UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES

DEPARTMENT OF ACCOUNTING
ACC304-FINANCIAL REPORTING III

Study Guide-IAS 32 and IFRS 9

1. Why is it important to have financial reporting standards for financial instruments?
2. Define the following terms: Financial Instruments; Financial Assets; Financial Liabilities; Equity;
Compound instruments. Give examples.
3. Identify some of the exceptions under IAS 32.
4. When are entities required to recognise financial instruments in their financial statements?
5. What is the critical distinction between equity and financial liability?
6. How are compound instruments accounted for under IAS 32?
7. How are treasury shares treated in the financial statements?
8. How are dividends, interests, gains and losses accounted for in the financial statements?
9. Identify the various classifications of financial assets and liabilities under IFRS 9.
10. Discuss the initial and subsequent measurement of the various classifications under point 13
above.
11. List disclosure requirements of financial instruments as required by IFRS 7

Review Questions-Financial Instruments

1. On January 1 2011, Swann issued three year 5% GH¢300, 000 loans at nominal value with
effective interest rate at 5%. The loan note will be redeemed at par.
Market Interest Rates at 31/12/2011 6%
Market Interest Rates at 31/12/2012 4%
The transaction is classified as FVTPL. Explain and illustrate how the loan is accounted for in the
financial statements for the three years to 31/12/2013.

2. A company issues 4% loan notes with a nominal value GH¢200, 000 at a discount of 2.5%. The
loan will be repayable at a premium of 10% after five years and the effective rate of interest is 7%.
Issue cost incurred amounted to GH¢5, 340.
How much will be recorded when the loan notes are issued?
What amounts will be posted to the income statement and statement of financial position for the 5
years.

3. An enterprise issued 1,000,000 GH¢1 4% redeemable shares at par on 1 st April, 2012, which was
redeemable on 31st March, 2016 at a 10% premium. The issue costs were GH¢ 100,000. The
constant annual rate of interest is approximately 9.28%. Ignore all tax implications. Calculate the
total finance cost and the annual charge to income statement.
 4. Everest limited issued GH¢400,000 8% convertible loan stock at par on 1 January, 2010,
redeemable at par on 31 December, 2014. The terms of conversion require that each GH¢100 of
the loan will be convertible into 50 equity shares of Everest Limited. The market rate of the loan
without a conversion option is 12% and interest is payable in arrears on 31 December each year.

The present value of GH¢1 at the discount rates of 8% and 12% are provided below:
Year 8% DCF 12% DCF
1 0.93 0.89
2 0.86 0.80
3 0.79 0.71
4 0.74 0.64
5 0.68 0.57
Required:
a) Pass a journal to record the initial recognition of the loan on 1 January, 2010.
b) Prepare extracts of Statement of Income and Statement of Financial Position at the end of
2012.
NB: All calculations should be rounded to the nearest whole number.

5. A strategic investor, NPIT, invests in 10 million equity shares of a listed company, EBAN
Construction Limited on 01 July 2011. The price per share is GH¢1 and incurred legal charges of
2% of the value of the investment. NPIT plans to hold the shares for trading in the short term.
Share prices during the period are as follows:
31 December 2011 GH¢1.40
31 December 2012 GH¢1.20

The shares were sold on 31 December 2013 at GH¢1.30 per share.

Required:
a) Prepare Journal entries to give effect to the above transactions
b) Prepare extracts from the income statement and statement of financial position for all the
relevant years.