BALIUAG UNIVERSITY

CPA Review Program

Theory of Accounts (FAR & AFAR)
_____________________________________________________________________________________________
Module 4: Financial Assets LVC

I. Financial Instruments Presentation (IAS 32)

 Definition
 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.
 A financial asset is any asset that is:
a. Cash
b. An equity instrument of another entity
c. A contractual right:
i. To receive cash or another financial asset from another entity
ii. To exchange financial assets or financial liabilities with another entity under conditions that are
potentially favorable to the entity
d. A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to receive a variable number of the
entity’s own equity instruments.
ii. A derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity’s own equity instruments.

II. Financial Instruments (IFRS 9)

 Financial asset classification
1. Financial asset at fair value
a. Through profit or loss
b. Through other comprehensive income
2. Financial asset at amortized cost
 Initial measurement of financial instruments
Financial Asset Initial Measurement
FVTPL
FVTOCI
Amortized cost
 Subsequent measurement of financial instruments
 Where assets are measured at fair value, gains and losses are either recognized entirely in:
a) Profit or loss if financial asset FVTPL
b) Other comprehensive income if financial asset FVTOCI
 The classification of a financial asset is made at the time it is initially recognized, namely when the entity
becomes a party to the contractual provisions of the instrument. If certain conditions are met, the
classification of an asset may subsequently need to be reclassified.
 Classification Guidelines
Is the objective of entity’s Is the financial asset held to
business model to hold the no achieve an objective by both no
financial assets to collect collecting contractual cash
contractual cash flows? flows and selling financial
assets?
yes yes

Do contractual cash flows represent solely payments of principal and no

interest?

Does the company apply the fair value option to eliminate an yes
accounting mismatch?
no no

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 Options for classification
Instrument Options
Even if an instrument meets the requirements to be measured at amortized cost or
FVTOCI, IFRS 9 contains an option to designate, at initial recognition, a financial asset
as measured at FVTPL if doing so eliminates or significantly reduces a measurement or
recognition inconsistency ('accounting mismatch').
If instrument is not held for trading, an entity can make an irrevocable election at
initial recognition to measure it at FVTOCI.
 Accounting impact of classification
Category Impact
 The asset is measured at the amount recognized at initial recognition minus principal
repayments, plus or minus the cumulative amortization of any difference between
that initial amount and the maturity amount, and any loss allowance.
Amortized cost  Interest income is calculated using the effective interest method and is recognized in
profit and loss.
 Changes in fair value are recognized in profit and loss when the asset is derecognized
or reclassified.
 The asset is measured at fair value.
 Debt instruments. Interest revenue, impairment gains and losses, and a portion of
foreign exchange gains and losses, are recognized in profit and loss on the same basis
as for Amortized Cost assets. Changes in fair value are recognized initially in Other
Comprehensive Income (OCI). When the asset is derecognized or reclassified, changes
in fair value previously recognized in OCI and accumulated in equity are reclassified to
profit and loss on a basis that always results in an asset measured at FVOCI having the
FVTOCI
same effect on profit and loss as if it were measured at Amortized Cost.
 Equity instruments. 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. Dividends are recognized in profit and loss
unless they clearly represent recovery of a part of the cost of the investment, in which
case they are included in OCI. Changes in fair value are recognized in OCI and are
never recycled to profit and loss, even if the asset is sold or impaired.
 The asset is measured at fair value. Changes in fair value are recognized in profit and
FVTPL
loss as they arise.
 Classification (IFRS 9 vs. IAS 39)
IFRS 9 IAS 39
Amortized cost Loans and receivables
FVTOCI Available for sale securities
FVTPL FVTPL (trading securities)
Held to maturity
 Reclassification
 For financial assets, reclassification is required between FVTPL, FVTOCI and amortized cost; if and only if the
entity’s business model objective for its financial assets changes so its previous business model assessment
would no longer apply.
 IFRS 9 does not allow reclassification:
a) When the fair value option has been elected in any circumstance for a financial asset
b) Equity investments (measured at FVTPL or FVTOCI)
c) Financial liabilities
 In general, reclassifications of financial assets are accounted for prospectively under IFRS 9; i.e., they do not
result in restatements of previously recognized gains, losses or interest income.
From To Requirement
Amortized Cost FVPL Measure fair value at reclassification date and recognize difference
between fair value and amortized cost in profit and loss.
FVPL Amortized Cost Fair value at the reclassification date becomes the new gross carrying
amount.
Amortized Cost FVOCI Measure fair value at reclassification date and recognize any difference
in OCI.
FVOCI Amortized Cost Cumulative gain or loss previously recognized in OCI is removed from
equity and applied against the fair value of the financial asset at the
reclassification date.

