Debt issued

20) Debt issued

Debt instruments with embedded derivatives that are related to UBS AG shares or to a derivative instrument that has UBS AG shares as its underlying are separated into a liability and an equity component at issue date if they require physical settlement. When the hybrid debt instrument is is- sued, a portion of the net proceeds is allocated to the debt component based on its fair value. The de- termination of fair value is generally based on quoted market prices for UBS debt instruments with comparable terms. The debt component is subsequently measured at amortized cost. The remaining amount of the net proceeds is allocated to the equity component and reported in Share premium. Sub- sequent changes in fair value of the separated equity component are not recognized. However, if the hybrid instrument or the embedded derivative related to UBS AG shares is to be cash settled or if it contains a settlement alternative, then the separated derivative is accounted for as a trading instrument, with changes in fair value recorded in Net trading income unless the entire hybrid debt instrument is designated at fair value through profit or loss with changes in fair value of the entire hybrid instrument also reflected in Net trading income (see part 7).

234 Wiley IFRS: Practical Implementation Guide and Workbook

MULTIPLE-CHOICE QUESTIONS

standing share that it will repurchase at a 1. Are there any circumstances when a contract that

future date).

is not a financial instrument would be accounted for (b) A contract for the delivery of as many of the as a financial instrument under IAS 32 and IAS 39?

entity’s ordinary shares as are equal in value (a) No. Only financial instruments are ac-

to $100,000 on a future date (i.e., the entity counted for as financial instruments.

will issue a variable number of own shares (b) Yes. Gold, silver, and other precious metals

in return for cash at a future date). that are readily convertible to cash are ac-

(c) A written call option that gives the holder counted for as financial instruments.

the right to purchase a fixed number of the (c) Yes. A contract for the future purchase or

entity’s ordinary shares in return for a fixed delivery of a commodity or other nonfinan-

price (i.e., the entity would issue a fixed cial item (e.g., gold, electricity, or gas) gen-

number of own shares in return for cash, if erally is accounted for as a financial instru-

the option is exercised by the holder, at a ment if the contract can be settled net.

future date).

(d) Yes. An entity may designate any nonfinan- (d) An issued perpetual debt instrument (i.e., a cial asset that can be readily convertible to

debt instrument for which interest will be cash as a financial instrument.

paid for all eternity, but the principal will not be repaid).

Answer: (c)

Answer: (c)

2. Which of the following assets is not a financial asset?

6. What is the principle of accounting for a com- (a) Cash. pound instrument (e.g., an issued convertible debt (b) An equity instrument of another entity.

instrument)?

(c) A contract that may or will be settled in the (a) The issuer shall classify a compound instru- entity’s own equity instrument and is not

ment as either a liability or equity based on classified as an equity instrument of the en-

an evaluation of the predominant character- tity.

istics of the contractual arrangement. (d) Prepaid expenses.

(b) The issuer shall classify the liability and eq- uity components of a compound instrument

Answer: (d)

separately as financial liabilities, financial 3. Which of the following liabilities is a financial

assets, or equity instruments. liability?

(c) The issuer shall classify a compound instru- (a) Deferred revenue.

ment as a liability in its entirety, until con- (b) A warranty obligation.

verted into equity, unless the equity compo- (c) A constructive obligation.

nent is detachable and separately transfer- (d) An obligation to deliver own shares worth a

able, in which case the liability and equity fixed amount of cash.

components shall be presented separately.

Answer: (d)

(d) The issuer shall classify a compound instru- ment as a liability in its entirety, until con- 4. Which of the following statements best describes

verted into equity.

the principle for classifying an issued financial in- strument as either a financial liability or equity?

Answer: (b)

(a) Issued instruments are classified as liabilities 7. How are the proceeds from issuing a compound or equity in accordance with the substance

instrument allocated between the liability and equity of the contractual arrangement and the defi-

components?

nitions of a financial liability, financial as- (a) First, the liability component is measured at set, and an equity instrument.

fair value, and then the remainder of the (b) Issued instruments are classified as liabilities

proceeds is allocated to the equity compo- or equity in accordance with the legal form

nent (with-and-without method). of the contractual arrangement and the defi-

(b) First, the equity component is measured at nitions of a financial liability and an equity

fair value, and then the remainder of the instrument.

proceeds is allocated to the liability compo- (c) Issued instruments are classified as liabilities

nent (with-and-without method). or equity in accordance with management’s

(c) First, the fair values of both the equity com- designation of the contractual arrangement.

ponent and the liability component are esti- (d) Issued instruments are classified as liabilities

mated. Then the proceeds are allocated to or equity in accordance with the risk and

the liability and equity components based on rewards of the contractual arrangement.

the relation between the estimated fair val-

Answer: (a)

ues (relative fair value method). (d) The equity component is measured at its in-

5. Which of the following instruments would not be trinsic value. The liability component is classified as a financial liability?

measured at the par amount less the intrinsic (a) A preference share that will be redeemed by

value of the equity component. the issuer for a fixed amount of cash on a

future date (i.e., the entity has an out-

Answer: (a)

Chapter 24 / Financial Instruments: Presentation (IAS 32)

235

8. What is the accounting for treasury share transac- tions? (a) On repurchase of treasury shares, a gain or loss is recognized equal to the difference between the amount at which the shares were issued and the repurchase price for the shares.

(b) On reissuance of treasury shares, a gain or loss is recognized equal to the difference between the previous repurchase price and the reissuance price.

(c) On repurchase or reissuance of previously repurchased own shares, no gain or loss is recognized.

(d) Treasury shares are accounted for as finan- cial assets in accordance with IAS 39.