Financial Instruments Flashcards
ABC Inc. purchased a forward contract on oil. They plan to take delivery of the oil in order to use it in the business. Under ASPE would the forward contract be subject to the standards on financial instruments?
No - under ASPE financial instruments guidance does not apply to contracts to buy or sell non-financial items except for:\n<ul>\n \t<li>Exchange-traded futures contracts; and</li>\n \t<li>Contracts that are designated in a qualifying hedging relationship in accordance with this section.</li>\n</ul>\n\n\n
Diamond Corp. had an investment in shares of DEF Inc. which are classified as FVOCI. The fair value of the shares was $135,000 at the end of year 1 and $95,000 at the end of year 2. What is the net amount that would be debited or credited to Diamond Corp?s P&L or OCI in year 2 under IFRS?
For the shares ofDEF at FVOCI, theOCI would be debited $40,000 which reflects the decrease in value for the shares.
10.\tMandras Inc. purchases a bond which it is planning to hold to maturity. It is Manduras?s practice to generally hold Bond?s to maturity unless the issuer is in financial difficulty in which case Manduras would sell the bond in order to limit its losses in the event of non collection. The bond pays interest based on a formula which take into account both prime rate and the performance of the TSX 300. Would Mandras be allowed to measure the bond at amortized cost under IFRS?
In this situation the contractual terms of the financial asset do not meet <u>t</u><u>he ?SPPI? contractual cash flow characteristics test which requires that the c</u>ontractual cash flows are solely payments of principal and interest (SPPI) on the principal amount outstanding and are consistent with a basic lending arrangement. In a basic lending arrangement, 2 primary factors should determine payments of interest/principal:\n\n1) Time value of money and\n\n2) Credit risk\n\nGiven that in this case interest payments are also impacted by the performance of the stock market, this test is not met, in which case the bond would be accounted for atamortized cost regardless of thebusiness model. The FVTPL category would have to be used unless the bond is designated at FVOCI at initial recognition.
Diamond Corp. had an investment in a bond, which is being measured at FVOCI. The fair value of the bond was $120,000 at the end of year 1 and $100,000 at the end of year 2. There was a credit impairment loss of $5,000 in year 2. What is the amount that would be debited or credited to Diamond Corp?s P&L and/or OCI in year 2 under IFRS?
For the debt OCI would be debited $15,000 which is the based upon the amount of the reduction in the fair value of the debt over the course of the year of $20,000 offset by the impairment loss of $5,000. Hence the total debit to OCI is $15,000. Diamond Corp would debit the P & L for the impairment loss of $5,000.
Diamond Corp. had an investment in shares of ABC Inc. which are classified as FVTPL. The fair value of the shares was $100,000 at the end of year 1 and $155,000 at the end of year 2. What is the net amount that would be credited to Diamond Corp?s P&L or OCI in year 2 under IFRS?
The shares that are classified as fair value through profit and loss (FVTPL) are reported at fair value with increases or decreases in value recognized as gains or losses in the P & L. The change in fair value during 2018 for these shares was an increase of $55,000. Accordingly the P&L would be credited $55,000 in connection with the gain in these shares.
During year 1 ABC Inc. made an investment in 1000 shares of ABC Inc. at a cost of $1,500,000 and elected to classify the shares as FVOCI. ABC Inc.?s year end is December 31. At the year 1 and year 2 year ends the shares had a fair value of $1,600,000 and $1,750,000 respectively. In February of of year 3, ABC disposed of the shares for $1,725,000. Which of the following is the amount of the gain or loss that would be recognized in the P&L upon disposal of the shares under IFRS?
Over the course of year 1and year 2, the shares would be written up from $1,500 to $1,750,000 (with the increase going to OCI) so that by the end ofyear 2 the carrying value of the shares would be $1,750,000. Therefore when the shares were disposed of at $1,725,000, the loss recognized would be $25,000 (i.e. $725,000 - $750,000).
Halis Inc. purchased 50,000 shares of a publicly traded stock, Blueberry Corp. as it believes that the company has tremendous short run potential. Halis is planning to flip the shares in the next 3 weeks and is hoping to make a large profit. Which of the following correctly describes the correct accounting for the shares under IFRS?
Given that Halis is planning to flip the shares in 3 weeks (i.e. the shares were acquired for the purpose of selling or repurchasing it in the near term), the shares would qualify as ?Held for Trading? and therefore Halis would be required to account for the shares at FVTPL.\n\n
What is the definition of a financial asset under ASPE?
A <b>financial asset</b> is any asset that is:\n\n(i) Cash; or\n\n(ii) Contractual right to receive cash or another financial asset from another party, e.g. receivable; or\n\n(iii) Contractual right to exchange financial instruments with another party under conditions that are potentially favourable e.g. a stock option; or\n\n(iv) Equity instrument of another entity e.g. shares of a company.
What is the definition of a financial asset under IFRS?
A <i>financial asset</i> is any asset that is:\n\n(a) cash; or\n\n(b) an equity instrument of another entity (e.g. shares of a company); or\n\n(c) a contractual right:\n\n(i) to receive cash or another financial asset from another entity (e.g. a receivable); or\n\n(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity (e.g. a stock option); or\n\n(d) a contract that will or may be settled in the entity’s own equity instruments and is:\n\n(i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or\n\n(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equityinstruments.\n\n
what is the definition of a financial liability under ASPE?
