CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

DUSAYEN, BERNARD I. CBET-01-202P

REVIEW QUESTIONS

CHAPTER 24

1. According to PAS 32.11, Financial instrument is any contract that gives rise to a financial asset
of one entity and a financial liability or equity instrument of another entity,
2. Financial asset is any asset that is:
a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from another entity;
d. A contractual right to exchange financial instruments with another entity under
conditions that are potentially favorable; or
e. A contract that will or may be settled in the entity’s own equity instruments and is not
classified as the entity’s own equity instrument.
3. Examples of Financial Assets:
a. Cash and Cash equivalents (e.g., cash on hand, in banks, short-term money placements,
and cash funds.
b. Receivables such as accounts, notes, loans, and finance lease receivables.
c. Investments in equity or debt instruments of other entities such as held for trading
securities, investments in subsidiaries, associates, joint ventures, investments in bonds
and derivative assets.
d. Sinking fund and other long-term funds composed of cash and other financial asset.
4. Financial Liability is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another entity;
b. A contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments and is not
classified as the entity’s own equity instrument.
5. Example of Financial Liability:
a. Payables such as accounts, notes, loans, and bonds payable.
b. Lease liabilities
c. Held for trading liabilities and derivatives liabilities
d. Redeemable preference shares issued.
e. Security deposits and other returnable deposits.
6. Equity instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities.
 CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

7. The guideline in determining whether a financial instrument is a financial liability or an equity

instrument is when they are in accordance with the substance of the contractual agreement and
the definition of a financial liability, financial asset and equity instrument.
8. A Redeemable Preference Share are preferred stocks which the holder has the right to redeem
at a set date; and are classified as financial liability because when the holder exercise its right to
redeem, the issuer is mandatorily obligated to pay for the redemption price.
9. A compound financial instrument is a financial instrument that, from the issuer’s perspective,
contains both a liability and an equity component. These components are classified and
accounted for separately. The fair value of the liability component is first determined. And the
residual amount is allocated to the equity component.
10. The bonds payable issued with share warrants are the bonds that are assigned an amount equal
to the “market value of the bonds ex-warrants”, regardless of the market value of the warrants.
The residual amount or remainder of the issue price shall then be allocated to the warrants.

On the other hand, the convertible bonds are assigned an amount equal to the market value of
the bonds without the conversion privilege. The residual amount or remainder of the issue
price shall then be allocated to the conversion privilege or equity component.

CHAPTER 36

1. The initial measurement of financial asset under PFRS 9, paragraph 5.1.1, provides that at initial
recognition, an entity shall measure a financial asset at fair value plus, in the case of financial
asset not at fair value through profit or loss, transaction costs that are directly attributable to
the acquisition of the financial asset.
2. The subsequent measurement under PFRS 9, paragraph 5.2.1, provides that after initial
recognition, an entity shall measure a financial asset at:
a. Fair value through profit or loss (FVPL);
b. Fair value through other comprehensive income ((FVOCI);
c. Amortized cost
3. The following financial assets shall be measured at fair value through profit or loss:
a. Financial assets held for trading or popularly known as “trading securities”;
b. All other investments in quoted equity instruments;
c. Debt investments that are irrevocably designated on initial recognition as at fair value
through profit or loss;
d. All debt investments that do not satisfy the requirements for measurement at amortized
cost and a fair value through other comprehensive income.
4. Appendix A of PFRS 9 provides that a financial asset is held for trading if:
a. It is acquired principally for the purpose of selling or repurchasing it in the near term;
b. On initial recognition, it is part of a portfolio of identified financial assets that are
managed together and for which there is evidence of a recent actual pattern of short-
term profit taking;
c. It is a derivative, except for a derivative that is a financial guarantee contract or
designated and an effective hedging instrument.
 CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

5. Equity investments that are not held for trading are measured at fair value through other
comprehensive income. It is a financial asset, wherein, at initial recognition, PFRS 9, paragraphs
5.7.5, provides that an entity may make an irrevocable election to present in other
comprehensive income or OCI subsequent changes in fair value of an investment in equity
instrument that is not held for trading.
6. The debt investment at amortized cost was explained by PFRS 9, paragraph, wherein it provides
that a financial asset shall be measured at amortized cost if both of the following conditions are
met:
a. The business model is to hold the financial asset in order to collect contractual cash
flows on specified date;
b. The contractual cash flows are solely payments of principal and interest on the principal
amount outstanding.
7. Under PFRS 9, paragraph 4.1.2A, a financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
a. The business model is achieved both by collecting contractual cash flows and by selling
the financial asset;
b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.
8. There are two treatments of unrealized gain and loss that can be made to measure financial
asset at fair value.
a. Under fair value through profit and loss, the unrealized gain is classified in the income
statement as other income, while the unrealized loss is reported in the income
statement as other expenses.
b. Under fair value through other comprehensive income, the unrealized gain is presented
as component of other comprehensive income in the statement of comprehensive
income. As its counterpart in journalizing, the Financial Asset – FVOCI is normally
classified as noncurrent asset.
9. The PFRS 9, paragraph 3.2.12, provides that on disposal of a financial asset the difference
between the carrying amount and the consideration received is recognized as gain or loss on
disposal to be reported in the income statement.
10. In accordance with PFRS 9, paragraph 5.7.1b, the gain or loss on disposal of equity investment
measured at fair value though other comprehensive income is recognized directly in retained
earnings.