?

A

Equity shares

18
Q

What financial instruments are subsequently measured at fair value through profit or loss?

A

Equity investments and derivatives

19
Q

How are financial assets held to collect cash and to be eventually sold on subsequently recognised?

A

Fair value through other comprehensive income

20
Q

What happens to the gains and losses from financial assets held at FVTOCI when the asset is derecognised?

A

They are reclassified to the P&L

21
Q

What is an irrevocable election?

A

When a company decides, on the day of recognition, to present changes in shares held for trading through OCI

22
Q

What happens to the gains and losses from equity shares, for which an irrevocable election to hold at FVTOCI has been made, when the asset is derecognised?

A

Nothing - they are NOT reclassified to the P&L

23
Q

What are the 3 conditions of a financial instrument to be classified as a derivative?

A
  1. Requires little or no initial investment
  2. Derives value from some underlying item
  3. Settled at some future date
    - -> SHARE OPTION
24
Q

What is the initial value recognised for a derivative?

A

ZERO

25
Q

How are most financial liabilities subsequently recognised?

A

At amortised cost

Liability c/f + effective interest - interest paid

26
Q

What two scenarios are financial liabilities held at FVTPL?

A

Financial liabilities held for short term profit making, or derivatives

27
Q

Can financial assets be reclassified, and if so when?

A

Yes, ONLY when the entity changes its business model for managing financial assets

28
Q

Can financial liabilities be reclassified, and if so when?

A

NEVER

CIMA - F2 (15 decks)

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