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IAS 32 Financial Instruments: Presentation-(Practicals Included)

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LIST OF THE PRESENT APPLICABLE AND EFFECTIVE ACCOUNTING STANDARDS:
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Highlights of this IFRS course:
How can you learn IAS 32?

IAS 32 Financial Instruments: Presentation- THEORY (SURFACE)

What is the scope of IAS 32?
What all are the Fin. Reporting standards connected with Financial Instruments?
What is the rules which IAS 32 provides for classification?
What do mean by a financial asset?
What is a finanical laibility?
What are the terms used under IAS 32?
What are the condition for offsetting financial asset & financial laibilities?
How are financial liabilities recognized initially and subsequently?
What is the use of effective interest method?
How are components of a compound fin. instrument measured on initial recognition

IAS 32 Financial Instruments: Presentation- THEORY (DEPTH)

What is the difference between a financial asset and a financial liability under IAS 32?
How does IAS 32 classify financial instruments, and what are the criteria for each classification?
Explain the conditions that must be met for financial assets and financial liabilities to be offset in the statement of financial position under IAS 32.
What is a compound financial instrument, and how are its components measured on initial recognition under IAS 32?
What is the difference between amortized cost and fair value measurement of financial assets and financial liabilities under IAS 32?
How does IAS 32 address the accounting for financial instruments that contain embedded derivatives?
What is the significance of the effective interest rate in the measurement of financial assets and financial liabilities under IAS 32?
What is the significance of the fair value measurement of financial instruments under IAS 32, and how is it determined?
How does IAS 32 address the accounting treatment for financial instruments that are classified as available for sale?

EVOLUTION OF ACCOUNTING STANDARD AND ITS FUTURE DEVELOPMENT

How has IAS 32 evolved over time, and what are some potential future developments in this area?

IFRS: AS AN AUDITOR!

What you need to know about IAS 32 as an auditor?
What are the key considerations for auditors in relation to IAS 32?

IFRS & ACCOUNTING RATIOS:

What all Accounting Ratios does IAS 32 connects which may get affected?
Examples of how the application of IAS 32 can impact various accounting ratios:
Table summarizing how the application of IAS 32 can impact various accounting ratios:

IAS INTERACTION WITH OTHER ACCOUNTING STANDARDS!

What do you understand by interaction of accounting standards and why are they important to be understood in general?
How IAS 32 does interacts with other accounting standards?
What do you understand by interaction of accounting standards and why are they important to be understood?
How can one approach towards understanding the interaction between accounting standards?
What if one fails to understand the interaction of accounting standards? How does it impact financial reporting?
Interaction of IAS 32 with other accounting standards: TABULATION!

CLIMATE IMPACT: IAS 16

Discuss the possible climate impact on IAS 32:
How can the climate impact on IAS 32 be mitigated?