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From To Requirement
FVPL FVOCI Asset continues to be measured at fair value but subsequent gains and
losses are recognized in OCI rather than profit and loss.
FVOCI FVPL Asset continues to be recognized at fair value and the cumulative gain or
loss previously recognized in other comprehensive income is reclassified
from equity to profit and loss.
 Derecognition
 An entity shall derecognize a financial asset when, and only when:
a) the contractual rights to the cash flows from the financial asset expire
b) it transfers the financial asset and the transfer qualifies for derecognition.
 Before evaluating whether, and to what extent, derecognition is appropriate, an entity determines whether
those requirements should be applied to a part of a financial asset (or a part of a group of similar financial
assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows:
a) Derecognition requirements are applied to a part of a financial asset if, and only if, the part being
considered for derecognition meets one of the following three conditions.
i. The part comprises only specifically identified cash flows from a financial asset (or a group of similar
financial assets).
ii. The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset
(or a group of similar financial assets).
iii. The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows
from a financial asset (or a group of similar financial assets).
b) In all other cases, derecognition requirements are applied to the financial asset in its entirety.

III. Impairment (IFRS 9)

 Loans and Receivables
 Long-term notes and loan receivable shall be subsequently measured at amortized cost using effective
interest method.
 Initial measurement of loan receivable = Principal minus direct origination fees received from borrower
plus direct origination costs incurred by the lender.
 Accounting for amortization of loan receivable:
Case Difference Amortization
Direct origination fees > Direct origination costs Unearned interest income Increase interest income
Direct origination costs > Direct origination fees Direct origination costs Decrease interest income
 Write offs
 For assets classified as Amortized Cost, an entity must write off a loan or receivable when no reasonable
expectation of recovering the asset or a portion thereof (e.g., a specified percentage) exists.
 Commitments and financial guarantees
 IFRS 9 modifies the basic requirement in IAS 39 for measuring commitments to provide loans at a below-
market interest rate, and financial guarantee contracts when those instruments are not measured at
FVPL.
 Under both standards, the basic requirement is to measure such liabilities at the higher of the amount
initially recognized less the cumulative amount of income recognized or any loss accruing under these
arrangements.
 However, under IAS 39, the loss amount is determined in accordance with IAS 37, Provisions,
Contingent Liabilities and Contingent Assets.
 Under IFRS 9, it is determined by the amount of the loss allowance determined under the expected
credit loss impairment requirements.
 Impairment model
 IFRS 9 establishes a new model for recognition and measurement of impairments in loans and receivables
that are measured at Amortized Cost or FVOCI—the so-called “expected credit losses” model.
 This is the only impairment model that applies in IFRS 9 because all other assets are classified and measured
at FVPL or, in the case of qualifying equity investments, FVOCI with no recycling to profit and loss.
 Expected credit losses
 Expected credit losses are calculated by:
a) identifying scenarios in which a loan or receivable defaults;
b) estimating the cash shortfall that would be incurred in each scenario if a default were to happen;
c) multiplying that loss by the probability of the default happening;
d) summing the results of all such possible default events.

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 Because every loan and receivable has at least some probability of defaulting in the future, every loan or
receivable has an expected credit loss associated with it—from the moment of its origination or acquisition.
 Expected credit losses are required to be measured through a loss allowance at an amount equal to:
a. The 12-month expected credit losses (expected credit losses that result from those default events on
the financial instrument that are possible within 12 months after the reporting date); or
b. Full lifetime expected credit losses (expected credit losses that result from all possible default events
over the life of the financial instrument).
 Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted
amount that is determined by evaluating the range of possible outcomes as well as incorporating the time
value of money.
 Also, the entity should consider reasonable and supportable information about past events, current
conditions and reasonable and supportable forecasts of future economic conditions when measuring
expected credit losses.
 Impairment loss = Carrying amount of loan receivable minus present value of cash flows.
 Allowance for loan impairment is recorded and the allowance account shall be amortized subsequently to
interest income.

