Certificate in International Financial Reporting Financial Instruments 2 — Questions and Answers
Question 1: Under IFRS 9, when an entity reclassifies financial assets, where is the effect recognised?
- Prospectively from the reclassification date with no restatement of prior gains or losses (Correct answer)
- Retrospectively with restatement of all prior periods
- In OCI only
- In retained earnings only
Correct answer: Prospectively from the reclassification date with no restatement of prior gains or losses
IFRS 9 requires prospective reclassification from the reclassification date without restating prior recognised amounts.
Question 2: Under IFRS 9, what is the 'SPPI' test used to determine?
- Whether contractual cash flows are solely payments of principal and interest (Correct answer)
- Whether the instrument should be fair valued
- Whether hedge accounting can be applied
- Whether the entity has significant influence
Correct answer: Whether contractual cash flows are solely payments of principal and interest
The SPPI test ensures the cash flows are consistent with a basic lending arrangement, enabling amortised cost classification.
Question 3: Under IFRS 9, a financial liability is derecognised when:
- The obligation is discharged, cancelled, or expires (Correct answer)
- The carrying amount is paid
- The liability is renegotiated
- A new creditor is identified
Correct answer: The obligation is discharged, cancelled, or expires
IFRS 9 requires derecognition of a financial liability only when the contractual obligation is extinguished.
Question 4: Under IAS 39/IFRS 9, hedge effectiveness requires a hedge relationship to be:
- Documented at inception, with an economic relationship and no credit risk dominating (Correct answer)
- Perfectly offsetting at all times
- Approved by auditors
- Based on derivatives only
Correct answer: Documented at inception, with an economic relationship and no credit risk dominating
IFRS 9 hedge accounting requires formal designation, documentation, an economic relationship, and low credit risk dominance.
Question 5: Under IFRS 9, gains and losses on financial assets designated as FVOCI (equity instruments) are:
- Recognised in OCI and never recycled to profit or loss (Correct answer)
- Recognised in profit or loss on disposal
- Recognised in OCI and recycled on disposal
- Recognised directly in retained earnings
Correct answer: Recognised in OCI and never recycled to profit or loss
For equity instruments designated at FVOCI, gains/losses remain in OCI permanently and are not recycled.
Question 6: Under IFRS 7, a sensitivity analysis for interest rate risk must show:
- The effect of a reasonably possible change in rates on profit or loss and equity (Correct answer)
- The exact hedging position at year-end
- All interest-bearing instruments at fair value
- The maximum possible loss scenario
Correct answer: The effect of a reasonably possible change in rates on profit or loss and equity
IFRS 7 requires entities to disclose how a reasonably possible change in rates would affect reported results.
Certificate in International Financial Reporting Financial Instruments 2
Under IFRS 9, when an entity reclassifies financial assets, where is the effect recognised?