3 Quiz 1

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International Financial Reporting Standards

The views expressed in this presentation are those of the

presenter,

not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Quiz:

Financial instrumentsJoint World Bank and IFRS Foundation train

the trainers workshop hosted by the ECCB,

30 April to 4 May 2012

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS

Foundation.

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Question 1

1/1/X1 Entity A buys 100 share options for 2,000 cash.The options permit Entity A to buy shares in a listed entity

XYZ for 50 per share at any time during the next 2 years.

Bank charges a fee of 20. On 1/1/X1 XYZ's share price is

44.At what amount should Entity A initially measure the

options?

a. 1,900

b. 1,980c. 2,000

d. 2,020

e. 4,040


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Solution 1

At what amount should Entity A initially measure theoptions?

a. 1,900

b. 1,980

c. 2,000 Initially measure at FV which is usually thetransaction price. 20 fee is expensed because will

measure at FVTPL.

d. 2,020

e. 4,040


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Question 2

Same facts as Question 1. At 31/12/X1 Entity A has not yetexercised the option; XYZ share price is 47; fair value of

option is 2,500.

At what amount should Entity A measure the options at

31/12/X1?

a. 1,980

b. 2,000

c. 2,020d. 2,500

e. 4,700


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Solution 2

Same facts as Question 1. At 31/12/X1 Entity A has not yet

exercised the option; XYZ share price is 47; fair value of

option is 2,500.

At what amount should Entity A measure the options at31/12/X1?

a. 1,980

b. 2,000c. 2,020

d. 2,500 Subsequent measurement at fair value

e. 4,700 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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6Question 3

Entity borrows 10,000 from a bank 5 years, fixed interestpayable annually 6% in arrears (this is a market rate.)

Bank charges entity 50 loan application fee. Entity should

measure the loan on initial recognition at...

a. 7,473 (= PV 10,000 at 6% for 5 years)

b. 7,423

c. 9,950d. 10,000

e. 10,050


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7Solution 3

Entity should measure the loan on initial recognition at...

a. 7,473 (= PV 10,000 at 6% for 5 years)

b. 7,423c. 9,950. Loan will be carried at amortised cost. Fee

is netted against loan. Affects effective interest.

See next slide...

d. 10,000

e. 10,050


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8Solution 3 continued

Excel A1 9950

2 -600

3 -600

4 -600

5 -600

6 -10600

7 0.6 [Guess at IRR, can omit]8 6.11908% [=IRR(A1:A6,A7)]

Using Excel to

calculate

internal rate of return

in Question 3


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9Solution 3 continued

Year

Loan liability

beginning

Interestexpense at

6.11908%

Cash

paid

Loanliability

ending

1 9,950 609 600 9,959

2 9,959 609 600 9,968

3 9,968 610 600 9,978

4 9,978 611 600 9,9895 9,989 611 600 10,000


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10Question 4

Entity A sells 100 of receivables to bank for 85. Entity Acontinues to collect and remit amounts collected to bank,

for which bank pays a fee to Entity A. Entity A has no

obligation for credit losses or for slow payment by

debtors. How is this transaction accounted for?

a. Entity A removes receivables from its balance sheet

and shows no liability for 85 proceeds

b. Entity A keeps 100 receivables on its balance sheet

and shows a liability for 85

c. Entity A keeps 100 receivables on its balance sheetand shows no liability for 85

d. Entity A removes receivables from its balance sheet

and shows a liability for 85


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11Solution 4

How is this transaction accounted for?a. Entity A removes receivables from its balance sheet

and shows no liability for 85 proceeds

b. Entity A keeps 100 receivables on its balance sheet and

shows a liability for 85c. Entity A keeps 100 receivables on its balance sheet and

shows no liability for 85

d. Entity A removes receivables from its balance sheet and

shows liability 85


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Question 5

A financial instrument that is designated as a hedginginstrument is always measured at Fair Value Through Profit

or Loss?

a. True

b. False


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Solution 5

A financial instrument that is designated as a hedginginstrument is always measured at Fair Value Through Profit

or Loss?

a.True

b.False. If it is a hedge of interest in a recognised

financial instrument, or hedge of firm commitment or

forecast transaction, hedging instrument is measured at

FV through OCI, with subsequent recycling.


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Question 6

Entity A has inventory it plans to sell in 3 months. Entity Ais worried about price decline during the 3 months and so

enters into forward contract to hedge price risk of its

inventory. Relationship meets conditions for hedge

accounting and Entity A documents the hedge.

What is the accounting?


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Question 6 continued

a. Recognise forward contract as an asset or liability at FVand change in FV in P&L. Recognise the change in FV

of the inventory in P&L and as an adjustment to the

carrying amount of the inventory.

b. Recognise forward contract as an asset or liability at FVand change in FV in OCI. Recognise the change in FV

of the inventory in OCI and as an adjustment to the


c. Recognise forward contract as an asset or liability at FV

and the change in the FV of the forward contract in OCI.

Do not recognise the change in the FV of the inventory

as inventory is measured at cost.


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Solution 6 continued

a. Recognise forward contract as an asset or liability atFV and change in FV in P&L. Recognise the change

in FV of the inventory in P&L and as an adjustment

to the carrying amount of the inventory.

b. Recognise forward contract as an asset or liability at FVand change in FV in OCI. Recognise the change in FV

of the inventory in OCI and as an adjustment to the


c. Recognise forward contract as an asset or liability at FV

and the change in the FV of the forward contract in OCI.

Do not recognise the change in the FV of the inventory

as inventory is measured at cost.


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Questions 7 and 8Scenario

Entity A purchased a bond at face value (equal to the fairvalue at that date) that pays a coupon based on the

market interest rate of 5 per cent per annum. At purchase

date, there are 20 years until the bonds maturity date.

Interest of CU500 is received every year in cash. Thebond has a maturity value of CU10,000.

17


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Question 7

Assume that the bond is measured at amortised costand that two years after the bond was purchased, the

market interest rate changed to 6 per cent per annum.

What journal entries should be processed by the entity

relating to the bond from inception until maturity of the

bond?

18


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Solution 7

At pu rchase date:Dr Assetbond 10,000

Cr Assetcash 10,000

Years 1 20:

Dr Assetcash 500

Cr Incomeinterest 500

At matur i ty date:

Dr Assetcash 10,000

Cr Assetbond 10,000

19


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Question 8

Assume that instead of being purchased at face value,the bond was purchased at a discount of 20 per cent.

The bond is correctly measured at amortised cost.

What journal entries should be processed by the entity

relating to the bond at purchase date and for the first

year thereafter?

20


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Solution 8

At pu rchase date:Dr Assetbond 8,000

Cr Assetcash 8,000

CU10,000 x 80% = CU8,0000

Year 1:

Dr Assetcash 500

Cr Assetbond 500

Dr Assetbond 550

Cr Incomeinterest 550

Effective interest rate = 6.87% (PV=CU8,000; n=20; PMT =CU500

and FV=CU10,000), CU8,000 x 6.87% = CU550

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Questions 9, 10 and 11Scenario

An entity enters into a forward exchange contract on 30April 20X1 to receive USD100,000 and deliver

CU399,688 on 31 March 20X2. The forward exchange

contract is designated as a hedging instrument for the

purchase of inventory on31 December 20X1the resulting payable is to be

settled on 28 February 20X2

All hedge accounting conditions are met

The entitys reporting period ends on 31 October

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The following spot and fair values of the forwardexchange rate contract are applicable:

23

SPOT FAIR VALUE OF

CONTRACT

30 April 20X1 3.7300 0

31 October 20X1 3.4714 (39,253)

31 December 20X1 3.3100 (62,658)

28 February 20X2 3.1507 (84,623)


Questions 9, 10 and 11Scenario continued

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Question 9

What journal entry(ies) must be processed at 31 October20X1 assuming that the entity designates the forward

exchange contract as a cash flow hedge of a forecast

transaction and the option in IAS39.98(b) is selected?

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Solution 9

31 October 20X1:

Dr OCIcash flow hedge 39,253

Cr Liabilityforward contract 39,253

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Question 10


exchange contract as a cash flow hedge of a forecast

transaction and the option in IAS39.98(a) is selected?

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Solution 10

31 October 20X1:

Dr OCIcash flow hedge 39,253


Note: the difference in accounting between the two

options in IAS39.98 relates to the timing of the effect on

profit or loss (ie a basis adjustment to the hedged item or

as the hedged item affects profit or loss)

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Question 11


exchange contract as a fair value hedge of an

unrecognised firm commitment?

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Solution 11

31 October 20X1:

Dr Profit or lossexchange loss 39,253


Dr Assetfirm commitment 25,860

Cr Profit or lossexchange gain 25,860

USD100,000 x (3.7300

3.4714) = CU25,860

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30Questions or comments?

Expressions of individual viewsby members of the IASB and its

staff are encouraged.

The views expressed in this

presentation are those of the

presenter.

Official positions of the IASB on

accounting matters aredetermined only after extensive

due process and deliberation.


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31

The requirements are set out in International FinancialReporting Standards (IFRSs), as issued by the IASB at1 January 2012 with an effective date after 1 January2012 but not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters andthe publishers do not accept responsibility for losscaused to any person who acts or refrains from actingin reliance on the material in this PowerPointpresentation, whether such loss is caused by

negligence or otherwise.

31


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