Financial instruments

Question 1

Process in accounting for financial instruments

Answer 1

1) Classify the financial instrument in terms of IAS 32.
2) Initial measurement: Recognise at fair value.
3) Classify into the correct category in terms of IFRS 9.
4) Subsequent measurement: in terms of IFRS 9.

Question 2

Classification

Answer 2

Based on the substance of the contractual arrangement.
+ Definitions
*Performed on initial recognition.

Question 3

Define financial instruments

Answer 3

Any contract that gives rise to a financial asset for one party and a financial liability or equity instrument of another entity.

Question 4

Define a Financial asset

Answer 4

Financial Asset (FA):
Any asset that is:
(1) Cash, or
(2) Equity instrument of another entity, or
(3) Contractual right → receive cash or another fin. asset, or
(4) Contractual right → exchange fin. assets/liabilities with other entities under favourable conditions, or
(5) Contract that will be settled in entity’s own equity instruments (the entity will receive its own shares) other than for a fixed number of equity instruments

Question 5

Define Financial liability

Answer 5

Contractual obligation to:
(1) Deliver cash or another fin. asset to another entity, or
(2) To exchange fin. assets/liabilities with other entities under unfavourable conditions, or
(3) That will be settled in the entity’s own equity instruments (e.g. shares) other than for a fixed number of equity instruments

Question 6

Define equity

Answer 6

Any contract that provides evidence of entity’s residual interest in another entity’s assets less liabilities.

Question 7

When can an instrument be equity?

Answer 7

An instrument can only be equity if:
* NO contractual obligation to settle in cash / another FA, and
* If it can be settled, it will be in a fixed number of the entity’s own equity instruments (shares).

Question 8

Contingent Settlement Provisions

Answer 8

Requires the issuer to deliver cash / another FA in the event of the occurrence / non-occurrence of an uncertain event that is beyond the control of both the issuer and holder (Financial liability)

Question 9

Where ARE the interest, dividends gains and losses recognised of the financial instrument.

Answer 9

1) Financial asset/ Financial liability
- recognised in P/L
2) Equity
- recognised in equity
3) Dividends on (cumulative redeemable preference shares
- interest/ finance costs for accounting purposes.

Question 10

When is a financial instrument recognised?

Answer 10

When and only when the entity becomes a PARTY to the CONTRACTUAL PROVISIONS of the instrument.

Question 11

Initial measurement ?

Answer 11

• Fair value adjusted for transaction costs
• exception:
• trade receivables that does not have a significant financing component is measured at transaction price.

Question 12

What is an accounting mismatch?

Answer 12

Financial asset bought to offset the risk in a particular financial liability.

Question 13

Classification of FL on fair value through P/L?

Answer 13

1) Held for trading
2) Designated as FVPL

Question 14

Exception of FV adjustment recognised in OCI for FL?

Answer 14

FV adjustment:
1) portio that is attributable to changes in credit risk of that liability.
2) Rest of the adjustment to P/L.

Question 15

What is a compound financial instrument?

Answer 15

A financial instrument that has a financial liability and equity component (convertible is the key word)

Question 16

Initial recognition of a compound financial instrument?

Answer 16

1) Measure the fair value of the instrument (proceeds)
2) Determine fair value of the liability component (CFI)
3) Difference between 1&2 = Equity.