S1 - financial instruments

Question 1

what are financial instruments

Answer 1

IAS32
any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another
To enhance a users understanding of the effect of financial instruments on the financial position, performance and cash flow of an entity
Financial instruments should be classified according to the substance of the contract, not its legal form

Question 2

what doesn’t count as financial instruments

Answer 2

physical/intangible assets
Prepayments
Most warranty obligations
Certain assets may generate economic benefit but there may be no contractual right to receive cash/another financial asset

Question 3

what are ordinary shares

Answer 3

voting rights
Receive dividends from profits of company
Repaid after preference shares
Treated as equity

Question 4

what are preference shares

Answer 4

no voting rights
Priority for dividends
Repaid after creditors but before ordinary shares
Treatment depends on nature
Redeemable

Question 5

what is redeemable v irredeemable

Answer 5

Redeemable - contractual obligation to pay dividends and repay the capital. Contractual obligation = classify as liability
Irredeemable = contractual obligation = liability. No contractual obligation/discretionary = classify as equity

Question 6

what are compound financial instruments

Answer 6

both a liability and equity element
Split component parts and present them separately according to its substance
Split accounting - allocate proceeds of issue between the separate components
PV of interest + capital = FV of liability element
Balance of net proceeds = FV of equity element
Issue of non convertible bond = loan - liability
Issue of option to purchase shares = equity

Question 7

what is measurement of a convertible bond

Answer 7

equity component remains constant throughout
Liability component is based upon an equivalent non convertible loan
Interest should be charged through the SOCI based on the higher non convertible rate
Company will only pay the lower convertible rate of interest and each year the liability component will increase - at redeemable date, total liability equals the amount payable

Question 8

what are treasury shares

Answer 8

equity instruments that are reacquired by the company - share buyback
Treatment:
Deduct from equity
Do not recognise gains or losses on purchase, sale, issue or cancellation
Consideration paid or received should be recognised in equity
Amount of treasury shares held dislocated in SOFP or notes
DR equity
Cr cash

Question 9

what is offsetting

Answer 9

separate presentation of financial assets or liabilities
Unless entity has legal rights of offset and entity intends to settle on net basis

Question 10

what issue costs are accounted for

Answer 10

account for professional fees
Dont account for internal costs as they would have been incurred anyway (not incremental)

Question 11

what is initial recognition

Answer 11

when the entity enters into the contractual provisions of the financial instrument
In SOFP