Ch 16 Complex - Final

Question 1

What is a financial instrument?

Answer 1

A contract that gives one party an asset and the other a liability or equity.

Question 2

What are primary financial instruments?

Answer 2

Basic things like receivables, payables, and shares.

Question 3

What is a derivative?

Answer 3

A financial contract that gets its value from something else (like a stock or currency).

Question 4

Why do people use derivatives?

Answer 4

To reduce risk (hedging) or to try to make profit (speculation).

Question 5

What are the 3 things that make something a derivative?

Answer 5

1) Value changes with underlying, 2) Little/no upfront cost, 3) Settled in future.

Question 6

What are examples of derivatives?

Answer 6

Options, forwards, futures.

Question 7

How are derivatives usually valued?

Answer 7

At fair value, with gains/losses going to net income.

Question 8

What is market risk?

Answer 8

Risk from price changes, interest rates, or currency changes.

Question 9

What is liquidity risk?

Answer 9

Risk that a company won’t have enough cash to pay.

Question 10

What is credit risk?

Answer 10

Risk that the other party won’t pay.

Question 11

Who uses derivatives to reduce risk?

Answer 11

Companies that buy/sell goods, borrow money, or use foreign currencies.

Question 12

Who uses derivatives to make profits from risk?

Answer 12

peculators and arbitrageurs.

Question 13

hen are derivatives recorded on financial statements?

Answer 13

When the contract is signed.

Question 14

What is an executory contract?

Answer 14

A future agreement where no one has done anything yet.

Question 15

What is net settlement?

Answer 15

ettling a contract with cash instead of goods.

Question 16

Do all contracts count as derivatives?

Answer 16

No, not if the company plans to take delivery (under IFRS).

Question 17

Are purchase contracts derivatives under ASPE?

Answer 17

Only if they are traded on an exchange.

Question 18

What is a call option?

Answer 18

A right to buy something later at a set price.

Question 19

What is a put option?

Answer 19

A right to sell something later at a set price.

Question 20

What is an option premium made of?

Answer 20

Intrinsic value + time value

Question 21

What is a forward contract?

Answer 21

A private deal to buy/sell something later at a locked-in price.

Question 22

What’s the difference between forwards and futures?

Answer 22

Futures are standardized and traded on exchanges.

Question 23

How are futures settled?

Answer 23

A: Daily through margin accounts

Question 24

How are own-share derivatives treated under IFRS?

Answer 24

Usually as equity, if they meet “fixed for fixed” rules.

Question 25

What is a hybrid or compound instrument?

Answer 25

A mix of debt and equity, like convertible bonds or preferred shares.

Question 26

How do you decide if a hybrid is debt or equity?

Answer 26

Look at the contract terms and what the company must do.

Question 27

How are hybrids split for accounting?

Answer 27

Into debt and equity parts, using fair value.

Question 28

What is share-based compensation?

Answer 28

Giving employees shares or stock options as payment.

Question 29

How are CSOPs (compensatory stock option plans) accounted for?

Answer 29

Expense is recorded over the time employees work (vesting period).

Question 30

What must companies disclose about share compensation?

Answer 30

Plan details, values, methods, and total cost in net income and equity.

Question 31

What is convertible debt?

Answer 31

Debt that can be converted into common shares, offering both interest and the ability to exchange for stock.

Question 32

hat is a key reason companies issue convertible debt?

Answer 32

To raise capital without giving up ownership.

Question 33

How is debt in hybrid instruments measured after issuance?

Answer 33

It is measured at amortized cost after initial fair value.

Question 34

what is a "residual value approach"?

Answer 34

It’s a method to allocate the value of hybrid instruments, with debt valued first.

Question 35

What is a key difference between IFRS and ASPE regarding hybrid instruments?

Answer 35

IFRS requires the residual value approach, while ASPE allows easier methods like setting the equity component to zero.

Question 36

What is a compensatory stock option plan (CSOP)?

Answer 36

A plan where employees receive stock options as part of their compensation.

Question 37

How do forfeitures affect accounting for stock options?

Answer 37

If an employee leaves or doesn’t meet requirements, the compensation expense must be adjusted.

Question 38

How do private companies handle direct stock awards?

Answer 38

hese are recorded at fair value, but employees can’t easily sell them due to no market.

Question 39

What do companies have to disclose about stock-based compensation plans?

Answer 39

ey need to disclose the accounting policy, details of the plans, and any changes in stock options (e.g., exercises, forfeitures).