topic 2.2 quiz and discussion section 11 basic financial...

1 The IFRS for SMEs

Topic 2.2

Quiz and Discussion

Section 11 Basic Financial Instruments

Michael Wells

© 2011 IFRS Foundation 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

2 Section 11 – Case

Below are items in an entity’s trial balance.

•Which items are in the scope of Section 11?

•For those that are in, how to measure after initial recog-

nition? FVTPL? Amortised cost? Cost less impairment?

Subsequent Measurement?

Account In Sec

11?

FV

TPL

Amor

-tised

Cost

Cost less

Impair-

ment

Opening Retained

Earnings

No (see

11.7(b))

Entity’s own equity is

covered by Section 22

Continued...




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Share capital No (see

11.7(b))

Entity’s own equity is


PP&E No Not a financial asset

Intangible assets No Not a financial asset

Investment in

Associate

No (see

11.7(a))

Associates are covered by

Section 14

Deferred tax asset No Not a financial asset –

statutory, not contractual




Account In Sec

11?

FV

TPL Amor-

tised

Cost

Cost less

Impair-

ment

Inventory No Not a financial asset

Trade receivables Yes (see

para

11.14(a))

Measure at

undiscounted

cash to be

received (ie net of

impairment) unless

a financing

transaction




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Cash Yes Measure at cash equivalent

in functional currency

Investment in non-

puttable listed

ordinary shares

Yes

(11.14(c)

(i))

Quoted

market

price




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Investment in

non-puttable non-

convertible

unlisted

preference

shares

Yes

(11.14(c)

(ii))

If FV is

reliably

measur

able

If FV not

reliably

measurable




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Investment in

fixed interest

term bonds

Yes

(unless

violates

11.9(b)-(d))

Yes

Investment in

mutual fund

(holds debt and

equity)

No. Not in

11.9.

Will be at FVTPL under Sec 12

because FV is reliably

measurable.




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Bank deposit (fixed

term and interest)

Yes

(unless

violates

11.9(b)-(d))

Yes

Loan receivable

from employee

(fixed term & int.)

Yes

(unless

violates

11.9(b)-(d))

Yes




Account In Sec

11?

FV

TPL

Amortised

Cost

Cost less

Impair-

ment

Loan

receivable

from

associate, no

interest,

repayable on

demand

Yes

(unless

violates

11.9(b)-

(d))

Yes

(discounted

from date

expected to

be received)




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Bank loan payable

(fixed term & int.)

Yes

(unless

violates

11.9(b)-

(d))

Yes

Liability for long-term

employee benefits

No (see

11.7(d))

Employee benefits are





Account In Sec

11?

FV

TPL

Amortised

Cost

Cost less

Impair-

ment

Obligations

under finance

leases

No (see

11.7(c))

Leases are covered by Section 20

Trade payables Yes (see

para

11.14(a))

Measure at

undiscounted cash

to be paid unless a

financing

transaction




Account In Sec

11?

FV

TPL

Amortised

Cost

Cost less

Impair-

ment

Warranty

obligation

No Not a financial liability – will not

result in payment of cash or

financial assets

Rent payable Yes Measure at

undiscounted

cash to be

paid unless a

financing

transaction




Account In Sec

11?

FV

TPL

Amor-

tised

Cost

Cost less

Impair-

ment

Interest payable Yes Yes

Current tax

liability

No Not a financial liability –

statutory, not contractual

Bank overdraft

(due on demand,

market rate of

interest)

Yes. Not

discounted

(due on

demand)


14 Section 11 – Quiz and discussion

Question 1: Under the IFRS for SMEs an entity

may choose, instead of Sections 11 and 12:

a. Full IFRSs for fin. inst: (IAS 32, IAS 39, & IFRS 7)

b. Recognition and measurement provisions of

Sections 11 and 12 and the disclosure provisions

of IFRS 7?

c. Recognition and measurement provisions of IAS 39

and the disclosure provisions of Sections 11 and

12?

d. Recognition and measurement provisions of either

IFRS 9 or IAS 39 and disclosure provisions of

Sections 11 and 12?



Question 1: Under the IFRS for SMEs an entity

may choose, instead of Sections 11 and 12:

a. Full IFRSs for fin. inst: (IAS 32, IAS 39, IFRS 7)

b. Recognition and measurement provisions of

Sections 11 and 12 and the disclosure provisions

of IFRS 7?

c.Recognition and measurement provisions

of IAS 39 and the disclosure provisions of

Sections 11 and 12? d. Recognition and measurement provisions of either

IFRS 9 or IAS 39 and disclosure provisions of

Sections 11 and 12?



