Financial instruments ASPE 3856

Question 1

What is the definition of a financial instrument?

Answer 1

• Contract that gives rise to financial asset of one
  party and financial liability or equity of other
  party

Question 2

What are the types of strategic investments to
which the financial instruments section does not
apply?

Answer 2

• Subsidiaries, joint ventures, entities subject to
  significant influence

Question 3

What financial instruments must be measured at fair
value (with changes in value being recognized in
net income)?

Answer 3

• Investments in equity instruments that are
  quoted in an active market
• Derivative contracts (other than those that
  qualify for hedge accounting and those that must
  be settled with equity of another entity whose
  fair value can’t be determined)

Question 4

How are financial assets, liabilities and equity
instruments measured when fair value is not required?

Answer 4

• Investments in equity instruments at cost less any
  reduction for impairment
• All other financial assets at amortized cost
• Financial liabilities at amortized cost
• An entity can chose to measure any of the above at fair value if the election is made at initial recognition

Question 5

How are instruments with both a liability and an
equity component (e.g., convertible debt) treated ?

Answer 5

• Option to allocate entire proceeds to liability component
• If allocating value to equity component must use
  residual method i.e., value the most easily computed
  component (usually debt) and subtract that amount
  from the total value to get the value of the other
  component (usually equity)

Question 6

When is a financial asset (including a loan receivable)
considered impaired and what amount should it be written down to?

Answer 6

• Financial asset is considered impaired when there is a significant adverse change in the amount or timing of expected future cash flows
• When impaired the asset should be written down to the greater of:

‒ PV of expected future cash flows discounted at current rate appropriate for asset

‒ Amount that could be realized by selling the asset at the balance sheet date

‒ Amount to be realized from any collateral, net of
related costs

Question 7

Can an impairment loss be reversed ?

Answer 7

• Yes, to the extent that circumstances change due
  to an event occurring after the original impairment entry (reversal cannot exceed the amount of the original write-down)
• Reversal is recorded in income

Question 8

ASPE 3856 requires an annual assessment of whether there are any indications that a financial
asset, or group of similar financial assets, measured at cost or amortized cost may be impaired.
What are possible indications of impairment?

Answer 8

ASPE 3856

• Significant financial difficulty of the customer or issuer
• Default or delinquency in interest or principal payments or covenant breach
• The entity granting a concession to the customer or issuer
• It becoming probable that the customer or issuer will enter bankruptcy or other financial reorganization
• The disappearance of an active market for a financial asset because of financial difficulties of the issuer
• A significant adverse change in the technological, market, economic or legal environment in which the customer or issuer operates

Question 9

If there are indications of impairment, how is
the impairment accounted for?

Answer 9

ASPE 3856

• Reduce carrying amount to highest of:
  ‒ PV of expected cash flows discounted at rate appropriate for asset
  ‒ Amount that could be realized from selling the asset
  ‒ Value of the collateral
• Impairment loss is recognized in income
• Impairment loss can be reversed (into income) but not above what carrying amount would have been if no impairment had been recognized