Financial Instruments: Presentation

Question 1

What is the definition of a financial liability?

Answer 1

A contractual obligation to deliver cash or another financial asset to another entity

Question 2

What is the definition of an equity instrument?

Answer 2

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

Question 3

Under the discussion paper, Financial Instruments with the Characteristics of Equity, when is there a liability?

Answer 3

Issuer can be required to pay cash or transfer another financial asset before liquidation
OR
the issuer has promised a particular return to the holder regardless of the issuer’s own performance and share price

Question 4

How do you account for convertible debt?

Answer 4

Split accounting
Dr Cash
Cr Liability
Cr Equity

Question 5

What is the definition of a financial asset?

Answer 5

Cash or a contractual right to receive cash or another financial asset from another entity

Question 6

What is the accounting standard for presentation of financial instruments?

Answer 6

IAS 32

Question 7

What is the liability of convertible debt measured at?

Answer 7

Amortised cost

Question 8

Explain split accounting and the effects

Answer 8

At inception value debt at its present value using non convertible debt interest rate.

The balance of the proceeds is take to equity.

Subsequently the debt is measured at amortised cost and equity does not change until conversion

Question 9

If a bonus issue which could be paid in cash, how would you account for this?

Answer 9

Dr SP or RE (nominal value)
Cr Financial Liability (present value)
Cr Equity (balancing figure)

Question 10

What discussion paper is in relation to the debt v equity argument?

Answer 10

2018/1: Financial Instruments with the Characteristics of Equity

Question 11

What does the discussion paper consider?

Answer 11

The principles by which financial instruments could be classified and which would provide useful information to users of financial statements

Question 12

What are the two features of a financial instrument that users regard as important according to the discussion paper?

Answer 12

• the issuer can be required to pay cash or to transfer another financial asset before liquidation
• the issuer has promised a particular return to the holder regardless of the issuer’s own performance and share price

A financial liability would have one or both of these features