IV. Hedge Accounting (IFRS9)

 Hedge accounting requirement
 The hedge accounting requirements in IFRS 9 are optional.
 If certain eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk
management activities in the financial statements by matching gains or losses on financial hedging
instruments with losses or gains on the risk exposures they hedge.
 Qualifying criteria for hedge accounting
 A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
1. The hedging relationship consists only of eligible hedging instruments and eligible hedged items.
2. At the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.
3. The hedging relationship meets all of the hedge effectiveness requirements.
 Hedging instruments
 Only contracts with a party external to the reporting entity may be designated as hedging instruments.
 A hedging instrument may be a derivative (except for some written options) or non-derivative financial
instrument measured at FVTPL unless it is a financial liability designated as at FVTPL for which changes due
to credit risk are presented in OCI. For a hedge of foreign currency risk, the foreign currency risk component
of a non-derivative financial instrument, except equity investments designated as FVTOCI, may be
designated as the hedging instrument.
 IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of a 10 year
instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9 also allows only the
intrinsic value of an option, or the spot element of a forward to be designated as the hedging instrument.
An entity may also exclude the foreign currency basis spread from a designated hedging instrument.
 IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging instrument.
 Combinations of purchased and written options do not qualify if they amount to a net written option at the
date of designation.
 Hedged items
 A hedged item can be a/an
a. Recognized asset or liability
b. Unrecognized firm commitment
c. Highly probable forecast transaction
d. Net investment in a foreign operation
 The hedged item must generally be with a party external to the reporting entity, however, as an exception
the foreign currency risk of an intragroup monetary item may qualify as a hedged item in the consolidated
financial statements if it results in an exposure to foreign exchange rate gains or losses that are not fully
eliminated on consolidation.
 Foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in
consolidated financial statements provided that the transaction is denominated in a currency other than
the functional currency of the entity entering into that transaction and the foreign currency risk will affect
consolidated profit or loss.
 An entity may designate an item in its entirety or a component of an item as the hedged item. The
component may be a risk component that is separately identifiable and reliably measurable; one or more
selected contractual cash flows; or components of a nominal amount.

