QUESTION #$1(12$ Marks, $24$ Minutes$)$

The articles "Financial Instruments$-$Mountain or Molehill" and "Navigating New Waters" discuss the new guidance on financial instruments. You have just finished reading both articles to get ready for class. You are sitting

down meeting a classmate for coffee. Your friend has asked you the following questions:

"I know that there are different categories in which I can classify financial instruments $-$ loans and receivables, held to maturity, held for trading and available for sale. Once I put a financial instrument in a category can I

reclassify in or out of that category? Is there any time I might be forced to change to a different category and if so why?"

"One of the key principles is the use of fair value. What are some methods of obtaining fair value? What happens if for example, I have shares in another company that I have decided to classify in available for sale and they

are not traded in an active market?"

"How do I treat impairment losses in the different categories?"

"What does the term to recycle mean and explain with a specific example how this works"

Thanks for agreeing to help me out. I really want to learn this so if you could write your answers out in a memo that would be great!!"

Required:

Prepare the memo for your friend answering all of the questions.