Module 12 - Financial Instruments: Presentation, classification and measurement

Question 1

Financial instrument =

Answer 1

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

Question 2

Equity instrument =

Answer 2

Contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities eg ordinary shares

Question 3

Primary financial instrument

Answer 3

Price based directly on market value

Question 4

Derivative financial instrument

Answer 4

Price varies in response to underlying item, has little or no initial investment and will be settled at a future date

Question 5

If there is a contractual obligation to deliver cash or another financial asset

Answer 5

Financial liability

Question 6

If there is NO contractual obligation to deliver cash or another financial asset

Answer 6

Equity

Question 7

Compound instruments

Answer 7

Has characteristics of both equity and financial liabilities

Question 8

Convertible debt > liability > measurement

Answer 8

Initially measure at fair value of similar debt without conversion rights

Question 9

Convertible debt > equity > measurement

Answer 9

Measure as residual of proceeds

Question 10

Company recognises a financial asset or liability when

Answer 10

It becomes a party to the contractual provisions of the instrument

Question 11

Derivatives measurement

Answer 11

Many have no initial cost or fair value therefore only recognised at a monetary amount when their fair value increases/ decreases

Question 12

Three classifications for financial assets:

Answer 12

• Amortised cost
• Fair value through other comprehensive income
• Fair value through profit or loss

Question 13

Measure asset at FVTPL if

Answer 13

Intention to sell in the short term (held for trading)

Question 14

Measure asset at FVTOCI if

Answer 14

Intention to hold and then sell before maturity

Question 15

Measure asset at AC if

Answer 15

Intention to hold to maturity

Question 16

Equity investments not held for trading

Answer 16

Should be measured at FVTOCI

Question 17

Default classification for liabilities

Answer 17

Amortised cost

Question 18

If liability:

• Held for trading
• Derivative
• Designated at FVTPL

Answer 18

Classify as fair value through profit or loss

Question 19

When accounting mismatch occurs

Answer 19

Elect to measure consistently

Question 20

Initial measurement of financial assets: AC and FVTOCI

Answer 20

Fair value plus transaction costs

Question 21

Initial measurement of financial assets: FVTPL

Answer 21

Fair value

Question 22

Initial measurement of financial liabilities: AC

Answer 22

Fair value less transaction costs

Question 23

Two classifications of financial liabilities:

Answer 23

• AC

- FVTPL

Question 24

Initial measurement of financial liabilities: FVTPL

Answer 24

Fair value

Question 25

Subsequent measurement: equity > FVTOCI

Answer 25

Measure at fair value at each reporting date

Question 26

Subsequent measurement: equity > FVTOCI > increase

Answer 26

DR Financial asset | CR Revaluation surplus

Question 27

Subsequent measurement: equity > FVTOCI > decrease

Answer 27

DR Revaluation surplus | CR Financial asset

Question 28

Subsequent measurement: debt/ equity > FVTPL

Answer 28

Measure at fair value at each reporting date

Question 29

Subsequent measurement: debt/ equity > FVTPL > increase

Answer 29

DR Financial asset | CR SPL - Fair value increase

Question 30

Subsequent measurement: debt/ equity > FVTPL > decrease

Answer 30

DR SPL - fair value decrease | CR Financial asset

Question 31

Subsequent measurement: debt > AC

Answer 31

Apply effective interest method

Question 32

Trade receivables classified as

Answer 32

Amortised cost

Question 33

Selling costs > equity instruments

Answer 33

Don't include as there has been no disposal

Question 34

Effective interest method > carrying amount of a debt investment =

Answer 34

Opening balance + interest at effective rate - nominal interest received

Question 35

Interest at effective rate (asset) =

Answer 35

Finance income

Question 36

Nominal interest =

Answer 36

Interest actually paid

Question 37

Bid- ask price spread

Answer 37

Pick lower

Question 38

Effective interest asset double entry

Answer 38

DR Financial asset | CR SPL - finance income

Question 39

Nominal interest asset double entry

Answer 39

DR Bank | CR Financial asset

Question 40

Subsequent measurement: liabilities > FVTPL > decrease

Answer 40

DR SPL - fair value decrease | CR Financial liability

Question 41

Subsequent measurement: liabilities > FVTPL > increase

Answer 41

DR Financial liability | CR SPL - fair value increase

Question 42

Subsequent measurement: liabilities > AC

Answer 42

Apply effective interest method

Question 43

Effective interest method > carrying amount of a financial liability =

Answer 43

Opening balance + interest at effective rate - nominal interest paid

Question 44

Interest at effective rate (liability)

Answer 44

Finance cost

Question 45

Effective interest liability double entry

Answer 45

DR SPL - Finance costs | CR Financial liability

Question 46

Nominal interest liability double entry

Answer 46

DR Financial liability | CR Bank

Question 47

Hedge accounting applied when

Answer 47

There is a designated hedging relationship between a hedged item and a hedging instrument

Question 48

3 types of hedging relationship:

Answer 48

- Fair value hedge - Cash flow hedge - Net investment hedge

Question 49

Fair value hedge

Answer 49

Hedge of exposure to changes in the fair value of a recognised asset or liability that affect profit or loss

Question 50

Cash flow hedge

Answer 50

Hedge of exposure to variability in future cash flows. Attributable to a risk associated with a recognised asset or liability OR a highly probable forecast transaction.

Question 51

Non-hedge derivative classification

Answer 51

FVTPL