IAS 39 Financial Instruments Recognition and Measurement II

A should continue to recognize the transferred receivables because it has retained substantially all the risks and rewards of the receivables. It has kept all the expected credit risk

The company has sold an investment in shares but retains an option to repurchase the shares at any time at a price equal to their current fair value

Entity A sells a portfolio of accounts receivables for GBP 700,000 and promises to pay up to GBP 50,000 to compensate the buyer if and when any defaults occur. Expected credit losses are significantly less than GBP 50,000

Entity A sells a portfolio of receivables but still collects the receivables for a fixed fee and passes the money received to the purchaser

The company has sold an investment in shares. There are no strings attached to the sale and no other rights or obligations are retained by A

Company A has a loan asset whose initial carrying amount is GBP 500,000 and whose effective interest rate is GBP 6. On 1 January 2006, A is given information that the borrower will probably enter into bankruptcy, and expects to collect only GBP 200,000 of the remaining principal and interest. Entity A expects to recover this amount on 31 December 2006

Impairment GBP 300,000: interest income GBP 11321

Impairment GBP 300,000: interest income GBP 30,000

Impairment GBP 311,321: interest income GBP 11321

Impairment GBP 311,321: interest income GBP 30,000

Which of the following characteristics is not one that relates to a derivative?

It typically requires no or very little initial investment

Its value changes in response to the change in a specified underlying interest rate (for example)

It is settled at a future date

It is acquired for the purpose of generating a profit from short-term fluctuations in market prices

On 1 July 2006, a company enters into a forward contract to purchase on 1 July 2009, a specified number of barrels of oil at a fixed price. The company is speculating that the price of oil will increase and plans to net settle the contract if the price increases. The forward contract has nil cost to the company. The forward contract is not designated as a hedging instrument. At 30 June 2007, the fair value of the forward contract has increased to GBP 700,000. At 30 June 2008, the fair value of the forward contract has declined to GBP 550,000. Show the journal entries for the derivative financial instrument at the company’s year ends of 30 June 2007 and 30 June 2008

Dr derivative asset GBP 700,000 Cr income statement GBP 700,000 (30 June 2007) Dr derivative asset GBP 150,000 Cr income statement GBP 150,000 (30 June 2008)

Dr income statement GBP 700,000 Cr derivative asset GBP 700,000 (30 June 2007) Dr income statement GBP 150,000 Cr derivative asset GBP 150,000 (30 June 2008)

Dr derivative asset GBP nil Cr income statement GBP nil (30 June 2007) Dr income statement GBP nil Cr derivative asset GBP nil (30 June 2008)

Dr derivative asset GBP 700,000 Cr income statement GBP 700,000 (30 June 2007) Dr income statement GBP 150,000 Cr derivative asset GBP 150,000 (30 June 2008)

A company owns a GBP 5 fixed rate loan asset that is measured at amortised cost at GBP 1million The company wants to eliminate the risk of changes in the fair value of the loan asset and so enters into an interest rate swap agreement. The swap is designated as a hedging instrument in a fair value hedge of the loan asset. Market interest rates increase. At the end of the financial year, the company receives GBP 50,000 in interest income on the loan .The change in the fair value of the interest rate swap is an increase of GBP 13,000. At the same time, the fair value of the loan asset decreases by GBP 13000. Which of the following entries are correct at the company’s year end?

Dr Cash GBP 50,000 Cr Interest income GBP 50,000 Dr Derivative GBP 13,000 Cr Reserves GBP 13,000 Dr Reserves GBP 13,000 Cr Loan asset GBP 13,000

Dr Interest income GBP 50,000 Cr Cash GBP 50,000 Dr Derivative GBP GBP 13,000 Cr Income statement GBP 13,000 Dr Income statement GBP 13,000 Cr Loan asset GBP 13,000

Dr Cash GBP 50,000 Cr Interest income GBP 50,000 Dr Loan asset GBP 13,000 Cr Income statement GBP 13,000 Dr Income statement GBP 13,000 Cr Derivative GBP 13,000

Dr Cash GBP 50,000 Cr Interest income GBP 50,000 Dr Derivative GBP 13,000 Cr Income statement GBP 13,000 Dr Income statement GBP 13,000 Cr Loan asset GBP 13,000

The fundamental difference between a cash flow hedge and a fair value hedge is -

Changes in fair value of a cash flow hedge are deferred in reserves; Changes in a fair value hedge are unrecognised until the hedged item is realised

Changes in fair value of a fair value hedge are deferred in reserves; Changes in a cash flow hedge are recognised in the current period

Changes in fair value of a cash flow hedge are offset against the hedged item; Changes in a fair value hedge are recognised in the current period

Changes in fair value of a cash flow hedge are deferred in reserves; Changes in a fair value hedge are recognised in the current period

Which of the following is not objective evidence of the impairment of a financial asset?

A measurable decrease in the estimated future cash flows from a group of financial assets

Significant financial difficulty of the issuer or obligor

Breach of contract, such as a default in principal payments

A temporary decline in the fair value of the asset below its previous carrying amount

Which of the following is not a condition for hedge accounting?

The hedge has actually reduced the company’s exposure to the hedged risk

The effectiveness of the hedge can be measured reliably

The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk

Formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge

Hedges of a net investment in a foreign operation are accounted for like a -

Cash flow hedge

Hedge against loss of profits

Non derivative contract

Fair value hedge

In which of the following circumstances would de-recognition of a financial liability not occur?

A company repurchases a bond in the market which it has issued previously

A payment to discharge an obligation

A written put option expires

A written put option expires The transfer of an amount to a special trust that will not be used for any other purpose than to pay a liability

IAS 39 Financial Instruments Recognition and Measurement II

A should continue to recognize the transferred receivables because it has retained substantially all the risks and rewards of the receivables. It has kept all the expected credit risk

Which of the following characteristics is not one that relates to a derivative?

The fundamental difference between a cash flow hedge and a fair value hedge is -

Which of the following is not objective evidence of the impairment of a financial asset?

Which of the following is not a condition for hedge accounting?

Hedges of a net investment in a foreign operation are accounted for like a -

In which of the following circumstances would de-recognition of a financial liability not occur?

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