Applying International Financial Reporting Standards Picker 3rd Edition Test Bank

Applying International Financial Reporting Standards

Picker 3rd Edition Test Bank

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-picker-3rd-edition-test-bank/

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 Testbank
to accompany

Applying International
Financial Reporting
Standards 3e
By

Prepared by
John Sweeting and Emma Holmes

John Wiley & Sons Australia, Ltd 2013

 Chapter 7: Financial Instruments

CHAPTER 7

Financial Instruments
Learning Objectives

Learning Objective 7.1 Describe the background to the development of

accounting standards on financial instruments

Learning Objective 7.2 Define a financial instrument

Learning Objective 7.3 Outline and apply the definitions of financial assets and
financial liabilities

Learning Objective 7.4 Explain the concept of a derivative

Learning Objective 7.5 Distinguish between equity instruments and financial

liabilities

Learning Objective 7.6 Explain the concept of a compound financial instrument

Learning Objective 7.7 Determine the classification of revenues and expenses

arising from financial instruments

Learning Objective 7.8 Determine when financial assets and financial liabilities
may be offset

Learning Objective 7.9 Describe the main disclosure requirements of IFRS 7

Learning Objective 7.10 Describe the scope of IAS 39

Learning Objective 7.11 Explain the concept of an embedded derivative

Learning Objective 7.12 Distinguish between the four categories of financial

instruments specified in IAS 39

Learning Objective 7.13 Apply the recognition criteria for financial instruments

Learning Objective 7.14 Understand and apply the measurement criteria for each
category of financial instrument

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Test Bank to accompany Applying International Financial Reporting Standards 3e

Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39
and be able to apply the rules to simple
common cash flow and fair value hedges

Learning Objective 7.16 Briefly describe the requirements of IFRS 9

Learning Objective 7.17 Briefly describe expected future developments with

respect to accounting for financial instruments.

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 Chapter 7: Financial Instruments

Multiple choice

1. When first issued, IAS 39 was:

Learning Objective 7.1 Describe the background to the development of accounting
standards on financial instruments
*a. More rule-based than other AASB standards
b. Less rule-based than other AASB standards
c. Wider in scope that other AASB standards
d. Narrower in scope that other AASB standards

2. Which of the following is NOT an example of a derivative financial instrument?

Learning Objective 7.4 Explain the concept of a derivative
a. A forward exchange contract
*b. A commercial bill contract
c. A futures contract
d. An option contract

3. Company A issues preference shares to Company B, the terms of which entitle party B to
redeem the preference shares for cash if Company A’s revenues fall below a specified
level. From Company A’s perspective the preference shares are:
Learning Objective 7.5 Distinguish between equity instruments and financial liabilities
a. an equity instrument
*b. a financial liability
c. a compound financial instrument
d. a financial asset

4. Which of the following items is classified as a financial asset?

Learning Objective 7.3 Outline and apply the definitions of financial assets and financial
liabilities
a. ordinary shares of the issuer;
b. loans payable (owed by the borrower);
*c. accounts receivable;
d. inventory.

5. All of the following would be regarded as financial instruments except:

Learning Objective 7.2 Define a financial instrument
a. bank overdraft;
b. notes payable;
c. cash;
*d. equipment.

© John Wiley & Sons Australia, Ltd 2013 7.4

Test Bank to accompany Applying International Financial Reporting Standards 3e

6. According to IAS 32 Financial Instruments: Presentation, which of the following items

would be regarded as a financial liability?
Learning Objective 7.3 Outline and apply the definitions of financial assets and financial
liabilities
a. ordinary shares held in another entity;
*b. a contract that is a non-derivative for which the entity is obliged to deliver a variable
number of its own equity instruments;
c. a contractual right to exchange under potentially favourable conditions, an option to
purchase shares below the market price;
d. the right of a depositor to obtain cash from a financial institution with which it has
deposited cash.

7. Which of the following are regarded as financial instruments:

I Deposits held by a financial institution;

II Ordinary shares;
III Raw materials inventories;
IV Property, plant and equipment.
V Accounts receivable and accounts payable.

Learning Objective 7.2 Define a financial instrument

a. I, II, IV and V only;
b. II, III and IV only;
*c. I, II and V only;
d. I, IV and V only.

