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Introduction
FINANCIAL
ASSETS AND
LIABILITIES
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Learning outcomes
Explain what financial instruments are
Define financial instruments in terms of
financial assets and financial liabilities
Distinguish between the categories of
financial instruments
Distinguish between debt and equity
capital
Account for compound instruments
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Introduction
and measurement
of equity dividends
for the issue of redeemable
preference shares and payment of preference
share dividends
Understand the recognition, Presentation and
disclosure of financial instruments
Account
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Accounting standards
Learning outcomes
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Definition of financial
liability/asset
Examples
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Solution
Solution
to receive cash
2. property, plant and equipment; Control
of physical assets creates an opportunity
to generate an inflow of cash or other
assets, but it does not give rise to a
present right to receive cash or other
financial asset
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10
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Classification of financial
instruments
Classification of financial
instruments(asset/liability)
A financial liability has a contractual obligation:
to deliver cash or another financial asset to another
entity, or to exchange financial instruments with
another entity under conditions that are potentially un
favorable, or
A financial asset has 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
favorable
Eg Bonds ,loans ,redeemable preference shares
Classified in to 2
1. Asset /liability instruments
2. Equity instruments
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Classification of financial
instruments(equity)
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Derecognition of financial
asset/liability
when, and only when, the
contractual rights to the cash flows of the
financial asset have expired
Liability when, and only when, the
obligation specified in the contract is
discharged, cancelled or expires
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Measurement of financial
instrument
Asset
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Recognition of financial
instruments
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on its classification
a liability /asset or equity
We will start with Liabilities then assets and
conclude with a equity
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Subsequent measurement of
financial liability
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repayments
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Example
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Solution
annual rate of interest to be charged is 10%
repayments
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Solution
Example
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Solution
1
2
3
4
5
Cash paid 4%
Closing
financial position
Year Finance cost(i/s)
(4,000)
97,468
(4,000)
100,290
(4,000)
103,310
(4,000)
106,542
(4,000)
(110,000)
0
Note the balance at year 5 would have been (110,00) which is repaid
as principle
If interest is paid at the beginning subtract from the opening
balance then calculate the finance charge
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94,830
97,468
100,290
103,310
106,542
Finance
costs 7%
6,638
6,822
7,020
7,232
7,457
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Solution
Year Opening
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1
2
3
4
5
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6,638
6,822
7,020
7,232
7,457
Non-current
liabilities(SFP)
97,468
100,290
103,310
106,542
0
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Solution
Example 2
A company issues 0% loan notes at their
nominal value of K20, 000. The loan notes are
repayable at a premium of K5, 900 after 3 years.
The effective rate of interest is 9%.
a)What amount will be recorded as a
financial liability when the loan notes are
issued?
b)What amounts will be shown in the
statement of profit or loss and statement of
financial position 1 -3-?
c)Show the journals for (a) and (b)
Journal entries
a)when loan is issued
Dr
cashbook
N.C.Liability
94,830
as calculated
as calculated
Payments(year 1-5)
N.C.Liability
Cash book
loan Repayment year 5
N.C.Liability
Cash book
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Cr
94,830
4,000
4,000
110,000
110,000
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Solution
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solution
B)Amount to be shown in income statement
Year
Opening
20,000
Finance
costs 9%
1,800
21,800
1,962
23,762
2,138
Cash paid 0%
Closing
(0)
21,800
(0)
23,762
(0)
(25,900)
The loan notes are repaid at par i.e. K20, 000, plus a premium of K5,
900 at the end of yea 3.
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Solution
Preference shares
K20,000
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Dr cash book
Cr Loan notes
K20,000
as calculated
25,9000
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example
Solution
@ 12% @8%
2008
80,000
2009
83,200
9,600
9,984
(6,400)
(6,400)
i/s
FINANCIAL ASSETS AND LIABILITIES(IFRS
7,IFRS9,IAS 32,39)
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Solution
86,784
SFP
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income statement
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Subsequent measurement of
financial assets
Subsequent measurement of
financial assets
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83,200
Journals
1. When stock is issued
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K6,400
Closing
balance
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Example
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Solution
Year Opening Investment
Income 12%
1
5,000
600
2
5,100
612
3
5,212
625
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Solution
Cash
Closing
received 10%
(500)
5,100
(500)
5,212
(500)
(5,337)
0
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1.
Journals
When loan is given
Dr asset (investment)
Cr Cash book
K5,000
K5,000
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Measurement of Equity
instrument
Measurement of Equity
instrument held for trading
statement
This means that equity instrument is always recorded
at market value in the statement of financial position
The difference between original price and the market
price is taken to the income statement under
investment income
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Measurement of Equity
instrument not held for trading
Example
company in November 2007 at a cost of K4. 20 per
share. At 31 December 2007 the shares a market
value of K4.90. The company is planning on
selling these shares in April 2008.
Prepare extracts from the statement of profit
or loss for the year ended 31 December 2007
and a statement of financial position as at that
date.
Show the journal entries
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solution
This an investment held for trading purposes as the
company plans to sell these shares. The investment
should therefore be measured at fair value through
income statement.
Statement of profit or loss
Investment Income (10,000 x (4.90 4.20))
7,000
Statement of Financial Position
Current assets
Investments (10,000 x 4.90)
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49,000
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Solution
Journals
Initial investment
Dr investment in equity K42,000 (4.2 x 10,000)
Cr cash book
K42,000
Change in market value
Dr investment in equity 700((4.9-4.2)x10,000)
Cr investment income
700
Note if the price has gone down the asset is cr and
investment expense Dr
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Example 2
Solution
The investment is a financial asset at fair value
through through other comprehensive income.
Statement of profit or loss
Revaluation reserves (20,000 x (3.40 3.80)) (8,000)
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Journals
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Initial investment
Dr investment in equity K76,000 (3.8 x 20,000)
Cr cash book
K76,000
Change in market value
Cr investment in equity
8000((3.4-3.8)x20,000)
Dr Revaluation reserves 8000
Note if the price has gone up the asset is Dr and
Reserves Cr
FINANCIAL ASSETS AND LIABILITIES(IFRS
7,IFRS9,IAS 32,39)
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Compound instruments
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IAS
Compound instruments
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Offsetting financial
assets/financial liabilities
Solution
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68.000
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Step 3
Step 1
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PV= FV
or
(1+r) n
PV = FV = ( 1+r)- n
discount factor
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Example
( 1+r)- n
Year Cash
flow
1
1,250
2
3
3
1,250
1,250
25000
Discount factor
( 1+0.1)- 1 =0.909
Fv X discount factor
Present value
1,250X0.909=1,136
( 1+0.1)- 2 =0.826
1+0.1)- 3 =0.751
(
(1+0.1)-3 0.7513
1,250X0.826=1,033
1,250X0.751=939
25000X0.751=18,775
PV=1,136+1033+939+18,782=21,890
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PV =
PV =
1- (1+r)-n
r
+ Par(1+r)-n
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1,250 1- (1.1)-3
0.1
+25000(1+0.1)-3
3,108.56+18,782.87
21,891.43
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End of year
1
2
3
2%
0.98
0.96
0.94
9%
0.92
0.84
0.77
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Solution
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solution
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Journal entry
When the convertible bonds are issued:
Dr Bank
K36, 000
Cr Financial Liability
K29,542
Cr Equity
K6,458
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Solution
Solution
Step 4 Calculate the conversion of bond
Caring amount as at end of year 3
Equity
6,458
Bond
36,000
42,458
120 ordinary shares for each K100 of bond.
(36,000)
I/S
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0
SFP
73
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Disclosure
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Any questions
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