Conceptual Framework and Accounting Standards

Midterm Examination

Accountancy Program

Name:_______________________________Date:_____________Set: A

Instructor:___________________________

Test I. Identification. Write the answers on the separate sheet provided

1. It is a financial instrument that gives the holder the right to put the instrument back to
the issuer for cash or another financial asset or is automatically put back to the issuer on
the occurrence of an uncertain future event or the death or retirement of the instrument
holder.

2. It refers to an agreement between two or more parties that has clear economic
consequences that the parties have little, if any, discretion to avoid, usually because the
agreement is enforceable by law

3. Some financial instruments that have both a liability and an equity component from the
issuer's perspective.

4. These are the entity's own equity instruments that it has reacquired and is deducted
from equity

5. These are contracts to purchase or sell a specific quantity of a financial instrument, a

commodity, or a foreign currency at a specified price determined at the outset, with

delivery or settlement at a specified future date.

6. It is a method of calculating the amortized cost of a financial asset or a financial liability

and of allocating the interest income or interest expense over the relevant period

7. It can allow an entity to reflect its risk management activities in the financial statements
by matching gains or losses on hedging instruments (e.g. derivatives) with losses or gains
on the risk exposures they hedge

8. It is a hedge of the exposure to variability in cash flows that (i) is attributable to a

particular risk associated with a recognized asset or liability (such as all or some future
interest payments on variable rate debt) or a highly probable forecast transaction and (ii)
could affect profit or loss.

9.It is any contract that gives rise to financial asset of one enterprise and financial liability
or equity instrument of another enterprise.
10. It is a debt security/instrument that promises to make payments periodically for a
specified period of time.

Test II. Identification. Write FA if Financial Asset, FL if Financial Liability, EI if equity

instrument or N if it does not belong to any group provided. Write the answers on the
separate sheet provided

1. Trademarks

2. Mortgage Payable

3. Unearned Income

4. Prepaid Expense

5. Loans Receivable

6. Investment Property

7. Common Shares

8. Leased Assets

9. Redeemable Preference Share

10. Loan-backed Securities

11. Tax Payable

12. Warranty Obligations

13. Trade Payable

14. Accounts Receivable

15. Cash in bank

Test III. Fill in the blanks. Write the answers on the separate sheet provided

1-8. Financial liability is any liability that is:

a 1. ____________ obligation: 2. to deliver_____________________________ to

another entity; or 3. to _____________ financial assets or financial liability with another
entity under conditions that are 4. ______________________ to the entity; or b) a
contract that will or may be settled in the 5. entity’s own __________ and is:
(i) a 6. ______________ for which the entity is or may be obliged to deliver a variable
number of the 7. entity’s own ______________; or

(ii) a derivative that will or may be settled other than by the 8. exchange of a __________
of cash or another financial asset for a fixed number of the entity’s own equity
instruments.

9. On conversion of a convertible instrument at maturity the entity 9. ______________

the liability component and recognize it as equity.

10- Financial asset ______________________ is an area where many changes have been
introduced by IFRS 9.

11, ____________________ is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument

12._____________________ is an agreement that, should the debtor default on a

secured obligation, the creditor can look only to the securing assets to recover its claim.

13. The________________ is mandatory for certain debt instrument assets unless the fair
value option is taken.

14. A financial instrument is an equity instrument only if: -

a) the instrument includes __________________ to deliver cash or another financial asset

to another entity or to exchange financial asset/liability with another entity under
conditions which are potentially unfavorable to issuer.

14. ________ also prescribes rules for the offsetting of financial assets and financial
liabilities.

15. IFRS 9 has two measurement categories: _______________________________.

17-19. If the financial asset is a debt instrument, management should consider whether
both the following tests are met:
■ The objective of the entity's 17. ___________ is to hold the asset to collect the
18.________________________.

■ The asset's contractual cash flows represent only payments of

19._________________.

20-21. Offsetting:

It specifies that a financial asset and a financial liability should be offset and the net

amount reported when and only when, an enterprise:

has a 20. _______________ right to set off the amounts; and

intends either to settle on a 21.___________, or to realize the asset and settle the liability

simultaneously.

22-25. The 22.______________ cost of a financial asset or financial liability is the amount
at which the financial asset or financial liability is measured at initial recognition minus
23.___________ repayments, plus or minus the 24,___________ amortization using the
effective interest method of any difference between that initial amount and the
25______________, and minus any reduction for impairment or un-collectability.

