FR 19 - Financial Instruments - Complex

Question 1

Define financial instrument

Answer 1

Any contractual right to receive or deliver cash or another financial asset

Question 2

What is a compound financial instrument?

Answer 2

An instrument that has attributes of both debt and equity

Question 3

Journals for convertible bonds

Answer 3

DR Cash
CR Bonds payable AT FMV of a similar instrument without conversion option
CR Surplus / Reserves for remainder

Question 4

Journals for transaction bcosts for bonds

Answer 4

DR Bonds payable (pro-rata the costs as % of total calculated in first journal)
DR Surplus / reservrs (pro-rata)
CR Cash

Question 5

Subsequent measures and entries for bonds

Answer 5

Amoritzed cost for debt portion, cost for equity

DR/CR Interest exp/revenue
DR/CR Bond payable
CR Cash

Question 6

Derecognition of convertible bonds

Answer 6

debt balance paid off in final period
any amounts in equity are left in equity

Question 7

Steps for converting to equity

Answer 7

Update records to account for interim interest expense, including amortization of idscounts or premiums up to derecognition date
Record derecognition of debt
Record derecognition of equity
Record issuance of shares at BOOK VALUE - NO GAIN/LOSS

Question 8

Convertible preferred shares entries at issuance

Answer 8

DR Cash CR Convertible preferred shares

Question 9

Convertible preferred shares measurement

Answer 9

historical cost

Question 10

Convertible prefered shares derecognition entries

Answer 10

DR convertible preferred shares CR common shares AT VALUE IN ACCOUNT, NO GAIN/LOSS

Question 11

Mandatory redemption shares recorded as

Answer 11

Liability - same as retractable shares

Question 12

If shares redeemable at company’s option record as

Answer 12

record as equity

Question 13

Redeemable shares sub meas

Answer 13

amortized cost and divs paid as interest expense

Question 14

Perpertual debt intiail entry

Answer 14

Fair value - PV of perp of interest payments
perp debt classified as a liability

Question 15

Perpertual debt sub meas

Answer 15

Amortized cost

Question 16

ASPE differences

Answer 16

1. measure equity portion at zero and record entire FV of instrument to the debt
2. measure more easily determinable component at FV, and allocate residual elsewhere.
3. Sub meas - can use straight-line or effective interest rate method
4. mandatory redeeemable shares as part of a tax-planning arrangement are issued as equity at their par, stated or assigned value. When redemption is demanded they are reclassified to liabilities at redemption amount. Difference to retained earnings.