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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?

A

Yes

24
Q

How is fair value of a financial liability measured?

A

Proceeds received - issue costs

25
Q

How is amortised costs of financial liability calculated? (Subsequent measurement)

A

Initial measurement value + effective interest – interest paid

26
Q

What does the accounting treatment of preference shares depends on?

A

Whether there is an obligation to make an interest or a dividend payment to the lender.

27
Q

IF a preference share is irredeemable then what are the obligations?

A

Only obliged to pay back at end of life of investment

not during

28
Q

IF a preference share is

redeemable then what are the obligations?

A

Obligation to pay interest or dividend at fixed period during life of investment.

29
Q

Are irredeemable preference shares debt or equity?

A

Equity (no obligation to pay)

30
Q

Are redeemable preference shares debt or equity?

A

Debt

31
Q

Where are dividends in relation to financial liabilities accounted for?

A

Finance costs

32
Q

What is a common example of a compound instrument?

A

Convertible loan note

33
Q

What do we need to do for compound instruments?

A

Account for both debt and equity

34
Q

How is the debt element of a compound instruments initially measured?

A

Calculate using the normal interest rate if there was no conversion option

35
Q

How is the equity element of a compound instruments initially measured?

A

Difference between proceeds and the debts element calculated

36
Q

How is the equity element of a compound instruments subsequently measured?

A

We dont

37
Q

How is the debt element of a compound instruments subsequently measured?

A

Initial value + market value - Interest Paid

38
Q

What is debt factoring?

A

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
Q

What is a sale with recourse?

A

This means that the factoring company can transfer back any receivables which were not
collected.

40
Q

What is a sale without recourse?

A

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
Q

Who holds the risk with a sale with recourse?

A

The selling company

42
Q

What is the accounting treatment with a sale with recourse?

A

A secure loan rather than a sale

43
Q

Who holds the risk with a sale without recourse?

A

The factoring company

44
Q

What is the accounting treatment with a sale without recourse?

A

Treat as sale

De-recognise all the receivables

45
Q

A disclosure is required for financial instruments under IFRS 7. The disclosures required are: (3)

A
  • 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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