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Financial Reporting & Analysis 2 > Financial Instruments > Flashcards

Financial Instruments Flashcards

1
Q

broadly, what is a financial instrument?

A

means of raising finance e.g. loans, shares etc.

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2
Q

Why is IAS 39 Financial Instruments: Recognition and Measurement obselete

A

had a role to play in the global financial crisis

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3
Q

what is the definition of a financial instrument

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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4
Q

what is a financial assets

A

cash, equity of another entity, or contractual right to receive cash

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5
Q

what is a financial liability

A

any liability that is a contractual obligation to deliver cash

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6
Q

what is an equity instrument

A

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

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7
Q

examples of financial assets

A

cash
accounts receivable
loans receivable

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8
Q

examples of financial liabilities

A

bank overdraft
accounts payable
loans payable
certain preference shares (those with a mandatory repayment date)

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9
Q

examples of equity instruments

A

ordinary shares
certain preference shares (those with no mandatory repayment date)

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10
Q

which financial standard deals with the classification of financial instruments

A

IAS 32 Financial Instruments: Presentation

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11
Q

for the buyer, is a financial instrument an asset or liability

A

asset

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12
Q

for the issuer of a financial instrument, why is it important to classify as an asset or liability correctly

A

can affect gearing

different accounting treatments apply to financial liabilities and financial assets

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13
Q

how to determine whether to classify financial instruments issued as debt or equity

A

if it includes a contractual obligation to deliver cash or another financial asset then it is a liability

otherwise it in equity

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14
Q

what are redeemable preference shares

A

preference shares that require a future repayment of the share capital

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15
Q

should preference shares be issued as debt or equity

A

issuer has an obligation to deliver cash

should be treated as liability

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16
Q

where should dividends on preference shares be expensed

A

finance costs

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17
Q

what is a compound financial instrument

A

a financial instrument that contains both a liability and an equity component

18
Q

what is an example of a compound financial instrument

A

convertible bond

liability component = issuer has obligation to repay bond coupon

equity component = the bond holder has the option to convert to ordinary shares

19
Q

how should compound financial assets be recognised

A

liability and equity components should be recognised separately

20
Q

how to calculate liability component of a convertible bond

A

fair value of net proceeds

21
Q

how to calculate equity component of a convertible bond

A

fair value of whole bond - fair value of liability component

22
Q

what accounting standard deals with the recognition of financial instruments

A

IFRS 9 Financial Instruments

23
Q

under IFRS 9, when should financial instruments be recognised

A

when there is a contract between the entity buying the assets and the entity issuing the instrument

24
Q

when should financial instruments be derecognised, according to IFRS 9

A

when the right or obligation to receive or pay cash expired

25
Q

at what value should financial instruments be recognised at initially

A

at their fair value, on the day the asset was bought/liability issued

i.e. amount of money that passed hands

26
Q

if a financial instrument is intended to be held until maturity, how should it be measured

A

Amortised cost method

27
Q

what does the effective interest method take into account

A

the premiums and discounts as well as the interest receivable

28
Q

what are the two ways in which assets can be measured over their lifetime

A

fair value

or

amortised cost

29
Q

why is amortised cost less volatile than fair value

A

spreads income over the lifetime of the asset

30
Q

what is the calculation for amortised cost

A

initial recognition + interest earned - interest received/payments made

31
Q

what are the two tests that need to be passed before an asset can be measured at amortised cost

A

business model test

cash flow characteristics test

32
Q

what is the business model test

A

must be holding the financial asset to collect its contractual cash flows

i.e. must be holding until maturity and not planning to trade before

33
Q

what is the cash flow characteristics test

A

the contractual cash flows must consist only of principal and interest

i.e. cash flows connected to inflation would fail this test

34
Q

examples of some financial assets that can be measured at amortised cost

A

holding of loan stocks until maturity

35
Q

examples of financial assets that pass the cash flow characteristics but not the business model test

A

financial asset we plan to trade before maturity

36
Q

how should financial assets planned to be sold before maturity be measured

A

fair value through OCI

37
Q

what is an example of a financial asset that doesnt pass the cash flow characteristics test or the business model test

A

holding of ordinary shares

38
Q

how should the holding of ordinary shares be measured

A

at fair value through profit or loss

39
Q

under what heading in the SOFP are assets measured at amortised costs

A

Financial assets at amortised costs

40
Q

which financial standard deals with disclosures of financial instruments

A

IFRS 7 Financial Instruments: Disclosures

41
Q

why are disclosures important for financial instruments

A

enables users to evaluate significance of financial instruments on the entity’s financial position and performance

enables users to evaluate the risk related to financial instruments

42
Q

what does the equity component of a convertible bond represent

A

the premium paid to have the option to convert

Financial Reporting & Analysis 2 (8 decks)

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