CLASS 6 Financial instruments (IFRS 7, IFRS 9, IAS 32)

Case
The following scenario relates to questions 1–6.
Bertrand issued $10 million convertible loan notes on 1 October 20X0 that carry a nominal interest (coupon)
rate of 5% per annum. They are redeemable on 30 September 20X3 at par for cash or can be exchanged for
equity shares in Bertrand on the basis of 20 shares for each $100 of loan. A similar loan note, without the
conversion option, would have required Bertrand to pay an interest rate of 8%.

The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, can be taken
as:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
Cumulative 2.72 2.58

1. How should the convertible loan notes be accounted for?

A. As a debt
B. As debt and equity
C. As equity
D. As debt until conversion, then as equity

2. Which of the following correctly recognises the convertible loan in Bertrand’s statement of financial
position on initial recognition (1 October 20X0)?
Equity Non-current liability
$000 $000
A. 810 9,190
B. nil 10,000
C. 10,000 nil
D. 40 9,960
Solution:
Calculations $`000
The value of whole instrument
Liability element:
PV principal
PV interest
Equity element

3. What is the amount that will be recognised as finance costs for the year ended 30 September
20X1?

Solution:
Calculations $`000
Liability element
Finance cost for year
 4. What is the amount that should be shown under liabilities at 30 September 20X1?

A. $9,425,000
B. $9,925,000
C. $9,960,000
D. Nil

Solution:
Calculations $`000
Finance liability at 1 October 20X0
Finance cost for year
Interest paid
Balance 30 September 20X1

5. If Bertrand had incurred transaction costs in issuing these loan notes, how should these have been
accounted for?

A. Added to the proceeds of the loan notes

B. Deducted from the proceeds of the loan notes
C. Amortised over the life of the loan notes
D. Charged to finance costs

6. Bertrand also purchased a debt instrument which will mature in five years` time. Bertrand intends
to hold the debt instrument to maturity to collect interest payments.
Complete the following statement using the options below.

This debt instrument will be measured as a financial

at in the financial statement of Bertrand Co.

asset amortised cost

liability fair value

fair value through profit or loss

MCQs

7. An 8% $30 million convertible loan note was issued on 1 April 20X5 at par. Interest is payable in
arrears on 31 March each year. The loan note is redeemable at par on 31 March 20X8 or
convertible into equity shares at the option of the loan note holders on the basis of 30 shares for
each $100 of loan. A similar instrument without the conversion option would have an interest rate
of 10% per annum.
The present values of $1 receivable at the end of each year based on discount rates of 8% and 10%
are:
8% 10%
End of year 1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
Cumulative 2.58 2.49

What amount will be created to equity on 1 April 20X5 in respect of this financial instrument?
A. $5,976,000
B. $1,524,000
C. $324,000
D. $9,000,000
Solution:
Calculations $`000
The value of whole instrument
Liability element:
PV principal
PV interest
Equity element

8. A 5% loan note was issued on 1 April 20X0 at its face value of $20 million. Direct costs of the issue
were $500,000. The loan note will be redeemed on 31 March 20X3 at a substantial premium. The
effective interest rate applicable is 10% per annum.
At what amount will the loan note appear in the statement of financial position as at 31 March
20X2?
A. $21,000,000
B. $20,450,000
C. $22,100,000
D. $21,495,000
Solution:
Calculations $`000
Financial liability
Finance cost for 1st year
Interest paid for 1st year
Balance 30 March 20X1
Finance cost for 2nd year
Interest paid for 2nd year
Balance 30 March 20X2
 9. Using the drag and drop below, complete the statement to show how IFRS 9 Financial Instruments
require investments in equity instruments to be measured and accounted for (in the absence of
any election at initial recognition)?

with charges going through

Fair value profit or loss

Amortised cost other comprehensive income

10. On 1 January 20X1 Penfold purchased a debt instrument for its fair value of $500,000. It had a
principal amount of $550,000 and was due to mature in five years. The debt instrument carries
fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held at
amortised cost.
At what amount will the debt instrument be shown in the statement of financial position of Penfold
as at 31 December 20X2?
A. $514,560
B. $566,000
C. $564,560
D. $520,800

Solution:
Calculations $
Financial asset at 1st January 20X1
Finance income
Interest received
Balance 31 December 20X1
Finance income
Interest received
Balance 31 December 20X2

11. IAS 32 Financial Instruments: Presentation classifies issued shares as either equity instruments or
financial liabilities. An entity has the following categories of funding on its statement of financial
position:
(1) A preference share that is redeemable for cash at a 10% premium on 30 May 2020
(2) An equity share which is not redeemable and has no restrictions on receiving dividends
(3) A loan note that is redeemable at par in 2022
(4) An irredeemable loan note that pays interest at 7% a year
Applying IAS 32, how would each of the above be classified in the statement of financial position?

As an equity As a financial
instrument liability
A. 1 and 2 only 3 and 4 only
B. 2 and 3 only 1 and 4 only
C. 2 only 1, 3 and 4
D. 1, 2 and 3 4 only
OTQs

12. Which of the following are NOT classified as financial instruments under IAS 32 Financial
Instruments: presentation?
Share options
Intangible assets
Trade receivables
Redeemable preference shares

13. Dexon`s draft statement of financial position as at 31 March 20X8 shows financial assets at fair
value through profit or loss with a carrying amount of $12.5 million as at 1 April 20X7.

These financial assets are held in a fund whose value changes directly in proportion to a specified
market index. At 1 April 20X7 the relevant index was 1,200 and at 31 March 20X8 it was 1,296

What amount of gain or loss should be recognized at 31 March 20X8 in respect of these assets?

Solution:
Calculations $
st
Carrying amount at 1 April 20X7
FV at 31st March 20X8
Gain (loss)

14. On 1 January 20X8 a company purchased 40,000 $1 listed equity shares at a price of $3 per share.
An irrevocable election was made to recognize the shares at fair value through other
comprehensive income. Transaction costs were $3,000. At the end of 31 December 20X8 the
shares were trading at $6 per share.
What amount in respect of these shares will be shown under `investment in equity instruments` in
the statement of financial position as at 31 December 20X8?

Assessment progress test (Class 6)  20 min

https://edu.hse.ru/mod/quiz/view.php?id=256881
SELF-STUDY (Financial Instruments)

(a) On 1 January 2005, an entity issued a debt instrument with a coupon rate of 3.5% at a par value
of $6,000,000. The directly attributable costs of issue were $120,000. The debt instrument is
repayable on 31 December 2011 at a premium of $1,100,000.

Required
What is the total amount of the finance cost associated with the debt instrument?

(b) On 1 January 20X3 Deferred issued $600,000 loan notes. Issue costs were $200. The loan notes
do not carry interest, but are redeemable at a premium of $152,389 on 31 December 20X4. The
effective finance cost of the loan notes is 12%.

Required
What is the finance cost in respect of the loan notes for the year ended 31 December 20X4

(c) On 1 January 20X1, EFG issued 10,000 5% convertible bonds at their par value of $50 each. The
bonds will be redeemed on 1 January 20X6. Each bond is convertible to equity shares at the
option of the holder at any time during the five year period. Interest on the bond will be paid
annually in arrears.
The prevailing market interest rate for similar debt without conversion options at the date of
issue was 6%. The discount factor for 6% at year 5 is 0.747. The cumulative discount factor for
years 1-5 at 6% is 4.212.

Required
At what value should the equity element of the hybrid financial instrument be recognized in the
financial statements at EFG at the date of issue?