Financial instruments Flashcards
What is a financial instrument?
Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity
What are examples of financial assets?
Cash
Equity instrument of another entity
Contractual right to receive cash or another asset from another entity
What is a financial liability?
Contractual obligation to deliver cash or another financial asset to another entity
What is an equity instrument?
Contract that evidences a residual interest in the assets of an entity after deducting its liabilities
Own ordinary shares, irredeemable preference shares
What is a preference share?
Right to receive a dividend - equity
Financial reporting focusses on substance of transactions - redeemable preference shares liabilities
What is a treasury share?
When a company reacquires its own shares instead of making dividend distributions
Deducted from equity
No gain/loss recognised
Amount should be disclosed in SFP or notes
When is a financial instrument recognised?
When the entity becomes party to the contractual provisions of the instrument
How are financial instruments initially measured?
fair value +/- transaction costs
Add assets
Deduct liabilities/equity
What is fair value measurement?
Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
To determine fair value, what does the standard require consideration of?
Principle market
Highest and best use of asset/liability
Assumptions that participants would use it
What is the hierarchy of inputs to arrive at fair value?
Level 1 - quoted prices in active markets for identical assets
Level 2 - Inputs other than quoted prices that are directly or indirectly observable
Level 3 - unobservable inputs
How should investments in equity instruments be valued?
If no quoted price and fair value can’t be reliably calculated, measure at cost
What is the amortised cost table headings for financial assets/liabilities?
B/f
+ effective interest (finance income)
- cash received/paid
C/f
What are the journal entries for held till maturity?
Dr financial asset
Cr cash (acquired + costs)
Dr financial asset
Cr finance income (total x %)
Dr financial asset (prev x %)
Cr finance income
Dr cash
Cr financial asset (nominal value x premium %)
How do we tackle compound financial instruments?
Split them up
Fair value of liability component measured at present value of expected cash flows - held at amortised cost
Fair value of equity component remainder of issue proceeds
What is the process to calculate compound financial instrument liabilities and equity?
Liability - multiply cash flows by discount factor to get present value for each year
Calculate interest and take off interest paid
Equity - liability component - total proceeds
What disclosures should be made for IFRS 7?
Carrying amount for each category of financial instrument
Fair value of each class
Narratives to help understand attitude to risk - credit risk, liquidity risk, market risk
What is the UK GAAP comparison for financial instruments?
IFRS 7 -disclosures, IFRS 9 - recognition and measurement
If reporting under FRS 101 - exempt from IFRS 7 &13 provided disclosures in consolidated group FS
FRS 102 has basic and other financial instruments