Acontractual obligation:\n\n(i) to deliver cash or another financial asset to another entity (e.g. a bond payable or account payable); or\n\n(ii) to exchange financial assets or financial liabilities with another entity under conditionsthat are potentially unfavourable to the entity (e.g. a company writes a call option).
What is the definition of a financial liability under IFRS?
Acontractual obligation:\n\n(i) to deliver cash or another financial asset to another entity (e.g. a bond payable or account payable); or\n\n(ii) to exchange financial assets or financial liabilities with another entity under conditionsthat are potentially unfavourable to the entity (e.g. a company writes a call option); or\n\nAcontract that will or may be settled in the entity’s own equity instruments and is:\n\n(i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or\n\n(ii) a derivative that will/or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a <u>fixed number</u> of the entity’s own equity instruments.\n\n
ABC Inc. issued convertible debt for $1 million. Could the full amount of the debt be reflected as a liability under ASPE?
Yes - Under ASPE one has the option of allocating the full proceeds of the debt to the liability component or breaking down the debt between debt and equity.
Would gold be a financial asset?
No - It does not meet the definition of a financial asset under either IFRS or ASPE.
A company issues convertible debt for $1 million. Could the full amount of the debt be reflected as a liability under IFRS?
No - Under IFRS one would have to break down the convertible debt betweenliabilities and equity.
Would mandatorily redeemable preferred shares be treated as equity or as a liability under IFRS?
They would be treated as a liability given that the company is required to deliver cash to (another entity) to redeem the shares on a particular date in the future. It is therefore similar to debt and would therefore meet the definition of a liability.
Would mandatorily redeemable preferred shares be treated as equity or as a liability under ASPE?
Unless they are issued for tax planning purposes they would be treated as a liability, given that the company is required to deliver cash to (another entity) to redeem the shares on a particular date in the future. It is therefore similar to debt and would therefore meet the definition of a liability.If they are issued in a tax planning arrangement they would be classified as equity (in a separate section of equity) at the time of issue with a suitable description indicating that they are mandatorily redeemable. When redemption is demanded, the issuer would reclassify the shares as liabilities and measure them at the redemption amount.
Would retractable preferred shares always be treated as a liability under ASPE?
Not always- They would normally be treated as a liability, given that the company is required to deliver cash to (another entity) to redeem the shareswhen the holder of the shares demandsthat they be redeemed. It is therefore similar to debt and would therefore meet the definition of a liability.However ifthey are issued in a tax planning arrangement they would be classified as equity (in a separate section of equity) at the time of issue with a suitable description indicating that they are mandatorily redeemable. When redemption is demanded, the issuer would reclassify the shares as liabilities and measure them at the redemption amount.
Would retractable preferred shares always be treated as a liability under IFRS?
Yes - They would always be treated as a liability, given that the company is required to deliver cash to (another entity) to redeem the shareswhen the holder of the shares demandsthat they be redeemed. Under IFRS, there is no exemptionfrom treating the shares as a liability if the shares are issued for tax planning purposes.
ABC Inc. borrows $1 million and is obligated to repay the amount of the debt by issuing its own shares. The number of shares that will need to be issued depends upon the value of the shares on the repayment date. For example if the share price is $10 then 100,000 shares will be issued and if the share price is $20, 50,000 shares will be issued. Would the amount owing be treated as a liability or equity?
It would be treated as a liability. If an entity has a contractual right or obligation todeliver a number of its own shares or other equity instruments to settle an obligation and the number of shares varies so that the fair value of the entity’s own equity instruments to be delivered equals the amount of the contractual obligation, the obligation is treated as a liability.
ABC Inc. borrows $1 million and is obligated to repay the amount of the debt by issuing its own shares. The company agrees to repay the obligation by issuing 100,000 shares regardless of the price of the shares on the re-payment date. Would the obligation be treated as a liability or equity?
Given that ABCcommitted to todeliver a <strong>fixed</strong> number of its own entity instruments - i.e. 100,000 shares - regardless of their future value, the obligationwould constitute equity.
Under what conditions is an entity allowed to offset a financial asset and liability?
Offsetting is allowed when entity:\n<ol>\n \t<li>Has a legally enforceable right to set off the recognized amounts and</li>\n</ol>\n<ol>\n \t<li>Intends either to settle on a net basis or to realize the asset and liability simultaneously</li>\n</ol>\n
In what situations would a financial instrument be treated as held for trading under IFRS?
It is classified as held for trading, in the following situations:\n<ul>\n \t<li>It is acquired or incurred principally for the purpose of selling in the near term or repurchasing in the near term (in the case of a liability); <strong>Or</strong></li>\n</ul>\n<ul>\n \t<li>It is partof a portfolio with evidence of a recent pattern of short?term profit taking; <strong>Or</strong></li>\n</ul>\n<ul>\n \t<li>It is a derivative e.g. stock option, futures contract etc. (excluding when thederivative is used for hedging).</li>\n</ul>
A company purchases shares of ABC Inc. on December 23 for $100 with the intent of flipping them quickly. At the company’s December 31 year end the shares are worth $120. How would the company account fr the change in value from acquisition date to year end under IFRS?
As the shares were purchased for the purpose of selling them in the near term they would be classified as held for trading and would therefore fall under the fair value through profit and loss category. As such they would be valued at fair value at year end and the $20 change in value would be treated as a gain in the P&L.
