l3.2 : financial instruments

Question 1

define financial instrument.

Answer 1

any contract that gives rise to financial asset of one firm and financial liability / equity instrument of another enterprise.

Question 2

state IAS32.

Answer 2

financial instruments : presentation

Question 3

state IAS39.

Answer 3

financial instruments : recognition + measurement

Question 4

define financial asset.

Answer 4

cash or contractual right to receive cash / financial asset or exchange financial instruments from another enterprise.
creates contractual right to exchange FIs under potentially favourable conditions.

Question 5

define financial liability.

Answer 5

to deliver cash or another financial asset to another enterprise.
creates contractual obligation to exchange FIs with another firm under potentially unfavourable conditions.

Question 6

define equity instrument.

Answer 6

contract which evidences residual interest in assets of firm after deducting all liabilities.

Question 7

what is off balance sheet financing?

Answer 7

concealing liabilities off SOFP to make gearing look better. reduces level of debt included in gearing ratio.

Question 8

state the three criteria that define a derivative.

Answer 8

financial instruments that :
- whose value changes in response to change in IR, security price, commodity price, exchange rate etc.
- require no / little net investment relative to other types of similar contracts
- that are settled at a future date

Question 9

what does IAS32 : compound instruments (convertible debt) state?

Answer 9

• split presentation into equity + liability elements
• measure liability by deriving fair value of similar liability without conversion option
• total fair value - liability fair value = residual equity fair value

Question 10

state the DEBK of converting convertible shares at maturity.

Answer 10

Dr liability
Cr share capital / premium

Question 11

state the DEBK of gaining repayment in cash for convertible shares at maturity.

Answer 11

Dr liability
Cr cash