Chapter 11 Financial Instruments

Question 1

Financial asset

Answer 1

A financial asset is:

1. Cash
2. An equity instrument of another entity.
3. A contractual right to receive cash or another financial asset from another entity.

Question 2

Financial liabilities

Answer 2

A financial liabilities is:

1. A contractual obligation to deliver cash or another financial asset to another entity.
2. A derivative standing at a loss.

Question 3

Classification

Answer 3

Financial instruments are classified as debt (financial asset or liability) or equity based on their substance rather than their legal form.

Debt instruments meet the definition of a financial asset or financial liability.

Question 4

Measurement

Answer 4

1. Investment in debt:
   Held to collect contractual cash flows (solely principle and interest)
   Fair value + transaction costs
   Amortised cost

2. Investment in debt:
Held to collect cash flows (solely principle and interest) and to sell financial assets.
Fair value + transaction costs
Fair value through OCI
Interest income to P/L

3. Investments in equity:
If not held for trading (optional: irrevocable election, if not taken up falls into all other category below)
Fair value + transaction costs
Fair value through OCI
Dividend income to P/L

4. All other financial assets
   Fair value (transaction costs expensed to PL)
   Fair value through P/L

Question 5

Amortised cost

Answer 5

Amortised cost of a debt instrument is the amount at which the debt was initially recorded less any principal repayments, plus the cumulative amortisation of the difference between the initial and maturity values (redemption premium / discount on inception).

Question 6

Convertible debt

Answer 6

A company’s own convertible debt is an example of a compound financial instrument.

The debt and equity are separated as follows:-
1. Determine the carrying amount of the debt component by reference to a similar liability that does not have conversion rights.

2. Make the equity component the balancing figure.