Question 2: Which of the following is a financial

asset outside scope of both Sections 11 & 12?

a.Trade receivables

b.5% holding in non-puttable ordinary shares of

another entity

c.5% holding in puttable ordinary shares of

another entity

d.30% holding in ordinary shares of another

entity which give us ‘significant influence’

over the other entity

e.Cash



Question 2: Which of the following is a financial

asset outside scope of both Sections 11 & 12?

a. Trade receivables

b. 5% holding in non-puttable ordinary shares of

another entity

c. 5% holding in puttable ordinary shares of another

entity

d.30% holding in ordinary shares of another

entity which give us ‘significant influence’

over the other entity. Associate – follow

Section 14. e. Cash



Question 3: Which of the following is not a basic

financial instrument (ie outside scope of Sec 11)?

a.Investment in non-convertible, non-puttable

preference shares

b.An entity’s own equity instrument

c.A fixed-interest, fixed-term loan payable to a

bank

d.A variable-interest, fixed-term loan payable

to a bank

e.An interest-free loan from a parent entity



Question 3: Which of the following is not a basic

financial instrument (ie outside scope of Sec 11)?

a.Investment in non-convertible, non-puttable

preference shares

b.An entity’s own equity instrument c.A fixed-interest, fixed-term loan payable to a

bank

d.A variable-interest, fixed-term loan payable

to a bank

e.An interest-free loan from a parent entity



Question 4: Entity buys 100 ordinary shares in

Co X on London Stock Exchange for 20 per share,

plus brokerage fee of 100. Co X is not a

subsidiary, not a JV, not an associate of the

entity. Entity should initially recognise the

investment at:

a. 1,900

b. 2,000

c. 2,100



Question 4: Entity buys 100 ordinary shares in Co X on

London Stock Exchange for 20 per share, plus brokerage

fee of 100. Co X is not a subsidiary, not a JV, not an

associate of the entity. Entity should initially recognise the

investment at:

a. 1,900

b. 2,000. Quoted equity instrument, so

FVTPL, therefore 100 fee is expensed

c. 2,100



Question 5: Entity borrows 10,000 from a bank 5

years, fixed interest payable annually 6% in

arrears. (This is a market rate.) Bank charges

entity 50 loan application fee. Entity should

measure the loan on initial recognition at...

a. 7,473 (= PV 10,000 at 6% for 5 years)

b. 7,423

c. 9,950

d. 10,000

e. 10,050



Question 5: Entity should measure the loan on

initial recognition at...

a. 7,473 (= PV 10,000 at 6% for 5 years)

b. 7,423

c. 9,950. Loan will be carried at

amortised cost. Fee is netted

against loan. Affects effective

interest. See next slide...

d. 10,000

e. 10,050



Excel Col A Column B

1 9950

2 -600

3 -600

4 -600

5 -600

6 -10600

7 6.11908%

Using Excel to

calculate

internal rate of

return in

Question 5

Cell B7

contains:

=IRR(B1:B6)



Year

Loan

liability

beginning

Interest

expense at

6.11908%

Cash

paid

Loan

liability

ending

1 9,950 609 600 9,959

2 9,959 609 600 9,968

3 9,968 610 600 9,978

4 9,978 611 600 9,989

5 9,989 611 600 10,000

Calculations for the answer, Question 5:



Question 6: 1/1/X1 entity gives employee interest-

free 4-year car loan 10,000. Bank would have

charged 8%. Loan receivable at 1/1/X1= ??? And

interest income for year X1 = ???

Choices Initial receivable Interest income for X1

a 7,350 0

b 7,350 800

c 7,350 588

d 10,000 0

e 10,000 800



Question 6: 1/1/X1 entity gives employee interest-

free 4-year car loan 10,000. Bank would have

charged 8%. Loan receivable at 1/1/X1= ??? And

interest income for year X1 = ???

(c) Loan receivable 1/1/X1= 7,350*

Interest income for X1 = 8% x 7,350 = 588

*Present value of 10,000 to be received in 4

years at 8%. In an Excel spreadsheet cell

put: =(10000)/1.08^4



Question 6: Journal Entries

Debit Credit

1/1/X1 Loan receivable 7,350

Prepaid compensation 2,650

Cash 10,000

31/12/X1 Compensation expense 588

Prepaid compensation 588

31/12/X1 Loan receivable 588

Interest income 588



Question 7: When assessing impairment of

financial assets measured at cost or amortised

cost, which must be assessed individually?

a. All financial assets that are individually significant

b. All equity instruments that are individually

significant

c. All equity instruments

d. All financial assets except equity instruments

e. All equity instruments and other financial assets

that are individually significant



Question 7: Which must be assessed

individually?

a. All financial assets that are individually significant

b. All equity instruments that are individually

significant

c. All equity instruments

d. All financial assets except equity instruments

e.All equity instruments and other

financial assets that are individually

significant



Question 8: SME sells 100 of receivables to bank

for 85. SME continues to collect and remit

amounts collected to bank, for which bank pays a

fee to SME. SME has no obligation for credit

losses or for slow payment by debtors. How is

this transaction accounted for?

See choices on next slide...



Question 8: Answer choices:

a.SME removes receivables from its balance

sheet and shows no liability for 85 proceeds

b.SME keeps 100 receivables on its balance

sheet and shows a liability for 85

c.SME keeps 100 receivables on its balance

sheet and shows no liability for 85

d.SME removes receivables from its balance




Question 8: Answer choices:

a.SME removes receivables from its

balance sheet and shows no liability

for 85 proceeds b.SME keeps 100 receivables on its balance


c.SME keeps 100 receivables on its balance

sheet and shows no liability for 85

d.SME removes receivables from its balance

sheet and shows liability 85


34 Questions or comments?

Expressions of individual views by

members of the IASB and its staff

are encouraged.

The views expressed in this

presentation are those of the

presenter.

Official positions of the IASB on

accounting matters are determined

only after extensive due process

and deliberation.

35

This presentation may be modified from time to time. The latest version may be downloaded from:

http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm

The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.

The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm

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