6. Financial Instrument Flashcards
Defune Financial Instruments
Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity
What are examples of financial instruments
Cash
Trade recievables
Trade Payables
Loans ( Bonds, Debentures, Loan notes)
Shares
Derivatives
What are the three categories of financial instruments
Financial Assets
Financial LIability
Equity Instrument
What are teh financial assets
Cash
Contractual rights
eg. Investment in shares , rrecievables, bonds purchased, forward stadning at a gain
What are financial liabilities
Any liabiliy that is a contractual obligation to deliver cash or another financial asset to an entity or exchange financial assets under unfavourable conditions
eg. Trade payables, bonds issued, redeemable preference shares, forward standing at a loss
What is a equity instrument
Any contract that evidences a residual interest in the asset of an entity after deducting all of its liabilities
eg. Own ordinary shares, Ireedeemable Non cumulative preference sharesq]
What are the characteristics of Derivatives
F: Settled at future date
U: Value changes in response to underlying variable
N: Requires No or little initial investments
What is the accounting entry for derivatives
Favourable: Debit financial asset and Credit profit/loss (finance income)
Unfavourable: Credit Financial liabiliity and Debit Profit or loss
What are compound financial instruments
When financial instruments have both characteristics of equity and financial liability - separate componenets which need to be classfied separately
How to calculate financial liability and equity components of compound financial instrument
FInancial liability component:
Present value of principal ( discounted at simple market interest)
+ Present value of interest ( interest x cumulative interest)
Equity component = Proceeds - Financial liability component
What is the accoutning entry for compound FI
Debit Cash
Credit Financial liability
Credit Equity
When does IFRS 9 allow recognition of financial instruemnts
When the entity becomes a party to the contractual provisions of the instrument
Recievables/Payables: on transfer of goods
Loans/Shares: on issue
Derivatives: On committment date
What are the principles of measuring financial asset
Driven by two factors:
Type of asset purchased ( debt vs equiy instruments)
Entity’s intention at date of purchase (held for trading vs keeping long term)
What is meant by Held for trading
A financial asset or liability that is acquired or incurred principally for the purpose of selling or repurchasing it in the near term
How are investments in debt instruments measured
Investments in debt instruments
Business model approach: held to collect contractual cash flows of principal and interest - Measure at amortised cost
Held to collect contractual cash flows and Sell - measured at fair value through other comprehensive income
How are equity instruments not held for trading measured
- Initial measurement at fair value + transaction costs
- Subsequent measurement at Fair value through other comprehensive income
Whcih investments in financial assets are measured at fair value through profit or loss
- Debt instruments held for trading
- Equity instruments held for trading
- Equity instruments not held for trading when irrevocable election not taken up
- Derivatives standing at a gain at year end
Define Fair value
The price that would be recievd to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Define Amortised cost
The amout at which the item was initially recodes, less any principal repayments, cumulative amortisation of the difference between initial and maturity values
how to account for initial measurement of financial asset
Debit Financial asset
Credit Cash
How to work out and account for finance income
In SPL
Debit Financial Asset
Credit Finance income
Bought down balance x effective interest rate
How to work out and account for interest
Debit Cash
Credit Financial Asset
Nominal or par value x
How to calculate carrying amount based on amortised cost
Value of financial asset
+ Finance income
- Interest
= Carrying value
How are financial liabilities measured
- Most financial liabilities ( payables loans, preference shares) are initially measured at Fair Value less transaction costs and subsequently measured at amortised cost
- Financial liabilities held for trading and derivatives at loss are initially measured at fair value (transaction costs in P/L) and subsequently also fair value through profit or loss
How is amortised cost measured
Bought forward value
Add interest
Take away payments
= Carried forward
