4.07- Investments under IFRS: Marketable Securities

Question 1

How does IFRS define a financial instrument?

Answer 1

as any contract that results in a financial asset of one entity and a financial liability or equity instrument of another entity

Question 2

How does IFRS define a financial asset?

Answer 2

• cash
• equity instrument of another equity
• a contractual right
• a contract that will be settled in the entity’s own equity instruments

Question 3

How does IFRS define a financial liability?

Answer 3

• a contractual obligation

- a contract that will be settled in the entity’s own equity intruments

Question 4

When are financial assets and liabilities recognized?

Answer 4

When an entity becomes a party to the contract that results in them

Question 5

How are financial assets measured?

Answer 5

generally measured at fair value through profit and loss with increases and decreases in FV being reported on the income statement

Question 6

What two conditions need to be met in order to financial assets to be measured at amortized cost?

Answer 6

• entity’s business model is to hold the asset to collect scheduled cash flows
• terms of the instrument call for cash flows that are exclusively payments of the principal/interest on certain dates

Question 7

Under the amortized cost method, what are 4 examples of loss events that could count as impairment?

Answer 7

• breach of contract
• likelihood of a debtor going into bankruptcy
• inactivity of the market for the instrument due to financial difficulty
• economic conditions contributing to defaults

Question 8

If a financial asset is being measured at amortized cost and it becomes impaired how do you measure future cash flows?

Answer 8

• the asset is written down to that amount

- the difference is recognized as an impairment loss

Question 9

Can an impairment loss be reversed?

Answer 9

yes, if the asset recovers in value

Question 10

Can you elect to report financial assets at FVTPL instead of amortized cost?

Answer 10

Yes but only if the election is made when the financial asset is first recognized, the election is irrevocable, FV measurement must eliminate any inconsistency from recognizing gains/losses on a different basis

Question 11

In general, what are financial liabilities measured at?

Answer 11

amortized cost

Question 12

What are 2 examples of liabilities that can be measured at FVTPL?

Answer 12

• derivatives that are liabilities
• financial guarantee contracts which are measured at the higher of their original amount less accumulated amortization amounts

Question 13

When can the election be made to report financial liabilities at FVTPL?

Answer 13

• when the liability is first recognized which leads to

- the election is irrevocable and doing so provides more relevant information

Question 14

How do financial liabilities that are measured at FV report gains/losses?

Answer 14

recognized in profit or loss

Question 15

What are some exceptions to recognizing profit or loss?

Answer 15

• the instrument is part of a hedging relationship
• it is an investment in equity instrument and they have elected to report gains/losses in OCI
• it is a financial liability designated as FVTPL

Question 16

When an investment in an equity instrument is not held for trading, can the entity elect to recognizes changes in FV in OCI rather than in profit or loss?

Answer 16

Yes but it must be made at initial recognition, the election will be irrevocable and the dividends are recognized in profit or loss