Financial Instruments

Question 1

Name the four categories of financial assets.

Answer 1

Financial asset at fair value through profit or loss
Held to maturity instruments
Loans and receivables
Available for sale financial assets

Question 2

Name the two categories of financial liabilities

Answer 2

Financial liability at fair value through profit or loss

Other financial liabilities

Question 3

How is financial instrument initially measured and recognized?

Answer 3

All financial instruments are initially measured at fair value plus transaction costs except for financial instruments at fair value through profit or loss where transaction costs are expensed

Question 4

When will financial assets be derecognised?

Answer 4

When the entity’s contractual rights to cash flow from the asset has expired or the asset is transferred

Question 5

When will financial liabilities be derecognised?

Answer 5

When the entity’s contractual obligation is discharged or canceled or expired

Question 6

What is the definition of financial asset?

Answer 6

Financial asset is any asset that is:

• cash
• an equity instrument of another entity
• a contractual right
  
  • to receive cash or another financial asset from another entity
  • to exchange financial assets or liabilities with another entity under potentially favorable conditions
• a contract that will or may be settled in the entity’s own equity instrument

Question 7

What is a financial liability?

Answer 7

A financial liability is any liability that is

• a contractual obligation
  
  • to deliver cash or another financial asset to another entity
  • to exchange financial assets or financial liabilities with another entity under potentially unfavorable conditions
• a contract that will or may be settled in the entity’s own equity instrument

Question 8

What is an equity instrument

Answer 8

Any contract that evidences a residual interest in the assets of an entity after detecting all of its liabilities

Question 9

What is the subsequent measurement for all of the categories of financial assets?

Answer 9

1. Financial asset at fair value through profit or loss
   
   • fair value
   • fair value adjustment through SCI
2. Held to maturity
   
   • amortized costs
3. Loans and receivables
   
   • amortized costs
4. Available for sale financial assets
   
   • fair value
   • fair value adjustment through equity

Question 10

What is a compound financial instrument?

Answer 10

It contains both liability and equity component

Question 11

How do you account for compound financial instruments such as redeemable debenture?

Answer 11

The obligation exists to make interest payment and to redeem the debenture for cash (liability portion).
The balance of redemption made up by issuing shares will be the equity portion.
Present value of the liability will be calculated by discounting the liability component back to present value using the market related rate for similar instrument.
The equity portion is the residual value after deducting the present value of liability component from the total proceed of the instrument.
The liability portion is subsequently measured at amortized cost and the equity portion remains constant at the initial amount.

Question 12

What are some examples of financial assets at fair value through profit or loss?

Answer 12

Investment in shares held for trading purpose

Question 13

What are some examples of held to maturity instruments?

Answer 13

Investment in debentures with fixed or determinable payments and fixed maturity that an entity has positive intention and ability to held to maturity
Investment in government bonds/redeemable preference shares with fixed or determinable payments and fixed maturity that an entity has positive intention and ability to held to maturity

Question 14

What are examples of available for sale financial assets?

Answer 14

Investments in shares not designated at fair value through profit or loss and not held for trading