TEST YOUR UNDERSTANDING ! -IAS 32 Financial Instruments: Presentation

QUIZ : TEST YOUR UNDERSTANDING ! -IAS 32 Financial Instruments: Presentation

IAS 32 Financial Instruments: Presentation- PRACTICAL ILLUSTRATION

QUESTION 1 Illustration 1: Trade receivables A Limited makes sale of goods to customers on credit of 45 days. The customers are entitled to earn a cash discount @ 2% per annum if payment is made before 45 days and an interest @ 10% per annum is charged for any payments made after 45 days. Company does not have a policy of selling its debtors and holds them to collect contractual cash flows. Evaluate the financial instrument.
QUESTION 2 Illustration 2: Deposits Z Limited (the ‘Company’) makes sale of goods to customers on credit. Goods are carried in large containers for delivery to the dealers’ destinations. All dealers are required to deposit a fixed amount of $ 10,000 as security for the containers, which is returned only when the contract with Company terminates. The deposits carry 8% per annum which is payable only when the contract terminates. If the containers are returned by the dealers in broken condition or any damage caused, then appropriate adjustments shall be made from the deposits at the time of settlement. How would such deposits be treated in books of the dealers?
QUESTION 3 Illustration 3: Perpetual debt instruments A Limited issue a bond at principal amount of $ 1000 per bond. The terms of bond require annual payments in perpetuity at a stated interest rate of 8 per cent applied to the principal amount of $ 1000. Assuming 8 per cent to be the market rate of interest for the instrument when it was issued, the issuer assumes a contractual obligation to make a stream of future interest payments having a fair value (present value) of $1,000 on initial recognition. Evaluate the financial instrument in the hands of both the holder and the issuer.
QUESTION 4 Illustration 4: Creditors for sale of goods A Limited (the ‘Company’) makes purchase of steel for its consumption in normal course of business. The purchase terms provide for payment of goods at 30 days credit and interest payable @ 12% per annum for any delays beyond the credit period. Analyze the nature of this financial instrument.
QUESTION 5 Illustration 5: Contract for exchange on unfavorable conditions A Limited (the ‘Company’) makes a borrowing for INR 10 Lakhs from RBC Bank, with bullet repayment of INR 10 Lakhs and an annual interest rate of 12% per annum. Now, Company defaults at the end of 5th year and consequently, a rescheduling of the payment schedule is made beginning 6th year onwards. The Company is required to pay INR 1,300,000 at the end of 6th year for one time settlement, in lieu of defaults in payments made earlier. a) Does the above instrument meet definition of financial liability? Please explain. b) Analyze the differential amount to be exchanged for one-time settlement
QUESTION 6 Illustration 6: Derivative contract: Entity – B Limited writes an option contract for sale of shares of Target Limited at a fixed price of $ 100 per share to C Limited. This option is exercisable anytime for a period of 90 days (‘American option’). Evaluate this under definition of financial instrument.
QUESTION 7 Illustration 7: Settlement in variable number of shares Target Limited took a borrowing from Z Limited for $ 10,00,000. Z Limited enters into an arrangement with Target Limited for settlement of the loan against issue of a certain number of equity shares of Target Limited whose value equals $ 10,00,000. For this purpose, fair value per share (to determine total number of equity shares to be issued) shall be determined based on the market price of the shares of Target Limited at a future date, upon settlement of the contract. Evaluate this under definition of financial instrument.
QUESTION 8 Illustration 8: Preference shares with non-cumulative dividend Silver Limited issued irredeemable preference shares with face value of $ 10 each and premium of $ 90. These shares carry dividend @ 8% per annum, however dividend is paid only when Silver Limited declares dividend on equity shares. Analyze the nature of this instrument.
QUESTION 9 Illustration 9: Non-derivative contract to be settled in own equity instruments A Limited invests in compulsorily convertible preference shares (CCPS) issued by its subsidiary B Limited at $ 1,000 each ($ 10 face value + $ 990 premium). Under the terms of the instrument, each CCPS is compulsorily convertible into one equity share of B Limited at the end of 5 years. Such CCPS carry dividend @ 12% per annum, payable only when declared at the discretion of B Limited. Evaluate this under definition of financial instrument.
QUESTION 10 Illustration 10: Derivative contract to be settled in own equity instruments A Limited issues warrants to all existing shareholders entitling them to purchase additional equity shares of A Limited (with face value of $ 100 per share) at an issue price of $ 150 per share. Evaluate whether this constitutes an equity instrument or a financial liability?
QUESTION 11 Illustration 1: Red pref. shares with mandatory dividend (refer Ex. 1 in section “Learning objective”) A Limited (issuer) issues preference shares to B Limited (holder). Those preference shares are redeemable at the end of 10 years from the date of issue and entitle the holder to a cumulative dividend of 15% p.a. The rate of dividend is commensurate with the credit risk profile of the issuer. Examine the nature of the financial instrument.
QUESTION 12 Illustration 2: Redeemable debentures with discretionary dividend X Co. Limited (issuer) issues debentures to Y Co. Limited (holder). Those debentures are redeemable at the end of 10 years from the date of issue. Interest of 15% p.a. is payable at the discretion of the issuer. The rate of interest is commensurate with the credit risk profile of the issuer. Examine the nature of the financial instrument.
QUESTION 13 Illustration 3: Perpetual loan with mandatory interest P Co. Limited (issuer) takes a loan from Q Co. Limited (holder). The loan is perpetual and entitles the holder to fixed interest of 8% p.a. Examine the nature of the financial instrument.
QUESTION 14 Illustration 4: Restriction on the ability of an entity to satisfy a contractual obligation Does the lack of access to foreign currency or the need to obtain approval for payment from a regulatory authority, will lead to contractual obligation?
QUESTION 15 Illustration 5: Optionally convertible redeemable preference shares D Limited issues preference shares to G Limited. The holder has an option to convert these preference shares to equity instruments of the issuer anytime up to a period of 10 years. If the option is not exercised by the holder, the preference shares are redeemed at the end of 10 years. Examine the nature of the financial instrument.
QUESTION 16 16 Illustration 6: Settlement alternative is non-financial obligation LMN Limited issues preference shares to PQR Limited. These preference shares are redeemable at the end of 5 years from the date of issue. The instrument also provides a settlement alternative to the issuer whereby it can transfer a particular commercial building to the holder, whose value is estimated to be significantly higher than the cash settlement amount. Examine the nature of the financial instrument.
QUESTION 17 Illustration 7: Cap on amount payable on liquidation ABC Limited has two classes of puttable shares – Class A shares and Class B shares. On liquidation, Class B shareholders are entitled to a pro rata share of the entity’s residual assets up to a maximum of $ 10,000,000. There is no limit to the rights of the Class A shareholders to share in the residual assets on liquidation. Examine the nature of the financial instrument.
QUESTION 18 Illustration 8: Investment manager’s share in a mutual fund Mutual Fund X has an Investment Manager Y. At the inception of the fund, Y had invested a nominal or token amount in units of X. Such units rank last for repayment in the event of liquidation. Accordingly, they constitute the most subordinate class of instruments. Examine the nature of the financial instrument.
QUESTION 19 Illustration 9: Differential voting rights T Motors Limited has issued puttable ordinary shares and puttable ‘A’ ordinary shares whereby holders of ordinary shares are entitled to one vote per share whereas holders of ‘A’ ordinary shares are not entitled to any voting rights. The holders of two classes of shares are equally entitled to receive share in net assets upon liquidation. Examine whether the financial instrument will be classified as equity.
QUESTION 20 Illustration 10: Conversion into a variable number of equity instruments S Limited has issued a class of puttable ordinary shares to T Limited. Besides the put option (which is consistent with other classes of ordinary shares), T Limited is also entitled to convert the class of ordinary shares held by it into equity instruments of S Limited whose number will vary as per the market value of S Limited. Examine whether the financial instrument will be classified as equity.
QUESTION 21 Illustration 11: Management fee contract between issuer and puttable instrument holder P Limited has issued puttable ordinary shares to Q Limited. Q Limited has also entered into an asset management contract with P Limited whereby Q Limited is entitled to 50% of the profit of P Limited. Normal commercial terms for similar contracts will entitle the service provider to only 4%-6% of the net profits. Examine whether the financial instrument will be classified as equity.
QUESTION 22 Illustration 12: Written put option on own equity instruments On 1 January 2018, Entity X writes a put option over 1,00,000 of its own equity shares for which it receives a premium of $ 5,00,000. Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own shares in one year’s time and to pay the option exercise price of $ 22,000,000. The option can only be settled through physical delivery of the shares (gross physical settlement). Examine the nature of the financial instrument.
QUESTION 23 Illustration 13: Written put option over non-controlling interests Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30% is held by Entity Z. On 1 January 2018, P writes an option to Z which grants Z the right to sell its shares to Parent P on 31 December 2019 for $ 1,000. Parent P receives a payment of $ 100 for the option. The applicable discount rate for the put liability is determined to be 12%. State by which amount the financial instrument will be recognized and under which category
