4. Financial Instruments

Question 1

Financial Instruments: What type of instrument is: Cash

Answer 1

Financial asset

Question 2

Financial Instruments: What type of instrument is: A contractual right to receive cash

Answer 2

Financial asset

Question 3

Financial Instruments: What type of instrument is: A contractual right to exchange financial assets/liabilities on favorable terms

Answer 3

Financial asset

Question 4

Financial Instruments: What type of instrument is: An equity instrument in another entity

Answer 4

Financial asset

Question 5

Financial Instruments: What type of instrument is: A contractual obligation to deliver cash

Answer 5

Finaincial liablity

Question 6

Financial Instruments: What type of instrument is: A contractual obligation to exchange financial assets/liabilities on unfavorable terms

Answer 6

Financial liability

Question 7

Financial Instruments: What type of instrument is: Residual interest on the assets of an entity after deducting all the liabilities

Answer 7

Equity instrument

Question 8

Financial Instruments: How is this recognized: Redeemable preference share dividends

Answer 8

Finance cost
(In P&L)

Question 9

Financial Instruments: How is this recognized: Irredeemable preference share dividends: No mandatory obligation to pay the dividend

Answer 9

Deducted from retained earnings
(In the SOCIE)

Question 10

Financial Instruments: How is this recognized: Irredeemable preference share dividends: Mandatory obligation to pay the dividend

Answer 10

Finance cost
(In P&L)

Question 11

Financial Instruments: How are financial assets usually initially recognized?

Answer 11

Fair Value
(Typically the amount paid or received)

PLUS

Transaction costs

Question 12

Financial Instruments: How are financial liabilities usually initially recognized?

Answer 12

Fair Value
(Typically the amount paid or received)

MINUS

Transaction costs

Question 13

Financial Instruments: How are financial assets AND liabilities usually subsequently recognized?

Answer 13

Amortized cost at effective interest rate

Question 14

Financial Instruments: Amortized cost calculation

Answer 14

1. Amortization
   MINUS
2. Cash

Question 15

Financial Instruments: Amortized costs: Amortization calculation

Answer 15

B/f amount
X
Effective interest rate

Question 16

Financial Instruments: Amortized costs: Cash calculation

Answer 16

Nominal value
X
Coupon rate of interest

Question 17

Financial Instruments: Compound instrument definition

Answer 17

Has characteristics of both
Equity
And
Liability

E.g. convertible bonds

Question 18

Financial Instruments: Compound instruments: Treatment

Answer 18

Split accounting

Question 19

Financial Instruments: Split accounting: How to work out the equity element

Answer 19

Total value

MINUS

The liability element

Question 20

Financial Instruments: Split accounting: How to work out the liability element

Answer 20

Present value
Of future cash flows
Using interest of
Equivalent bond with no conversion option

Question 21

Financial Instruments: Split accounting: How will the liability element change over time?

Answer 21

Amortized cost

Question 22

Financial Instruments: Split accounting: How will the equity element change over time?

Answer 22

It wont
(Because it’s equity)

Question 23

Financial Instruments: Treasury Shares: Definition

Answer 23

Acquiring own shares

1. Instead of dividend distributions
2. To return excess capital to shareholders

Question 24

Financial Instruments: Treasury Shares: How to treat

Answer 24

1. Debit to equity
2. No gain or loss recognized on their purchase

Question 25

Financial Instruments: Where are treasury shares disclosed?

Answer 25

EITHER

P&L or
Notes

Question 26

Financial Instruments: Quantitative disclosure definition

Answer 26

For each class of financial instrument:

1. Carrying value
2. Fair value

Question 27

Financial instruments: Qualitative dislciure definiton

Answer 27

Information to allow users to understand management’s attitude to risk
(Credit/Liquidity/Market)