04 Objective Type Financial Instruments B15 PDF

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QUESTIONSScenario (related to Q1 to 3 below) Bertrand issued $10 million convertible loan notes on 1 October 20X0 that carry a nominal interest (coupon) rate of5% per annum. They are redeemable on 30 September 20X3 at par for cash or can be exchanged for equity shares in Bertrand on the basis of 20 ...

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Objective Type Financial Instruments

QUESTIONS Scenario (related to Q1 to 3 below) Bertrand issued $10 million convertible loan notes on 1 October 20X0 that carry a nominal interest (coupon) rate of5% per annum. They are redeemable on 30 September 20X3 at par for cash or can be exchanged for equity shares in Bertrand on the basis of 20 shares for each $100 of loan. A similar loan note, without the conversion option, would have required Bertrand to pay an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, can be taken as: 5% 8% End of year 1 0.95 0.93 2 0.91 0.86 3 0.86 0.79 cumulative 2.72 2.58 1.

2.

3.

4.

5.

How should the convertible loan notes be accounted for? (a) As debt (b) As debt and equity (c) As equity (d) As debt until conversion, then as equity

   

What is the amount that will be recognised as finance costs for the year ended 30 September 20X1? (a) $500,000 (b) $800,000 (c) $735,000 (d) Nil

   

What is the amount that should be shown under liabilities at 30 September 20X1 (a) $9,425,000 (b) $9,925,000 (c) $9,690,000 (d) Nil

   

Which of the following are not classified as financial instruments under IAS 32? (a) Share options (b) Intangible assets (c) Trade receivables (d) Redeemable preference shares

   

An 8% $30 million convertible loan note was issued on 1 April 20X5 at par. Interest is payable in arrears on 31 March each year. The loan note is redeemable at par on 31 March 20X8 or convertible into equity shares at the option of the loan note holders on the basis of 30 shares for each $100 of loan. A similar instrument without the conversion option would have an interest rate of 10% per annum. The present values of $1 receivable at the end of each year based on discount rates of 8% and 10% are: 8% 10% End of year 1 0.93 0.91 2 0.86 0.83 3 0.79 0.75 Cumulative 2.58 2.49 What amount will be credited to equity on 1 April 20X5 in respect of this financialinstrument?  (a) $5,976,000  (b) $1,524,000  (c) $324,000  (d) $9,000,000

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Objective Type Financial Instruments 6.

Dexon's draft statement of financial position as at 31 March 20X8 shows financial assets at fair value through profit or loss with a carrying amount of $12.5 million as at 1 April 20X7.These financial assets are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X7 the relevant index was 1,200 and at 31 March 20X8 it was 1,296. What amount of gain or loss should be recognised at 31 March 20X8 in respect of these assets?

$ 7.

On 1 January 20X8 a company purchased 40,000 $1 listed equity shares at a price of $3 per share. An irrevocable election was made to recognise the shares at fair value through other comprehensive income. Transaction costs were $3,000. At the year end of 31 December 20X8 the shares were trading at $6 per share. What amount in respect of these shares will be shown under 'investments in equity instruments' in the statement of financial position as at 31 December 20X8?

$ 8.

ABC Co purchased 10,000 shares on 1 September 20X4, making the election to use the alternative treatment under IFRS 9. The shares cost $3.50 each. Transaction costs associated with the purchase were $500. At 31 December 20X4, the shares are trading at $4.50 each. What is the gain to be recognised on these shares for the year ended 31 December 20X4?  (a) $10,000  (b) $45,000  (c) $9,500  (d) $35,000

9.

DEF Co has purchased an investment of 15,000 shares on 1 August 20X6 at a cost of $6.50 each. DEF intend to sell these shares in the short term, and are holding them for trading purposes. Transaction costs on the purchase amounted to $1,500. As at the year end 30 September 20X6, these shares are now worth $7.75 each. What is the gain on this investment during the year ended 30 September 20X6, and where in the Financial Statements will it be recognised?  (a) $18,750 in Other Comprehensive Income  (b) $18,750 in Profit or Loss  (c) $17,250 in Other Comprehensive Income  (d) $17,250 in Profit or Loss

10.

For which category of financial instruments are transaction costs excluded from the initial value, and instead expensed to profit or loss?  (a) Financial Liabilities at amortised cost  (b) Financial Assets at fair value through profit or loss  (c) Financial Assets at fair value through other comprehensive income  (d) Financial Assets at amortised cost

11.

If Bertrand had incurred transaction costs in issuing convertible loan notes, how should these have been accounted for?  (a) Added to the proceeds of the loan notes  (b) Deducted from the proceeds of the loan notes  (c) Amortised over the life of the loan notes  (d) Charged to finance costs

12.

Later that year Bertrand purchased a debt instrument which will mature in five years' time. Bertrand intends to hold the debt instrument to maturity to collect interest payments. How should this debt instrument be measured in the financial statements of Bertrand?  (a) As a financial liability at fair value through profit or loss  (b) As a financial liability at amortised cost  (c) As a financial asset at fair value through profit or loss  (d) As a financial asset at amortised cost

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Objective Type Financial Instruments 13.

A 5% loan note was issued on 1 April 20X0 at its face value of $20 million. Direct costs of the issue were $500,000. The loan note will be redeemed on 31 March 20X3 at a substantial premium. The effective interest rate applicable is 10% per annum. At what amount will the loan note appear in the statement of financial position as at 31 March 20X2?  (a) $21,000,000  (b) $20,450,000  (c) $22,100,000  (d) $21,495,000

14.

How does IFRS 9 Financial Instruments require investments in equity instruments to be measured and accounted for (in the absence of any election at initial recognition)?  (a) Fair value with changes going through profit or loss  (b) Fair value with changes going through other comprehensive income  (c) Amortised cost with changes going through profit or loss  (d) Amortised cost with changes going through other comprehensive income

15.

On 1 January 20X1 Penfold purchased a debt instrument for its fair value of $500,000. It had a principal amount of $550,000 and was due to mature in five years. The debt instrument carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held at amortised cost. At what amount will the debt instrument be shown in the statement of financial position of Penfold as at31 December 20X2?  (a) $514,560  (b) $566,000  (c) $564,560  (d) $520,800

ANSWERS 1. 2.

3.

(b) (c)

(a)

As debt and equity . Interest payable ($10m x 5% x 2.58*) Capital repayable ($10m x 0.79) Debt element Finance costs for year = 9,190 × 8%

$'000 1,290 7,900 9,190 735

1 October 20X0 Finance charge 8% Interest paid (10,000 × 5%) Balance 30 September 20X1

$'000 9,190 735 (500) 9,425

.

. 4.

(b)

5.

(b)

Intangible assets. These do not give rise to a present right to receive cash or other financial assets. The other options are financial instruments Interest years 1–3 (30m × 8% × 2.49) Repayment year 3 (30m × 0.75) Debt component Equity option (β)

$'000 5,976 22,500 28,476 1,524 30,000

.

6.

7.

$1,000,000 gain

$240,000

.

$12,500 × 1,296 / 1,200 Carrying amount Gain

$'000 13,500 (12,500) 1,000

40,000 shares @ $6

$ 240,000

.

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Objective Type Financial Instruments 8.

(c)

9.

(b)

10.

(b)

11.

(b)

12.

(d)

13.

(d)

The investment should be classified as Fair Value through other comprehensive income. As such, they will initially be valued inclusive of transaction costs. Therefore, the initial value is 10,000 × $3.50 = $35,000 + $500 = $35,500. At year-end, these will be revalued to fair value of $4.50 each, therefore 10,000*$4.50 = $45,000. The gain is therefore $45,000 – $35,500 = $9,500. If you chose A, you have not capitalised the initial transaction costs. If you chose B, you have selected the fair value. If you chose D, you have selected the cost Financial Assets held for trading will be valued at Fair Value through Profit or Loss. These are therefore valued excluding any transaction costs (which will be expensed to profit or loss). The initial value of the investment is therefore 15,000 × $6.50 = $97,500 The shares will be revalued to fair value as at year end, and the gain will be taken to profit or loss. The year-end value of the shares is 15,000 × $7.75 = $116,250, giving a gain of $18,750. This is recognised within profit or loss. If you chose A you have recognised the gain in the incorrect place. If you chose C or D you have incorrectly capitalised the transaction costs. Transaction costs are included when measuring all financial assets and liabilities at amortised costs, and when valuing financial assets valued at fair value through other comprehensive income. Financial assets valued at fair value through profit or loss are expensed through the profit or loss account on initial valuation and not included in the initial value of the asset. Deducted from the proceeds of the loan notes. The effective interest rate is then applied to the net amount. As a financial asset at amortised cost $'000 19,500 1,950 (1,000) 20,450 2,045 (1,000) 21,495 Fair value with changes going through profit or loss. Fair value through OCI would be correct if an election had been made to recognise changes in value through other comprehensive income. Amortised cost is used for debt instruments, not equity instruments. Proceeds (20m – 0.5m) Interest 10% Interest paid (20m × 5%) Balance 30 March 20X1 Interest 10% Interest paid (20m × 5%)

14.

(a)

15.

(a)

.

1 January 20X1 Interest 8% Interest received (550,000 × 6%) 31 December 20X1 Interest 8% Interest received 31 December 20X2

$ 500,000 40,000 (33,000) 507,000 40,560 (33,000) 514,560

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