Accounting Theory and Practice: Financial Assets and Liabilities, Fair Value, Set-Off Rights

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3101AFE ACCOUNTING THEORY AND PRACTICE

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Answer 1:
a) Loan receivable is a amount that has to be recovered by the company so it is classified as
financial assets
b) Loan Payable refers to the amount that to be paid by the company at any future period so
it means it is financial liability.
c) Ordinary shares classified as equity as it represents shareholder’s capital
d) Investment in ordinary shares is type of financial asset for any company (Deegan, 2013)
e) It is financial liability due to obligation on company
f) Investment is preference share is financial assets as it guarantee inflow of economic
resources
Answer 2:
The value of a derivative financial instrument is influenced by the value of an underlying
item. This is because these are categorized to be secondary financial instruments whose value is
influenced by the significant change that occurs in the value of underlying financial instruments.
For example, the value of a share option is influenced by the changes that occur in the market
value of the underlying shares. The financial instruments are required to be measured at the fair
value as per the AASB 139 accounting standard. The profit or loss realized on the financial
instruments is transferred to the profit or loss (Sangiuolo, 2008).
Answer 3:
There is a consequence of reporting a financial instrument as debt rather than in the
equity on the statement of proof or loss. For example, if preference shares are reported as a
liability in place of equity then the payments realized at regular intervals related to it will be
categorized as interest expense and not dividends. Thus, it will have an impact on the reported
profit or loss of an entity and therefore the issues should classify the preference shares as equity.
The accounting standard of AASB 132 has provided in-depth guidance for reporting the debt and
equity components of a financial instrument (Deegan, 2016).
Answer 4:
The accounting standard of AASB 13 has stated fair value to be the price that is expected
be realized by selling an asset or transferring of a liability in an orderly transaction carried out
between the participants of a market on the date at which they are measured. Orderly transactions
that assumes having a sufficient exposure about the market for developing in-depth information
about asset or liability before the date of measuring their significant values. Such a transaction
cannot be a forced one and usually involves insufficient exposure to the market for enabling the
participants to acquired in -depth information about an asset or a liability (Henderson, 2015).
Answer 5: