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FAR UK GAAP > Ch 5 - Fin Instruments > Flashcards

Ch 5 - Fin Instruments Flashcards

1
Q

What are the 4 sections of FRS 102 that deal with FI?

A

Section 11 Basic Financial Instruments
Section 12 Other FI
Section 22 Liabilities equity

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2
Q

What does Section 11 Basic Financial Instruments deal with?

A

How FI are measured
When they should be recognised in FS
Disclosure of FI in FS

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3
Q

What does Section 22 Liabilities equity deal with?

A

classification of FI and their presentation in FS

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4
Q

What does Section12 Other Fin Instruments deal with?

A

Not examinable

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5
Q

Define a FI

A

‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity’

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6
Q

Define a financial asset

A

Cash
An equity instrument of another entity (e.g. investment)
A contractual right to receive cash or another financial asset from another entity
A contractual right to change fin instruments on potentially favourable terms

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7
Q

Define a finance liability

A

any liability that is a contractual obligation to

  • Deliver cash or another financial asset to another entity
  • To exchange financial instruments with another entity under conditions that are potentially unfavourable
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8
Q

Define an equity instrument

A

any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities

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9
Q

Give an example of a financial asset

A

Cash

Debtor

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10
Q

What must the issuer of FI classify FI as

A

must classify FI as a financial liability, financial asset or equity instrument on initial recognition according to its substance

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11
Q

How are the following classified in FS?

Redeemable preference shares

A

Liabiltiies

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12
Q

How are the following classified in FS?

Irredeemable preference shares

A

Equity unless there is a mandatory obligation to pay a dividend (then would be liability)

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13
Q

When is classification of financial liabilities and equity carried out and can it then be changed?

A

Classified at date of issue

Can’t then be changed

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14
Q

How should Interest, dividends, losses and gains be classified?

A

The accounting treatment of interest, dividends, losses and gains relating to a FI follows the treatment of the instrument itself
Therefore, redeemable preference share dividends should be treated as interest expense in P&L
Irredeemable preference share dividends should be taken through P&L reserve in SOCE unless there is a mandatory obligation to pay the dividend
If there is an obligation to pay dividend, should be treated as an interest expense

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15
Q

How should redeemable preference share dividends be treated in FS?

A

as interest expense in P&L

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16
Q

How should Irredeemable preference share dividends be treated in FS?

A

should be taken through P&L reserve in SOCE unless there is a mandatory obligation to pay the dividend

If there is an obligation to pay dividend, should be treated as an interest expense

17
Q

How are financial assets initially recognised?

A

At FV, which is usually any cash paid to acquire the asset plus transaction costs

18
Q

How are financial liabilities initially recognised?

A

usually the net proceeds received

So any transaction costs need to be deducted on initial recognition

19
Q

How is FV defined?

A

amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowledgable, willing parties in an arm’s length transaction

20
Q

What is the subsequent treatment of fin assets and liabilities after recognition?

A

In FAR Exam, all fin assets and liabilities will be measured at amortised cost using the effective interest rate method
Calc
BF (FV)
AddAmortisation (interest) = FV * effective interest rate
Less cash = nom value * coupon rate
= CF (amortised cost)

21
Q

What is a compound instrument?

A

financial instrument that has characteristics of both equity and a liability
E.g. a convertible bond

22
Q

Give an example of a compound instrument

A

E.g. a convertible bond

23
Q

How should compound instruments be dealt with per Section 22?

A

Section 22 requires compound instruments to use split accounting at the date of the issue

24
Q

How would a convertible bond be split per section 22?

A

Liability = obligation to pay annual interest and capital (calc PV of future cash flow using interest rate of equiv bond w no conversion option as discount rate)

Equity = option to convert to shares
Total value of bond less liability element = equity element

Then shown separately on FS

25
Q

How are compound instruments subsequently recognised in FS after recognition?

A

Going forward, the liability element will be held under amortised cost per FRS 102 Section 11
Going forward, the equity element won’t change

26
Q

What are treasury shares?

A

This is where companies acquire their own shares as an alternative to making dividend distributions and/or as a way to return excess capital to SH

27
Q

What is the treatment for a treasury share?

A

They should be deducted from equity
i.e. they are shown as -ve equity
No gain or loss should be recognised on their purchase
Consideration paid or received should be recognised directly in equity

28
Q

What are the 2 main categories for disclosures required for FI?

A

Info about the significance of FI

Info about the nature and extent or risks arising from financial instruments and how the entity manages those risks

29
Q

What are the qualitative disclosures made up on for Fin Instruments?

A 
Entity must disclose the carrying value of each class of FI 
The FV of each class of FI should also be disclosed
30
Q

What are the quantitative disclosures made up on for Fin Instruments?

A 
Entity must disclose info to enable users to understand management’s attitude to risk 
Disclosures may focus on entity’s
Credit risk 
Liquidity risk 
Market risk
31
Q

How are FI treated under FRS 105 regarding initial recognition?

A

As per FRS 102, transaction costs are added to a financial asset and deducted from the financial liability
However, if the transaction cost is deemed immaterial, it should be expensed to P&L immediately

32
Q

How are FI treated under FRS 105 regarding subsequent recognition?

A

Equity investments are measured at cost less impairment

All other financial instruments are measured as follows

33
Q

What is the main diff between FRS 102 and FRS 105 re FI?

A

There is no revaluation or remeasurement to FV in FRS 105 and no requirement to use an effective interest rate (as per FRS 102)

34
Q

What is convertible debt?

A

Split into debt and equity elements
However, a simplified approach is adopted where the debt element is recorded at the FV of a similar non-convertible liability

35
Q

What is the approach for calculating convertible debt?

A

A simplified approach is adopted where the debt element is recorded at the FV of a similar non-convertible liability
Then equity is the balancing figure

FAR UK GAAP (18 decks)

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