QUESTION 24 Illustration 14: (Conversion into a number of equity instruments equivalent to a fixed value ) CBA Limited issues convertible debentures to RQP Limited for a subscription amount of $ 100 crores. Those debentures are convertible after 5 years into equity shares of CBA Limited using a pre-determined formula. The formula is: Fair value on date of conversion 100 crores X (1+10%)^5 Examine the nature of the financial instrument.
QUESTION 25 Illustration 15: Conversion into a fixed number of equity instruments DF Limited issues convertible debentures to JL Limited for a subscription amount of $ 100 crores. Those debentures are convertible after 5 years into 15 Crore equity shares of $ 10 each. Examine the nature of the financial instrument.
QUESTION 26 Illustration 16: Written option for a fixed or variable number of equity instruments ST Limited purchases an option from AT Limited entitling the holder to subscribe to equity shares of issuer at a fixed exercise price of $ 50 per share at any time during a period of 3 months. Holder paid an initial premium of $ 2 per option. Examine whether the financial instrument will be classified as equity.
QUESTION 27 Illustration 17: Written option with multiple exercise prices WC Limited writes an option in favour of GT Limited wherein the holder can purchase issuer’s equity instruments at prices that fluctuate in response to the share price of issuer. As per the terms, if the share price of issuer is less than $ 50 per share, option can be exercised at $ 40 per share. If the share price is equal to or more than $ 50 per share, option can be exercised at $ 60 per share. Explain the nature of the financial instrument.
QUESTION 28 Illustration 18: Share swap arrangements Acquirer Limited enters into an arrangement with shareholders of Target Limited wherein Acquirer Limited will purchase shares of Target Limited in a share swap arrangement. The share swap ratio is agreed as 1:5 i.e. 1 equity share of Acquirer Limited for every 5 equity shares held in Target Limited. Examine whether the financial instrument will be classified as equity.
QUESTION 29 Illustration 19: Conversion ratio changes with time On 1 January 2018, NKT Limited subscribes to convertible preference shares of VT Limited. The conversion ratio varies as below: Conversion up to 31 March 2018: 1 equity share of VT Limited for each preference share held Conversion up to 30 June 2018: 1.5 equity share of VT Limited for each preference share held Conversion up to 31 December 2018: 2 equity share of VT Limited for each preference share held. Examine whether the financial instrument will be classified as equity.
QUESTION 30 Illustration 20: Conversion ratio changes to protect rights of convertible instrument holders On 1 January 2018, HT Limited subscribes to convertible preference shares of RT Limited. The preference shares are convertible in the ratio of 1:1. The terms of the instrument entitle HT Limited to proportionately more equity shares of RT Limited in case of a stock split or bonus issue. Examine whether the financial instrument will be classified as equity.
QUESTION 31 Illustration 21: Con. ratio changes if issuer subsequently issues shares to others at a lower price On 1 January 2018, PG Limited subscribes to convertible preference shares of BG Limited at $ 100 per preference share. The preference shares are convertible in the ratio of 10:1 i.e. 10 equity shares for each preference share held. On a fully diluted basis, PG Limited is entitled to 30% stake in BG Limited. If subsequent to the issuance of these convertible preference shares, BG Limited issues any equity instruments at a price lower than $ 10 per share, conversion ratio will be changed to compensate PG Limited for dilution in its stake below the expected dilution at a price of $ 10 per share. Examine the nature of the financial instrument.
QUESTION 32 Illustration 22: Conversion ratio is variable in a narrow range On 1 January 2018, NG Limited subscribes to convertible preference shares of AG Limited at $ 100 per preference share. On a fully diluted basis, NG Limited is entitled to 30% stake in AG Limited. The preference shares are convertible at fair value, subject to, NG Limited’s stake not going below 15% and not going above 40%. Examine the nature of the financial instrument.
QUESTION 33 Illustration 23: Instrument convertible only at the option of issuer XYZ Limited issues optionally convertible debentures with the following terms: The debentures carry interest at the rate of 7% p.a. Issuer has option to either: Convert the instrument into a fixed number of its own shares at any time, or redeem the instrument in cash at any time. The redemption price is the fair value of the fixed number of shares into which the instrument would have converted if it had been converted. The holder has no conversion or redemption options. Debentures have a tenor of 12 years and, if not converted or redeemed earlier, will be repaid in cash at maturity, including accrued interest, if any. Examine the nature of the financial instrument.
