FI Leases and shizz Flashcards
(38 cards)
What is IAS 39/IFRS 9
Financial Instruments; recognition and measurement
what is IAS 32
Financial instruments; Presentation
what is IFRS 7
FI; DIsclosures
What are financial instruments
- Any contract that gives rise a financial asset of one entity and a financial liability or equity instrument of another
- Contract - unlike intangibles, their existence is clear
What are some common examples of financial instruments
- Trade receivables/payables, loans, investment in shares, bank overdraft
- Derivative, preference shares, convertible loan stock
What is a financial asset
- Cash, equity instrument or another entity or contractual right to receive cash or other financial asset
- NOT physical assets such as inventory
What is a financial liability
- Contractual obligation to transfer cash/ financial asset or entity’s own equity instrument to another party
What is an equity instrument
- Provides residual interest in an entity after deducting all of its liabilities
- Liability = obligation to transfer an economic resource
- Key point in distinguishing between equity and debt is that for equity there is no contractual obligation to pay cash
FA,FL,EQ?
A Ltd sells 5k of goods to B Ltd on credit
A Ltd has the right to receive cash and B Ltd has an obligation to pay
A FA
B FL
FA,FL,EQ?
C plc pays 30k in advance for 12 months fire insurance
C plc has the right to receive future fire insurance cover not cash or other FA, HENCE not a FA
FA,FL,EQ?
D plc issues 50,000 ordinary shares which E plc acquires
The shares are EQ in D plc and a FA for E plc
FA,FL,EQ?
F Ltd borrows 100k from G Plc
F Ltd has a FL, G plc has a FA
What are preference shares
- have some similarities to debt
- dividends often set at a specified rate
- whether equity or debt depends mainly on whether the shares are cumulative or noncumulative
- if cumulative, holder does not lose the right to the dividend if the company decides not to pay it in a given year
- unpaid dividend roll up to the future
Where do cumulative preference shares go in the FS
- NCL as a Finance expense
Where do non-cumulative preference shares go in the FS
Equity
and Changes in equity statement
UNLESS the holder has the right to demand that they are redeemed - in that case then NCL
Give and example and explain what a compound financial instrument is
Convertible Bond
- Have the characteristics of both equity and debt
- Obligation to pay annual interest and at some point repay the capital but gives the holders the option to convert bonds into shares in the future
- IAS 32 requires the components be split between debt and equity
Explain what IAS 32 wants
IAS 32 requires the components be split between debt and equity
- Liability element = Present value of interest payments and eventual capital repayment
- Discount rate = market rate applicable to a similar bond that is non convertible
- Equity element = remainder of the proceeds on issue
What are treasury shares, why and how are they treated
- a companys own shares which it buys back
;Boost value of shares, reduce cash reserves, reduce future CF in dividends, Increase EPS signalling higher dividends - Cost of purchase shown as a negative reserve in equity
DR Treasury Shares
Cr Bank
what are the four types of derivatives
Forward contract
Futures contract
Option
Swap
What is a forward contract
agreement to buy something at a certain price at a certain date in the future
what is a futures contract
similar to a forward contract but they are based on standardised contracts traded on securities exchange
what are swaps
2 parties swap interest terms, fixed for variable, with financial institution acting as an intermediary
what are options
give the holder the right but not the obligation to buy or sell an asset within a certain period at a set price
what are the accounting problems of derivatives
- How should they be measured
- what would be the effect if they were reported at historical cost
- often with no initial outlay
- nothing to record on signing the contract
- gains/losses would not be reported until realisation
- derivatives with NIL cost would never appear in the BS
- IAS 3 requires companies to report their derivatives at fair value which is the price a buyer is willing to pay and is revalued annually