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 For a hedge of a net position whose hedged risk affects different line items in the statement of profit or
loss and other comprehensive income, any hedging gains or losses in that statement are presented in a
separate line from those affected by the hedged items.
 Hedge effectiveness requirements
 In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:
a. There is an economic relationship between the hedged item and the hedging instrument.
b. The effect of credit risk does not dominate the value changes that result from that economic
relationship.
c. The hedge ratio of the hedging relationship is the same as that actually used in the economic hedge
 Rebalancing and discontinuation
 If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio
but the risk management objective for that designated hedging relationship remains the same, an entity
adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the
qualifying criteria again.
 An entity discontinues hedge accounting prospectively only when the hedging relationship (or a part of a
hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This includes instances
when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge accounting
can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship).
 Time value of options
 When an entity separates the intrinsic value and time value of an option contract and designates as the
hedging instrument only the change in intrinsic value of the option, it recognizes some or all of the change
in the time value in OCI which is later removed or reclassified from equity as a single amount or on an
amortized basis (depending on the nature of the hedged item) and ultimately recognized in profit or loss.
This reduces profit or loss volatility compared to recognizing the change in value of time value directly in
profit or loss.
 Forward points and foreign currency basis spreads
 When an entity separates the forward points and the spot element of a forward contract and designates as
the hedging instrument only the change in the value of the spot element, or when an entity excludes the
foreign currency basis spread from a hedge the entity may recognize the change in value of the excluded
portion in OCI to be later removed or reclassified from equity as a single amount or on an amortized basis
(depending on the nature of the hedged item) and ultimately recognized in profit or loss. This reduces
profit or loss volatility compared to recognizing the change in value of forward points or currency basis
spreads directly in profit or loss.
 Credit exposures designated at FVTPL
 If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial instrument
(credit exposure) it may designate all or a proportion of that financial instrument as measured at FVTPL if:
a. The name of the credit exposure matches the reference entity of the credit derivative (‘name
matching’).
b. The seniority of the financial instrument matches that of the instruments that can be delivered in
accordance with the credit derivative.
 If designated after initial recognition, any difference in the previous carrying amount and fair value is
recognized immediately in profit or loss.
 An entity discontinues measuring the financial instrument that gave rise to the credit risk at FVTPL if the
qualifying criteria are no longer met and the instrument is not otherwise required to be measured at
FVTPL. The fair value at discontinuation becomes its new carrying amount.
 Summary of accounting for hedging instruments
Hedged Item Apply Hedge Type of hedge Accounting Treatment
Acctg.
Exposed asset No Undesignated Recognized gain or loss in hedging instrument in P/L
or liability hedge same with hedged item
Firm Yes Fair value Recognized gain or loss in hedging instrument in P/L
commitment hedge same with hedged item (gain/loss on hedging instrument
and hedged item are the same)
(Cash flow At the settlement date, firm commitment account will be
hedge may be adjusted to the asset or to profit or loss.
used see below)
Forecasted Yes Cash flow Recognized gain or loss in hedging instrument in OCI.
transaction hedge Transfer the OCI to P/L if it actually impacts profit or loss.
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Hedged Item Apply Hedge Type of hedge Accounting Treatment
Acctg.
At the settlement date, hedging instrument gain/loss –
OCI will be adjusted to the asset or to profit or loss.
Net investment Yes Net Recognized gain or loss in hedging instrument in OCI.
in foreign entity investment Transfer the OCI to P/L upon disposal of investment
hedge – cash
flow hedge
Speculation (no No Not applicable Recognized gain or loss of the derivative in P/L.
hedge item) The derivative is measured at fair value.
 Summary of the types of hedge
Fair Value Hedge Cash Flow Hedge Net Investment Hedge
Purpose Hedge of the exposure to Hedge of the exposure to Hedge future changes in
changes in fair value. variability in cash flows currency exposure of a
net investment in a
foreign operation.
Examples of Recognized asset or liability. Recognized asset or liability Foreign subsidiaries.
hedged items Unrecognized firm (such as all or some future
commitment. interest payments on
A component of any such variable-rate debt).
item, that is attributable to a Highly probable forecast
particular risk and could affect Transaction.
profit or loss (or OCI for Firm commitment.
equity instrument)
Gain/loss on Recognized in profit or loss. Effective hedge is recognized Effective hedge is
hedging Remain in OCI if the hedge in OCI. recognized in OCI.
instrument item is an equity instrument Ineffective hedge to P/L. Ineffective hedge to P/L.
designated as FA-FVTPL
Definition of terms
Accounts receivable are amounts due from customers for goods or services which have been provided in the
normal course of business operations.
Amortised cost of financial asset or financial liability is the amount at which the asset or liability was measured
upon initial recognition, minus principal repayments, plus or minus the cumulative amortisation of any premium or
discount, and minus any write-down for impairment or uncollectibility.
Carrying amount is the amount at which an asset is presented in the statement of financial position. Cash refers to
cash on hand and demand deposits with banks or other financial institutions.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash
which are subject to an insignificant risk of changes in value.
Compound instrument is an issued single financial instrument that contains both liability and equity (e.g. a
convertible loan.
Control is the ability to direct the strategic and financial and operating policies of an entity so as to obtain benefits
from its activities.
Credit risk is the risk that a loss may occur from the failure of one party to a financial instrument to discharge an
obligation according to the terms of a contract.
Derecognition is the removal of a previously recognised financial asset or liability from an entity’s statement of
financial position.
Derivative is a financial instrument or other contract where its value changes in response to changes in a specified
underlying; requires little or no initial net investment relative to the other types of contracts that have a similar
response to changes in market conditions; and (3) it is settled at a future date.
Effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or
group of financial instruments) and of allocating the interest income or expense over the relevant period.
Effective interest rate is the rate that exactly discounts estimated future cash flow to the net carrying amount of
the financial instrument through the expected life of the instrument (or a shorter period, when ppropriate).
Embedded derivative is a component of a hybrid (combined) financial instrument that also includes a non-
derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way
similar to a standalone derivative.
Equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its
liabilities.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and
willing parties in an arm’s-length transaction.
Financial instrument is any contract which gives rise to both a financial asset of one entity and a financial liability or
equity instrument of another entity.
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Financial asset A contractual right to receive cash or another financial asset from another entity; or to exchange
financial instruments with another entity under conditions that are potentially favourable.
Financial liability A contractual obligation to to deliver cash or another financial asset to another entity; or to
exchange financial instruments with another entity under conditions which are potentially unfavourable to the
entity.
Hedging involves designating one or more hedging instruments such that the change in fair value or cash flows of
the hedging instrument is an offset, in whole or part, to the change in fair value or cash flows of the hedged item.
Hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange
rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash
flows are expected to offset changes in the fair value or cash flows of a designated hedged item.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed
maturities that the entity has the positive intent and ability to hold to maturity.
Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial
liabilities.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market, other than: those at fair value through profit or loss; those designated as available-for-sale;
and those which the holder may not recover substantially all of its initial investment.
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices.
Market value is the amount obtainable from a sale, or payable on acquisition, of a financial instrument in an active
market.
Other price risk is the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused
by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial
instruments traded in the market.
Transaction costs are the incremental costs directly attributable to the acquisition or disposal of a financial asset or
liability.

