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Frequently Asked Questions

CIMA F2 Sample Question Answers

Question # 1

Which of the following defines the calculation of interest cover?

A. Profit before interest and tax divided by finance costs
B. Finance costs divided by profit before interest and tax
C. Profit after tax divided by finance costs
D. Finance costs divided by profit after tax 

Question # 2

AB and CD are competitors supplying components to the car manufacturing industry. AB operates in Country X and CD operates in Country Y. Both entities were incorporated onthe same day, are the same size and prepare financial statements to 31 March each year using international accounting standards. Which of the following statements taken individually would limit the usefulness of the comparison of the return on capital employed ratio between the two entities?

A. The corporate tax rate is 25% in Country X and 40% in Country Y.
B. The average rate of inflation is 3% in Country X and 10% in Country Y.
C. The average rate of borrowing is 2% in Country X and 7% in Country Y.
D. The currency is Dollar in Country X and Krona in Country Y.

Question # 3

RS has issued an instrument with a nominal value of $1 million, at a discount of 2.5%, and a coupon rate of 6%. The terms of the issue are that the instrument must either be redeemed at par, at the option of the holder, in three years' time, or alternatively converted into equity shares in RS. The characteristics of this instrument taken as a whole indicates that it would be classifedas which of the following?

A. Compound instrument
B. Debt instrument
C. Equity instrument
D. Discounted instrument

Question # 4

W and Y are very similar entities with the same level of profit before interest and tax. However, W has gearing of 95% and Y has gearing of 30%.Which of the following statements is true?

A. Investing in W carries a higher level of risk than investing in Y.
B. A greater proportion of profit will be available out of which to declare a dividend in W.
C. Investors in Y will expect a higher return than investors in W.
D. Y has a greater commitment to meet interest payments than W.

Question # 5

AB, a listed entity, prepared its financial statements to 31 December 20X7, in accordance with international accounting standards. Which THREE of the following were disclosed as related parties of AB in its financial statements?

A. AB's defined benefit pension plan.
B. The wife of the Managing Director of AB, to whom AB sold a motor vehicle in the year to 31 December 20X7.
C. ST, an entity that was jointly established by AB and CD, and that is accounted for as a joint venture in AB's financial statements to 31 December 20X7.
D. AB's bank that provides more than 60% of the entity's loan finance.
E. AB's main supplier, GH, who supplies more than 70% of AB's goods for manufacture.

Question # 6

ST has in issue unquoted 7% debentures which were issuedat par and are redeemable in 1 year's time.These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%.Which of the following would explain why the yield to maturity is lower than the coupon?

A. ST will benefit from the tax relief on the interest payment.
B. The debentures will be redeemed at a discount to their par value. 
C. The debentures will be redeemed at their par value.
D. The market value of the debentures must be higher than their par value.

Question # 7

AB acquired its one subsidiary, CD, on 1 January 20X1. At this date the fair value of CD's property, plant and equipment was found to be $40 million higher than its carrying value. The relevant items had a remaining estimated useful life of 10 years from the date of acquisition. At 31 December 20X4 AB and CD presented property, plant and equipment of $100 millionand $50 million respectively in their individual financial statements. The value of property, plant and equipment presented in AB's consolidated statement of financial position at 31 December 20X4 is:

A. $174 million
B. $190 million
C. $150 million
D. $134 million

Question # 8

The consolidated statement of profit or loss for VW for the year ended 30 September 20X7 includes the following: What is VW's interest cover for the year ended 30 September 20X7?

A. 4.5
B. 3.3
C. 4.1
D. 5.1

Question # 9

JJ's current share price is $1.80, with a dividend of $0.20 a share just about to be paid. Dividends have increased at an average annual growth rate of 4.5% and this is expected to continue into the future. What is JJ's cost of equity?

A. 17.6%
B. 16.1%
C. 12.5%
D. 11.1%

Question # 10

ST has in issue unquoted 7% debentures which were issued at par and are redeemable in 1 year's time. These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%. Which of the following would explain why the yield to maturity is lower than the coupon? 

A. ST will benefit from the tax relief on the interest payment.
B. The debentures will be redeemed at a discount to their par value.
C. The debentures will be redeemed at their par value.
D. The market value of the debentures must be higher than their par value.

Question # 11

GH acquired 3,000,000 of the 12,000,000 equity shares of JK. All shares carried equal voting rights and no other single shareholder of JK held more than 10% of the equity shares. GH has the power to participate in the financial and operating policy decisions but Based on the information provided above, how would GH's investment in JK be accounted for in its consolidated financial statements?

A. Associate
B. Joint venture
C. Joint arrangement
D. Financial asset

Question # 12

FG has a weighted average cost of capital of 12% based on its existing: • level of gearing of 30% (measured as debt/(debt + equity)); and • business operations. This would be used as an appropriate discount factor to assess which of the following significantprojects?

A. A project in an industry in which FG does not currently operate, funded wholly by equity.  
B. A project to extend FG's existing operations, funded wholly by debt.  
C. A project in an industry in which FG does not currently operate, funded 30% with debt and 70% with equity. 
D. A project to extend FG's existing operations, funded 30% with debt and 70% with equity.  

Question # 13

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale. Which of the following describes the value of the financial asset on the date of acquisition?

A. Fair value excluding transaction costs.  
B. Fair value including transaction costs.  
C. Present value including transaction costs.  
D. Present value excluding transaction costs.  

Question # 14

XY purchased $100,000 of quoted 8% bonds in the current year which it intends to hold until redemption. Which of the following identifies the correct classification and subsequent measurement basis for this financial instrument?

A. A loans and receivables financial asset subsequently measured at fair value with gains and losses in reserves. 
B. A held to maturity financial asset subsequently measured at amortised cost.  
C. A loans and receivables financial asset subsequently measured at amortised cost.  
D. A held to maturity financial asset subsequently measured at fair value with gains and losses in reserves

Question # 15

AB sold the majority of its operating equipment to LM for cash on 30 December 20X9 and then immediately leased it back under an operating lease. AB used the cash proceeds from the sale to reduce its long term borrowings significantly. No early repayment charge was levied by the lender. Which of the following statements is true in respect of AB's ratios calculated at 31 December 20X9?

A. AB's return on capital employed would be lower as a result of this sale being recorded.
B. AB's current ratio would be lower as a result of this sale being recorded.
C. AB's non-current asset turnover would be lower as a result of this sale being recorded.
D. AB's gearing ratio would be lower as a result of this sale being recorded.

Question # 16

AB acquired a financial investment on 1 January 20X9, incurring $5,000 related agency fees. AB initially classified the investment as held for trading, in accordance with IAS 32 Financial Instruments: Presentation. Which of the following statements reflects the accounting treatment that AB adopted in respect of this investment when it prepared its financial statements to 31 December 20X9?

A. Agency fees were recorded as an expense and the gain/loss on the remeasurement of the investment at the year end was recorded in profit or loss for the year. 
B. Agency fees were recorded as an expense and the gain/loss on the remeasurement of the investment at the year end was recorded in other comprehensive income
C. Agency fees were added to the cost of the investment and the gain/loss on the remeasurement of the investment at the year end was recorded in profit or loss for the year

Question # 17

The following information relates to DEF for the year ended 31 December 20X7: • Property, plant and equipment has a carrying value of $3,500,000 and a tax written down value of $2,500,000. • There are unused tax losses to carry forward of $1,250,000. These tax losses have arisendue topoor trading conditions which are not expected to improve in the foreseeablefuture. • The corporate income tax rate is 25%. In accordance with IAS 12 Income Taxes, the financial statements of DEF for the year ended 31 December 20X7 would recognise deferred tax balances of:

A. Option A
B. Option B
C. Option C
D. Option D

Question # 18

Ratios calculated from the financial statements of ST Group for the years ended 31 August 20X7 and 20X6 are as follows:  Which of the following would have contributed to the movements in these ratios? 

A. During 20X7 ST Group acquired an associate which made a relatively small profit for the year. 
B. ST Group extended its customer base which resulted in an increase in the volume of sales during 20X7. 
C. During 20X7 ST Group increased the useful life of its vehicles to five years from four and adjusted the depreciation charge accordingly
D. The fair value of an investment acquired in 20X7 and classified as fair value through profit or loss has increased in value by the year end. 

Question # 19

PQ and WX are similar sized entities and operate in the same industry within Country X . Both operate from a single warehouse and have similar levels of non current asset resources. The following ratios have been calculated at 31 October 20X8: If considered individually, which of the following would limit the usefulness of these ratios in assessing the comparative financial performances of PQ and WX? 

