Financial Instruments - F2

Question 1

What is a financial instrument?

Answer 1

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Question 2

What is an equity instrument?

Answer 2

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

Question 3

What should financial instruments initially be recognised as?

Answer 3

Fair value

Question 4

What are the subsequent measurement of equity instruments?

Answer 4

Not re-measured after initial recognition

Question 5

What should happen to the directly attributable costs of a financial liability?

Answer 5

Capatilised unless classified as fair value through P&L
e.g. professional fees
Capitalised transaction costs are deducted from the liability

Question 6

What are the two possible categories for financial liabilities and how are they subsequently measured?

Answer 6

Other financial liabilities - all liabilites other than FVPL e.g. a loan
Measurement: Record at fair value less costs, Measure subsequently at amortised cost

Fair value through profit or loss - instruments held for trading
Measurement: Record at fair value, expense transaction costs, restate to fair value at each reporting date, any gain or loss is taken to P&L

Question 7

What is compound intruments?

Answer 7

A financial instrument that has characteristics of both equity and liabilities

Question 8

What should a financial asset be recognised as initially?

Answer 8

Fair value

Question 9

What is the subsequent treatment of assets?

Answer 9

Revalue to fair value
Gains or losses to P&L

Question 10

What is a derivative?

Answer 10

Financial instrument that derives its value from the value of an underlying asset, price, rate or index

Question 11

What are the characteristics of a derivative?

Answer 11

Value changes in response to changes in the underlying item
Requires little or not initial investment
Settled at a future date

Question 12

What are the five types of derivatives?

Answer 12

Forward - obligation to buy or sell at a specified date at a specified price
Futures contracts - obligation to buy at a specific date
Options - right to buy at a specified date
Forward rate agreements - Fix interest charge on a floating rate loan
Swaps - exchange periodic payments at specified intervals