QUESTION 34 Illustration 24: Conversion ratio changes under independent scenarios On 1 January 2018, STAL Limited subscribes to convertible preference shares of ATAL Limited. The preference shares are convertible as below: Convertible 1:1 if another strategic investor invests in the issuer within one year Convertible 1.5:1: if an IPO is successfully completed within 2 years Convertible 2:1: if a binding agreement for sale of majority stake by equity shareholders is entered into within 3 years Convertible 3:1: if none of these events occur in 3 years’ time. Examine whether the financial instrument will be classified as equity.
QUESTION 35 Illustration 25: Conversion ratio changes under inter-dependent scenarios On 1 January 2018, RHT Limited subscribes to convertible preference shares of RDT Limited. The preference shares are convertible as below: Convertible 1:1 if another strategic investor invests at an enterprise valuation (EV) of USD 100 million. Convertible 1.5:1: if another strategic investor invests at EV of USD 150 million Convertible 2:1: if another strategic investor invests at EV of USD 200 million Convertible 3:1: if no strategic investment is made within a period of 3 years Examine the nature of the financial instrument.
QUESTION 36 Illustration 26: Foreign currency convertible bond Entity A issues a bond with face value of USD 100 and carrying a fixed coupon rate of 6% p.a. Each bond is convertible into 1,000 equity shares of the issuer. Examine the nature of the financial instrument.
QUESTION 37 Illustration 27: Red. Debentures with discretionary dividend (continued from Illustration 2) X Co. Limited (issuer) issues debentures to Y Co. Limited (holder). Those debentures are redeemable at the end of 10 years from the date of issue. Interest of 15% p.a. is payable at the discretion of the issuer. The rate of interest is commensurate with the credit risk profile of the issuer. Examine the nature of the financial instrument.
QUESTION 38 Illustration 28: Perpetual loan with mandatory interest (continued from Illustration 3) P Co. Limited (issuer) takes a loan from Q Co. Limited (holder). The loan is perpetual and entitles the holder to fixed interest of 8% p.a. Examine the nature of the financial instrument.
QUESTION 39 Illustration 29: Optionally con. Redeemable preference shares (continued from Illustration 5) D Limited issues preference shares to G Limited. The holder has an option to convert these preference shares to equity instruments of the issuer anytime up to a period of 10 years. If the option is not exercised by the holder, the preference shares are redeemed at the end of 10 years. Examine the nature of the financial instrument.
QUESTION 40 Illustration 30: Perpetual loan with mandatory interest (continued from Illustration 3) P Co. Limited (issuer) takes a loan from Q Co. Limited (holder) for $ 12 Lakhs. The loan is perpetual and entitles the holder to fixed interest of 8% p.a. The rate of interest commensurate with credit risk profile of the issuer is 12% p.a. Calculate the value of the liability and equity components.
QUESTION 41 Illustration 31: Optionally con. Redeemable preference shares (continued from Illustration 29) On 1 July 2018, D Limited issues preference shares to G Limited for a consideration of $ 10 Lakhs. The holder has an option to convert these preference shares to a fixed number of equity instruments of the issuer anytime up to a period of 3 years. If the option is not exercised by the holder, the preference shares are redeemed at the end of 3 years. The preference shares carry a fixed coupon of 6% p.a. The prevailing market rate for similar preference shares, without the conversion feature, is 9% p.a. Calculate the value of the liability and equity components.
QUESTION 42 Illustration 32: Optionally convertible debentures with issuer’s redemption option D Limited issues preference shares to G Limited for a consideration of $ 10 Lakhs. The holder has an option to convert these preference shares to a fixed number of equity instruments of the issuer anytime up to a period of 3 years. If the option is not exercised by the holder, the preference shares are redeemed at the end of 3 years. The preference shares carry a coupon of RBI base rate plus 1% p.a. The prevailing market rate for similar preference shares, without the conversion feature or issuer’s redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is 9% p.a. Calculate the value of the liability and equity components.
QUESTION 43 Illustration 33: Optionally con. Redeemable preference shares (continued from Illustration 31) The amortization schedule of the instrument is set out below: Dates Cash flows Finance cost at effective interest rate Liability Equity 01 July 2018 1,000,000 - 9,24,061 75,939 30 June 2019 (60,000) 83,165 9,47,226 75,939 30 June 2020 (60,000) 85,250 9,72,476 75,939 30 June 2021 (10,60,000) 87,524 - 75,939 Assume that D Limited has an early redemption option to prepay the instrument at $ 11 Lakhs and on 30 June 2020, it exercises that option. Calculate the value of the liability and equity components

