Recognition and Derecognition of Financial Instruments
4) Recognition and Derecognition of Financial Instruments
UBS recognizes financial instruments on its balance sheet when, and only when, the Group be- comes a party to the contractual provisions of the instrument. UBS enters into transactions where it transfers financial assets recognized on its balance sheet but retains either all risks and rewards of the transferred financial assets or a portion of them. If all or sub- stantially all risks and rewards are retained, the transferred financial assets are not derecognized from the balance sheet. Transfers of financial assets with retention of all or substantially all risks and re- wards include, for example, securities lending and repurchase transactions described under parts 12) and 13). They further include transactions where financial assets are sold to a third party with a con- current total rate of return swap of the transferred assets to retain all their risks and rewards. These types of transactions are accounted for as secured financing transactions similar to repurchase agree- ments.
In transactions where substantially all of the risks and rewards of ownership of a financial asset are neither retained nor transferred, UBS derecognizes the financial asset if control over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabili- ties as appropriate. In transfers where control over the financial asset is retained, the Group continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Examples of such transactions are transfers of financial assets involving guarantees, writing put options, acquiring call options, or specific types of swaps linked to the performance of the asset.
UBS removes a financial liability from its balance sheet when, and only when, it is extinguished (ie., when the obligation specified in the contract is discharged or cancelled or expires).
Chapter 25 / Financial Instruments: Recognition and Measurement (IAS 39)
MULTIPLE-CHOICE QUESTIONS
nomic benefits will flow to the entity and the 1. The scope of IAS 39 includes all of the following
cost or value of the instrument can be mea- items except:
sured reliably.
(a) Financial instruments that meet the defini- (b) A financial asset is recognized when, and tion of a financial asset.
only when, the entity obtains control of the (b) Financial instruments that meet the defini-
instrument and has the ability to dispose of tion of a financial liability.
the financial asset independent of the actions (c) Financial instruments issued by the entity
of others.
that meet the definition of an equity instru- (c) A financial asset is recognized when, and ment.
only when, the entity obtains the risks and (d) Contracts to buy or sell nonfinancial items
rewards of ownership of the financial asset that can be settled net.
and has the ability to dispose the financial asset.
Answer: (c)
(d) A financial asset is recognized when, and 2. Which of the following is not a category of fi-
only when, the entity becomes a party to the nancial assets defined in IAS 39?
contractual provisions of the instrument. (a) Financial assets at fair value through profit
Answer: (d)
or loss. 7. In which of the following circumstances is derec- (b) Available-for-sale financial assets.
(c) Held-for-sale investments. ognition of a financial asset not appropriate? (d) Loans and receivables.
(a) The contractual rights to the cash flows of the financial assets have expired.
Answer: (c)
(b) The financial asset has been transferred and 3. All of the following are characteristics of finan-
substantially all the risks and rewards of cial assets classified as held-to-maturity investments
ownership of the transferred asset have also except:
been transferred.
(a) They have fixed or determinable payments (c) The financial asset has been transferred and and a fixed maturity.
the entity has retained substantially all the (b) The holder can recover substantially all of
risks and rewards of ownership of the trans- its investment (unless there has been credit
ferred asset.
deterioration). (d) The financial asset has been transferred and (c) They are quoted in an active market.
the entity has neither retained nor transferred (d) The holder has a demonstrated positive
substantially all the risks and rewards of intention and ability to hold them to matu-
ownership of the transferred asset. In addi- rity.
tion, the entity has lost control of the trans- ferred asset.
Answer: (b)
Answer: (c)
4. Which of the following items is not precluded from classification as a held-to-maturity investment?
8. Which of the following transfers of financial (a) An investment in an unquoted debt instru-
assets qualifies for derecognition? ment.
(a) A sale of a financial asset where the entity (b) An investment in a quoted equity instru-
retains an option to buy the asset back at its ment.
current fair value on the repurchase date. (c) A quoted derivative financial asset.
(b) A sale of a financial asset where the entity (d) An investment in a quoted debt instrument.
agrees to repurchase the asset in one year for a fixed price plus interest.
Answer: (d)
(c) A sale of a portfolio of short-term accounts 5. All of the following are characteristics of
receivables where the entity guarantees to financial assets classified as loan and receivables
compensate the buyer for any losses in the except:
portfolio.
(a) They have fixed or determinable payments. (d) A loan of a security to another entity (i.e., a (b) The holder can recover substantially all of
securities lending transaction). its investment (unless there has been credit
Answer: (a)
deterioration). (c) They are not quoted in an active market.
9. Which of the following is not a relevant consid- (d) The holder has a demonstrated positive
eration when evaluating whether to derecognize a fi- intention and ability to hold them to matu-
nancial liability?
rity. (a) Whether the obligation has been discharged. (b) Whether the obligation has been canceled.
