Question 1

In determining the amount to be assigned to the equity component of a compound financial instrument,you must:
A)add the face value of the financial liability to the fair value of the compound financial instrument as a whole.
B)deduct the face value of the financial liability from the fair value of the compound financial instrument as a whole.
C)deduct the face value of the financial liability from the face value of the compound financial instrument as a whole.
D)deduct the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Accepted Answer

The equity component of a compound financial instrument is the residual amount after deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. This is because the equity component is essentially the amount that would be left over if the financial liability component was extinguished.

Question 2

Discuss the substance-over-firm approach in IAS 32 Financial Instruments.

Accepted Answer

The answer of Discuss the substance-over-firm approach in IAS 32...

Question 3

Adopting the effective-interest method means that the balance of the debenture liability represents:
A)the par value of the debenture.
B)the present value of the liability throughout the debenture term.
C)the adjustment to the debenture par value.
D)the borrowing cost.

Accepted Answer

Adopting the effective-interest method means that the debenture liability is measured at its present value throughout the debenture term. This includes both the principal amount and the interest expense, based on the effective interest rate implicit in the debenture. Therefore, the balance of the debenture liability represents the present value of the liability throughout the debenture term.

Question 4

An essential characteristic of a liability is the existence of a present obligation.What does this mean?
 Discuss the different types of obligations that may be considered 'present' obligations.

Accepted Answer

The answer of An essential characteristic of a liability is...

Question 5

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

Accepted Answer

The answer of In accordance with IAS 37 Provisions,Contingent Liabilities...

Question 6

Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.

Accepted Answer

The answer of Explain,in the context of Positive Accounting Theory,the...

Question 7

Discuss the necessary conditions prescribed in IAS 37 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

Accepted Answer

The answer of Discuss the necessary conditions prescribed in IAS...

Question 8

Where the change in the carrying amount of a liability is due to the impacts of using present values,the change shall be recognised as a(n):
A)gain on sale of liability.
B)revaluation reserve adjustment.
C)adjustment to opening retained earnings.
D)borrowing cost.

Accepted Answer

When the change in the carrying amount of a liability is due to the impacts of using present values, it is recognized as a borrowing cost. This is because the adjustment reflects the cost of borrowing over time, taking into account the time value of money.

Question 9

Discuss the criteria required to classify a liability as current.

Accepted Answer

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Question 10

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of IAS 37,is:
A)the pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
B)the after-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
C)the pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability, and shall also reflect risks for which future cash flows have already been adjusted.
D)the pre-tax risk free rate.

Accepted Answer

According to paragraph 47 of IAS 37, the discount rate to be used when measuring a liability at present values is "the pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability." This means that the rate should reflect the cost of borrowing today's money in the relevant currency, taking into account the risk (or uncertainty) of the future cash flows associated with the liability. The rate should not include any risks that have already been adjusted for in the future cash flows, and it should be a pre-tax rate (i.e. not adjusted for taxes).

Question 11

Explain in what situations,and why,some provisions should be measured at present values.

Accepted Answer

The answer of Explain in what situations,and why,some provisions should...

Question 12

Explain,providing an example,the 'effective-interest method' used to amortise debenture discount and debenture premium accounts.What is the implication of using this method for the balance of the net liability throughout the debenture term?

Accepted Answer

The answer of Explain,providing an example,the 'effective-interest method' used to...

Question 13

Unless the probability of any outflow in a settlement is remote,an entity needs to disclose for each class of contingent liability:
A)the possibility of any reimbursement.
B)an indication of the timing and amount uncertainties.
C)an estimate of its financial effect.
D)All of the given answers must be disclosed.

Accepted Answer

All the given options must be disclosed if the probability of any outflow in a settlement is not remote. The disclosure should include the possibility of any reimbursement, an indication of timing and amount uncertainties, and an estimate of its financial effect. This is in accordance with the accounting standard ASC 450-20.

Question 14

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the effective-interest rate embodied in the instrument? $\begin{array}{|l|l|l|l|l|l|l|}
\hline\text { Period } & \text { Opening } &\text { Effective } & \text { Coupon rate } &\text { Discount } &\text { Balance of }  & \text { Net liability }\
&\text { liability }&\text { interest }&&\text { amortisation }&\text { discount }&\
\hline 0 & & & & & 736055 & 9263945 \
\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \
\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \
\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707\
\hline
\end{array}$

A)6%
B)5%
C)Variable, as shown in the table it has increased from 5.5837% in Period 1 to 6.2738% in Period 3.
D)4%.

Accepted Answer

The answer of From the following extract of an amortisation...

Question 15

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the net liability (assuming the debenture has not yet been repaid),at the end of Period 10? $\begin{array}{|l|l|l|l|l|l|l|}
\hline\text { Period } & \text { Opening } &\text { Effective } & \text { Coupon rate } &\text { Discount } &\text { Balance of }  & \text { Net liability }\
&\text { liability }&\text { interest }&&\text { amortisation }&\text { discount }&\
\hline 0 & & & & & 736055 & 9263945 \
\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \
\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \
\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707\
\hline
\end{array}$

A)Nil
B)£9 500 000
C)£9 905 582
D)£10 000 000

Accepted Answer

The answer of From the following extract of an amortisation...

Question 16

IFRS 13 defines fair value measurement as:
A)the price that would be received to buy an asset or received to transfer a liability in an orderly transaction between market participants at the due date.
B)the price that would be paid to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the due date.
C)the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
D)the price that would be estimated to sell an asset or to transfer a liability in an orderly transaction between market participants at the measurement date.

Accepted Answer

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 17

Explain,in the context of the latest IAS 37,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

Accepted Answer

The answer of Explain,in the context of the latest IAS...

Question 18

A compound instrument,such as a convertible note,comprises two components.They are:
A)a financial liability (contractual arrangement to deliver cash or another financial liability) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).
B)a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).
C)a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a variable number of ordinary shares of the entity).
D)a financial liability (contractual arrangement to deliver cash or another financial asset) and an equity instrument (a put option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity).

Accepted Answer

A convertible note involves a contractual arrangement to repay the principal amount plus interest (financial liability) and a call option to convert the note into a fixed number of ordinary shares of the entity (equity instrument). Therefore, the correct answer is B.

Quiz 9: An Overview of Accounting for Liabilities

In determining the amount to be assigned to the equity component of a compound financial instrument,you must:

Discuss the substance-over-firm approach in IAS 32 Financial Instruments.

Adopting the effective-interest method means that the balance of the debenture liability represents:

An essential characteristic of a liability is the existence of a present obligation.What does this mean? Discuss the different types of obligations that may be considered 'present' obligations.

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.

Discuss the necessary conditions prescribed in IAS 37 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

Where the change in the carrying amount of a liability is due to the impacts of using present values,the change shall be recognised as a(n) :

Discuss the criteria required to classify a liability as current.

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of IAS 37,is:

Explain in what situations,and why,some provisions should be measured at present values.

Explain,providing an example,the 'effective-interest method' used to amortise debenture discount and debenture premium accounts.What is the implication of using this method for the balance of the net liability throughout the debenture term?

Unless the probability of any outflow in a settlement is remote,an entity needs to disclose for each class of contingent liability:

IFRS 13 defines fair value measurement as:

Explain,in the context of the latest IAS 37,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

A compound instrument,such as a convertible note,comprises two components.They are: