Financial instruments

FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

Question

Kumasi Ventures Plc has had 5 million shares in issue for many years. Earnings for the year ended 31 December Year 4 were GH₵2,579,000. Earnings for the year ended 31 December Year 3 were GH₵1,979,000. Tax is at the rate of 30%.

Outstanding share options on 500,000 shares have also existed for a number of years. These can be exercised at a future date at a price of GH₵3 per share. The average market price of shares in Year 3 was GH₵4 and in Year 4 was GH₵5.

On 1 April Year 3 Kumasi Ventures Plc issued GH₵1,000,000 convertible 7% bonds. These are convertible into ordinary shares at the following rates:

On 31 December Year 6: 30 shares for every GH₵100 of bonds

On 31 December Year 7: 25 shares for every GH₵100 of bonds

On 31 December Year 8: 20 shares for every GH₵100 of bonds

Required:

Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3

Answer

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Tags: Convertible bonds, Diluted EPS, Earnings per share, Financial instruments, Share options
Level: Level 2

Topic: Financial Instruments

FR – L2 – Q58 – Financial Instruments

Calculate finance cost and SFP extracts for Bolgania Ltd’s 6% convertible loan stock for 20X4; comment on Accra Advisors’ advice.

Question

On 1 October 20X3 Bolgania Ltd issued GH¢10 million 6% convertible loan stock on the following terms:
The issue price was at par.
The loan stock is convertible into the company’s equity shares at the option of the stockholders four years after the date of its issue (30 September 20X7) on the basis of 20 shares for each GH¢100 of loan stock. Alternatively it will be redeemed at par.
Accra Advisors had advised that if Bolgania Ltd had issued similar loan stock without the conversion rights, then it would have had to pay an interest (coupon) rate of 10% on the loan stock. This is because the terms of conversion to equity shares are favourable.
Accra Advisors further advised that because it is almost certain that the loan stock holders will exercise their right to convert to equity shares, the loan stock has the substance of equity and can be included as such on the statement of financial position. This has the added advantage of improving/reducing the company’s gearing (debt/equity) in comparison to what would be the case with the issue of ‘straight’ loan stock.

The present value of GH¢1 receivable at the end of each year, based on discount rates of 6% and 10% can be taken as:

Required
In relation to the 6% convertible loan stock, calculate the finance cost to be shown in the statement of profit or loss and the extracts from the statement of financial position for the year to 30 September 20X4; and comment on Accra Advisors’ advice.

Answer

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Tags: Convertible Loan Stock, Debt and Equity Classification, Finance Costs, Financial instruments, IAS 32
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q56 – Financial Instruments

Account for convertible loan notes in Tafu Ltd's financial statements for the year to 30 September 20X4.

Question

Tafu Ltd issued GH¢10 million of 4% convertible loan notes on 1 October 20X3, on which interest is paid annually in arrears on 30 September. The loan notes are convertible into equity shares of Tafu Ltd on 30 September 20X6 at the rate of 20 shares in Tafu Ltd for every GH¢100 of notes. Alternatively, the notes can be redeemed on that date for cash at par, at the option of the note holder.
If Tafu Ltd had issued straight loan notes, redeemable at par after 3 years, it would have had to pay interest at the rate of 7% in order to persuade investors to subscribe for them.

Required:
(a) Show how the convertible loan notes would be accounted for in the financial statements of Tafu Ltd for the year to 30 September 20X4.

(b) Comment on the validity of the reasons of the directors for choosing to issue convertible loan notes.

Answer

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Tags: Convertible Loan Notes, Financial instruments, Gearing, IAS 32
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

Question

On 1 January Year 1 Jordana PLC has the following capital and reserves.

Equity	GH₵
Share capital (1 million ordinary shares)	1,200,000
Retained earnings	5,670,300
	6,870,300

During Year 1 the following transactions took place.

1 January: An issue of GH₵100,000 8% GH₵1 redeemable preference shares at a premium of 60%. Issue costs are GH₵2,237. Redemption is at 100% premium on 31 December Year 5. The effective rate of interest is 9.5%.
31 March: An issue of 300,000 ordinary shares at a price of GH₵1.30 per share. Issue costs, net of tax benefit, were GH₵20,000.
30 June: A 1 for 4 bonus issue of ordinary shares.
Profit for the year, before accounting for the above, was GH₵508,500. The dividends on the redeemable preference shares have been charged to retained earnings.

Required
Set out capital and reserves and liabilities resulting from the above on 31 December Year 1.

Answer

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Tags: Accounting Standards, Convertible Loan Notes, Corporate Governance, Deferred Tax, Equity, Financial instruments, Financial Statements, Liabilities, Preference Shares, Share Capital
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

Question

AB Enterprises, a company whose domestic currency is the cedi, has imported a consignment of tomato paste from Spain at a cost of EUR540,000, which is payable in three months’ time. Ama Kofi, the company’s finance director, is concerned about the company’s exposure to currency risk, and she is considering the use of forward contracts or currency futures to hedge the risk.

Required:
(i) Explain to Ama Kofi FOUR differences between a forward contract and a futures contract.
(ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AB Enterprises facing in relation to the EUR540,000 tomato paste consignment?
(iii) Explain to Ama Kofi, THREE disadvantages of hedging the euro exposure with futures hedge.

Answer

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Tags: Basis risk, Currency Risk, Financial instruments, Forward contracts, Futures contracts, Futures hedging, Hedging, Transaction risk
Level: Level 2

Topic: Futures and hedging with futures

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

Question

Briefly describe the following financial instrument:

(a) Forwards

(b) Futures

Answer

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Tags: Currency Risk, Financial instruments, Hedging, Options
Level: Level 2

Topic: Hedging with options

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

Question

Discuss the criteria for recognising revenue under IPSAS 47: Revenue and contrast these criteria with the criteria for revenue recognition under IPSAS 9 AND IPSAS 23.

Answer

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Tags: Binding Arrangements, Financial instruments, IPSAS 23, IPSAS 47, IPSAS 9, Non-Binding Arrangements, Revenue Recognition
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

Question

A company has the following equity shares and bonds in issue:

2,000,000 equity shares of GH¢0.50 each.

GH¢1,000,000 of 4% convertible bonds.

The current earnings per share (EPS) is GH¢0.25.

The rate of tax is 30%.

The convertible bonds are convertible into equity shares at the rate of 40 shares for every GH¢100 of bonds.

Required

On the basis of this information, calculate the expected change in EPS if all the bonds are converted into equity shares.

Answer

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Tags: Convertible bonds, Corporate finance, Earnings per share, Equity shares, Financial instruments, Taxation
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

Question

Amoah Plc and Bonsu Plc each have in issue 2,000,000 ordinary shares of GH₵1 nominal value.
Amoah Plc also has GH₵2,500,000 of 12% convertible debentures in issue. Each GH₵100 of bonds is convertible into 20 ordinary shares at any time until the date of expiry of the bonds. If the bonds have not been converted by the expiry date, they will be redeemed at 105.
Bonsu Plc has 500,000 equity warrants in issue. Each warrant gives its holder an option to subscribe for 1 ordinary share at a price of GH₵5.00 per share. The warrants can be exercised at any time until the date of their expiry.
The shares of both companies, the convertible debentures, and the warrants are all actively traded in the stock market.

Required
(a) Calculate the value of each GH₵100 unit of convertible debentures of Amoah Plc and the value of each warrant of Bonsu Plc on the day of expiry, if the share price for each company at that date is:
(i) GH₵4.40
(ii) GH₵5.20
(iii) GH₵6.00
(iv) GH₵6.80

(b) Assume that the profit before interest and tax of both companies is GH₵1,200,000 and the rate of tax is 50%.

Calculate the earnings per share for:

(i) Amoah Plc, assuming that none of the convertible debentures are converted

(ii) Amoah Plc, assuming that all of the convertible debentures are converted

(iii) Bonsu Plc, assuming that none of the warrants are exercised

(iv) Bonsu Plc, assuming that all of the warrants are exercised

Answer

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Tags: Earnings per share, Equity, Financial instruments, onvertible debentures, Profit after tax, Stock market, Warrants
Level: Level 2

Topic: Sources of finance: debt

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

Question

You are the manager in Dee Kay Company, a firm of Chartered Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information relating to one client which were discussed at the meeting is given below.
Tap Co
Tap Co is a clothing manufacturer, which has recently expanded its operations overseas. To manage exposure to cash flows denominated in foreign currencies, the company has set up a treasury management function, which is responsible for entering into hedge transactions such as forward exchange contracts. These transactions are likely to be material to the financial statements. The audit partner is about to commence planning the audit for the year ending 31 July 2014.
Required:
Discuss why the audit of financial instruments is particularly challenging, and explain the matters to be considered in planning the audit of Tap Co’s forward exchange contracts.

Answer

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Tags: Audit Planning, Financial instruments, Forward exchange contracts, Risk Assessment, Treasury management
Level: Level 3

Topic: Audit Evidence

Tag (SQ): Financial instruments

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FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

FR – L2 – Q58 – Financial Instruments

Calculate finance cost and SFP extracts for Bolgania Ltd’s 6% convertible loan stock for 20X4; comment on Accra Advisors’ advice.

FR – L2 – Q56 – Financial Instruments

Account for convertible loan notes in Tafu Ltd's financial statements for the year to 30 September 20X4.

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

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FR – L2 – Q62 – Financial Instruments

Calculate diluted EPS for Year 4 and comparative diluted EPS for Year 3 for a company with convertible bonds and share options.

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FR – L2 – Q58 – Financial Instruments

Calculate finance cost and SFP extracts for Bolgania Ltd’s 6% convertible loan stock for 20X4; comment on Accra Advisors’ advice.

You're reporting an error for "FR – L2 – Q58 – Financial Instruments"

FR – L2 – Q56 – Financial Instruments

Account for convertible loan notes in Tafu Ltd's financial statements for the year to 30 September 20X4.

You're reporting an error for "FR – L2 – Q56 – Financial Instruments"

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

You're reporting an error for "FR – L2 – Q55 – Financial Instruments"

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

You're reporting an error for "FM – L2 – Q87 – Foreign exchange risk and currency risk management"

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

You're reporting an error for "FM – L2 – Q85 – Forwards"

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

You're reporting an error for "PSAF – L2 – Q8.4 – Revenue Recognition Standards"

FM – L2 – Q31 – Sources of finance: debt

Calculate the change in EPS if convertible bonds are converted into equity shares for a company with given financial data.

You're reporting an error for "FM – L2 – Q31 – Sources of finance: debt"

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

You're reporting an error for "FM – L2 – Q16 – Sources of finance: debt"

AAA – L3 – Q47 – Financial instruments

Discuss challenges in auditing financial instruments and matters for planning the audit of Tap Co’s forward exchange contracts.

You're reporting an error for "AAA – L3 – Q47 – Financial instruments"

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