Quiz: Financial instruments

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International Financial Reporting Standards
Quiz:
Financial instruments
Joint World Bank and IFRS Foundation ‘train
the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
The
views expressed
in this
presentation
areor
those
presenter,
not necessarily
those
of the IASB
IFRSof the
presenter,
Foundation.
not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 1
1/1/X1 Entity A buys 100 share options for 2,000 cash.
The options permit Entity A to buy shares in a listed entity
XYZ for 50 per share at any time during the next 2 years.
Bank charges a fee of 20. On 1/1/X1 XYZ's share price is
44.
At what amount should Entity A initially measure the
options?
a. 1,900
b. 1,980
c. 2,000
d. 2,020
e. 4,040
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 1
At what amount should Entity A initially measure the
options?
a. 1,900
b. 1,980
c. 2,000 Initially measure at FV which is usually the
transaction price. 20 fee is expensed because will
measure at FVTPL.
d. 2,020
e. 4,040
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 2
Same facts as Question 1. At 31/12/X1 Entity A has not yet
exercised the option; XYZ share price is 47; fair value of
option is 2,500.
At what amount should Entity A measure the options at
31/12/X1?
a. 1,980
b. 2,000
c. 2,020
d. 2,500
e. 4,700
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 2
Same facts as Question 1. At 31/12/X1 Entity A has not yet
exercised the option; XYZ share price is 47; fair value of
option is 2,500.
At what amount should Entity A measure the options at
31/12/X1?
a. 1,980
b. 2,000
c. 2,020
d. 2,500 Subsequent measurement at fair value
e. 4,700
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 3
6
Entity borrows 10,000 from a bank 5 years, fixed interest
payable annually 6% in arrears (this is a market rate.)
Bank charges entity 50 loan application fee. Entity should
measure the loan on initial recognition at...
a.
b.
c.
d.
e.
7,473 (= PV 10,000 at 6% for 5 years)
7,423
9,950
10,000
10,050
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 3
7
Entity should measure the loan on initial recognition at...
a. 7,473 (= PV 10,000 at 6% for 5 years)
b. 7,423
c. 9,950. Loan will be carried at amortised cost. Fee
is netted against loan. Affects effective interest.
See next slide...
d. 10,000
e. 10,050
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 3 continued
8
Excel
1
9950
2
-600
3
-600
4
-600
5
-600
6
-10600
7
0.6 [“Guess” at IRR, can omit]
8
6.11908%
A
Using Excel to
calculate
internal rate of return
in Question 3
[=IRR(A1:A6,A7)]
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 3 continued
Year
Loan liability
beginning
9
Interest
expense at
6.11908%
Cash
paid
Loan
liability
ending
1
9,950
609
600
9,959
2
9,959
609
600
9,968
3
9,968
610
600
9,978
4
9,978
611
600
9,989
5
9,989
611
600
10,000
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 4
10
Entity A sells 100 of receivables to bank for 85. Entity A
continues to collect and remit amounts collected to bank,
for which bank pays a fee to Entity A. Entity A has no
obligation for credit losses or for slow payment by
debtors. How is this transaction accounted for?
a. Entity A removes receivables from its balance sheet
and shows no liability for 85 proceeds
b. Entity A keeps 100 receivables on its balance sheet
and shows a liability for 85
c. Entity A keeps 100 receivables on its balance sheet
and shows no liability for 85
d. Entity A removes receivables from its balance sheet
and shows a liability for 85
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 4
11
How is this transaction accounted for?
a. Entity A removes receivables from its balance sheet
and shows no liability for 85 proceeds
b. Entity A keeps 100 receivables on its balance sheet and
shows a liability for 85
c. Entity A keeps 100 receivables on its balance sheet and
shows no liability for 85
d. Entity A removes receivables from its balance sheet and
shows liability 85
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 5
A financial instrument that is designated as a hedging
instrument is always measured at Fair Value Through Profit
or Loss?
a. True
b. False
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 5
A financial instrument that is designated as a hedging
instrument is always measured at Fair Value Through Profit
or Loss?
a.True
b.False. If it is a hedge of interest in a recognised
financial instrument, or hedge of firm commitment or
forecast transaction, hedging instrument is measured at
FV through OCI, with subsequent recycling.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 6
Entity A has inventory it plans to sell in 3 months. Entity A
is worried about price decline during the 3 months and so
enters into forward contract to hedge price risk of its
inventory. Relationship meets conditions for hedge
accounting and Entity A documents the hedge.
