Chapter 3 Flashcards
What is a financial instrument?
Any contract that fives rise to financial asset of one entity and a liability or equity instrument of another entity
What is a financial asset?
Cash
Entity instrument of another entity
Contract right to receive cash or another asset from an entity
What is a financial liability?
Any liability that is a contractual obligation to:
Deliver cash to another entity
Exchange financial instruments under conditions that are unfavourable
What is an entity instrument?
Any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities
What is IAS 32?
Provides rules on classifying instruments as liabilities or equity
What are the 3 standards that deal with instruments?
IAS 32 Financial Instruments: Presentation
IFRS 7: Financial Instruments: Disclosures
IFRS 9: Financial Instruments
What is IFRS 9?
Provides guidance on when instruments should be recognised and how
States that instruments should be initially recognised at fair value
What is a compound instrument?
Instrument that has characteristics of both equity and liabilities
Convertible bonds
After initial recognition they are split into financial liabilities and equity instruments
What is a derivative?
Instrument that derives its value from the value of an underlying asset, price, rate or index
What are the five types of derivatives?
Forward - obligation to buy or sell as a specified price at a future date
Future contracts
Options - right not obligation to buy or sell
Forward rate agreements
Swaps
What are the characteristics of a derivative?
Value changes in response to changes in underlying items
Requires little or no initial investment
Settled at a future date
How are derivatives accounted as?
Fair value through P&L
FV typically nil at initial recognition and restated at each reporting date
