CAF-6 · Chapter 2
Financial instruments MCQs with Answers
15 multiple-choice questions on Financial instruments for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the definitions in IAS 32, which of the following items is explicitly classified as a non-financial liability?
- A) Trade payables
- B) Current tax payable
- C) A loan from a bank
- D) Issued convertible bonds
Show answer & explanation
Answer: B) Current tax payable
Current tax payable is a statutory obligation rather than a contractual one, so it is classified as a non-financial liability.
Question 2
When should an entity initially recognize a financial asset or a financial liability in its statement of financial position?
- A) When management forms an intention to acquire the instrument.
- B) When the risks and rewards of ownership have fully transferred.
- C) When the entity becomes a party to the contractual provisions of the instrument.
- D) When cash has physically changed hands between the parties.
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Answer: C) When the entity becomes a party to the contractual provisions of the instrument.
IFRS 9 strictly states that an entity recognizes a financial asset or liability when, and only when, it becomes a party to the contractual provisions of the instrument.
Question 3
Alpha Corp purchases equity shares in another company. The shares are not held for trading. According to IFRS 9, how can Alpha Corp classify this investment at initial recognition?
- A) It must be classified at amortised cost.
- B) It must be classified at fair value through profit or loss (FVPL) with no other options.
- C) It can be classified at FVPL or, by an irrevocable choice, at fair value through OCI (FVOCI).
- D) It must be classified as a non-monetary asset carried at historical cost.
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Answer: C) It can be classified at FVPL or, by an irrevocable choice, at fair value through OCI (FVOCI).
For equity instruments not held for trading, the default classification is FVPL, but an entity can make an irrevocable choice at initial recognition to classify them at FVOCI.
Question 4
Beta Ltd acquires a debt instrument. Its business model is solely to hold the asset to collect contractual cash flows. Additionally, the cash flows represent solely payments of principal and interest (SPPI). How must this financial asset be classified?
- A) Fair value through profit or loss
- B) Fair value through other comprehensive income
- C) Amortised cost
- D) Lower of cost and net realizable value
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Answer: C) Amortised cost
A debt instrument is classified at amortised cost if it meets both the 'hold to collect' business model test and the SPPI (solely payments of principal and interest) test.
Question 5
Gamma Inc manages a portfolio of bonds where the business model objective is achieved by both collecting contractual cash flows and selling the bonds. The cash flows meet the SPPI test. Assuming no accounting mismatch exists, how should these bonds be classified?
- A) Amortised cost
- B) Fair value through other comprehensive income (FVOCI)
- C) Fair value through profit or loss (FVPL)
- D) As an equity instrument
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Answer: B) Fair value through other comprehensive income (FVOCI)
Debt instruments held within a business model whose objective is achieved by both collecting contractual cash flows and selling the assets, and which pass the SPPI test, are classified at FVOCI.
Question 6
Under what specific condition can a financial asset that otherwise meets the strict criteria for amortised cost or FVOCI be designated as Fair Value through Profit or Loss (FVPL)?
- A) When the asset is internally generated.
- B) When management decides it is easier to measure.
- C) If doing so eliminates or significantly reduces an accounting mismatch.
- D) If the asset is a trade receivable.
Show answer & explanation
Answer: C) If doing so eliminates or significantly reduces an accounting mismatch.
IFRS 9 allows an exception where a financial asset may be designated as FVPL, even if it meets the requirements for amortised cost or FVOCI, if it eliminates an accounting mismatch.
Question 7
Delta Ltd acquires a financial asset and correctly classifies it as fair value through profit or loss (FVPL). How should the transaction costs associated with acquiring this asset be treated?
- A) Added to the initial fair value of the asset.
- B) Deducted from the initial fair value of the asset.
- C) Expensed immediately in profit or loss.
- D) Deferred and amortized over the life of the asset.
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Answer: C) Expensed immediately in profit or loss.
While transaction costs are added to (or subtracted from) the initial measurement for AC and FVOCI instruments, transaction costs for instruments measured at FVPL are expensed immediately.
