Chapter 3 - Financial Instruments Flashcards
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).