A. Depreciation of warehouses being charged to cost of sales by PQ and distribution costs by WX.
B. Operating lease rentals for plant and equipment being charged to administration expenses by PQ and distribution costs by WX. 
C. Year end review of equipment resulting in WX charging an impairment loss while PQ's equipment is not impaired.
D. Increased prices for raw materials, which was passed on to customers by both entities.  

Question # 20

EF obtained a government licence, free of charge, to operate a silver mine in 20X7 and $5 million was spent on preparing the site. The mine commenced operation on 1 January 20X8. The licence requires that at the end of the mine's useful life of 20 years, the site above ground must be reinstated to its original position. EF estimated that the cost in 20 years' time of this reinstatement will be $3 million, which has a present value of $1 million at 1 January 20X8. Which THREE of the following describe how the cost of the reinstatement of the site shouldbe treated in the financial statements of EF in the year ended 31 December 20X8?

A. The cost of the mine will be increased by $1 million on 1 January 20X8.
B. The cost of the mine will be increased by $3 million on 1 January 20X8.
C. There will be a credit to finance costs for the unwinding of the discount on the reinstatement provision.
D. There will be a debit to finance costs for the unwinding of the discount on the reinstatement provision.
E. Only the cost of the site preparation will be depreciated over the mine's useful economic life.
F. Depreciation will be charged over 20 years on the full cost of the mine including the reinstatement cost.

Question # 21

A group presents its financial statements in A$. The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition. There have been no impairments to this goodwill. Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows: The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

A. A$75,758.
B. A$66,667.
C. A$150,000.
D. A$132,000.

Question # 22

Which of the following actions would be most likely to improve an entity's gross profit margin?

A. Negotiating with trade suppliers for a bulk purchase discount
B. Offering increased credit to customers
C. Reducing administrative expenses by 10%
D. Writing down the value of obsolete inventories

Question # 23

AB and CD are separate entities that prepare financial statements to 31 May using international accounting standards. AB and CD provide technical support services to the financial services industry and operate in the same country. The financial statements are identical except for the following: • AB purchased all operating equipment, paying $100,000, using a 5 year bank loan. The useful life of the equipment was 5 years. • CD signed an operating lease agreement for all operating equipment for 5 years paying $20,000 per year. Both entities charge all expenses relating to the equipment to cost of sales. From the information provided, which ofthe following ratios would be reliably comparable for AB andCD?

A. Gross profit margin
B. Return on capital employed
C. Non current asset turnover
D. Profit before tax margin

Question # 24

JK is seeking to raise finance for a project and the directors would prefer to take out a fixed rate bank loan repayable over the next 5 years. The project will increase the profit of JK even after taking into account the additional interest costs. Which of the following statements about the use of a bank loan in this situation is true?

A. In the long term servicing a bank loan is more expensive than servicing equity shares due to the higher risk for the lender.
B. The interest on a bank loan is deducted from profit before dividends can be declared to equity shareholders each year. 
C. Because the assets of a business belong to the equity shareholders, a bank loan should NOT be secured on the assets of the business.
D. A bank loan has high issue costs compared to an issue of equity shares because it takes longer to arrange. 

Question # 25

XYZ had 600,000 ordinary shares in issue on 1 July 20X4. On 1 January 20X5, the entity made a 1 for 2 bonus issue. The profit attributable to ordinary shareholders for the year ended 30 June 20X5 was $2,925,000. What is the basic earnings per share for the year ended 30 June 20X5?

A. $3.25
B. $4.88
C. $1.63
D. $3.90

Question # 26

On 1 January 20X1 KL acquired 75% of the equity shares of PQ. Goodwill arising on the acquisition was $480,000. On 31 December 20X3 KL sold the full investment of PQ to XY Group for $2,000,000. On this date the net assets of PQ were $1,340,000 and the noncontrolling interests stood at $410,000.What is the gain on disposal to be recognised in the consolidated statement of profit or loss of KL?

A. $590,000
B. $180,000
C. $660,000
D. $635,000

Question # 27

HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them. HJ's legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed. Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successfully this claim. What is the correct accounting treatment for these two items in HJ's financial statements?

A. Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.  
B. Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.  
C. Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.  
D. Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.  

