Ch10 Financial instruments Flashcards
Definition of financial instrument
Financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
List the three categories of financial assets (based on their subsequent measurement).
- Financial assets subsequently measured at AMORTISED COST;
- Financial assets subsequently measured at FAIR VALUE through OTHER COMPREHENSIVE INCOME;
- Financial assets subsequently measured at FAIR VALUE through PROFIT OR LOSS.
What are cash equivalents?
Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
Cash flow characteristics tests at classification of financial assets.
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
Business model test at classification of financial assets.
Assessment of whether the objective of the entity’s business model is to:
a) HOLD the financial asset to collect the contractual cash flow OR
b) SELL the financial asset prior to its contractual maturity to realise its fair value changes.
Definition of effective interest rate (EIR).
EIR is rate that exactly discounts estimated future cash flows through the expected life of the financial instrument to the gross carrying amount of financial asset or to the amortised cost of financial liability.
Derivatives should be classified as:
financial instruments subsequently measured at fair value through profit or loss (@ FVTPL).
Describe three levels in fair value hierarchy as defined in IFRS 13 - Fair Value Measurement.
Level 1: Asset values are based on quoted prices in active markets for identical assets.
Level 2: Asset values are based on other observable market data, such as quoted prices for similar assets.
Level 3: Asset values are based on data, which are not derived from the market.