IAS 32 Financial Instruments: Presentation- PRACTICAL PROBLEMS WITH CALCULATIONS !

QUESTION 1 A trader buys goods but the payment is deferred past the date on which the physical assets are transferred. Does the transaction give rise to any financial instrument?
QUESTION 2 A trader enters into a contract to buy 10 tons of copper but there is no physical delivery. The buyer will settle the transaction paying or receiving the difference between settlement prices of copper in MCX on a specified date. Is it a financial instrument?
QUESTION 3 Is a commodity derivative essentially financial instrument?
QUESTION 4 X Inc has entered into Feb 2018 5 futures contract in MCX to buy 125 MT (lot size 25 MT) of steel at an agreed price of $ 6,500 per MT. There is a practice of settling the transaction net based on settlement price of commodity exchange future. On 31st December 2017 X Inc finalizes 3rd quarter accounts. As on that date, settlement price is $ 6,600 per MT. Under the contract, the carrying amount of the financial asset should be $ 12,500. Is a contractual right to receive cash or another financial asset from another entity financial asset?
QUESTION 5 X Inc has entered into contract with its lender bank to pay off 10% $ 10 Million loans due in 5 years against 9% $ 10 Million of the same maturity. Current market yield is 9%. This contract has been entered into in the context of declining interest rate scenario. PV of annuity at 9% for 5 years 3.8997 and PV at 9% at 5th year 0.6499. Is it a financial instrument?
QUESTION 6 X Inc entered into a contract with Y Inc to issue 1 Million $ 100 10% Debentures against which the latter company will surrender equivalent equity shares of X Inc, at the mean closing market price of next three months. Is it a financial instrument?
QUESTION 7 X Inc entered into a contract with Y Inc to sell plant and machinery of agreed valuation of $ 200 Million against which the later company will surrender equivalent equity shares of X Inc at the mean closing market price of next three months. Is it a financial instrument?
QUESTION 8 X Inc entered into contract with Y Inc to buy plant and machinery of agreed valuation of $ 200 Million against which the former company will issue equivalent number of equity shares at the mean closing market price of next three months. Is it a financial instrument?
QUESTION 9 X Inc issued 1,000 share warrants of $ 50 each, which becomes exercisable into one equity shares after one year. Current market price of equity share of the company is $ 60. Is it a financial instrument?
QUESTION 10 X Inc issued 1,000, Share Warrants of $ 50 each to Y Inc, in exchange of 500, 10% Debentures of $ 100 each. Is it a financial instrument?
QUESTION 11 X Inc entered into a contract with Y Inc to buy back its 10,000 equity shares which the latter company holds at the settlement price of the August 2008 future contract of its own share in exchange of delivering inventory of health care products in which Y Inc deals in. Is it a financial instrument?
QUESTION 12 Does operating lease contract give rise to financial instrument to the lessor or the lessee?
QUESTION 13 Does finance lease contract give rise to financial instrument to the lessor or the lessee?
QUESTION 14 X Inc invested in 8% perpetual debt of face value of $ 10,000. How should this instrument be evaluated as an item of financial asset/liability assuming that the current market yield is 7%?
QUESTION 15 What is contractual right and contractual obligation?
QUESTION 16 Is prepaid expense as rent paid in advance, or advance salary or advance payment to suppliers of raw materials a financial asset?
QUESTION 17 X Inc commits to grant a 5 years maturity loan to Y Inc amounting to $ 200 Million. This loan commitment is outside the scope of IFRS 9. X Inc should apply IAS 37, Provision, contingent Liabilities and Contingent Assets to loan commitments that are not within the scope of IFRS 9. But if there is a commitment to grant or take a loan at a specified rate, will it become financial derivative to which IAS 32, IFRS 9 and IFRS 7 will apply?
QUESTION 18 X Inc commits to grant a 5 years maturity loan to Y Inc amounting to $ 200 Million at 10% on 20 March 2018. The loan is to be granted on 10 April 2018. As on 31 March 2018, market rate of interest is 9.5% p.a. show the effect on financial asset and liability. If X Inc has the practice of selling the loan asset resulting from the loan commitment shortly after the origination, i.e. loan sale or securitization, what action X Inc would take?