Question 8
Epsilon Co issues a financial liability that will be measured at amortised cost. At initial recognition, how should the transaction costs be treated?
- A) Deducted from the initial fair value of the financial liability.
- B) Added to the initial fair value of the financial liability.
- C) Expensed immediately in the statement of comprehensive income.
- D) Recognized as a separate intangible asset.
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Answer: A) Deducted from the initial fair value of the financial liability.
At initial recognition, a financial liability measured at amortised cost is recorded at fair value minus transaction costs.
Question 9
Zeta Ltd holds an investment in debt securities measured at amortised cost. Which rate is used to calculate the interest income recognized in profit or loss for this instrument?
- A) The market rate at the reporting date
- B) The effective interest rate
- C) The nominal coupon rate
- D) The incremental borrowing rate
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Answer: B) The effective interest rate
Subsequent measurement at amortised cost involves calculating interest income using the effective interest rate (often described as the internal rate of return).
Question 10
Which of the following financial instruments is NOT required to be assessed for impairment (loss allowance) under IFRS 9?
- A) A debt instrument measured at amortised cost.
- B) A debt instrument measured at fair value through OCI.
- C) A debt instrument measured at fair value through profit or loss (FVPL).
- D) Trade receivables.
Show answer & explanation
Answer: C) A debt instrument measured at fair value through profit or loss (FVPL).
All instruments measured at FVPL are not required to be assessed for impairment because any fair value movements (including those due to credit risk) are already reflected in profit or loss.
Question 11
According to IFRS 9, if a financial asset is classified as an investment in equity instruments designated at FVOCI, where are the subsequent changes in fair value recognized?
- A) In profit or loss.
- B) In other comprehensive income (OCI).
- C) They are ignored until the asset is sold.
- D) Adjusted against the retained earnings directly.
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Answer: B) In other comprehensive income (OCI).
For equity instruments irrevocably designated at FVOCI, subsequent changes in fair value are recognized in other comprehensive income.
Question 12
While most financial liabilities are classified and measured at amortised cost, under what circumstance would a financial liability be measured at fair value?
- A) If the liability arises from a statutory obligation like income tax.
- B) If the liability is a standard trade payable.
- C) If the liability is held for trading or to eliminate an accounting mismatch.
- D) If the entity expects to hold the liability until maturity.
Show answer & explanation
Answer: C) If the liability is held for trading or to eliminate an accounting mismatch.
Financial liabilities are typically measured at amortised cost, with exceptions for those held for trading, held for hedging, or designated at FVPL to eliminate an accounting mismatch.
Question 13
Sigma Bank holds a loan receivable from a corporate client. Which of the following events would act as an indicator that the loan is impaired under IFRS 9?
- A) A general increase in market interest rates.
- B) The borrower being granted concessions due to significant financial difficulty.
- C) A change in the bank's internal business model.
- D) The borrower changing its board of directors.
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Answer: B) The borrower being granted concessions due to significant financial difficulty.
IFRS 9 lists significant financial difficulty, breach of contract, borrower bankruptcy, and the granting of concessions to the borrower as primary indicators of impairment.
Question 14
Omega Corp evaluates a new debt investment to determine its classification. It notes that the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest. This evaluation is commonly known as:
- A) The Business Model test
- B) The SPPI test
- C) The Effective Interest test
- D) The Expected Credit Loss test
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Answer: B) The SPPI test
The requirement that contractual cash flows represent solely payments of principal and interest on specified dates is known as the SPPI test.
Question 15
For an investment in debt instruments measured at FVOCI, how is the effective interest accounted for?
- A) It is ignored because the asset is measured at fair value.
- B) It is recognized entirely in other comprehensive income.
- C) It is calculated using the effective interest rate and recognized in profit or loss.
- D) It is deducted directly from the carrying amount of the asset.
Show answer & explanation
Answer: C) It is calculated using the effective interest rate and recognized in profit or loss.
Even though a debt instrument at FVOCI has its fair value changes recognized in OCI, its interest income is still calculated using the effective interest rate and recognized in profit or loss.