According to IAS 32.11, what is the definition of a financial instrument?
It is a contract that gives rise to a financial asset of one entity and a financial liability or an equity instrument of another entity.
What are the main business activities of a credit institution involving financial instruments described in the course?
- The traditional loan business.
- Principal trading.
- Hedging
What is the primary objective of the ‘traditional’ loan business for a credit institution?
To earn an interest margin, which is the difference between interest paid on liabilities and interest earned on assets.
What is the primary objective of the client-induced principal trading for a credit institution?
To make a short-term profit through the difference between the buying and selling price as a service for a client.
What is the dominant concept underlying the IFRS framework?
The deliver of information for taking decisions to investors.
IFRS 9 is considered a political compromise between which two divergent measurement concepts?
The historical cost accounting concept and the full fair value accounting concept.
What are the two ‘short-term objectives’ of the IASB for financial instruments, valid under both IAS 39 and IFRS 9?
All derivatives must be recognized on the balance sheet and measured at fair value.
According to IAS 32.11, what are the four types of assets that qualify as a financial asset?
- Cash.
- Contractual rights to receive cash.
- Contractual rights to exchange financial assets favorably.
- Equity instruments of another entity.
Under IAS 32.11, a contractual obligation to deliver cash or another financial asset is defined as a _________ .
financial liability
Under IAS 32.11, any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities is defined as _________ .
an equity instrument
What is the key conceptual difference between the old IAS 39 definition of fair value and the newer IFRS 13 definition?
IAS 39 used a ‘translation price’ concept, while IFRS 13 uses an ‘exit price’ concept.
What are the three core characteristics of a derivative under IFRS 9?
- Its value changes in response to an underlying.
- It requires little to no initial net investment.
- It is settled at a future date.
The classification of debt instruments under IFRS 9 depends on which two tests?
The SPPI (Solely Payments of Principal and Interest) test and the business model test
What must be true of a debt instrument’s contractual cash flows for it to pass the SPPI test?
The cash flows must be solely payments of principal and interest on the principal amount outstanding.
For the purpose of the SPPI test, interest is considered a consideration for what components?
- For the time value of money.
- For the credit risk associated with the principal amount.
- For other basic lending risks, costs, and a profit margin.
According to IFRS 9, an instrument that fails the SPPI test must be measured at what value?
Fair Value through Profit or Loss (FVTPL).
What two factors are relevant when assessing if an interest rate component properly represents the time value of money?
The currency in which the asset is denominated and the link between the interest rate and its reset period (tenor).
A bond denominated in USD that pays a coupon based on 3-month EURIBOR would likely fail the SSPI test because the coupon does not capture changes in the ___________ .
USD market rates
If a financial instrument’s contractual terms modify the time value of money element, what assessment must be performed to check for SPPI compliance?
A benchmark test must be performed to measure the significance of the modification against a benchmark instrument/
If the benchmark test shows a significant deviation between a financial asset’s contractual cash flows and the benchmark’s cash flows, how must the asset be measured?
It must be measured at fair value.
When assessing contingent cash flow changes for the SPPI test, an entity should consider _______________ .
all reasonably possible scenarios, not every possible scenario.
A bond’s coupon that is subject to a leverage factor, such as ‘3 x (EUR CMS10YR – EUR CMS 2YR)’, would likely fail the SPPI test because it creates cash flow variability inconsistent with a _____.
basic lending agreement
For a rating-linked note’s interest rate to be SPPI-compliant, the change in interest must truly compensate the change in what?
Credit risk.
An interest payment indexed to a debtor’s net income would generally fail the SPPI test unless it can be shown to only compensate the holder for changes in _______.
Credit risk.
