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(solution) Question 4, 5 and 7 please. Not sure how to answer the questions,

  • Question 4, 5 and 7 please. 

Not sure how to answer the questions, please provide details answers / solutions. 

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




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






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.




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?


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