FAR Recap

Question 1

Financial asset

Answer 1

Contractual right to receive cash/equity instrument in another entity i.e. shares

Question 2

Financial liability

Answer 2

Contractual obligation to deliver cash

Question 3

Equity instrument

Answer 3

Residual interest in net assets without contractual obligations (shares issued etc)

Question 4

Preference shares

Answer 4

Redeemable - obligation so liability

Irredeemable - equity unless dividend is mandatory, then liability

Question 5

Convertible instruments

Answer 5

Liability component = PV of future cash flows then unwind each year

Equity component represents buyer’s right to convert debt into equity,
= consideration - liability

Question 6

Convertible instruments: double entry

Answer 6

Initially:

Dr Cash
Cr Financial liability
Cr Equity

Each year end:

Dr Finance cost (interest)
Cr Financial liability

Dr Financial liability (cash paid)
Cr Cash

Question 7

Treasury shares

Answer 7

Reacquire own shares:

Dr Treasury shares
Cr Cash

Release shares at a later date:

Dr Cash
Cr Treasury shares
Dr/Cr Retained earnings (B)

Question 8

IFRS 9 Financial Assets: Equity

Answer 8

FVPL - default

FVOCI:

Not held for short term trading

Irrevocable designation made at beginning

Question 9

IFRS 9 Financial Assets: Debt

Answer 9

Amortised cost:

Business model test - to hold to maturity

Contractual cash flow test - Cash is solely principal and interest

FVOCI:

Cash flow test but not business model

Would sell for returns when possible

FVPL:

Short term intention to trade/fails both tests

Question 10

Classification of financial assets

Answer 10

Should be made when instrument is first recognised

Do based on process of elimination in exam

May need to discount if FA paying less than market value

Question 11

IFRS 13 Fair value measurement: Introduction

Answer 11

Price to sell asset or transfer liability in orderly arm’s length transaction between market participants i.e. well-informed investors at the measurement date

IFRS 13 seeks to increase consistency and comparability in FV

Question 12

IFRS 13 Fair value measurement: Hierarchy of inputs

Answer 12

Level 1 - unadjusted quoted price in active markets for identical instruments

Level 2 - other inputs observable either directly or indirectly in active market eg similar items (LIBOR rate etc)

Level 3 - unobservable inputs i.e. PV of CFs

Question 13

IFRS 13 Fair value measurement: Bid/ask price

Answer 13

Bid price = FV, price dealer will buy for i.e lower price

Ask price = price dealer will sell for (high price)

Transaction costs = Bid - ask price + any other costs eg brokerage fees

BID PRICE FOR FV - IFRS 13 also permits use of mid market price

FVOCI/Amortised cost - transaction costs at acq

Question 14

IFRS 13 Fair value measurement: Principal/most advantageous market

Answer 14

FV is based on assumptions in market place and not entity specific (FV = transaction costs ignored)

Assumes transaction to sell/transfer asset/liability takes place in:

Principal market = default (greatest volume of activity)

Most advantageous market (highest net amount received) = if no principal market exists

Decide based on net price received (including transaction and transport costs) but ignore transaction costs for FV as they are characteristic of the transaction not A/L

Question 15

IFRS 13: Disclosures

Answer 15

Information about hierarchy level into which FV measurements fall

Transfers between level 1 and 2

If level 3 then effect on P/L/OCI in period

Question 16

IFRS 9: Reclassify all affected assets when change business model

Answer 16

Begins or ceases to perform an activity that is significant to ops (rare event)

Reclass is applied prospectively from reclass date

Only apply to investments in debt instrument as investment in equity always held at FV

FA = amortised cost, does not mean entity can never sell the asset

Infrequent or insignificant sales are permitted, provided the business model to collect contractual cash flows remains unchanged.

Question 17

IFRS 9: Impairment accounting

Answer 17

Must create loss allowance on recognition of financial asset

Allowance based on expected credit loss from a default

ECL = exposure x loss given default x probability of default

Question 18

Objective evidence of impairment

Answer 18

Financial difficulty of issuer

Default in interest or principal payments

Granting a concession wouldn’t have otherwise i.e. amended Ts and Cs

Probably will enter bankruptcy

Disappearance of an active market

Purchase of FA at deep discount rate that reflects incurred credit losses

Question 19

Trade receivables

Answer 19

No financing element (CF < 12 months from initial sale) - loss allowance = lifetime ECL

Other trade receivables (eg > 12m) - Choose 3 stage approach or lifetime ECL from recognition

Question 20

FA derecognition

Answer 20

Derecognise when:

Transfers substantially all risks and rewards or

Contractual rights have expired

Gains/losses on derecognition recognised to PL or OCI

Common examples:

Repurchasing - examine terms to assess whether risks and rewards transferred

Factoring:

Without recourse - does not have to compensate factor, RR transferred

With recourse - Guarantees future performance, examine terms for RR transfer

Question 21

Financial liabilities

Answer 21

EG issues (takes out) loan/bond

FVPL or AC

Question 22

Credit risk - FVPL

Answer 22

Entity’s credit risk deteriorates

Reduce FV of FL creating a gain

IFRS 9: Anomalous to recognise a gain in PL so goes to OCI

Question 23

Derecognition of FL

Answer 23

Only when obligation specified is discharged, cancelled or expires

Any difference arising taken to P/L

Question 24

FL: Exchange or modification of debt

Answer 24

Existing loan exchanged for new loan with existing lender/terms changed

Accounting treatment depends if new terms substantially different

I.e. PV of CF of new loans including fees is 10% difference to PV of CF of old loan

If different - derecognise old liability, recognise new liability at FV, difference recognised in PL along with any fees

Not 10% different - do not derecognise old FL, restats liability to PV of new CFs and deduct fees paid, difference to P/L

Question 25

Derivatives: definition

Answer 25

FA or FL whose value is derived from the value of an underlying item, requires no or small initial investment and settled at future date - usually FVPL

Non-financial asset derivative if:

Can be settled in cash or another financial instrument and not entered into for purpose of delivering for use within business

Question 26

Derivatives: types

Answer 26

Forwards/futures - contract to transact in future

Options - right but not obligation to transact in future

Swaps - transfer of finance payments

Question 27

Embedded derivatives

Answer 27

Non-derivative contract eg bond with derivative contract embedded eg option to convert to shares at later date

Bond is the host contract, derivative is an embedded derivative

Host is FA - do not separate out, full contract FVPL

Host is not FA, eg FL or lease - combine provided:

Not both FVPL

Separate instrument is derivative

Characteristics of ED not closely related to host

When combined, derivative = FVPL, Host - per appropriate IAS/FRS

Question 28

Financial instruments: Disclosures

Answer 28

CV disclosed separately on face of SFP or in notes, As/Ls at FVPL/OCI/AC, other Ls

Qualitative - entities exposure to risk, how they arise, how it is managed

Quantitative - numerical disclosure of risk and its concentration

Types of risk:

Market - FV of future cash fluctuates due to changes in market prices

Credit - One party causes loss to another by failing to discharge obligations

Liquidity - Cannot meet financial obligations when they fall due