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?

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

What is an example of a financial asset?

Deposit of money into a bank account Signup and view all the answers

What is an example of a financial liability?

Bank overdraft Signup and view all the answers

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

The entity records a financial asset Signup and view all the answers

What is an ordinary share?

An equity instrument with no contractual obligation to repay Signup and view all the answers

How are compound financial instruments classified?

As both a liability and equity component Signup and view all the answers

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

The substance of the instrument Signup and view all the answers

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

It is derecognized Signup and view all the answers

How are financial assets measured initially?

At fair value Signup and view all the answers

What is the purpose of the effective interest method?

To determine the amount of interest earned Signup and view all the answers

How are redeemable preference shares classified?

As a liability Signup and view all the answers

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

They are capitalized Signup and view all the answers

How are financial liabilities measured?

At fair value 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