Financial instrument basics
This is the term for a contract that creates a financial asset for one party and a financial liability for another.
A financial instrument.
When initially measuring financial assets, transaction costs are added to fair value EXCEPT for assets measured using this method.
A: Fair value through profit or loss (P&L).
Under this subsequent measurement method, changes in fair value flow directly to profit or loss.
A: Fair value through profit or loss (P&L).
Provide the journal entry to record the initial purchase of shares that are NOT held for trading, including transaction costs.
DR Investment in Shares, CR Cash.
Name the three main types of financial instruments covered in the lecture.
Debt instruments, equity instruments, and derivatives.
For financial liabilities, initial measurement is fair value in this direction relative to transaction costs.
Fair value plus transaction costs
Under this subsequent measurement method, changes in fair value are recorded in Other Comprehensive Income (OCI) rather than profit or loss.
Fair value through other comprehensive income (OCI).
When recording interest income on a debt instrument at amortised cost and cash is received, provide both journal entries.
DR Cash / CR Interest Income (cash received); DR Investment in Debt Instrument / CR Interest Income
This type of financial instrument includes options and futures, with its value based on an underlying asset
A derivative
When an equity instrument held for trading is first recognised, brokerage fees are recorded here rather than added to the investment.
A: Brokerage expense
This subsequent measurement method, used for debt instruments, uses the effective interest method and does NOT re-measure to fair value each period.
Amortised cost.
If an equity instrument NOT held for trading (FVOCI) increases in fair value, provide the journal entry.
DR Investment in Shares, CR Gain in Fair Value (OCI).
A derivative can be an asset to one party and this to the counterparty.
A financial liability.
Under trade date accounting for equity instruments NOT held for trading, no entry is made on the trade date. Instead, the entry is recorded on this date.
The settlement date.
The 'held for' test determines this key accounting outcome for a financial instrument.
Where gains and losses are recognised — profit or loss (FVTPL) versus OCI (FVOCI).
If an equity instrument HELD for trading (FVTPL) increases in fair value, provide the journal entry.
DR Investment in Shares, CR Gain in Fair Value (P&L).
True or false: a derivative's classification as an asset or liability depends solely on which party holds it and how its value has moved relative to cost.
True — a derivative is an asset if its fair value exceeds cost and a liability if below, from each party's perspective.
On trade date accounting for equity instruments held for trading, a payable to broker is raised. Provide the complete trade-date journal entry.
DR Shares, DR Brokerage Expense, CR Cash (or CR Payable to Broker).
When a debt instrument measured at amortised cost increases in carrying amount due to interest accruing, which side of which account is credited?
CR Interest Income
For a debt instrument recognised at amortised cost, show the initial recognition journal entry when cash is paid.
DR Investment in Debt Instrument (fair value + transaction costs), CR Cash.