SECTION 11

Basic Financial Instruments

#1

True or False: When accounting for financial

instruments, the entity has the choice to use section 11 and 12 of the IFRS for SMEs

in full or IAS 39 in full.

False

The entity does have a choice of what accounting policy to use but if they

decide to use IAS 39, they may do so only with regards to recognition and

measurement. As per disclosures, the entity should still use section 11 and

12.

The following are accounted for as basic financial instruments, except:a. A receivable recognized for long-term loans made to another entity.

b. Cash purchase of another entity’s ordinary shares.c. Cash purchase of another entity’s convertible preference shares.d. None of the above.

#2

C

According to section 11.8 and 11.11, investments in convertible preference shares do not fall under the definition of basic financial instruments. This is

under Section 12. Other examples include cash, demand deposits, A/R,

A/P, N/R, N/P, L/R, L/P, B/P and investments in nonputtable and

nonconvertible shares

Which of the following is not a characteristic of a basic debt instrument?

a. Its return could be fixed, variable or a mix of both as long as if the rate is variable, it is based on a quoted or observable rateb. It does not contain a contractual provision that could result in the holder losing principal in current or prior periodsc. Its contractual provisions to prepay are contingent to future eventsd. It contains no conditional returns except its variable return or prepayments not contingent to future events.

#3

C

Aside from C, all are characteristics of a basic debt instrument. C is wrong because contractual provisions to

prepay should not be contingent on future events.

The following financial statements will be measured at the transaction price plus

transaction costs, except:a. A receivable recognized for goods sold.b. A loan received from a bank.c. Receivable for item sold on a two-year interest free credit.d. Receivable from sale of goods in which is deferred beyond normal business terms.

#4

D

When payment is deferred beyond normal business transactions, it is

considered as a financing transaction. Financing transactions can also be

instruments financed at a non-market interest rate. In these cases, initial

measurement is the present value of future payments discounted at the market rate of interest for a similar

debt instrument.

Which of the following is true?a. The amortized cost of a financial asset is net of the amount at which the financial asset is measured at initial recognition .b. Financial asset that have no stated interest rate are initially measured at an undiscounted amount.c. Effective interest rate method does not include allocation of the interest income or interest expense.d. None of the above.

#5

AB is wrong because financial assets and

liabilities that have no stated interest are measured at amortized cost if the instrument is

noncurrent. The statement becomes true, however, for current assets and liabilities. C on the other hand is wrong because the method is precisely a method of allocating interest income

and expense. As you know, amortized cost is computed as the measurement at initial

recognition subtracted by loan repayments and impairment and added/subtracted by

cumulative amortization.

Which of these statements is true?a. All kinds of debt instruments, whether as a financial asset or liability, are measured at amortized cost.b. All investments in nonputtable and nonconvertible preference/ordinary shares held for trading are measured using FVTPLc. The firm has a choice to measure investments in debt as FVTPL, AFS or HTM according to the purpose of the firm.d. None of the above.

#6

B

Not all kinds of debt instruments are measured at amortized cost as current debt

instruments are measured at its undiscounted carrying cost. Also, investments

in debt could not be measured as FVTPL or AFS. Lastly investments in either debt or

equity cannot be classified as AFS unless the entity adapts IAS 39 as its accounting policy.

This is one of the two main differences between the IFRS for SMEs and the full IFRS.

True or False. For an instrument measured at amortized cost, the impairment loss is the difference

between the asset’s carrying amount and the present value of estimated cash flows discounted at the asset’s current

effective interest rate.

#7

False

As we learned in 114, impairment is measured by the estimated cash flows

discounted at the asset’s original effective interest rate.

True or False. Reversal of an impairment loss shall result in carrying amount that

exceeds what the carrying amount would have been had the impairment

not previously been recognized.

#8

False

Again as we learned in 114, reversal of an impairment result should not

exceed what the carrying amount would have been had the impairment

not previously been recognized.

For instruments measured at cost less impairment, impairment loss is the

difference between the carrying amount and the

a. current market valueb. best estimated selling pricec. present value of contingent cash flows discounted at the current market rate of return for a similar assetd. present value of estimated cash flows discounted at the current market rate of return for a similar asset

#9

B

In the full IFRS, instruments measured at cost less impairment, impairment loss is

the difference between the carrying amount and the present value of

estimated cash flows discounted at the current market rate of return for a similar

asset. But for IFRS for SMEs, the only requirement is that impairment loss be the

difference between the carrying amount and the best estimated selling price.

True or False. If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount

of the financial asset or financial liability by discounting cash flows at the current

market rate and recognize the adjustment as income or expense in profit or loss at the date or revision.

#10

False

Even if the asset is not impaired but the entity revises its estimates of payments or receipts, the original

effective interest rate should still be used.

The following cases warrant a derecognition of the financial asset,

except:a. Contractual rights to cash flow are settledb. The entity transfers to another party only some of the risks and rewards of ownership but control for such was not transferred.c. Entity transfers substantially all of the risks and rewards of ownership.d. None of the above.

#11

BAs the entity still retains some of the risks and rewards of ownership, the entity should retain the asset as its own. Only when control of such

asset to another party has been transferred and the other party has the practical and

unilateral ability to sell the asset in its entirety to an unrelated 3rd party without needing to impose additional restrictions can the entity derecognize the asset but still recognize any separate rights and obligations retained or

created in the transfer.

An entity shall disclose the following for financial instrument transfers that does not

qualify for derecognition, except:a. The nature of the risks and rewards of ownership to which the entity remains exposed.b. Nature of the assets.c. The carrying amounts of the assets and of any associated liabilities that the entity continues to recognize.d. None of the above

#12

D

All 3 must be disclosed.

An entity is concerned that one of its customers will not be able to make all

principal and interest payments due on a loan in a timely manner because the

customer is experiencing financial difficulties.  The entity and the

customer negotiate a restructuring of the loan.  The entity expects that the

customer will be able to meet its obligations under the restructured terms.  In which of the following

restructuring cases will the entity not recognize an impairment loss?

#13

a. Customer B will pay the full principal amount of the original loan five years after the original due date, but none of the interest due under the original terms. b. Customer B will pay the full principal amount of the original loan on the original due date but with interest at a lower interest rate than the interest rate inherent in the original loan. c. Customer B will pay the full principal amount of the original loan five years after the original due date and all interest accrued during the original loan term, but no interest for the extended term. d. Customer B will pay the full principal amount of the original loan five years after the original due date and all interest, including interest for both the original term of the loan and the extended term.

#13

DAn impairment loss should be recognised in

cases (a)–(c) as the present value of the future principal and interest payments

discounted at the loan’s original effective interest rate will be lower than the carrying

amount of the loan.   In case (d), even though the timing of payments has changed, the

lender will receive interest on interest, and the present value of the future principal and interest payments discounted at the loan’s original effective interest rate will equal the

carrying amount of the loan.  Therefore, there is no impairment loss.

An entity bought 50 non-puttable ordinary shares in a listed company on

the market for cash of $500, and incurred $10 of broker transaction fees. The journal entry on initial recognition

of the investment includes?A. Dr. Investment in Equity 510B. Dr. Investment in Equity 500C. Dr. Investment in Debt 510D. Cr. Investment in Debt 500

#14

BDr Investment in equity instruments 500Dr Transaction costs 10

Cr  Cash 510The entity initially recognises an investment in equity instruments at the price paid which is

$500. For financial instruments that are measured at fair value through profit or loss after initial recognition, transaction costs are

recognised as expenses when they are incurred.  In other words, transaction costs are not taken into account when determining the

amount to recognized initially.

On 15 December 20X1 an entity provided services to a customer and charged the customer $200 with payment due within 60 days.  At the entity’s financial year end (31 December 20X1) the customer has not yet paid the amount due. At what amount should the receivable be recognized on Dec 31?a. 0b. 200c. 180d. 100

#15

B

The entity initially recognised a trade receivable at $200.  The trade receivable is a current asset and there is no hidden financing

transaction.  Therefore, assuming the customer is expected to pay the full amount shortly after the year-end (and hence there is no impairment), on subsequent measurement

at 31 December 20X1 the trade receivable would continue to be measured at the

undiscounted amount of the cash expected to be received