Financial Instruments Flashcards

0
Q

Treatment of transaction cost for financial instruments

A

For all financial instruments (assets or liabilities) to be measured at fair value, the transaction cost associated with acquiring or incurring the item are EXCLUDED from the cost of financial instruments.

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1
Q

Financial instruments as defined by ASC 825

A

Cash — including foreign currency and demand deposits

Evidence of an ownership interest in an entity — including investments in C/S and P/S, warrants and options to purchase stock, and partnerships and LLCs.

Contracts that results in an exchange of cash or ownership interest in an entity.

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2
Q

Accounting wise four specific purposes why derivatives are held.

A

1- To speculate
2- As a fair value hedge
3- As a cash flow hedge
4- As a foreign currency hedge

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3
Q

Impairment assessment of financial instruments

A

Financial assets must be assessed for impairment and, if it is determined that Fair Value is less than Carrying Value and the decline is other than temporary, the asset must be written down and (generally) a loss recognized in current income. For more info on this topic please see study text in the bullet “Financial Instruments Introduction”

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4
Q

Mandatory disclosures about financial instruments.

A

1- Fair value
2- Related carrying value
3- Whether the instrument /amount is an asset or liability.

Required disclosures may be reported in the body of the financial statements or in the footnotes.

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5
Q

Concentration of credit risk disclosures

A

All entities must disclose all significant concentrations of credit risks arising from all financial instruments.

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6
Q

What is credit risk?

A

It is the possibility of loss from the failure of another party to perform according to the terms of a contract.

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7
Q

What is concentration of credit risk?

A

It occurs when an entity has contracts of material value with one or more parties in the same industry or region or having similar economic characteristics.

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8
Q

What must be disclosed in concentration of credit risk disclosure?

A

1- Information about the common activity, region, or economic characteristics that identifies the concentration.
2- The maximum amount of loss due to credit risk.
3- The entity’s policy of requiring collateral or other security to support financial instruments subject to credit risk.
4- The entity’s policy of entering into master netting arrangements to reduce the credit risk associated with financial instruments.

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