Test IV. Multiple Choice. Write the letter of the correct answer on the separate sheet
provided

1. It is any contract that gives rise to both a financial asset of one entity and a financial
liability or an equity instrument of another entity.

A. Financial Instrument

B. Equity Instrument

C. Debt Instrument

D. Derivative Instrument

2. A financial asset is any asset that is (choose the incorrect one)

A. Cash

B. A contractual right to receive cash or another financial financial asset from another
entity
C. A contractual right to exchange financial instruments with another entity under
conditions that are potentially unfavorable.

D. An equity instrument of another entity

3. A financial liability is any liability that is a contractual obligation

I. To deliver cash or other financial asset to another entity

II. To exchange financial instruments with another entity under conditions that are all
unfavorable

A. I only

B. II only

C. Both I and II

D. Neither I nor II

4. It is any contract that evidences residual interest in the assets of an entity after
deducting all of its liabilities

A. Equity instrument

B. Debt instrument

C. Loan receivable

D. Investment in Bonds

5. Financial assets include all of the following, except

A. Prepaid expenses

B. Cash in Bank

C. Trade accounts receivable

D. Loans receivable

6. Financial Liabilities include all of the following except

A. Trade accounts payable

B. Notes payable
C. Bonds payable

D. Income taxes payable

7. A preference share that provides for mandatory redemption on a specific date or at the
option of the holder is

A. A financial asset

B. A financial liability

C. An equity instrument

D. Neither a financial liability nor an equity instruments

8. An entity has preference shares in issue. The preference shares are redeemable after 5
years. How will the preference shares and the related preference dividend be presented in
the financial statements of the current year?

Preference shares Preference dividend

A. Non-current liability Deducted from equity

B. Equity Deducted from equity

C. Equity Finance cost

D. Non-current liability Finance cost

9. Which of the following is not a financial instrument?

A. Cash deposited in a bank

B. Gold bullion deposited in a bank

C. A perpetual debt instrument, meaning no maturity date, that pays interest annually
extending into the indefinite future

D. Ordinary share capital issued by another entity

10. Under PFRS 9, which of the following is not a category of financial assets?

A. Financial assets held for sale

B. Financial assets at fair value through profit or loss

C. Financial assets at fair value through other comprehensive income

D. Financial assets at amortized cost

11. All of the following financial assets shall be measured at fair value through profit or
loss, except

A. Financial assets held for trading

B. Financial assets designated on initial recognition as at fair value through profit or loss

C. Financial assets at amortized cost

D. Investments in quoted equity instruments

12. As a rule, transaction costs that are directly attributable to the acquisition of a financial
asset shall be

A. Capitalized as cost of the financial asset

B. Expensed when incurred

C. Charged to retained earnings

D. Included as a component of other comprehensive income

13. If the financial asset is held for trading or if the financial asset is measured at fair value
through profit or loss, transaction costs directly attributable to the acquisition shall be

A. Capitalized as cost of the financial asset

B. Expensed immediately when incurred

C. Deferred and amortized over a reasonable period

D. Included as a component of other comprehensive income

14. Depending on the business model for managing financial assets, an entity shall classify
financial assets subsequent to initial recognition at

A. Fair value

B. Amortized Cost

C. Either fair value or amortized cost

D. Neither fair value nor amortized cost

15. Under PFRS 9, a financial asset shall be measured subsequently at amortized cost
when

I. The business model of the entity is to hold the financial asset in order to collect
contractual cash flows on specified dates.

II. The contractual cash flows are solely gains and payments of principal and interest on
the principal amount outstanding

A. I only

B. II only

C. Either I or II

D. Both I and II

16. The irrevocable election to present subsequent changes in fair value in other
comprehensive income is applicable only to

A. Investment in equity instrument that is not held for trading

B. Investment in equity instrument that is held for trading

C. Financial Asset measured at amortized cost

D. Financial asset measured at fair value

17. The contractual agreement between an investor and the bond issuer is contained in a
formal document known as

A. Contract of debt

B. Bond indenture

C. Bond Certificate

D. Bond agreement

18. IFRS 9 is effective starting

A. January 2, 2017

B. January 1, 2018

C. January 2, 2018

D. January 1, 2019
19. Contracts that give the purchaser the right, but not the obligation, to buy or sell a
specified quantity of a particular financial instrument, commodity, or foreign currency, at a
specified price , during or at a specified period of time