8. Company A issued convertible notes 3 years ago and accounted for them as a compound
financial instrument. Complete the following:

At the end of the three year period the portion of the XXX component that relates to the
notes which have been converted XXX.
Learning Objective 7.6 Explain the concept of a compound financial instrument
a. equity, is transferred to profit & loss
b. liability, remains as a liability
*c. liability, is transferred to equity
d. liability, is transferred to profit & loss

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 Chapter 7: Financial Instruments

9. Company A has convertible notes on issue. These notes are convertible to ordinary shares
of the Company after 3 years. The distributions made to the note holders by Company A
are classified by Company A as follows:
Learning Objective 7.6 Explain the concept of a compound financial instrument
a. interest expense.
b. dividends distributed.
*c. a portion representing interest expense and a portion representing dividends
distributed
d. indeterminable based on the information provided.

10. Which of the following events provide objective evidence that a financial asset has been
impaired:

I A default in interest payments.

II The borrower enters into bankruptcy.
III Significant financial difficulty of the issuer.
IV The downgrade of an entity’s credit rating.
Learning Objective 7.14 understand and apply the measurement criteria for each category
of financial instrument
*a. I, II and III only;
b. II, III and IV only;
c. I, III and IV only;
d. II and IV only.

11. IAS 39 Financial Instruments: Recognition and Measurement, requires that ‘Held-to-
maturity’ investments be initially measured at:
Learning Objective 7.14 understand and apply the measurement criteria for each category
of financial instrument
a. fair value;
*b. fair value plus transaction costs;
c. discounted future cash outflows;
d. discounted future net cash flows.

© John Wiley & Sons Australia, Ltd 2013 7.6

Test Bank to accompany Applying International Financial Reporting Standards 3e

12. The formal documentation of a hedging relationship must include identification of:

I II III IV
The hedging instrument No No Yes Yes
The hedged item No Yes Yes No
The nature of the risk being hedged No Yes Yes Yes
How the entity will assess hedge effectiveness Yes No Yes No

Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. I;
b. II;
*c. III;
d. IV.

13. To be regarded as ‘highly effective’ in achieving offsetting changes in fair value or cash
flows, actual hedge results must be in the range:
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. 70% - 100%;
*b. 80% - 125%;
c. 90% - 100%;
d. 20% - 50%.

14. Whitnall Limited lost $150 on a hedging instrument and had a corresponding gain on the
hedged item of $100. The effectiveness range for the associated transactions is:
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. 100% - 150%;
b. 20% - 30%;
c. 0% - 15%;
*d. 66% - 150%.

© John Wiley & Sons Australia, Ltd 2013 7.7

 Chapter 7: Financial Instruments

15. The degree to which changes in the fair value or cash flows of a hedge item that are
attributable to a hedge risk are offset by the changes in the fair value or cash flows of a
hedging instrument, describes:
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. transaction exposure;
b. hedge ineffectiveness;
*c. hedge effectiveness;
d. transaction variability.

16. When accounting for a cash flow hedge, IAS 39 Financial Instruments: Recognition and
Measurement, requires that hedge ineffectiveness is:
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
*a. recorded in profit or loss;
b. separately recorded in equity;
c. recorded separately as a financial liability;
d. capitalised as a deferred asset.

17. Under IAS 39 Financial Instruments: Recognition and Measurement, when a fair value
hedge instrument expires it:
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. must be transferred within equity to retained earnings;
b. remains permanently in equity;
c. must be discontinued retrospectively;
*d. must be discontinued prospectively.

© John Wiley & Sons Australia, Ltd 2013 7.8

Test Bank to accompany Applying International Financial Reporting Standards 3e

18. The definition of a derivative requires which of the following characteristics to be met?

I its value must change in response to a change in an underlying variable such as a

specified interest rate, price or foreign exchange rate.
II it must be settled on a net basis
III it must require no initial net investment or an additional net investment that is smaller
than would be required for other types of contracts with similar responses to changes
in market factors.
IV it is to be settled at a future date
Learning Objective 7.11 explain the concept of an embedded derivative
a. I, II and III
*b. I, III and IV
c. I, II and IV
d. II, III and IV

19. Which of the following categories of financial instruments is NOT subsequently measured
at amortised cost?
Learning Objective 7.14 understand and apply the measurement criteria for each category
of financial instrument
a. Held-to-maturity investments
b. Loans and receivables
c. Other financial liabilities
*d. Available-for-sale financial assets

20. Which of the following is NOT a condition for hedge accounting to be applied?
Learning Objective 7.15 Outline the rules of hedge accounting set out in IAS 39 and be
able to apply the rules to simple common cash flow and fair value hedges
a. There must be formal designation and documentation of the hedging relationship at
the inception of the hedge.
b. The effectiveness of the hedge must be able to be reliably measured.
*c. The hedge must be expected to be effective
d. For cash flow hedges, the forecast transaction must be highly probable.

