CP-08 (Financial instruments)

Question 1

What is a financial instrument?

Answer 1

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Question 2

Preference shares

Answer 2

provide the holder with the right to receive an annual dividend (usually of a
predetermined and unchanging amount) out of the profits of a company, together with a fixed amount on the ultimate liquidation of the company or at an earlier date if the shares are redeemable. The legal form of preference shares is that they are equity.

Question 3

Offsetting

Answer 3

Financial assets and financial liabilities should generally be presented as separate items in the statement of financial position. However, offset is required if:
* the entity has a legal right of offset;
* the entity intends to settle on a net basis.

Question 4

Offsetting

Answer 4

Offsetting is when an entity presents its assets and liabilities (or revenues and expenses) as a net amount, rather than showing them separately.
To reflect a more accurate picture of the company’s financial position and to avoid overstating assets or liabilities.
Often seen in cases like accounts receivable vs. accounts payable with the same party, bank overdrafts, intercompany balances, etc.

Example
Suppose a company has:
Accounts Receivable from a customer: $10,000
Accounts Payable to the same customer: $4,000
Instead of showing both the receivable and payable separately, the company may offset and show:
Net Receivable = $6,000
(if legal right and intent to settle net exists)