Financial Instruments: IFRS 9 & IFRS 7 Definitions

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Questions and Answers

How is a financial asset defined?

A contractual obligation to receive cash

A contractual right to receive cash (correct)

A contractual right to deliver cash

An obligation to make future payments

Fair value is the price that would be received to sell an asset but not to transfer a liability.

False

What is the definition of a financial liability?

A contractual obligation to deliver cash

If finance raised creates an obligation to make future payments, then it is classified as a ____________.

liability Signup and view all the answers

Uploaded PDFs retain their original layout, formatting, and design, regardless of the device or platform used to view them.

True Signup and view all the answers

Which of the following are common uses of uploaded PDFs? (Select all that apply)

Business and marketing materials Signup and view all the answers

What advantage do uploaded PDFs provide in terms of document integrity and formatting?

Preserves document integrity and formatting Signup and view all the answers

Uploaded PDFs can be encrypted and password-protected for ______________ and access control.

security Signup and view all the answers

How should transaction costs be treated for liabilities?

Deducted from the liability Signup and view all the answers

A company should always revalue its financial instruments in subsequent years.

False Signup and view all the answers

What is the main aim of revaluing a financial instrument?

To make a capital gain Signup and view all the answers

If a company receives a loan of £80 with an arrangement fee of £5, the loan liability would be reported at £_____ in the financial statements.

75 Signup and view all the answers

What is the accounting treatment for arrangement fees if a company does not revalue its financial instruments?

Included in the loan liability Signup and view all the answers

A company should revalue a loan given to someone if it expects to receive interest and get its principal back.

False Signup and view all the answers

What is the accounting treatment for arrangement fees if a company revalues its financial instruments?

Expensed immediately Signup and view all the answers

Match the following scenarios with their accounting treatment for arrangement fees:

Receive a loan of £80 with an arrangement fee of £5 = Included in the loan liability to report at the net proceeds Give a loan of £10m to someone = Included in the loan asset to report at the net proceeds Buy shares in Next plc = Expensed immediately Receive a loan of £30m to finance business operations = Included in the loan liability to report at the net proceeds Signup and view all the answers

What is the purpose of recording arrangement fees, such as the £20,000 cost in the example, separately?

To prevent companies from 'hiding' costs until later years Signup and view all the answers

The effective rate of interest is the same as the nominal rate of interest.

False Signup and view all the answers

How is the loan liability calculated at the end of the year in the example?

The loan liability at the end of the year is calculated by adding the unpaid fair finance cost to the initial loan liability. Signup and view all the answers

The liability at the end of year should include any unpaid _________ cost.

fair finance Signup and view all the answers

Match the following statements with the correct category:

Can be tested on a group basis = Impairments Requires indicators of non-payment before the year-end = Impairments Created only when allowances have occurred = Impairments Signup and view all the answers

What is the fair finance cost expense reported in the income statement for the year ended 30 September 2016 for Dun plc?

£1.95 million (£19.5 million x 10%) Signup and view all the answers

What is the amount of premium paid at the end of year 4?

£800,000 Signup and view all the answers

The interest rate is 5%.

False Signup and view all the answers

What is the term used to describe the spread of costs over the life of the finance?

effective interest rate Signup and view all the answers

The fair cost of £200,000 is also known as the ______________ rate.

effective interest Signup and view all the answers

What is the year-end liability at the end of year 3?

£10,600,000 Signup and view all the answers

The premium of £800,000 is paid at the end of year 1.

False Signup and view all the answers

Match the following journal entries with their descriptions:

Cr bank 800,000 = Payment of premium Dr expense 200,000 = Recording of fair cost Dr liability 600,000 = Reduction of year-end liability Signup and view all the answers

What is the total amount of cash paid in year 4?

£800,000 Signup and view all the answers

If a company receives a loan of £80 with an arrangement fee of £5, how should the loan liability be reported in the financial statements?

£75 Signup and view all the answers

A company should always revalue its financial instruments in subsequent years.

False Signup and view all the answers

What is the main aim of revaluing a financial instrument?

To make a capital gain Signup and view all the answers

If a company does not revalue its financial instruments, the arrangement fees are _______________ in the loan liability.

included Signup and view all the answers

What is the accounting treatment for arrangement fees if a company revalues its financial instruments?