A. Choice contracts

B. Puttable contracts

C. Option contracts

D. Rightful contracts

20. The test that will determine whether or not receipts are of principal repayments and
interest only

A. Business flow administration test

B. Business model test

C. Cash basis model test

D. Cash flow characteristics test

Test V. True or False. Write A if the Statement is True, B if the statement is False. Write the
answers on the separate sheet provided

1. If a non-recourse provision exists, the debtor is required to assess (to ‘look through to’)
the particular underlying assets or cash flows to determine whether the financial asset's
contractual cash flows are solely payments of principal and interest

2. IFRS 9 introduces more significant changes to the types of items that are eligible for
hedge accounting and how entities can designate those hedged items

3. An entity may at initial recognition revocably designate a financial asset at fair through
profit or loss if doing so eliminates or significantly reduces a measurement or recognition
inconsistency.

4. An entity may, at initial recognition, revocably designate a financial liability as

measured at fair value through profit or loss when permitted by this IFRS or when doing
so results in more relevant information.

5. IFRS 9 removes the requirement in IAS 39 to measure unquoted equity investments at

cost when the fair value cannot be determined reliably

6. All derivatives in scope of IFRS 9, including those linked to unquoted equity

investments, are measured at cost.

7. PAS 32 applies to instruments designated to be measured at fair value through profit or

loss and contract for the future purchase or delivery of a commodity or other nonfinancial
items that can’t be settled out

8. Under equity instruments, the entity has no obligation to pay cash or another
non-financial asset.

9. Treasury shares are an entity’s own shares that is currently issued and will be
reacquired but not retired.

10. Offsetting of a financial asset is permitted if the entity has the legal right of set off or
the intention to settle the amounts on a net basis.

11. A puttable instrument includes a contractual obligation for the holder to redeem or
repurchase the instrument.

12. The FVTOCI category for debt instruments is not the same as the available-for-sale
category under IAS 39.

13. The issuer of a financial instrument shall classify the instrument, or its components
parts, on initial recognition as a financial liability, financial asset or an equity instrument in
accordance with the form of the contractual arrangement and definitions of a financial
liability, a financial asset and equity instrument.

14. Under FVPL, The asset is measured at fair value; changes in fair value are recognized
in profit and loss as they arise.

15. Dividends are recognized when the entity’s right to receive payment is established, it is
probable the economic benefits will flow to the entity and the amount can be measured
reliably.

16. The application of the hedge accounting requirements in IFRS 9 is optional.

17. Callable preference shares are preferred stocks which the holder has the right to
redeem at a set date.

18. Callable preference shares are classified as equity instrument because the right to call
is at the discretion of the issuer.

19. When calculating the effective interest rate, an entity shall estimate cash flows
considering all contractual terms of the financial instrument but shall not consider future
credit losses.
20. The objective of this IAS 32 is to enhance user’s understanding of the significance of
financial instruments to an entity’s financial position, performance and cash flows.

21. Costs of issuing or reacquiring equity instruments (other than in a business

combination) are accounted for as a deduction from equity, net of any related income tax
benefit.

22. An embedded derivative is a component of a hybrid contract that also includes a

derivative host—with the effect that some of the cash flows of the combined instrument
vary in a way similar to a stand-alone derivative.

23. A debt instrument that meets the cash flow characteristics test and is not designated
at FVTPL under the fair value option must be measured at FVTOCI if it is held within a
business model whose objective is to hold financial assets in order to collect contractual
cash flows.

24. The version of IFRS 9 issued in 2014 supersedes all previous versions and is
mandatorily effective for periods beginning on or after 1 January 2018 with early adoption
permitted.

25. The transaction costs of an equity transaction are accounted for as a deduction from
equity to the extent they are incremental gain directly attributable to the equity
transaction that otherwise would have been avoided.

26. On conversion of a convertible instrument at maturity the entity derecognizes the

liability component and recognize it as equity.

27. When the initial carrying amount of a compound financial instrument is required to be
allocated to its equity and liability components, the equity component is assigned the
residual amount after deducting from the fair value of the instrument as a whole the
amount separately determined for the liability component.

28. Under IFRS 9 all financial instruments are initially measured at fair value plus or minus,
in the case of a financial asset or financial liability not at fair value through profit or loss,
transaction costs.

29. Futures are generic exchange-traded, whereas forwards are branded and tailored.

30. I will pass this exam.