Question # 28

What figure will be presented in GHI's consolidated statement of changes in equity for the year ended 31 December 20X4, in respect of dividends paid to non-controlling interest?

A. $25,000
B. $125,000
C. $100,000
D. $0

Question # 29

ST acquired 75% of the 2 million $1 equity shares of CD on 1 January 20X3, when the retained earnings of CD were S3,550,000. CD has no other reserves. ST paid $5,600,000 for the shares in CD and the non controlling interest was measured at its fair value of S1,400,000 at acquisition. At 1 January 20X3, the fair value of CD's net assets were equal to their carrying amount,with the exception of a building. This building had a fair value of $1,000,000 in excess of its carrying amount and a remaining useful life of 25 years on 1 January 20X3.At 31 December 20X5, the retained earnings of ST and CD were $8,500,000 and $5,250,000 respectively.What is the value of retained earnings that will be presented in the consolidated statement of financial position of ST as at 31 December 20X5?

A. $9,685,000
B. $9,775,000
C. $9,715,000
D. $10,080,000

Question # 30

LM acquired 80% of the equity shares of ST when ST's retained earnings were $50 million. The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6. No other fair value adjustments were required at the date of acquisition.LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6. The consolidated retained earnings of LM at 31 December 20X6 were: 

A. $164 million
B. $176 million
C. $272 million
D. $284 million

Question # 31

An entity undertakes an issue of new debt which has the effect of reducing the entity's weighted average cost of capital (WACC). Which of the following would best explain why the WACC will have fallen?

A. The entity was 100% equity financed prior to the issue of the debt.
B. The risk to the shareholders has reduced leading to a fall in the cost of equity.
C. The new debt is being used to replace existing debt that had a lower cost.
D. The new debt is being used to replace existing debt that had the same cost.

Question # 32

Which of the following actions should XY's management take in order to reduce its investment in working capital?

A. Sell its long-term investments and use the proceeds to reduce its bank overdraft.
B. Extend credit terms with its trade customers.
C. Scrap its obsolete inventory and replace with new inventory.
D. Pay trade suppliers more quickly to take advantage of prompt payment discounts.

Question # 33

A group presents its financial statements in A$. The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition. There have been no impairments to this goodwill.Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows: The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

A. A$75,758.
B. A$66,667.
C. A$150,000.
D. A$132,000. 

Question # 34

Which of the following reduce the usefulness of ratio analysis when comparing entities that operate in the same industry?Select ALL that apply. 

A. The revenue figure being aggregated from many different activities and sources.  
B. Accounting estimates in respect of depreciation being different between entities.  
C. The effect of a material and unusual item being disclosed separately in the notes.  
D. An entity adopting a policy of revaluing its non current assets.  
E. Ratio calculations being based on historical information.  
F. Ratios being quick and easy to calculate.  

Question # 35

You are a Financial Controller at BCD and are in the process of preparing the year-end financial statements. A member of your finance team has come to see you about her provisions balance at year-end. She says that the Managing Director has asked her to increase the provisions balance by $1 million overall. She thinks this is because BCD has had a very good year in terms of profit, and the Managing Director wants to put some profit aside to protect against any future reductions in profit. $1 million is material to BCD. You believe that the provisions balance was fairly stated without the additional $1 million. Which TWO of the following would be appropriate actions in this scenario? 

A. Discuss the matter with the Finance Director as he is your immediate line manager.  
B. Speak to the Managing Director to explain that the level of provisions is governed by financial reporting standards.
C. Tell the member of your finance team to ignore the Managing Director and to leave the provisions balance as it was.
D. Contact the external auditors of BCD and tell them that the Managing Director wants to change the provisions balance
E. Speak to the shareholders at the upcoming annual general meeting about this issue.  

Question # 36

How would KL account for its investment in MN in its consolidated financial statements for the year to 31 December 20X9?

A. Joint venture
B. Joint arrangement
C. Financial asset
D. Subsidiary

Question # 37

GH owned 70% of the equity share capital of XY at 1 January 20X6. GH acquired a further 20% of XY's equity share capital on 31 December 20X6 for $430,000. Non controlling interest was measured at $600,000 immediately prior to the 20% acquisition.Which of the following amounts will GH debit to non controlling interest when the 20% acquisition is adjusted for in its consolidated financial statements at 31 December 20X6?

