Question 1

Under ASPE, forfeitures which occur under a stock-based compensation structure are accrued throughout the vesting period.

Accepted Answer

Under ASPE (Accounting Standards for Private Enterprises) in Canada, forfeitures under a stock-based compensation structure are not accrued throughout the vesting period. Instead, they are recognized when they actually occur.

Question 2

General debt carries a firm commitment to interest payments and repayment of capital at maturity.

Accepted Answer

The answer of General debt carries a firm commitment to...

Question 3

To be classified as retractable preferred shares, the cash repayment must either be contractually required or at the option of the investor.

Accepted Answer

The answer of To be classified as retractable preferred shares,...

Question 4

Under IFRS, forfeitures which occur under a stock-based compensation structure are accrued throughout the vesting period.

Accepted Answer

Under IFRS, entities have the option to either estimate the number of awards that are expected to vest (including forfeitures) at the grant date and revise if necessary, or recognize forfeitures as they occur, without accruing them throughout the vesting period.

Question 5

Assume that a company wishes to grant stock options to a supplier in exchange for services rendered.The company chose to value this exchange at the going market rate charged by the suppliers' competitors.This is an example of a Level 2 Fair Value Hierarchy application.

Accepted Answer

This scenario is an example of a Level 3 Fair Value Hierarchy application because it involves using unobservable inputs (e.g., the market rate charged by competitors) for the valuation, as there is no observable market price for the specific transaction.

Question 6

Share-based payments to suppliers are valued at the value of the goods or services received.

Accepted Answer

The answer of Share-based payments to suppliers are valued at...

Question 7

Perpetual debt is valued as debt because it has no equity component.

Accepted Answer

Perpetual debt is often considered a hybrid instrument because it has characteristics of both debt and equity, such as no maturity date and interest payments similar to dividends.

Question 8

Embedded derivatives are those that can be detached and separately sold from their host contracts.

Accepted Answer

Embedded derivatives are inseparable from their host contracts and cannot be traded independently.

Question 9

When stock rights are issued to current shareholders, it may require more than one such right to later acquire one additional share of the stock covered by the rights.

Accepted Answer

The answer of When stock rights are issued to current...

Question 10

Retractable preferred shares are those which can be redeemed only at the investor's discretion.

Accepted Answer

Retractable preferred shares can be redeemed at the option of the shareholder, but the terms of redemption, including timing and price, are typically predefined by the issuing company in the share's prospectus, not solely at the investor's discretion.

Question 11

When bonds are converted, it is first necessary to update any accounts relating to bond premium or discount, accrued interest, and foreign exchange gains and losses on foreign currency denominated debt.

Accepted Answer

The answer of When bonds are converted, it is first...

Question 12

An instrument may be classified as equity even though the investor can demand payment.

Accepted Answer

An instrument cannot be classified as equity if the investor has the right to demand payment, as equity instruments do not have an obligation to deliver cash or another financial asset.

Question 13

Futures contracts are traded on public exchanges while forward contracts are not.

Accepted Answer

The answer of Futures contracts are traded on public exchanges...

Question 14

Convertible bonds with a floating conversion price is treated solely as debt.

Accepted Answer

Convertible bonds with a floating conversion price have both debt and equity components because the conversion feature is considered an embedded derivative that needs to be separated from the debt component and accounted for as equity or as a derivative liability, depending on the specific terms of the bond.

Question 15

Management of a company that has convertible bonds outstanding would likely force conversion of its bonds of the fair market value of the shares upon conversion exceeds the fair value of the bonds.

Accepted Answer

The answer of Management of a company that has convertible...

Question 16

When a bond matures, an investor will convert if the market price of the convertible bond is higher than the conversion price of the bond.

Accepted Answer

When a bond matures, the investor does not convert based on the market price; instead, the issuer typically pays back the principal amount of the bond. Conversion decisions are usually made before maturity, based on whether converting the bond into stock would be more valuable than its redemption value, not on the bond's market price at maturity.

Question 17

If cash payments to investors are dependent on one or more future events, the instrument in question would be considered equity.

Accepted Answer

Cash payments to investors that are dependent on one or more future events typically describe contingent consideration, which can be part of a financial instrument but does not solely qualify the instrument as equity. Equity classification depends on ownership rights and other factors, not just the contingency of payments.

Question 18

The proceeds of any bonds sold with detachable stock warrants must be pro-rated between the bonds and the warrants.

Accepted Answer

The answer of The proceeds of any bonds sold with...

Question 19

The measurement date of a compensatory stock option must precede the date of grant.

Accepted Answer

The measurement date for a compensatory stock option is typically the date of grant, as this is when the terms and beneficiaries of the option are determined.

Question 20

An escalation clause will normally cause preferred shares to trade as debt.

Accepted Answer

An escalation clause typically refers to a provision in a contract that allows for an increase in wages or prices under certain conditions, not a feature of preferred shares that would cause them to trade as debt. Preferred shares trade more like debt or equity based on their dividend rates, convertibility, and other features, not escalation clauses.

Quiz 15: Financial Instruments: Complex Debt and Equity