QUESTION 19 X Inc issued 1 Million shares of $ 1 face value for $ 40 each. It promises to buy back equity shares from the willing subscribers at the end of one year from the date issue of such equity shares @ $ 50 each. Is it a financial liability?
QUESTION 20 Does a derivative linked to interests in subsidiaries, associates or join ventures, fall within the scope of IAS 32, IFRS 9 and IFRS 7?
QUESTION 21 X Inc has entered into a 5 years Pay Fixed Receive Variable swap contract with a swap dealer for a notional amount of $ 10 Million. The swap rate is 6.5% p.a. But the contract requires that X would pay gross at fixed rate every January 1 and July 1 and receive gross at floating rate. Does this swap contract satisfy the definition of derivatives?
QUESTION 22 X Inc enters into a pay 8% fixed and receive floating swap for 4 years on notional principal of $ 100 Million. Settlement date is every January 2 and July 2. If X Inc pays the present value of the fixed leg discounted at the current market yield of 8%, fixed leg of the swap is prepaid at the inception. Should the contract still be considered as a derivative?
QUESTION 23 X Inc enters into a pay 6-month LIBOR and receive 8% fixed swap for 4 years on notional principal of $ 100 Million. Settlement date is every January 2 and July 2. If X Inc pays, the present value of the floating leg discounted at the current market yield of 7.25% the floating leg of the swap is prepaid at the inception. Should the contract still be considered as a derivative?
QUESTION 24 ABC Inc issued 5 years 8% Debentures of $ 100 Million to XYZ Inc. In turn, XYZ Inc issued 3-month LIBOR based debentures of $ 100 Million for a maturity of 5 years. Should these off setting loans be treated as derivatives?
QUESTION 25 ABC Inc has purchased an out-of-the-money call option to buy equity shares of X Inc – current market price $ 120, strike price $ 160, Call premium $ 100 for a lot size of 100. Since this call is expected not to be exercised, should it be treated as a derivative?
QUESTION 26 ABC Inc purchases goods in US$. It enters into contract with a US Bank to convert its US Dollars purchases for the year 2008 into Indian Rupees at a fixed exchange rate of US Dollars 1 = Rs.64.80. Is this contract derivative?
QUESTION 27 X Inc has US$ 140 Million LIBOR based loan. It enters into 100 Million LIBOR swap (Spot Exchange rate €1 = US$ 1.40). Swap: US$ LIBOR + 50 basis point = € LIBOR. So, X Inc will pay € LIBOR and receive US$ LIBOR + 50 basis point. Is it a derivative contract?
QUESTION 28 X Inc enters into a contract to buy 1,000 equity shares of A Inc from one of its shareholders Mr. S @ $. 100 per share. Delivery of shares to be given after 3 months. Current market price of such shares is $ 125. Mr. X pays the forward price upfront. X Inc could buy one lot of call option with $ 100 strike price at a call premium of $ 55. Is the transaction a derivative?
QUESTION 29 Should initial margin of option/future be treated as initial investment?
QUESTION 30 X Inc enters into a contract to purchase 10 tons of steel in accordance with its usage plan. This contract the company to take delivery of the specified quantity of steel after 3 months at a price agreed on the date of the contract. This is forward buying contract, which X Inc has to settle gross by taking delivery. Is it a derivative contract to be classified as financial instruments?
QUESTION 31 X Inc has entered into a contract by which it has the option to sell its identified Property, Plant and Equipment (PPE) to Y Inc for $ 100 Million after 3 years where its current market price is $ 180 Million. Is the put option of X Inc a financial instrument? Is the written put option of Y Inc a financial instrument?
QUESTION 32 X Inc has entered into a forward contract to sell its identified Property, Plant and Equipment (PPE) to Y Inc for $ 100 Million after 3 years whereas its current market price is $ 180 Million. Is the forward contract a financial instrument to X Inc and Y Inc?

IAS 32 Financial Instruments: Presentation- EXAM RELATED TECHNICL POINTS

IAS 32 Financial Instruments: Presentation- EXAM RELATED TECHNICL POINTS
How can one TEACH IAS 32?

IAS 32 Financial Instruments: Presentation- PPT PRESENTATION -COURSE NOTES

IAS 32 Financial Instruments: Presentation- PPT PRESENTATION -COURSE NOTES
How can one TEACH IAS 32?

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