Financial Instruments

Question 1

What are the relevant IFRS Standards?

Answer 1

• IFRS 9 Financial Instruments
• IAS32 Financial Instruments: Presentation.

Question 2

Financial Instrument definition according to IAS32:

Answer 2

Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
Includes Cash, Trade receivables and trade payables, Loans, Shares, Derivatives.

Question 3

What are the 3 categories that Financial instruments fall into?

Answer 3

1.) Financial Assets
2.) Financial Liabilities
3.) Equity instruments
LEES NOTAS

Question 4

What are the 3 characteristics of Derivatives?

Answer 4

F = It is settled at a Future date
U = Its value changes in response to an Underlying variable
N = It requires No or little net investment
Examples include futures, options, forwards and swaps

Question 5

How do we Account for Derivatives?

Answer 5

• If derivative is favourable at year end, it is a financial asset:
  Debit Financial Asset
  Credit Profit or loss (typically finance income)
• If derivative is unfavourable at year end (standing at a loss) it is a financial liability.
  Debit : Profit or loss (typically finance costs)
  Credit : Financial liability

Question 5

Compound financial instruments:

Answer 5

Where a financial instrument contains some characteristics of equity and some of financial liability then its separate components need to be classified separately.
For example: convertible debt, contains some characteristics of equity and some of financial liability.

Question 6

What is the calculation of Compound financial instruments:

Answer 6

Financial and equity components are separated as follows:
1.) Financial Liability component:
*Present value of principal X
Present value of interest X
__X___
(=Discount using market interest rate of non-convertible debt. Principal = discount factor present value table. Interest = cumulative table)

2.) Equity component = Proceeds - Financial liability component

Question 7

What is the accounting entry to record a compound instrument issued by an entity:

Answer 7

Debit : Cash
Credit : Financial liability
Credit : Equity

Question 8

When does a Financial Instrument become recognised in AFS?

Answer 8

Recognised in Statement of Financial Position when entity becomes a party to the contractual provisions of the instrument (IFRS 9)

Question 9

Measurement of Financial Asset are driven by 2 factors:

Answer 9

1.) Type of financial asset purchased
- Investments in debt instruments
- Investments in equity instruments
2.) Entity’s intentionat the date of purchase
- Acquired principally for the purpose of selling it in short-term (held for trading)
- Acquired with intention of keeping it for long term
(These factors will determine whether measurement is at amortised cost or fair value and if at fair value, whether remeasurement gains or losses are recognised in profit or loss (P/L) of in OCI.

Question 10

‘Held for trading’ definition according to IFRS 9:

Answer 10

A financial asset (or financial liability) that is acquired (or incurred) principally for the purpose of selling (or repurchasing it) in the near term.

Question 11

IFRS 13 Fair Value measurement Definition:

Answer 11

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date.

Question 12

Definition of Amortised Cost:

Answer 12

The amount at which the item is initially recorded, less any principal repayments, plus the cumulative amortisation of difference between initial and maturity values. (IFRS 9)

Question 13

What are the differences between initial value and maturity value?

Answer 13

Is amortised using the effective interest rate of the interest rate of the instrument, ie its internal rate of return. This includes:
- Transaction costs
- Interest
- Any discount on the debt on inception
- Any premium on redemption