Financial Instruments

Question 1

Describe IAS32 and explain what a financial asset/liability is

Answer 1

IAS32 shows how to classify instruments such as a loans as liability or equity)

Financial asset= cash or cash equivalent, A contractual right to exchange financial assets/liabilities on favourable terms

Financial liability= contractual obligation to deliver cash or exchange financial asset/liabilities on unfavourable terms

Question 2

What is an equity instrument and how do you classify redeemable/irredeemable shares AND dividends for them

Answer 2

Equity instrument- residual interest in asset of entity after deducting all its liabilities

Redeemable preference share: liability
Irredeemable preference share: equity unless obligation to pay dividend (liability)

Redeemable preference share dividend: finance cost in SPL
Irredeemable preference share dividend: retained earning in SOCE unless obligation to pay dividend (finance cost in SPL)

If obligation= Liability. If not= Equity

Question 3

What does IFRS9 describe? What is EIR? How do you treat Financial assets/liabilities

Answer 3

Addresses measurement and recognition of financial instruments

EIR= Spread cost of liability such as fees, discounts, interest, to SPL over term

For assets you add transaction costs, for liability to remove costs

Question 4

What is a compound instrument? How is it treated in FS?

Answer 4

Financial instrument that has characteristic of both equity and liability e.g. convertible bond. Shown as liability in SFP and is an amortised cost whereas equity stays same throughout (SPL: Finance cost)

Question 5

What is a treasury share and what is the double entry?

Answer 5

Where company acquires its own shares as alternative to making dividend distributions as a way to return excess capital to shareholders
* Dr Equity Cr Cash
* Gain or loss shouldn’t be recognised

Question 6

Describe disclosure of financial instruments. Include qualitative and quantitative disclosures

Answer 6

IFRS 7

2 main areas- info about significance of instruments and also risks arising and how entity manages this

Quantitative disclosures: entity must disclose carrying value and fair value of each class of instrument

Qualitative disclosure: disclose info to enable users to understand management’s attitude to risk e.g. entity credit risk

Question 7

List 3 exchange rate pricing rules

Answer 7

Historic- rate at date of transaction (use for initial transactions)
Closing- rate at reporting date
avg- avg rate throughout accounting period

Question 8

What are monetary/non-monetary items?

Answer 8

o Monetary: items that can be converted into cash (receivable, payable, loans)
o Non monetary: items that give no right to receive cash (inventory, property, PPE)

Question 9

How do you treat settled transactions

Answer 9

For settled transactions (payment occurring at accounting period) use historic rate at that date.

May differ to date of initial transaction. Exchange difference may arise, this is posted to SPL

Question 10

If asked to calculate equity component of convertible bond- what do you do?

Answer 10

1. Calc initial recognition: (issue amt x par value) x % of shares
2. inital recognition x (1/(1+market rate of interest)
3. Multiply for however many years (squared, power of 3, 4, 5 etc)
4. Once reached number of years in question, do (shares x par value) x rate of last step
5. Minus total from (shares x par value) to get equity