Chapter 3 - Financial Instruments Flashcards
(32 cards)
What standards cover financial instruments?
IAS 32 - Fin Instruments Presentation
IAS 39 - Fin Instruments Recognition and Measurement
IFRS 7 - Fin Instruments Disclosure
IFRS 9 - Financial Instruments
What is a financial instrument?
Any contract that gives rise to a financial asset of one entity and a liability / equity instrument of another entity.
What is a financial asset?
Either:
- cash
- contractual right to receive cash or another financial asset
- contractual right to exchange financial assets or liabilities with another entity on potentially favourable terms
- an equity instrument, for example shares, of another entity
If an asset has physical substance, can it be considered a financial asset?
No
What is a financial liability?
Either:
- a contractual obligation to deliver cash or another financial asset
- contractual obligation to exchange financial assets or liabilities with another entity
Examples: trade payables or loans
What is an equity instrument?
An equity instrument is a contract that evidences a residual interest in the net assets of an entity
What are the 2 types of financial instruments?
Primary (e.g. receivables, payables and equity)
Derivative financial instruments (e.g. financial options, futures and forwards, currency swaps)
What is a derivative per IFRS 9 ?
Financial instrument that has specific characteristics:
- Value changes in response to the change in a specified interest rate, financial instrument price, commodity price etc
- Requires no initial net investment or is smaller than required for other types of contracts
- Settled at a future date.
What is IAS 32 and what are the objectives and scope?
IAS 32 is Financial Instruments: Presentation.
Establishes principles for presenting financial instruments.
Applies to all entities and to all types of financial instruments, except where another standard is more specific.
What are examples of items which are not covered under the scope of IAS 32?
- Interests in subsidiaries, associates or joint ventures
- employers rights and obligations under IAS 19 employee benefits
- Share-based payment transactions under IFRS 2 Share-Based Payment
- Insurance contracts.
True or false:
The substance of a financial instrument is considered over the legal form.
True
What are the 3 types of classifications under IAS 32 ?
- Financial asset
- Financial liability
- Equity instrument
Is the right to deliver an entity’s own shares always considered an equity instrument?
Not necessarily.
If the contract is structured in a way that a variable number of shares may be issued to satisfy a fixed monetary amount, then this is a financial liability.
What is a compound financial instrument?
One that contains both a liability component and an equity component.
Should be classified separately according to their substance (IAS 32.28).
A convertible bond is an example of what?
A compound financial instrument.
The economic effect of issuing the convertible bond is the same as issuing a non-covertible bond and an option to purchase shares.
A convertible bond has two parts that should be measured separately - a liability component, and an equity component.
How should these components be measured?
Each component should be estimated at fair value of the component parts.
Liability = measured at fair value of a similar financial liability that does not have a equity element.
Present value of interest payments & capital amount, discounted at a rate similar to a “straight” bond.
Equity = difference between the fair value of the compound instrument as a whole, and the amount allocated to the liability component.
What are Treasury Shares under IAS 32?
If an entity acquires its own shares and they are deducted from equity
How should Treasury Shares be treated under IAS 32?
Entity should not recognise any gain or loss made from a transaction involving treasury shares.
Any consideration paid or received should be recognised directly in equity.
True or false:
Gains or losses from Treasury Shares should be recognised under IAS 32.
False
What disclosure requirement is there for Treasury Shares?
Under IAS 1, the amount of Treasury Shares should be disclosed in either the statement of financial position or the notes in the financial statements.
Where interest, dividends, losses or gains arise in relation to a financial instrument classified as a financial liability, how should this be recognised?
In the profit or loss for the period under IAS 32.35.
Dividends paid out in repsect
How are dividends paid out in respect of a financial instrument that is classified as an expense treated under IAS 32?
Should be recognised as an expense.
Examples are dividends on redeemable preference shares - presented as finance costs in profit and loss.
For equity instruments, how are distributions (e.g. dividends) treated?
Distributions paid to the holders of a financial instrument classified as equity should be charged directly against equity
If an entity has both financial assets and financial liabilities, how should these be presented?
As separate items in the statement of financial position.
However, is possible to net off under some circumstances.
Under IAS 32, an entity is required to offset a recognised financial asset and financial liability when the entity:
(a) currently has a legally enforceable right to set-off the recognised amounts
(b) intends to settle on a net basis or realise the asset / settle liability simultaneously.
