10. Financial Instruments Flashcards
What is a financial instrument?
Any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument of another entity
What is the entry to record a financial asset?
Dr Fin Asset
Cr Cash
What is the entry to record a financial liability?
Dr Cash
Cr Fin Lib
Should a financial instrument be recorded according to its substance or legal form?
Substance
Are redeemable preference shares classified as financial liabilities or equity instruments?
Financial liabilities
Are cumulate (redeemable and non redeemable) preference shares classified as financial liabilities or equity instruments?
Financial liabilities
What are compound instruments?
Those which show characteristics of both equity and financial liabilities e.g. convertible debt
How do we separate compound instruments?
- The PV of future cash flows of the liability component
- The remainder of issue proceeds in equity
How will the carrying amount of the liability portion of a compound instrument change from one year to the next?
C/f amount + interest accrued - interest paid
What are all financial instruments initially measured at? (UNLESS)
Fair Value (+/-) transaction costs (UNLESS the asset/liability is held at FVTPL)
How do transaction costs impact fair value of financial instruments (assets v liabilities)?
Assets - ADD
Liabilities - REMOVE
What are the 3 key types of financial asset?
- Equity instrument (shares) in another company
- Cash or receivables
- A derivative standing at a gain
What are the 3 key types of financial liability?
- Payables or debenture loans
- Redeemable preference shares
- A derivate standing at a loss
What are the 3 key types of equity instrument?
- A company’s own shares
- Share options
- Irredeemable preference shares
What is the most common example of a compound instrument?
Convertible debt
How are debt instruments, held purely for the collection of contractual cash flows and not for resale, subsequently measured?
At amortised cost
Asset c/f + Effective Interest - Interest Received
What financial instrument is never measured at amortised cost?
Equity shares
What financial instruments are subsequently measured at fair value through profit or loss?
Equity investments and derivatives
How are financial assets held to collect cash and to be eventually sold on subsequently recognised?
Fair value through other comprehensive income
What happens to the gains and losses from financial assets held at FVTOCI when the asset is derecognised?
They are reclassified to the P&L
What is an irrevocable election?
When a company decides, on the day of recognition, to present changes in shares held for trading through OCI
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?
Nothing - they are NOT reclassified to the P&L
What are the 3 conditions of a financial instrument to be classified as a derivative?
- Requires little or no initial investment
- Derives value from some underlying item
- Settled at some future date
- -> SHARE OPTION
What is the initial value recognised for a derivative?
ZERO
How are most financial liabilities subsequently recognised?
At amortised cost
Liability c/f + effective interest - interest paid
What two scenarios are financial liabilities held at FVTPL?
Financial liabilities held for short term profit making, or derivatives
Can financial assets be reclassified, and if so when?
Yes, ONLY when the entity changes its business model for managing financial assets
Can financial liabilities be reclassified, and if so when?
NEVER