Answer: (d)
(c) Whether the obligation has expired. 6. What is the principle for recognition of a finan-
(d) Whether substantially all the risks and re- cial asset or a financial liability in IAS 39?
wards of the obligation have been trans- (a) A financial asset is recognized when, and
ferred.
only when, it is probable that future eco-
Answer: (d)
284 Wiley IFRS: Practical Implementation Guide and Workbook
10. At what amount is a financial asset or financial (b) The interest rate currently charged by the liability measured on initial recognition?
entity or by others for similar debt instru- (a) The consideration paid or received for the fi-
ments (i.e., similar remaining maturity, cash nancial asset or financial liability.
flow pattern, currency, credit risk, collateral, (b) Acquisition cost. Acquisition cost is the con-
and interest basis).
sideration paid or received plus any directly (c) The interest rate that exactly discounts esti- attributable transaction costs to the acquisi-
mated future cash payments or receipts tion or issuance of the financial asset or fi-
through the expected life of the debt instru- nancial liability.
ment or, when appropriate, a shorter period (c) Fair value. For items that are not measured
to the net carrying amount of the instrument. at fair value through profit or loss, transac-
(d) The basic, risk-free interest rate that is de- tion costs are also included in the initial
rived from observable government bond measurement.
prices.
(d) Zero.
Answer: (c)
Answer: (c)
15. Which of the following is not objective evidence 11. In addition to financial assets at fair value
of impairment of a financial asset?
through profit or loss, which of the following catego- (a) Significant financial difficulty of the issuer ries of financial assets is measured at fair value in the
or obligor.
balance sheet? (b) A decline in the fair value of the asset below (a) Available-for-sale financial assets.
its previous carrying amount. (b) Held-to-maturity investments.
(c) A breach of contract, such as a default or de- (c) Loans and receivables.
linquency in interest or principal payments. (d) Investments in unquoted equity instruments.
(d) Observable data indicating that there is a
Answer: (a)
measurable decrease in the estimated future cash flows from a group of financial assets
12. What is the best evidence of the fair value of a although the decrease cannot yet be associ- financial instrument?
ated with any individual financial asset. (a) Its cost, including transaction costs directly
Answer: (b)
attributable to the purchase, origination, or issuance of the financial instrument.
16. Under IAS 39, all of the following are char- (b) Its estimated value determined using dis-
acteristics of a derivative except:
counted cash flow techniques, option pricing (a) It is acquired or incurred by the entity for models, or other valuation techniques.
the purpose of generating a profit from (c) Its quoted price, if an active market exists
short-term fluctuations in market factors. for the financial instrument.
(b) Its value changes in response to the change (d) The present value of the contractual cash
in a specified underlying (e.g., interest rate, flows less impairment.
financial instrument price, commodity price,
Answer: (c)
foreign exchange rate, etc.). (c) It requires no initial investment or an initial 13. Is there any exception to the requirement to
net investment that is smaller than would be measure at fair value financial assets classified as at
required for other types of contracts that fair value through profit or loss or available for sale?
would be expected to have a similar re- (a) No. Such assets are always measured at fair
sponse to changes in market factors. value.
(d) It is settled at a future date. (b) Yes. If the fair value of such assets increases
Answer: (a)
above cost, the resulting unrealized holding gains are not recognized but deferred until
17. Under IAS 39, is a derivative (e.g., an equity realized.
conversion option) that is embedded in another con- (c) Yes. If the entity has the positive intention
tract (e.g., a convertible bond) accounted for sepa- and ability to hold assets classified in those
rately from that other contract?
categories to maturity, they are measured at (a) Yes. IAS 39 requires all derivatives (both amortized cost.
freestanding and embedded) to be accounted (d) Yes. Investments in unquoted equity instru-
for as derivatives.
ments that cannot be reliably measured at (b) No. IAS 39 precludes entities from splitting fair value (or derivatives that are linked to
financial instruments and accounting for the and must be settled in such unquoted equity
components separately.
instruments) are measured at cost. (c) It depends. IAS 39 requires embedded
Answer: (d)
derivatives to be accounted for separately as derivatives if, and only if, the entity has em-
14. What is the effective interest rate of a bond or bedded the derivative in order to avoid de- other debt instrument measured at amortized cost?
rivatives accounting and has no substantive (a) The stated coupon rate of the debt instru-
business purpose for embedding the deriva- ment.
tive.
Chapter 25 / Financial Instruments: Recognition and Measurement (IAS 39)
(d) It depends. IAS 39 requires embedded (a) The hedged item and hedging instrument are derivatives to be accounted for separately if,
both measured at fair value with respect to and only if, the economic characteristics and
the hedged risk, and changes in fair value risks of the embedded derivative and the
are recognized in profit or loss. host contract are not closely related and the
(b) The hedged item and hedging instrument are combined contract is not measured at fair
both measured at fair value with respect to value with changes in fair value recognized
the hedged risk, and changes in fair value in profit or loss.
are recognized directly in equity.
Answer: (d)
(c) The hedging instrument is measured at fair value, with changes in fair value recognized 18. Which of the following is not a condition for
directly in equity to the extent the hedge is hedge accounting?