Report separately Signup and view all the answers

Match the following scenarios with their accounting treatment for arrangement fees:

Scenario: Receive a loan of £80 with an arrangement fee of £5 = Include in the loan liability Scenario: Give a loan of £10m to someone = Report as an expense Scenario: Buy some shares = Report separately Signup and view all the answers

A company should revalue a loan given to someone if it expects to receive interest and get its principal back.

False Signup and view all the answers

What is the purpose of recording arrangement fees separately?

To show the fair value of the financial instrument Signup and view all the answers

What is the purpose of recording arrangement fees, such as the £20,000 cost in the example, separately?

To match the cost with the related loan Signup and view all the answers

The effective rate of interest is the same as the nominal rate of interest.

False Signup and view all the answers

What is the fair finance cost expense reported in the income statement for the year ended 30 September 2016 for Dun plc?

£1.95 Signup and view all the answers

The loan liability at 30 Sep 2016 for Dun plc is £19.5 + (1.95 - £__________). = £20.95

0.5 Signup and view all the answers

Match the following scenarios with their accounting treatment for arrangement fees:

Scenario 1: Company does not revalue its financial instruments = Scenario 2: Company revalues its financial instruments a) Treat arrangement fees as an expense immediately = b) Amortize arrangement fees over the life of the loan Signup and view all the answers

What is the main objective of the entity's business model in holding a financial asset?

To hold the financial asset to collect its contractual cash flows. Signup and view all the answers

A fair value option exists to designate any debt instrument as FVTPL if by doing so it significantly reduces a measurement or recognition inconsistency.

True Signup and view all the answers

What is amortised cost for financial instruments?

Amortised cost for financial instruments means reporting a fair finance cost in the income statement for finance raised, and adding any unpaid finance costs at a year-end to the figure reported for the piece of finance in the year-end balance sheet. Signup and view all the answers

Held for trading liabilities are reported at ___________, while other financial liabilities are reported at amortised cost.

FVTPL Signup and view all the answers

How are arrangement fees treated for liabilities if a company does not revalue its financial instruments?

They are capitalised and amortised over the life of the loan Signup and view all the answers

Match the following scenarios with their accounting treatment for arrangement fees:

Scenario 1: Company does not revalue its financial instruments = Scenario 2: Company revalues its financial instruments Accounting Treatment 1: Expensed immediately = Accounting Treatment 2: Capitalised and amortised over the life of the loan Signup and view all the answers

What is the purpose of recording arrangement fees separately?

The purpose of recording arrangement fees separately is to match the cost with the life of the finance. Signup and view all the answers

The liability at the end of the year should include any unpaid ______________ cost.

finance Signup and view all the answers

Study Notes

Financial Instruments - IFRS 9 & IFRS 7

Definitions

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
A financial asset is a contractual right to receive cash.
A financial liability is a contractual obligation to deliver cash.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Examples of financial assets: financial investments, cash, trade receivables.
Examples of financial liabilities and financial equity: equity shares, loans, bonds, convertible debentures, preference shares.

Classifying Finance Raised as Equity / Liability

Long-term finance raised needs to be reported in the Balance Sheet, classified as liabilities or equity.
An instrument is reported as a liability if its substance meets the definition of a liability.
Repayable preference shares are classified as a liability, while non-repayable preference shares are classified as equity.
A convertible debenture is deemed to be partly a liability and partly equity.
The liability component is the obligation to make future payments, and the remainder is equity.

Initial Recording of Financial Assets and Liabilities - Day 1 Rules

For items that will be reported at fair value through profit and loss (FVTPL) in the future, do not include transaction costs.
For other assets, transaction costs should be added.
For other liabilities, transaction costs should be deducted (i.e., report at the net proceeds).

Recording of Financial Instruments in Subsequent Years

If the main aim is to make a capital gain from a financial instrument, revalue it.
If not, do not revalue the instrument, and report at amortized cost.

Financial Assets

Debt instruments:
- Reported at amortized cost if they meet the business model test and the cash flow characteristic test.
- Otherwise, reported at FVTPL.
Equity instruments:
- Held for trading items are measured at FVTPL.
- If not held for trading, either report at FVTPL or irrevocably designate the instrument as an item to be revalued annually with the gain/loss reported in OCI.

Financial Liabilities

Held for trading liabilities are reported at FVTPL.
Other financial liabilities are reported at amortized cost.
A fair value option also exists to designate any debt instrument as FVTPL if it significantly reduces a measurement or recognition inconsistency.

