Financial Instruments: IAS 32, IFRS 7, IFRS 9
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Questions and Answers

What is a financial instrument according to IAS 32 and IFRS 9?

  • Any financial transaction between two entities
  • Only loans and credit contracts
  • Only debt securities and equity instruments
  • Any contract that gives rise to a financial asset of one entity and a financial liability of another entity (correct)

    • What is a financial asset?

  • Any asset that is a contractual right to receive cash or another financial asset from another entity (correct)
  • Any equity instrument of another entity
  • Any liability that is a contractual obligation to deliver cash or another financial asset
  • Only cash and cash equivalents

    • What is a financial liability?

  • Any equity instrument of another entity
  • Any asset that is a contractual right to receive cash or another financial asset from another entity
  • Any liability that is a contractual obligation to deliver cash or another financial asset to another entity (correct)
  • Any liability that is not a contractual obligation to deliver cash or another financial asset

    • What is an equity instrument?

    <p>Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities</p> Signup and view all the answers

    What is an example of a financial asset?

    <p>Deposit of money into a bank account</p> Signup and view all the answers

    What is an example of a financial liability?

    <p>Bank overdraft</p> Signup and view all the answers

    What is the result of selling goods to a customer on credit?

    <p>The entity records a financial asset</p> Signup and view all the answers

    What is an ordinary share?

    <p>An equity instrument with no contractual obligation to repay</p> Signup and view all the answers

    How are compound financial instruments classified?

    <p>As both a liability and equity component</p> Signup and view all the answers

    What is the main criterion for classifying a financial instrument as an equity instrument?

    <p>The substance of the instrument</p> Signup and view all the answers

    What happens to a financial asset when the entity's contractual rights to receive cash from it expire?

    <p>It is derecognized</p> Signup and view all the answers

    How are financial assets measured initially?

    <p>At fair value</p> Signup and view all the answers

    What is the purpose of the effective interest method?

    <p>To determine the amount of interest earned</p> Signup and view all the answers

    How are redeemable preference shares classified?

    <p>As a liability</p> Signup and view all the answers

    What happens to transaction costs when a financial asset is recognized?

    <p>They are capitalized</p> Signup and view all the answers

    How are financial liabilities measured?

    <p>At fair value</p> Signup and view all the answers

    Study Notes

    Financial Instruments

    • A financial instrument is a contract between two entities, resulting in a financial asset for one entity and a financial liability or equity instrument for the other.

    Definitions

    • A financial asset: any asset that is cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset from another entity.
    • A financial liability: any liability that is a contractual obligation to deliver cash or another financial asset to another entity.
    • An equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.

    Examples of Financial Instruments

    • Issue of a loan stock
    • Selling goods to a customer on credit
    • Deposit of money into a bank account
    • Bank overdraft
    • Ordinary shares (equity instrument)
    • Purchase of ordinary shares (financial instrument between issuing and investing company)

    Classification of Financial Instruments

    • Depends on the substance, not the form
    • Classified as an equity instrument if there is no contractual obligation to deliver cash or another financial asset to another entity
    • Redeemable preference shares are a liability, with mandatory repayment of share capital and the right to require repayment

    Compound Financial Instruments

    • Have a liability and equity component
    • Determine the fair value of the liability component and equity component

    Recognition and Measurement (IFRS 9)

    • A financial asset or liability should be recognized when the entity becomes party to the contractual provisions
    • A financial asset is derecognized when the entity's contractual rights to receive cash expire
    • Measurement is at fair value (normally the amount when acquired or incurred) with transaction costs considered

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    Description

    Learn about financial instruments, assets, and liabilities as defined by IAS 32, IFRS 7, and IFRS 9. Understand the concepts and their applications.

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