Compound Financial Instruments and Treasury Shares Accounting
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Questions and Answers

When should an entity recognize the exchange difference between the end of the previous reporting period and the settlement date?

  • During the same settlement period (correct)
  • During the next settlement period
  • Only when there is a change in functional currency
  • At the beginning of the next financial year

    • What translation procedures should be applied when an entity's functional currency changes?

  • Do not translate any transactions
  • Translate all transactions using historical rates
  • Apply translation procedures applicable to the new functional currency from the change onwards (correct)
  • Translate using only average rates for the period

    • In case an entity's functional currency differs from the presentation currency, how should income and expenses be translated?

  • Not translating income and expenses
  • Using average rates for a period (correct)
  • Using the closing rate at the date of the statement of financial position
  • Using the opening rate at the statement of financial position date

    • When is it appropriate to use average rates for translating transactions?

    <p>When spotting exchange rates at transaction dates are not available</p> Signup and view all the answers

    Where should an entity recognize the resulting exchange difference?

    <p>In other comprehensive income</p> Signup and view all the answers

    What should an entity do if exchange rates fluctuate significantly?

    <p>Avoid using average rates</p> Signup and view all the answers

    How should a compound financial instrument be classified and accounted for?

    <p>Both liability and equity components classified and accounted for separately.</p> Signup and view all the answers

    What happens when an entity reacquires its equity instruments (treasury shares)?

    <p>The instruments are deducted from the equity.</p> Signup and view all the answers

    Where are interest, dividends, losses, and gains relating to financial liabilities recognized?

    <p>Interest and dividends in equity; losses and gains in profit or loss.</p> Signup and view all the answers

    How should preference dividends be treated in determining profit or loss?

    <p>Deduct from profit or loss</p> Signup and view all the answers

    How are transaction costs related to the issuance of an equity instrument accounted for?

    <p>Accounted as a deduction from the equity.</p> Signup and view all the answers

    What should be deducted from profit or loss for cumulative preference shares?

    <p>One-year dividend, declared or not</p> Signup and view all the answers

    When can an entity offset a financial asset and a financial liability on the statement of financial position?

    <p>When there is both a legal right of offset and an intention to settle on a net basis or simultaneously.</p> Signup and view all the answers

    How should consideration paid or received for a compound financial instrument be recognized?

    <p>Deducted from the equity.</p> Signup and view all the answers

    How should preference dividends be adjusted for tax purposes?

    <p>After-tax amounts should be deducted from profit or loss</p> Signup and view all the answers

    When determining the weighted average number of outstanding ordinary shares, how should reacquired treasury shares be treated?

    <p>Average them from the reacquisition date as a deduction to outstanding shares</p> Signup and view all the answers

    What should an entity consider when determining the inclusion timing of ordinary shares?

    <p>Terms and conditions attaching to their issue</p> Signup and view all the answers

    How should EPS be adjusted when an entity issues ordinary shares without a corresponding change in resources?

    <p>Retrospectively adjust EPS in previous periods</p> Signup and view all the answers

    How should the investor compute its share when the investee has cumulative preference shares held by other parties classified as equity?

    <p>By adjusting first in the profit or loss the preference dividends regardless of when declared or not</p> Signup and view all the answers

    What should an entity do if its investment in an associate or joint venture becomes classified as held for sale?

    <p>Follow PFRS 5 (Non-current Assets Held for Sale and Discontinued Operation)</p> Signup and view all the answers

    When can an entity account for the remaining portion of an associate or joint venture that is classified as held for sale?

    <p>When only a portion is classified as held for sale</p> Signup and view all the answers

    What action should an entity take if it loses significant influence or joint control over its investee?

    <p>Discontinue the equity method</p> Signup and view all the answers

    In what circumstance should an entity revalue its retained interest in an investment in an associate that becomes a joint venture?

    <p>When there is a change in share ownership percentage</p> Signup and view all the answers

    How should an investor treat its share in an investee's losses if it has interests in preference shares, associates, and loans?

