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ACCA Financial Reporting > 13: Financial instruments > Flashcards

13: Financial instruments Flashcards

1
Q

What can a financial instrument be?

A
  • A Financial asset
  • A financial liability
  • Equity
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2
Q

What is IAS 32 for financial instruments?

A

Presentation

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3
Q

What is IFRS 9 for financial instruments?

A

Recognition and Measurement

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4
Q

What is IFRS 7 for financial instruments?

A

Disclosures

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5
Q

What are compound intruments?

A

Instruments with two or more elements

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6
Q

Give examples or financial assets?

A
  • cash,
  • trade receivables
  • investments in associates or subsidiaries
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7
Q

What is the definition of a financial asset under IAS 32? (4)

A
  • Cash
  • A contractual right to receive cash or a financial asset from another entity
  • A contractual right to exchange financial assets or liabilities with another entity under conditions which are potentially favourable
  • An equity instrument of another entity (Investment in sub)
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8
Q

Give examples or financial liabilities?

A
  • trade payables,
  • loans, and
  • redeemable preference shares.
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9
Q

What is the definition of a financial liability under IAS 32? (4)

A

Contractual obligation:

  • To deliver cash or another financial asset to another entity
  • To exchange financial assets or liabilities with another entity under conditions which are potentially unfavourable
  • That will or may be settled in entity’s own equity instruments (Pref shares/compound instruments)
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10
Q

How do we initially measure financial assets?

A

Fair value

This is usually how much we pay for it!

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11
Q

Describe a debt instrument

A

A debt instrument is a type of fixed income asset

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12
Q

How can debt instruments be accounted for? (3)

A
  • Fair value through profit or loss (the default position if not other information is given in the exam)
  • Amortised cost
  • Fair value through other comprehensive income
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13
Q

What are the two tests to decide which method the debt instruments is to be valued under?

A

1 - Business model test – the purpose of the investment

2 - Contractual cash flow characteristics test – cash received due to having the investment

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14
Q

What do we need for an investment to be held at amortised cost? (2)

A

1 - Hold until end of its life

2 - Cashflows arising must only relate to principle repayments and interest

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15
Q

What is the amortised cost of asset calculation?

A

Balance brought forward + interest income – payment received = balance carried forward

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16
Q

What do we need for an investment to be held at fair value through other comprehensive income (FVTOCI)? (2)

A

1 - Must be held until maturity but can be sold if being replaced with an new investment with higher return

2 - Cashflows arising must only relate to principle repayments and interest

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17
Q

What is an equity instrument?

A

When an entity purchases shares in another entity.

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18
Q

What are the two ways to measure equity instruments?

A

either

  • fair value through profit or loss (FVTPL) or
  • fair value through other comprehensive income (FVOCI).
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19
Q

How do we measure at fair value through profit or loss?

A

The investment is recognised as an asset, however any transaction costs aren’t capitalised – they are immediately expensed to the statement of profit or loss.

20
Q

How are gains or losses measures through fair value through profit or loss?

A

Any gain or loss is again, immediately expensed to the statement of profit or loss.

21
Q

Why would a business elect to use Fair value through other comprehensive income?

A

Keep P+L more comparable year on year.

22
Q

What do we need to elect for Fair value through other comprehensive income?

A
  • Must be long term investment

- Must be done on acquisition (Cant change half way)

23
Q

Can transaction costs be Capitalised through Fair value through other comprehensive income?

24
Q

How is fair value of a financial liability measured?

A

Proceeds received - issue costs

25
How is amortised costs of financial liability calculated? (Subsequent measurement)
Initial measurement value + effective interest – interest paid
26
What does the accounting treatment of preference shares depends on?
Whether there is an obligation to make an interest or a dividend payment to the lender.
27
IF a preference share is irredeemable then what are the obligations?
Only obliged to pay back at end of life of investment | not during
28
IF a preference share is | redeemable then what are the obligations?
Obligation to pay interest or dividend at fixed period during life of investment.
29
Are irredeemable preference shares debt or equity?
Equity (no obligation to pay)
30
Are redeemable preference shares debt or equity?
Debt
31
Where are dividends in relation to financial liabilities accounted for?
Finance costs
32
What is a common example of a compound instrument?
Convertible loan note
33
What do we need to do for compound instruments?
Account for both debt and equity
34
How is the debt element of a compound instruments initially measured?
Calculate using the normal interest rate if there was no conversion option
35
How is the equity element of a compound instruments initially measured?
Difference between proceeds and the debts element calculated
36
How is the equity element of a compound instruments subsequently measured?
We dont
37
How is the debt element of a compound instruments subsequently measured?
Initial value + market value - Interest Paid
38
What is debt factoring?
If a company has trade receivables which it is struggling to collect the cash in for, they could transfer them to a factoring company.
39
What is a sale with recourse?
This means that the factoring company can transfer back any receivables which were not collected.
40
What is a sale without recourse?
A sale without recourse means that the factoring company have purchased all of the debts and therefore would hold the risk for any uncollected debts
41
Who holds the risk with a sale with recourse?
The selling company
42
What is the accounting treatment with a sale with recourse?
A secure loan rather than a sale
43
Who holds the risk with a sale without recourse?
The factoring company
44
What is the accounting treatment with a sale without recourse?
Treat as sale De-recognise all the receivables
45
A disclosure is required for financial instruments under IFRS 7. The disclosures required are: (3)
- The carrying amount of each financial instrument - Any income, expenditure, gains or losses within the statement of profit or loss or other comprehensive income - Any risks associated with the financial instruments, and steps management are taking to mitigate the risks

ACCA Financial Reporting (17 decks)

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