What is the accounting?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 6 continued
a. Recognise forward contract as an asset or liability at FV
and change in FV in P&L. Recognise the change in FV
of the inventory in P&L and as an adjustment to the
carrying amount of the inventory.
b. Recognise forward contract as an asset or liability at FV
and change in FV in OCI. Recognise the change in FV
of the inventory in OCI and as an adjustment to the
carrying amount of the inventory.
c. Recognise forward contract as an asset or liability at FV
and the change in the FV of the forward contract in OCI.
Do not recognise the change in the FV of the inventory
as inventory is measured at cost.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 6 continued
a. Recognise forward contract as an asset or liability at
FV and change in FV in P&L. Recognise the change
in FV of the inventory in P&L and as an adjustment
to the carrying amount of the inventory.
b. Recognise forward contract as an asset or liability at FV
and change in FV in OCI. Recognise the change in FV
of the inventory in OCI and as an adjustment to the
carrying amount of the inventory.
c. Recognise forward contract as an asset or liability at FV
and the change in the FV of the forward contract in OCI.
Do not recognise the change in the FV of the inventory
as inventory is measured at cost.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions 7 and 8
Scenario
17
Entity A purchased a bond at face value (equal to the fair
value at that date) that pays a coupon based on the
market interest rate of 5 per cent per annum. At purchase
date, there are 20 years until the bond’s maturity date.
Interest of CU500 is received every year in cash. The
bond has a maturity value of CU10,000.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 7
18
• Assume that the bond is measured at amortised cost
and that two years after the bond was purchased, the
market interest rate changed to 6 per cent per annum.
• What journal entries should be processed by the entity
relating to the bond from inception until maturity of the
bond?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 7
19
At purchase date:
Dr Asset—bond
10,000
Cr Asset—cash
10,000
Years 1 – 20:
Dr Asset—cash
500
Cr Income—interest
500
At maturity date:
Dr Asset—cash
Cr Asset—bond
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
10,000
10,000
Question 8
20
• Assume that instead of being purchased at face value,
the bond was purchased at a discount of 20 per cent.
The bond is correctly measured at amortised cost.
• What journal entries should be processed by the entity
relating to the bond at purchase date and for the first
year thereafter?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 8
At purchase date:
Dr Asset—bond
Cr Asset—cash
CU10,000 x 80% = CU8,0000
Year 1:
Dr Asset—cash
Cr Asset—bond
Dr Asset—bond
Cr Income—interest
21
8,000
8,000
500
500
550
550
Effective interest rate = 6.87% (PV=CU8,000; n=20; PMT =CU500
and FV=CU10,000), CU8,000 x 6.87% = CU550
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions 9, 10 and 11
Scenario
22
• An entity enters into a forward exchange contract on 30
April 20X1 to receive USD100,000 and deliver
CU399,688 on 31 March 20X2. The forward exchange
contract is designated as a hedging instrument for the
purchase of inventory on
31 December 20X1—the resulting payable is to be
settled on 28 February 20X2
• All hedge accounting conditions are met
• The entity’s reporting period ends on 31 October
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions 9, 10 and 11
Scenario continued
23
• The following spot and fair values of the forward
exchange rate contract are applicable:
SPOT
FAIR VALUE OF
CONTRACT
30 April 20X1
3.7300
0
31 October 20X1
3.4714
(39,253)
31 December 20X1
3.3100
(62,658)
28 February 20X2
3.1507
(84,623)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 9
24
What journal entry(ies) must be processed at 31 October
20X1 assuming that the entity designates the forward
exchange contract as a cash flow hedge of a forecast
transaction and the option in IAS39.98(b) is selected?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 9
25
31 October 20X1:
Dr OCI—cash flow hedge
Cr Liability—forward contract
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
39,253
39,253
Question 10
26
What journal entry(ies) must be processed at 31 October
20X1 assuming that the entity designates the forward
exchange contract as a cash flow hedge of a forecast
transaction and the option in IAS39.98(a) is selected?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 10
27
31 October 20X1:
Dr OCI—cash flow hedge
Cr Liability—forward contract
39,253
39,253
Note: the difference in accounting between the two
options in IAS39.98 relates to the timing of the effect on
profit or loss (ie a basis adjustment to the hedged item or
as the hedged item affects profit or loss)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 11
28
What journal entry(ies) must be processed at 31 October
20X1 assuming that the entity designates the forward
exchange contract as a fair value hedge of an
unrecognised firm commitment?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 11
29
31 October 20X1:
Dr Profit or loss—exchange loss
39,253
Cr Liability—forward contract
Dr Asset—firm commitment
Cr Profit or loss—exchange gain
39,253
25,860
25,860
USD100,000 x (3.7300 – 3.4714) = CU25,860
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
Expressions of individual views
by members of the IASB and its
staff are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
30
31
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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