Financial Instrument

Question 1

What are the two types of financial instruments?

Answer 1

Financial Assets and Financial Liabilities

Question 2

What are the two categories for financial assets?

Answer 2

Fair Value through Profit and loss and Armotised cost

Question 3

When can put items through Fair Value through profit and loss?

Answer 3

If the item can be for trade, buy and sell and looking for profit

Question 4

When can an item be put through armotised cost for both financial assets and financial liabilities?

State what test it needs to pass for both financial assets and financial liabilities?

Answer 4

When it relates to Rec loans and payable loans.

For rec loans, it has to pass two tests in order to armotised costs whereas payable loans, it requires no test

Question 5

What two test do you need in order for the Rec loan to recognised in armotised cost?

Answer 5

1) Business model - Keep it to maturity

2) Cashflow - Capital and interest only

Question 6

If we buy and sell Rec loan, do we recognise this through fair value through profit and loss or armotised cost?

Answer 6

FVTPL becuase we are buying and selling the rec loan meaning we are making a profit so this needs to be recognised FVTPL.

Question 7

If the Rec loan is normally kept at maturity, however we are going to sell the loan, do we recognise this through FVTPL or Armotised cost and why?

Answer 7

Armotised cost. Although we are going to sell the loan, if it normally kept at maturity then we recognise this through armotised cost

Question 8

Where does Interest of the armotised cost go to?

Answer 8

I/S

Question 9

What is the double entry for opening value in armotised cost?

Answer 9

Dr Rec Loan Cr Cash

Question 10

State the double entry for Interest in armotised cost?

Answer 10

Dr Rec Loan Cr Interest

Question 11

State the double entry for Received in armotised cost?

Answer 11

Dr Cash Cr Rec loan

Question 12

Where does the closing Value of the armotised cost go to?

Answer 12

SFP

Question 13

When calculating Rec loan through FVTPL, what do we have to calculate?

Answer 13

We have to calculate the FV by PV of future C/F in the closing balance and balance goes to the P/L account.

Question 14

What is the difference between FVTPL and FVTOCI?

Answer 14

FVTPL is the equity instrument that is held for trading and FVTOCI is the equity instrument held for longer term

Question 15

In a payable loan, when issued on discount, what adjustment you need to make?

Answer 15

You need to make adjustment in the opening value.

Question 16

When issuing cost through FVTPL, what is the double entry for this?

Answer 16

Dr I/S Cr Cash

Question 17

Are your own shares known as financial instruments?

Answer 17

These are equity instruments

Question 18

When issuing cost through armotised cost, state the double entry for this?

Tell me what happens to the opening value for both Rec and payable loan

Answer 18

Dr Opening Cr Cash

For assets ( rec loan), You increase the opening value.

For Liability ( Payable loan), you decrease the opening value.

Question 19

What is convertible loan?

Answer 19

When converting cash into shares

Question 20

At the beginning, what is the double entry in convertible loan?

Answer 20

Dr cash,Cr Loan Cr Equity

Question 21

How do we calculate the opening FV of loan in a convertible?

Answer 21

Using the Percentage of convertible in which we unwind the Int and the capital.

Question 22

If the company decides to take the convertible loan option, what double entry is this?

Answer 22

DR Loan, CR Equity, CR Share Capital CR Share Premium ( Balance)

Question 23

If you are guaranteeing for somebody an amount if they don’t pay, what is the double entry for this?

Answer 23

DR I/S CR Financial Liability.

Question 24

When do we de-recognise Financial asset?

Answer 24

We need to de-recongise the financial asset if:

1) The right to C/F has been expired
2) The right of C/F is kept but there is an obligation to pass on without delay
3) If the asset has been transferred ( The majority of risks and rewards been transferred) - No control.

Question 25

How do we de-recognise Financial liability?

Answer 25

If the FL has been extinguished.

The criteria for Financial assets does not apply in financial liabilities

Question 26

When do we reclassify the financial asset between FVTPL, FVTOCI and armotised cost?

Answer 26

1) Only if financial assets business objective changes

2) DO not restate any previously recognised.

Question 27

When the financial asset is de-recongised, where do we the cumulative revaluation gain or losses?

Answer 27

P/L

Question 28

Do we recognise the revalaution gains or losses in P/L when the financial asset is de-recognised, if the item is an equity FVTOCI?

Answer 28

No, we do no recognise this in P/L

Question 29

What is an embedded derivative?

Answer 29

When there is a non-derivative and a derivative a contract

Question 30

When there is an embedded derivative in the contract, what is the normal way to treat this?

Answer 30

Take out the embedded derivate from the host contract and treat this separately as an FVTPL

Question 31

When do we not separate the embedded derivative?

Answer 31

When the host contract and embedded derivate are closely related and share the same risk and economic consequences

Question 32

Let’s say XYZ Ltd issues bonds in the market where the payment of coupon and principal is indexed with the price of Gold. Do we separate the embedded derivatives?

Answer 32

In this case, we can see that the host contract does not have economic and risk characteristics associated with embedded derivatives (which is in this case price of gold). Hence in this case the embedded derivative needs to be separated from the host contract and needs to be accounted separately.

Question 33

Let’s say the same company XYZ Ltd issues bonds in the market where the payment of coupon and principal is indexed with the share price of the company.

Do we separate the embedded derivate from the host contract?

Answer 33

In this case, we can see that the host contract has economic and risk characteristics associated with embedded derivatives (which is in this case share price of the company). Hence, in this case the embedded derivative need not be separated from the host contract and can be accounted together. This is because of the fact that both have the same economic and risk characteristics.