PASSWORD PROFESSIONAL TUTORS

FINANCIAL INSTRUMENTS
Deji Awobotu
08022796341

Section 4 of FR Syllabus
Fair value measurement, financial assets and liabilities
a) Differentiate between debt and equity financial instruments.
b) Calculate, where necessary, discuss and account for financial
instruments using amortised cost or fair value measurement in
accordance with the provisions of relevant accounting standards
(IAS 32, IFRS 7, IFRS 9 and IFRS 13) with respect to
measurement (including fair value and amortised cost),
recognition, de-recognition and disclosures, excluding hedging
but including simple impairment cases.
CLASS ROOM CASE STUDIES
CASE STUDY 1
Password wishes to purchase a new ride for its Animation Galaxy
theme park but requires extra funding. On 30 September 20X3,
Password issued the following preference shares:
a) 1 million preference shares for $3 each. No dividends are
payable. Password will redeem the preference shares in three years'
time by issuing ordinary shares worth $3 million. The exact number of
ordinary shares issuable will be based on their fair value on 30
September 20X6.
b) 2 million preference shares for $2.80 each. No dividends are
payable. The preference shares will be redeemed in two years' time
by issuing 3 million ordinary shares.
c) 4 million preference shares for $2.50 each. They are not
mandatorily redeemable. A dividend is payable if, and only if,
dividends are paid on ordinary shares.
Required:
Discuss whether these financial instruments should be classified as
financial liabilities or equity in the financial statements of Coasters for
the year ended 30 September 20X3.
CASE STUDY 2
a) Apapa raised finance on 1 January 20X1 by the issue of a two
year 2% bond with a nominal value of $10,000. It was issued at a
discount of 5% and is redeemable at a premium of $1,075. Issue
costs can be ignored. The bond has an effective rate of interest of
10%.
b) Alaba raised finance by issuing $20,000 6% four year loan notes
on 1 January 20X4. The loan notes were issued at a discount of 10%,
and will be redeemed after four years at a premium of $1,015. The
effective rate of interest is 12%. The issue costs were $1,000.
c) Alafia raised finance by issuing zero coupon bonds at par on 1
January 20X5 with a nominal value of $10,000. The bonds will be
redeemed after two years at a premium of $1,449. Issue costs can be
ignored. The effective rate of interest is 7%.
The reporting date for each entity is 31 December

CASE STUDY 3
On 1 April 20x7, a company issued 40,000 $ redeemable preference
shares with a coupon rate of 8% at par. They are redeemable at a
large premium which gives them an effective finance cost of 12% per
annum.
How would these redeeable preference shares appear in the financial
statements for the years ending 31 March 2008 and 2009?

CASE STUDY 4
On 1 January 20X1, Yinka issued a financial liability for its nominal
value of $10 million. Interest is payable at a rate of 5% in arrears. The
liability is repayable on 31 December 20X3. Yinka trades financial
liabilities in the short-term. At 31 December 20X1, market rates of
interest have risen to 10%.
Required: Discuss the accounting treatment of the liability at 31
December 20X1.
CASE STUDY 5
Ibrahim regularly invests in assets that are measured at fair value
through profit or loss. These asset purchases are funded by issuing
bonds. If the bonds were not remeasured to fair value, an accounting
mismatch would arise. Therefore, Ibrahim designates the bonds to be
measured at fair value through profit or loss. The fair value of the
bonds fell by $30m during the reporting period, of which $10m related
to Ibrahim's credit worthiness.
Required: How should the bonds be accounted for?

CASE STUDY 6
a) On 1 January 20X1 Bolinco issued a $50m three year convertible
bond at par. There were no issue costs. The coupon rate is 10%,
payable annually in arrears on 31 December. The bond is redeemable
at par on 1 January 20X4. Bondholders may opt for conversion in the
form of shares.
The terms of conversion are two 25cent equity shares for every $1
owed to each bondholder on 1 January 20X4. Bonds issued by similar
entities without any conversion rights currently bear interest at 15%.
Assume that all bondholders opt for conversion in shares.
Required: How will this be accounted for by Bolinco?

b) David issues a $100,000 4% three year convertible loan on 1

January 20X6. The market rate of interest for a similar loan without
conversion rights is 8%. The conversion terms are one equity share
($1 nominal value) for every $2 of debt. Conversion or redemption at
par takes place on 31 December 20X8.
Required: How should this be accounted for:
 if all holders elect for the conversion?
 if no holders elect for the conversion?
CASE STUDY 7
b)A company invested $,5000 in 10% loan note. The loan notes are
repayable at a premium after 3 years. The effective rate of
interest is 12%. The company intends to collect the contractual
cashflows which consists solely of repayment of interests and
capital and have therefore chosen to record the financial asset
at amortised cost.
Required What amounts will be shown in Statement of Profit or
Loss and Statement of Financial Position for the financial asset
for years 1 – 3.
c) On 1 January 20x5 FCE bought a $10,000 6% bond for $9,000
incurring acquisition costs of $144. Interest is received annually
in arears and the bond will be redeemed at a premium of $500
over its nominal value on 31 December 20x7. The effective rate
of interest is 11%. The fair value of the bond was as follows :
31 December 20x5 $11,000
31 December 20x6 $10,400
Required: Show how the bond will be accounted for over the
three year period if ;
a. FCE planned to hold the bond until the redemption date
b. FCE may sell the bond if the possibility of an investment with a
higher return arises.

CASE STUDY 8
1. A company invested in 10,000 shares of a listed company in
November 20x7 at a cost of $4.20 per share. At 31 December
20x7 the shares have a market value of $4.90.
Required : Prepare extracts from the Statement of Profit or Loss
for the year ended 31 December 20x7 and a Statement of
Financial Position as at that date.
2. A company invested in 20,000 shares of a listed company in
October 20x7 at a cost of $3.80 per share. At 31 December 20x7,
the shares have a market value of $3.40. The company is not
planning of selling these shares in the short term and elects to
hold them as Fair value through other comprehensive income.
 Prepare extracts from the Statement of profit or loss and other
comprehensive income for the year ended 31 December 20x7
and a Statement of financial position as at that date.

CASE STUDY 9
• An entity has an outstanding receivables balance with a major
customer amounting to $12million, and this was factored to
Finance Co. on 1 September 20x7. The terms of the factoring
were :
Finance Co. will pay 80% of the gross receivable outstanding
amount to the entity immediately.
➢ The balance will be paid (less the charges below) when the debt
is collected in full. Any amount of the debt outstanding after four
months will be transferred back to the entity at its full book value.
➢ Finance Co. will charge 1% per month of the net amount owing
from the entity at the beginning of each month. Finance Co had
not collected any of the factored receivable amount by the year
end.
➢ The entity debited the cash from Finance Co to its bank account
and removed the receivable from its accounts. It has prudently
charged the difference as an administration cost

How should this arrangement be accounted for in the financial

statements for the year ended 30 September 20x7