Question

1. Firms may hold financial assets to earn returns. How the firm would classify financial assets? What treatment will such financial assets get in the financial statements in accordance with US GAAP and IFRS standards?

2. Company owner contributes 100,000, which is invested in a twenty year bond with a 5% coupon paid semi-annually. After six months the firm receives the coupon payment of 2500 and the market price has reached to 102,000. Show the balance sheet and income statement treatment under each of the following categorization: held for trading, available for sale, held to maturity.

3. At the start of year 1 owner contribute 100. After year 1 the company purchases the financial assets categorized as AFS worth 10. During year 1 the net income is 20 which is retained. The value of financial assets goes up to 12. During year 2 there is treasury stock operation worth 30 Net income is 40 which is retained. Financial asset goes up to 15. Show the relevant equity components at the end of year 1 and 2.

Discuss all in detail

Answer 1

Solution to qst 1.:

The meaning of Financial Instruments is stated by the IFRS 9 Financial Intruments, once the respective financial instrument is determined i.e, either Financial Asset or a Liability. Its Clasification is determined by the IAS 1 Presentation of Financial Statements.

As per the IAS 1;

The clasification of FIinancial asset is either - Current Financial Asset or Non-Current Financial Asset.

But, here the question arises is, what is the meaning of Current FInancial Asset or Non-Current Financial Asset ?.

Current Financial Asset	Non-Current Financial Asset
When the entity expect to realise the asset within twelve months from the date of reporting period. i.e, <= 12months.	When the entity do not expect to realise the asset within twelve months from the date of reporting period. i.e, >12 months.

What is the treatment of Financial Assets ?.

As per IFRS 9 Financial Instruments,

The accounting of Financial assets depends on the Business model,

Entity should assess whether its Business Model is to,

a. Hold Only, or

b. Hold or Sell or Trade

For further explanation please refer the chart attached herewith.,

Solution to qst 2.:

Please refer the image attached herewith.

Solution to qst 3.:

Please refer the image attached herewith.