Deck 7: Financial Instruments

Question 1

The formal documentation of a hedging relationship must include identification of:

A) I;
B) II;
C) III;
D) IV.

Answer 1

C

Question 2

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument. Complete the following:
At the end of the three year period the portion of the XXX component that relates to the notes which have been converted XXX.

A) equity, is transferred to profit & loss
B) liability, remains as a liability
C) liability, is transferred to equity
D) liability, is transferred to profit & loss

Answer 2

C

Question 3

Which of the following is NOT a condition for hedge accounting to be applied?

A) There must be formal designation and documentation of the hedging relationship at the inception of the hedge.
B) The effectiveness of the hedge must be able to be reliably measured.
C) The hedge must be expected to be effective
D) For cash flow hedges, the forecast transaction must be highly probable.

Answer 3

C

Question 4

When first issued, IAS 39 was:

A) More rule-based than other AASB standards
B) Less rule-based than other AASB standards
C) Wider in scope that other AASB standards
D) Narrower in scope that other AASB standards

Question 5

To be regarded as 'highly effective' in achieving offsetting changes in fair value or cash flows, actual hedge results must be in the range:

A) 70% - 100%;
B) 80% - 125%;
C) 90% - 100%;
D) 20% - 50%.

Question 6

Which of the following events provide objective evidence that a financial asset has been impaired:
I A default in interest payments.
II The borrower enters into bankruptcy.
III Significant financial difficulty of the issuer.
IV The downgrade of an entity's credit rating.

A) I, II and III only;
B) II, III and IV only;
C) I, III and IV only;
D) II and IV only.

Question 7

According to IAS 32 Financial Instruments: Presentation, which of the following items would be regarded as a financial liability?

A) ordinary shares held in another entity;
B) a contract that is a non-derivative for which the entity is obliged to deliver a variable number of its own equity instruments;
C) a contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market price;
D) the right of a depositor to obtain cash from a financial institution with which it has deposited cash.

Question 8

The degree to which changes in the fair value or cash flows of a hedge item that are attributable to a hedge risk are offset by the changes in the fair value or cash flows of a hedging instrument, describes:

A) transaction exposure;
B) hedge ineffectiveness;
C) hedge effectiveness;
D) transaction variability.

Question 9

Which of the following items is classified as a financial asset?

A) ordinary shares of the issuer;
B) loans payable (owed by the borrower);
C) accounts receivable;
D) inventory.

Question 10

When accounting for a cash flow hedge, IAS 39 Financial Instruments: Recognition and Measurement, requires that hedge ineffectiveness is:

A) recorded in profit or loss;
B) separately recorded in equity;
C) recorded separately as a financial liability;
D) capitalised as a deferred asset.

Question 11

All of the following would be regarded as financial instruments except:

A) bank overdraft;
B) notes payable;
C) cash;
D) equipment.

Question 12

Under IAS 39 Financial Instruments: Recognition and Measurement, when a fair value hedge instrument expires it:

A) must be transferred within equity to retained earnings;
B) remains permanently in equity;
C) must be discontinued retrospectively;
D) must be discontinued prospectively.

Question 13

Which of the following is NOT an example of a derivative financial instrument?

A) A forward exchange contract
B) A commercial bill contract
C) A futures contract
D) An option contract

Question 14

Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows:

A) interest expense.
B) dividends distributed.
C) a portion representing interest expense and a portion representing dividends distributed
D) indeterminable based on the information provided.

Question 15

Whitnall Limited lost $150 on a hedging instrument and had a corresponding gain on the hedged item of $100. The effectiveness range for the associated transactions is:

A) 100% - 150%;
B) 20% - 30%;
C) 0% - 15%;
D) 66% - 150%.

Question 16

Which of the following are regarded as financial instruments:
I Deposits held by a financial institution;
II Ordinary shares;
III Raw materials inventories;
IV Property, plant and equipment.
V Accounts receivable and accounts payable.

A) I, II, IV and V only;
B) II, III and IV only;
C) I, II and V only;
D) I, IV and V only.

Question 17

Which of the following categories of financial instruments is NOT subsequently measured at amortised cost?

A) Held-to-maturity investments
B) Loans and receivables
C) Other financial liabilities
D) Available-for-sale financial assets

Question 18

The definition of a derivative requires which of the following characteristics to be met?
I its value must change in response to a change in an underlying variable such as a specified interest rate, price or foreign exchange rate.
II it must be settled on a net basis
III it must require no initial net investment or an additional net investment that is smaller than would be required for other types of contracts with similar responses to changes in market factors.
IV it is to be settled at a future date

A) I, II and III
B) I, III and IV
C) I, II and IV
D) II, III and IV

Question 19

Company A issues preference shares to Company B, the terms of which entitle party B to redeem the preference shares for cash if Company A's revenues fall below a specified level. From Company A's perspective the preference shares are:

A) an equity instrument
B) a financial liability
C) a compound financial instrument
D) a financial asset

Question 20

IAS 39 Financial Instruments: Recognition and Measurement, requires that 'Held-to- maturity' investments be initially measured at:

A) fair value;
B) fair value plus transaction costs;
C) discounted future cash outflows;
D) discounted future net cash flows.

Question 21

IAS 39 requires that on initial recognition, financial assets and liabilities be measured at:

A) historic cost;
B) fair value;
C) lower of cost or market;
D) net present value.

Question 22

Which of the following is within the scope of IAS 39?

A) a lease obligation to which IAS 17 applies
B) a lease renewal option within a lease agreement
C) a contract for contingent consideration payable in a business combination covered by IFRS 3
D) a share option issued under an employee share scheme which is covered by IFRS 2.

Question 23

Callas Corporation Limited buys an option that entitles it to purchase 2000 shares in Maria Limited at $5 per share at any time in the next 3 months. The derivative financial instrument in this transaction is the:

A) shares in Callas Corporation Limited;
B) shares in Maria Limited;
C) price of the shares in Maria Limited after 3 months have elapsed;
D) option priced at $5.

Question 24

When an entity has a legally enforceable right to set off the recognised amounts of a financial asset and financial liability and it intends to settle on a net basis, it:

A) can write off both the asset and the liability;
B) may offset the financial asset and liability;
C) is not entitled to offset the asset and liability;
D) need not present the asset, the liability or the net amount in its financial statements.

Question 25

A financial liability classified as fair value through profit and loss must be:

A) I, II and III
B) I, III and IV
C) I, II and IV
D) II, III and IV

Question 26

The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss is referred to as:

A) interest rate risk;
B) liquidity risk;
C) market risk;
D) credit risk.

Question 27

A financial asset classified as fair value through profit and loss (FVTPL) must be:

A) I, II and III
B) I, III and IV
C) I, II and IV
D) II, III and IV

Question 28

Which of the following is excluded from the scope of IAS 39?

A) a lease renewal option within a lease agreement.
B) a contract for contingent consideration receivable in a business combination covered by IFRS 3
C) an investment in a controlled entity accounted for at cost in the investor's separate consolidated financial statements.
D) Loan commitments that cannot be settled in cash or another financial instrument.

Question 29

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to:

A) deduct from equity, net of tax;
B) add to equity, net of tax;
C) expense in the period incurred;
D) defer as a contingent asset.

Question 30

The classification of a financial instrument on the Statement of Financial Position of an entity is governed by the principle of:

A) legal form;
B) net present value;
C) substance over form;
D) forfeiture.