IFRS 9 Flashcards | Financial Instruments Revision Questions
IFRS Revision
IFRS 9 Financial Instruments Flashcards
Use these IFRS 9 flashcards to revise classification and measurement, SPPI, amortised cost, FVTPL, FVTOCI, financial liabilities, fair value, and hedge accounting.
Table of contents
Classification and measurement
What two tests must a financial asset satisfy to be measured at Amortised Cost under IFRS 9?
The business model test (held to collect) and the contractual cash flow characteristics test (SPPI).
Under IFRS 9, how is a financial asset classified if the business model objective is achieved by both collecting contractual cash flows and selling the asset?
Fair Value through Other Comprehensive Income (FVTOCI).
What is the default classification for equity investments that are not held for trading and for which no election is made?
Fair Value through Profit or Loss (FVTPL).
Initial measurement of a financial asset at FVTPL excludes what specific costs?
Transaction costs, which are expensed immediately.
How are transaction costs treated for financial assets measured at Amortised Cost?
They are added to the initial fair value of the asset.
What specific requirement must be met to elect FVTOCI for an equity investment?
The investment must not be held for trading and the election must be irrevocable at initial recognition.
Where is dividend income from an equity investment measured at FVTOCI recognised?
Profit or Loss.
A financial asset is measured at FVTPL if to do so eliminates or significantly reduces a(n) _____.
Accounting mismatch.
How should a derivative used for hedging be classified if hedge accounting is NOT used?
Fair Value through Profit or Loss (FVTPL).
What is the initial measurement of a zero-interest loan to an employee according to IFRS 9?
Fair value, being the present value of future cash flows discounted at the market rate for a similar loan.
Under IFRS 9, why is an interest-free loan to an employee not initially recognised at the amount lent?
Because it is not at a market rate and must be recognised at fair value.
Where is the difference between the amount lent and the fair value of an interest-free employee loan recognised?
Profit or Loss, as an employee benefit expense.
For a financial asset measured at FVTOCI (debt), where is the interest income recognised?
Profit or Loss using the effective interest method.
How is a put option on an equity investment usually classified if it is not part of a hedge?
Fair Value through Profit or Loss (FVTPL).
Under IFRS 9, can a financial asset be reclassified after initial recognition?
Only if the entity changes its business model for managing those financial assets.
Under IFRS 9, what is the contractual cash flow test for financial assets also known as?
The SPPI test, meaning solely payments of principal and interest.
Under IFRS 9, are loan arrangement costs expensed immediately or included in the carrying amount of the loan asset?
They are included in the initial carrying amount if the asset is measured at Amortised Cost.
Under IFRS 9, how are transaction costs for financial assets measured at FVTOCI (equity) treated?
They are included in the initial carrying amount.
If a financial asset fails the SPPI test, it must be measured at _____.
Fair Value through Profit or Loss (FVTPL).
Under IFRS 9, what is the default classification for a derivative asset?
Fair Value through Profit or Loss (FVTPL).
Financial liabilities and convertibles
What is the subsequent measurement basis for financial liabilities, unless they are held for trading or designated at FVTPL?
Amortised cost using the effective interest method.
In split accounting for a compound instrument, which component is calculated first?
The liability component.
How is the fair value of the liability component of a convertible loan determined at issue?
By discounting future cash flows using the market interest rate for a similar non-convertible debt.
Under IFRS 9, how is the initial equity component of a convertible bond derived?
As the residual amount after deducting the fair value of the liability from the total proceeds.
How are issue costs of a convertible bond allocated?
They are allocated proportionately to the liability and equity components based on their initial carrying amounts.
What happens to the carrying amount of the equity component of a convertible bond in subsequent periods?
It remains unchanged from its initial recognition value.
Where is the finance cost of the liability component of a convertible bond recognised?
Profit or Loss.
What discount rate is used to calculate the subsequent amortised cost of a liability after issue costs are deducted?
The revised effective interest rate.
A finance cost of a loan is calculated by multiplying the _____ by the effective interest rate.
Opening carrying amount.
If the coupon rate of a bond is 8% but the market rate for similar debt is 10%, the bond will be issued at a _____ to its par value.
Discount.
In a convertible loan, the difference between the total proceeds and the present value of the future cash flows is the _____.
Equity component.
Fair value and hedge accounting
According to IFRS 13, which market price should be used to measure the fair value of a financial asset in an active market?
The bid price, which is the exit measure.
Under IFRS 9, how is the effective portion of a cash flow hedge recognised?
In Other Comprehensive Income (OCI).
Where is the ineffective portion of a cash flow hedge recognised?
Profit or Loss.
What is the accounting term for adjusting the carrying amount of a non-financial asset with cumulative hedging gains or losses?
Basis adjustment.
For a hedge of a firm commitment to purchase a machine, where are the cumulative gains in the hedge reserve transferred upon recognition of the machine?
They are adjusted against the initial carrying amount of the property, plant and equipment.
According to the examiner, what is the exit measure for fair value under IFRS 13?
The price that would be received to sell an asset.
If a cash flow hedge results in over-hedging, where is the excess gain on the derivative recognised?
Profit or Loss.
According to IFRS 13, which price is used for fair value if a buy and sell price are quoted for shares?
The sell price, being the bid price.
What happens to the cumulative gains in the cash flow hedge reserve when a hedged forecast sale occurs?
They are reclassified from the reserve to Profit or Loss as a reclassification adjustment.
A firm commitment to purchase a machine is considered a(n) _____ contract until delivery.
Executory.
How is the fair value of a non-financial asset determined under IFRS 13?
Based on its highest and best use.
What is the examiner's feedback regarding the use of the average price for fair value measurement under IFRS 13?
It is permitted and awarded credit if bid or ask prices are not explicitly required.
Special cases and exam points
Under IAS 21, what exchange rate is used to translate a foreign currency trade payable at the reporting date?
The closing spot rate at the reporting date.
Why is the carrying amount of property, plant and equipment not affected by exchange rate fluctuations after initial recognition?
Because it is a non-monetary asset measured at historical cost.
According to examiner reports, what is a common error when calculating the impairment of goodwill for a partially-owned subsidiary using the proportionate net assets method?
Failing to gross up the goodwill to include the portion attributable to the non-controlling interest.
If the non-controlling interest is measured at fair value, how is an impairment loss allocated?
Proportionately between the parent and the non-controlling interest.
When does depreciation of a newly acquired machine begin according to IAS 16?
When the asset is available for use in the location and condition intended by management.
How are costs of issuing equity, such as share issue costs, treated in the financial statements?
They are deducted directly from equity.
In a sale and leaseback resulting in an operating lease under old rules at below fair value, how is the loss on sale treated?
It is deferred and amortised over the lease term as a prepayment.
According to IAS 21, exchange differences on monetary items are recognised in _____.
Profit or Loss.
Where should the gain on a bargain purchase, or negative goodwill, be recognised?
Profit or Loss after reassessing the fair values of assets and liabilities.
If a subsidiary is acquired during the year, what portion of its finance costs is included in the consolidated statement of profit or loss?
The portion incurred from the date of acquisition to the end of the reporting period.
What is the common examiner trap regarding netting off hedging gains and losses?
Netting off the derivative gain against an unrecognised loss on a firm commitment instead of following hedge accounting mechanics.
What is the examiner's tip for dealing with the time value of money in financial instrument questions?
Discounting is essential for any long-term asset or liability with no or low interest.
Under IFRS 10, all group entities must apply _____ accounting policies.
Uniform.
How is a biological asset initially measured under IAS 41?
Fair value less costs to sell.
Where are gains or losses from changes in fair value of biological assets recognised?
Profit or Loss.
What exchange rate is used to translate the depreciation charge of a foreign subsidiary's machine?
The average rate for the period, or the actual rate at the transaction date.
In consolidation, what is the correct treatment for cash-in-transit sent by a subsidiary to a parent?
Add to consolidated cash and equivalents and eliminate the intra-group receivable.
According to the examiner, what happens if an entity voluntarily provides segment information?
It must comply with the full provisions of IFRS 8.