21. Callas Corporation Limited buys an option that entitles it to purchase 2000 shares in Maria
Limited at $5 per share at any time in the next 3 months. The derivative financial
instrument in this transaction is the:
Learning Objective 7.4 explain the concept of a derivative
a. shares in Callas Corporation Limited;
b. shares in Maria Limited;
c. price of the shares in Maria Limited after 3 months have elapsed;
*d. option priced at $5.

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 Chapter 7: Financial Instruments

22. The classification of a financial instrument on the Statement of Financial Position of an

entity is governed by the principle of:
Learning Objective 7.5 Distinguish between equity instruments and financial liabilities
a. legal form;
b. net present value;
*c. substance over form;
d. forfeiture.

23. The appropriate accounting treatment for incremental costs directly attributable to an
equity transaction that would otherwise have been avoided is to:
Learning Objective 7.7 determine the classification of revenues and expenses arising from
financial instruments
*a. deduct from equity, net of tax;
b. add to equity, net of tax;
c. expense in the period incurred;
d. defer as a contingent asset.

24. When an entity has a legally enforceable right to set off the recognised amounts of a
financial asset and financial liability and it intends to settle on a net basis, it:
Learning Objective 7.8 determine when financial assets and financial liabilities may be
offset
a. can write off both the asset and the liability;
*b. may offset the financial asset and liability;
c. is not entitled to offset the asset and liability;
d. need not present the asset, the liability or the net amount in its financial statements.

25. The risk that one party to a financial instrument will fail to discharge an obligation and
cause the other party to incur a financial loss is referred to as:
Learning Objective 7.9 describe the main disclosure requirements of IFRS 7
a. interest rate risk;
b. liquidity risk;
c. market risk;
*d. credit risk.

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Test Bank to accompany Applying International Financial Reporting Standards 3e

26. Which of the following is within the scope of IAS 39?

Learning Objective 7.10 describe the scope of IAS 39
a. a lease obligation to which IAS 17 applies
*b. a lease renewal option within a lease agreement
c. a contract for contingent consideration payable in a business combination covered by
IFRS 3
d. a share option issued under an employee share scheme which is covered by IFRS 2.

27. Which of the following is excluded from the scope of IAS 39?
Learning Objective 7.10 describe the scope of IAS 39
a. a lease renewal option within a lease agreement.
b. a contract for contingent consideration receivable in a business combination covered
by IFRS 3
c. an investment in a controlled entity accounted for at cost in the investor’s separate
consolidated financial statements.
*d. Loan commitments that cannot be settled in cash or another financial instrument.

28. A financial asset classified as fair value through profit and loss (FVTPL) must be:

I a derivative that is a financial guarantee contract or a hedging instrument

II acquired principally for the purpose of selling it in the near term
III part of a portfolio of identified instrument that are managed together and for
which there is evidence of a recent actual pattern of short-term profit-taking
IV designated as such upon initial recognition
Learning Objective 7.12 distinguish between the four categories of financial instruments
specified in IAS 39
a. I, II and III
b. I, III and IV
c. I, II and IV
*d. II, III and IV

© John Wiley & Sons Australia, Ltd 2013 7.11

Applying International Financial Reporting Standards Picker 3rd Edition Test Bank

Chapter 7: Financial Instruments

29. A financial liability classified as fair value through profit and loss must be:

I a derivative (except for a derivative that is a financial guarantee contract or a

hedging instrument)
II acquired principally for the purpose of selling it in the near term
III part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-
term profit-taking
IV designated as such upon initial recognition
Learning Objective 7.12 distinguish between the four categories of financial instruments
specified in IAS 39
a. I, II and III
*b. I, III and IV
c. I, II and IV
d. II, III and IV

30. IAS 39 requires that on initial recognition, financial assets and liabilities be measured at:
Learning Objective 7.14 understand and apply the measurement criteria for each category
of financial instrument
a. historic cost;
*b. fair value;
c. lower of cost or market;
d. net present value.

© John Wiley & Sons Australia, Ltd 2013 7.12

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