    <p>Only up to its interest in the associate or joint venture</p> Signup and view all the answers

    What is the purpose of giving rights issues to shareholders?

    <p>To allow shareholders the preemptive right to purchase new shares</p> Signup and view all the answers

    Which of the following is an example of a bonus element in a rights issue?

    <p>A bonus element in a rights issue to existing shareholders</p> Signup and view all the answers

    How should an entity account for bonus elements in the computation of EPS?

    <p>Include them in both basic and diluted EPS calculations</p> Signup and view all the answers

    What is the computation method for the total number of potential shares outstanding during the period?

    <p>Multiply the number of shares outstanding before all periods by an adjustment factor</p> Signup and view all the answers

    What does the theoretical ex-rights fair value per share represent?

    <p>The fair value of shares immediately after exercising rights</p> Signup and view all the answers

    What does a reverse share split involve?

    <p>Consolidation of shares with a corresponding increase in par value</p> Signup and view all the answers

    Study Notes

    Translation Procedures

    • An entity shall translate its results and financial position to the presentation currency using the following procedures:

    Assets and Liabilities

    • Translate assets and liabilities using the closing rate at the date of the statement of financial position.

    Income and Expenses

    • Translate income and expenses, including other comprehensive income, using the spot exchange rates at the dates of the transactions.
    • For practical reasons, an entity may use the average rates for a period if it will provide a reasonable approximation of the spot rates when the transactions took place.

    Exchange Difference

    • The resulting exchange difference is recognized in other comprehensive income.
    • If exchange rates fluctuate significantly, the use of the average rates is inappropriate.

    Cumulative Preference Shares

    • When an investee has cumulative preference shares, the investor shall compute its share after adjusting for preference dividends regardless of when declared or not.
    • The investor’s share in the investee’s losses shall be only up to its interest in the associate or joint venture.

    Investments

    • Those investments in an associate or joint venture classified as held for sale shall follow the PFRS 5 (Non-current Assets Held for Sale and Discontinued Operation).
    • If the classified as held for sale is only a portion, an entity shall account for the remaining using the equity method.

    Discontinuation of Equity Method

    • An entity shall discontinue the equity method when it loses significant influence or joint control over its investee.

    Compound Financial Instrument

    • A compound financial instrument contains both a liability and an equity instrument component from the issuer’s perspective.
    • Each component shall be classified and accounted for separately.

    Equity Instruments

    • If an entity reacquires its equity instruments (treasury shares), these instruments shall be deducted from equity.
    • No gain or loss shall be recognized in profit or loss.
    • Consideration paid or received shall be recognized directly in equity.

    Financial Instruments

    • Interest, dividends, losses, and gains relating to a financial instrument classified as a financial liability shall be recognized in profit or loss.
    • Those classified as an equity instrument are recognized directly in equity.

    Transaction Costs

    • The transaction costs related to the issuance of an equity instrument shall be accounted for as a deduction from equity.
    • If these costs are related to a financial liability, they will be included in the carrying amount of the financial liability and subsequently amortized to profit or loss.

    Offset

    • An entity can offset a financial asset and a financial liability in which the net amount is presented in the statement of financial position when the entity has both a legal right of offset and an intention to settle the amounts on a net basis or simultaneously.

    Preference Dividends

    • Deduct the preference dividends from the profit or loss.
    • If the preference shares are cumulative, deduct the one-year dividend, whether declared or not, from profit or loss.
    • If the preference shares are non-cumulative, subtract only the dividend declared from profit or loss.

    Weighted Average Number of Outstanding Ordinary Shares

    • Ordinary shares are usually time-weighted in the following manner:

    Earnings Per Share (EPS)

    • The standard provides that an entity shall include such bonus elements in the computation of both the basic EPS and diluted EPS.
    • In computing the total number of potential shares outstanding during the period, multiply the number of shares outstanding for all periods before the rights issue by the adjustment factor.

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    Description

    Learn about compound financial instruments which consist of both a liability and an equity component, and understand how to classify and account for each component separately. Explore the process of determining the value of the equity component by subtracting the debt component's value, and the treatment of treasury shares in accounting.

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