Multiple Choice Questions

1. Which of the following loan commitments are within the scope of IFRS 9?
A. Loan commitments that the entity designates as financial liabilities at fair value through profit or loss
B. Loan commitments that can be settled net in cash or by delivering or issuing another financial instrument
C. Commitments to provide a loan at a below-market interest rate
D. All of the above
2. S1. An entity shall recognize a financial asset or a financial liability in its statement of financial position when, and
only when, the entity becomes party to the contractual provisions of the instrument.
S2. IFRS9 classifies long term debt securities when the objective of entity’s business model is to hold the financial
assets to collect contractual cash flows (principal and interest) as held to maturity.
Which statement is true
A. Statement one C. Both statements
B. Statement two D. None of the statements
3. Which of the following conditions give rise to derecognition of a part of an asset under IFRS 9?
A. The part considered for derecognition comprises only a fully proportionate share of specifically identified cash
flows from a financial asset (or a group of similar financial assets)
B. The part considered for derecognition comprises only specifically identified cash flows from a financial asset
C. The part considered for derecognition comprises only a fully proportionate share of the cash flows from a
financial asset (or a group of similar financial assets)
D. All of the above
4. The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s
________________ that use financial instruments to manage ________________ arising from particular risks that
could affect profit or loss.

A. Risk management activities; exposures C. Risk diversification activities; credit concentration

B. Risk mitigation activities; credit losses D. Risk mitigation activities; credit exposures
5. Which of the following are exceptions for IFRS 9 application?
A. Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument as if
the contracts were financial instruments
B. Derivatives that are embedded in leases
C. Contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-
financial item in accordance with the entity’s expected purchase, sale or usage requirements
D. All of the above
6. Which of the following cannot be a hedged item?
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A. Recognized asset C. Unrecognized firm commitment
B. Forecast transaction D. None of the above
7. 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.
A. Puttable instrument C. Equity instrument
B. Callable instrument D. Compound financial instrument
8. Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial
liability.
A. Initial direct costs C. Direct origination costs
B. Transaction costs D. Bond issue costs
9. The amount at which the financial asset or financial liability is measured at initial recognition minus the principal
repayments, plus or minus the cumulative amortization using the effective interest method of any difference
between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
A. Financial liability C. Amortized cost
B. Held-to-maturity instrument D. Credit-impaired financial asset
10. The rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial
asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial
liability.
A. Nominal interest rate C. Stated interest rate
B. Market interest rate D. Effective interest rate
11. Financial asset is any asset that is (choose the exception)
A. Cash
B. A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity
instruments.
C. A contractual right to receive cash or another financial asset from another entity.
D. An equity instrument of another entity.
12. Transaction cost is not included in the initial recognition of financial asset at
A. FVTPL C. Amortized cost
B. FVOCI D. B and C
13. Changes in fair value of financial assets are included in the net income for financial asset at
A. FVTPL C. Both A and B
B. FVOCI D. Neither A nor B
14. Cash flow characteristic test relates to cash flow from
A. Interest C. Interest, principal and proceeds from sale
B. Interest and principal D. Interest, principal, proceeds from sale and transaction
cost
15. Debt instrument may be classified as financial asset at (choose the exception)
A. FVTPL C. Amortized cost
B. FVOCI D. None of the foregoing
16. Equity instrument may be classified as financial asset at (choose the exception)
A. FVTPL C. Amortized cost
B. FVOCI D. None of the foregoing
17. Financial instruments measured at FVOCI where the changes in fair value may be recycled to profit or loss
A. Debt instruments C. Both A and B
B. Equity instruments D. Neither A nor B
18. To eliminate accounting mismatch, financial asset at initial recognition may irrevocably be designated as financial
asset at
A. FVTPL C. Amortized cost
B. FVOCI D. None of the foregoing