Amortized Cost

Amortized cost for financial instruments means two things:
- Report a fair finance cost in the Income Statement for finance raised.
- Add any unpaid finance costs at the year-end to the figure reported for the piece of finance in the year-end Balance Sheet.

Impairments

Non-significant balances can be tested on a group basis with allowances created only when indicators of non-payment have occurred before the year-end.

What is an uploaded PDF?

A Portable Document Format (PDF) file uploaded to a website, platform, or storage system that contains text, images, and other content preserved in its original layout and formatting.

Characteristics of uploaded PDFs

Retains original layout, formatting, and design regardless of the device or platform used to view it.
Allows easy sharing, downloading, and printing.
Supports interactive elements such as links, forms, and multimedia content.
Can be encrypted and password-protected for security and access control.

Common uses of uploaded PDFs

Sharing and collaborating on documents.
Online publications like e-books, articles, and reports.
Educational resources such as course materials and study guides.
Business and marketing materials like brochures, catalogs, and whitepapers.
Government and legal documents like forms, regulations, and court documents.

Advantages of uploaded PDFs

Preserves document integrity and formatting.
Platform-independent and device-agnostic.
Supports search and indexing capabilities.
Allows easy annotation and commenting.
Reduces the risk of document tampering and alteration.

Limitations of uploaded PDFs

Large file size affecting upload and download times.
Difficult to edit or modify.
Requires specialized software or plugins to view and interact with.
Vulnerable to security risks like malware and viruses.

Transaction Costs

For other assets, transaction costs should be added.
For other liabilities, transaction costs should be deducted (reported at the net proceeds).

Recording of Financial Instruments

If the main aim is to make a capital gain, revalue the financial instrument.
If the main aim is not to make a capital gain, do not revalue the financial instrument.

Financial Assets (Debt Instruments)

Reported at amortized cost if they meet the business model test and the cash flow characteristic test.
Otherwise, reported at Fair Value Through Profit or Loss (FVTPL).

Effective Interest Rate

Calculates the annual finance cost and the closing balance for the finance.
Spreads the costs related to a piece of finance evenly over its entire life.
Also known as the internal rate of return.

Loan Liability

If arrangement fees are paid, deduct them from the loan amount to show net proceeds.
Report amortized cost.
Liability at the end of the year should include any unpaid fair finance cost.

Impairments

Non-significant balances can be tested on a group basis.
Allowances are created only when indicators of non-payment have occurred before the year-end.

Arrangement Fees

For other assets, transaction costs should be added
For other liabilities, transaction costs should be deducted (report at net proceeds)
Example: Smith Ltd receives a loan of £80 with an arrangement fee of £5, so the loan liability would be £75 (£80 - £5)

Recording of Financial Instruments

Revalue financial instruments if the main aim is to make a capital gain from it
Do not revalue if the main aim is to receive interest and get the principal back
Examples:
- Buying shares in Next plc: revalue to make a capital gain
- Giving a £10m loan: do not revalue, just receive interest and get the principal back
- Receiving a £30m loan: do not revalue, just receive interest and get the principal back

Financial Assets

Debt Instruments:
- Reported at amortised cost if they meet the business model test and cash flow characteristic test
- Otherwise, reported at Fair Value through Profit or Loss (FVTPL)
Business model test: hold the financial asset to collect contractual cash flows
Cash flow characteristic test: solely give rise to receipts of principal and interest
Fair value option: designate any debt instrument as FVTPL to reduce measurement or recognition inconsistency

Financial Liabilities

Held for trading liabilities: reported at FVTPL
Other financial liabilities: reported at amortised cost
Fair value option: designate any debt instrument as FVTPL to reduce measurement or recognition inconsistency or to achieve fair value growth

Amortised Cost

Not related to amortisation (wearing out of an intangible asset)
For financial instruments, amortised cost means:
- Report a fair finance cost in the Income Statement
- Add any unpaid finance costs at year-end to the Balance Sheet figure
Examples:
- Smith Ltd receives a £10m loan with a 4-year repayment period
- A company issues £1m of 10% loan stock repayable after five years at a premium of £20,000

Impairments

Non-significant balances can be tested on a group basis with allowances created only when indicators of non-payment have occurred before the year-end

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Description

Learn the definitions of financial instruments, financial assets, financial liabilities, and fair value according to IFRS 9 and IFRS 7. Test your knowledge of these essential accounting concepts.