• Question4,5and7please.

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3101AFE S2 2016 Workshop Questions Topic 9: Financial instruments Question 1: Categorise each of the following common financial instruments as financial assets, financial liabilities or equity instruments - of the issuer or the holder, as specified. (a) Loans receivable (holder) financial asset (b) Loans payable (issuer) financial liability (c) Ordinary shares of the issuer equity (d) The holder's investment in the ordinary shares in part (c) financial asset (e) Redeemable preference shares of the issuer, redeemable at any time at the option of the holder equity (f) The holder's investment in the preference shares in part (e) financial asset Question 2: What factors influence the value of a derivative financial instrument, and how should changes in the value of derivatives be treated from an accounting perspective? The value of a derivative is directly related to another underlying item. For example, a share option - which is a derivative - derives its value from the market value of the underlying shares. Derivative financial instruments create rights and obligations that have the effect of transferring one or more of the fi nancial risks inherent in the underlying primary fi nancial instrument. According to paragraph 9(a) of AASB 139, the value of a derivative: changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rati ng or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying'); In relation to the measurement of derivative financial instruments there is a general requirement, as provided in AASB 139, that financial instruments are to be measured at fair value. As with fi nancial instruments generally, all derivatives are required to be recognised and measured at fair value. Gains and losses on the financial instruments would generally go directly to profit or loss. However, this will be influenced by whether there is an associated hedge that has been designated as a hedge and that has been deemed to be 'effective'. Question 3: What does mark to market mean? Mark to market means that particular assets will be valued on the basis of their net market value, that is, their current selling prices less the costs that will arise in making such a sale. When assets are 'marked to market' it is normal for any gain or loss in the value of the assets to be treated as part of the period's profit or loss (that is, as an income or expense item). Question 4: Arthur Ltd has the following statement of financial position: Statement of financial position before set-of Loans Payable 1,000, 000 Loans receivable 1,200,000 Shareholder's equity 1,000, 000 Non-current assets 800,000 2,000,000 2,000,000 1 Assume that Arthur Ltd has an amount owing to Blayney Ltd of $300,000 and an amount receivable from Blayney Ltd of $400,000. Assuming a right of set-of exists, why would Arthur want to perform a set-of? What would be the impact on the debt to assets ratio? Question 5: Subsequent to initial measurement, financial assets are to be classified as being measured at either fair value or amortised cost. What is the basis for determining whether fair value or amortised cost shall be used? Question 6: Futures contracts are considered to be highly leveraged instruments, with the result that considerable gains or losses can be incurred. What does this mean? A futures contract is a contract to buy or sell an agreed quantity of a particular item, at an agreed price, on a specific date. Substantial gains or losses can be made given that typically only a small deposit is made on the contract. For example, a deposit of 5 per cent may be made on a futures contract that requires the delivery of a commodity for a fixed price of $1 million. If the price of the commodity rises to $1.05 million (a modest increase of 5 per cent) the futures trader has lost $50 000 on the contract (the trader is locked in to receiving only $1 million for an asset that can be acquired on the market for $1.05 million)that is, the trader has lost the entire amount of the deposit as a result of a 5 per cent rise in the price of the commodity. Question 7: Holder Ltd purchases a option contract from Issuer Ltd that gives Holder Ltd the right to acquire 100 000 options in Torquay Ltd for a price (exercise price) of $10.00 per share. When the contract was exchanged the price of Torquay Ltd shares were $9.00 each. The option entitles Holder Ltd to exercise the options and buy the shares any time within the next six months. If the options are not exercised within the six month period, then the options will expire. Required Determine whether a financial liability or financial asset exists from the perspective of Holder Ltd and Issuer Ltd. Further, if the price of shares in Torquay Ltd falls to $5.00, with the result that it is improbable that Holder Ltd will ever exercise the options, will this change the classification of the options as either financial assets or financial liabilities? ****************** 2