19. If the financial asset is held within a business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets; and the contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount outstanding, the instrument shall be
initially measured at
A. FVTPL C. Amortized cost
B. FVOCI D. None of the foregoing
20. Equity instrument not held for trading may be irrevocably elected at initial recognition to be measured at
A. FVTPL C. Amortized cost
B. FVOCI D. None of the foregoing
21. If the entity has neither retained nor transferred substantially all of the risks and rewards of the financial asset and
the entity has relinquished control, then
A. The entity continues to recognize the asset to the extent to which it has a continuing involvement in the financial
asset.
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B. The entity shall defer derecognition until all of the risks and rewards are transferred.
C. Derecognition of the financial asset is appropriate.
D. None of the foregoing.
22. Which statement is incorrect regarding reclassification of financial asset?
A. Reclassification is allowed when (and only when) an entity changes its business model for managing financial
assets. Reclassification is according to the new business model.
B. The reclassification should be applied prospectively from the reclassification date.
C. Where FVOCI option is elected for equity instrument, reclassification is not allowed.
D. None of the foregoing.
23. Which of the following circumstances are likely to suggest cost is not an appropriate estimate of fair value in
accordance with IFRS 9?
i. The CEO retires at the end of his contracted term.
ii. There in a significant improvement in the market for the company’s product.
iii. There in a significant downturn in the economy where the company operates.
iv. There in an allegation of low-level fraud by an employee of the company. Management does not consider
the fraud to be significant.
A. i, ii and iii C. ii and iii
B. i and ii D. All of the above.
24. A company holds two main portfolio of securities. Both portfolios provide cash flows that meet the test of solely
payments of interest and principal under IFRS 9. Securities in portfolio A are sold on a regular basis based on the
movement of prices of securities. Securities in portfolio B are never sold but are held to maturity. How should the
portfolio be classified and measured?
A. Both portfolio as amortized cost C. Portfolio A at amortized cost and portfolio B at fair value
B. Both portfolio at fair value D. Portfolio A at fair value and portfolio B at amortized cost
25. Which of the following would not be a financial instrument according to the definition in IAS 32?
A. Cash in bank C. Prepayment from insurance contract
B. Bill of exchange D. Forward exchange contract
26. Market risk include which of the following risks?
i. Currency credit risk ii. Currency risk iii. Liquidity risk iv. Interest rate risk
A. ii and iv C. ii, iii and iv
B. iii and iv D. all of the above
27. According to IAS 32, one of the following would be classified as equity?
A. Redeemable preference shares with fixed redemption date.
B. Redeemable preference shares redeemable at the discretion of the issuer.
C. Redeemable preference shares redeemable in 5 years at the request of the holder.
D. Redeemable preference shares redeemable at the discretion of the issuer who has given formal notification of
such intention.
28. XYZ issues a note with no maturity that is redeemable at the discretion of the issuer but can be converted by the
holder to ordinary shares of the issuer at any time. According to IAS 32, XYZ should classify the instrument as
A. Equity because the holder is exposed to changes in the fair value of the issuer’s shares.
B. Liability because the holder is exposed to changes in the fair value of the issuer’s shares.
C. Equity because the holder is not exposed to changes in the fair value of the issuer’s shares.
D. Liability because the holder is not exposed to changes in the fair value of the issuer’s shares.
29. Which of the following statements regarding reclassification under IFRS 9 is correct?
A. Reclassification of financial liability is prohibited.
B. Reclassification of financial asset is permitted and is likely to be frequent.
C. Reclassification of financial asset at amortized cost to fair value is prohibited.
D. Reclassification of financial asset at to prohibited fair value is amortized cost.
30. XYZ issues a 5-year interest bearing bonds. The bonds are convertible into fixed number of equity instruments of
the issuer at the discretion of the holder. How should the bonds be classified according to IAS 32?
A. Equity C. Either equity or liability
B. Liability D. As having liability and equity components

“Therefore I tell you, whatever you ask for in prayer, believe that you have received it, and
it will be yours.” Mark 11:24

“I believe if you keep your faith, you keep your trust, you keep the right attitude, if you're
grateful, you'll see God open up new doors.” Joel Osteen

Module 4 Page 9 of 9