A. $400,000
B. $120,000
C. $200,000
D. $430,000 

Question # 38

The dividend yield of ST has fallen in the year to 31 May 20X5, compared to the previous year. The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00. There were no issues of share capital during the year. Which of the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

A. The dividend paid in the year was reduced in order to pay for new assets.  
B. Surplus cash was used to pay a special dividend in addition to the normal dividend in the year. 
C. The profit for the year fell significantly and the dividend per share stayed the same.  
D. To compensate investors for the reduction in share price a higher dividend per share was paid.

Question # 39

Which of the following, in accordance with IFRS 2 Share-based Payments, are only applicable to the accounting treatment of cash settled rather than equity settled sharebased payment schemes? Select ALL that apply

A. The instruments in the scheme are remeasured at the end of each financial year to fair value.
B. The instruments in the scheme are measured at the fair value at the grant date of the scheme
C. The credit entry in the financial statements is to liabilities.  
D. The credit entry in the financial statements is to equity.  
E. The expense of the scheme is spread to profit or loss over the vesting period.  

Question # 40

AB and FG incorporated on 1 January 20X1 in the same country and had similar investment in net assets. Both entities are financed entirely by equity. In the year to 31 December 20X1 both entities generated the same volume of sales. Which of the following, taken individually, would explain why AB's return on capital employed ratio was lower than that of FG? 

A. AB revalued its non current assets upwards on 31 December 20X1; FG's non current assets were stated at historic cost. 
B. FG issued bonds on 31 December 20X1; AB remains ungeared.  
C. AB paid a lower dividend to its shareholders than FG in the year.  
D. AB's deferred tax provision at the year end is higher than that of FG.  

Question # 41

JJ's current share price is $1.80, with a dividend of $0.20 a share just about to be paid. Dividends have increased at an average annual growth rate of 4.5% and this is expected to continue into the future. What is JJ's cost of equity?

A. 17.6%
B. 16.1%
C. 12.5%
D. 11.1%

Question # 42

A group presents its financial statements in A$. The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition. There have been no impairments to this goodwill. Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows:  The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

A. A$75,758.
B. A$66,667.
C. A$150,000.
D. A$132,000.

Question # 43

When accounting for a finance lease under IAS 17 Leases, which TWO of the following are recognised in the statement of profit or loss?

A. Finance cost element of the lease payments
B. Depreciation of the leased asset
C. Lease payments paid
D. Lease payments payable
E. Capital repayment element of the lease payments

Question # 44

LM acquired 80% of the equity shares of ST when ST's retained earnings were $50 million. The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6. No other fair value adjustments were required at the date of acquisition. LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6. The consolidated retained earnings of LM at 31 December 20X6 were:

A. $164 million
B. $176 million
C. $272 million
D. $284 million

Question # 45

EF have just paid a dividend of 20 cents a share and the current share price is $3.75. EF regularly reinvests 40% of its profit for the year and generates a return on reinvested funds of 12%. The cost of equity for EF using the dividend valuation model is: 

A. 10.4%
B. 12.9%
C. 10.7%
D. 13.2%

Question # 46

Information from the financial statements of RST for the year ended 30 April 20X9 is as follows:What is the price earnings (P/E) ratio for RST at 30 April 20X9?

A. 15.83
B. 7.92
C. 10.56
D. 9.31

Question # 47

Which TWO of the following are true in relation to IAS21 The Effects of Changes in Foreign Exchange Rates when consolidating an overseas subsidiary?

A. A current period exchange gain or loss is shown within the consolidated statement of comprehensive income within other comprehensive income.
B. Goodwill is re-translated at the end of each reporting period and reflected at the period end exchange rate in the consolidated statement of financial position
C. Assets and liabilities of the subsidiary are translated at each reporting date using the average exchange rate for the period. 
D. Goodwill is reflected in the consolidated statement of financial position translated at the exchange rate on the date of acquisition
E. The statement of profit or loss of the subsidiary is translated for the reporting period using the closing exchange rate.

Question # 48

GH issued a 6% debenture for $1,000,000 on 1 January 20X4. A broker fee of $50,000 was payable in respect of this issue. The effective interest rate associated with this debt instrument is 7.2%. The carrying value of the debenture at 31 December 20X4 is: 

A. $958,400
B. $1,065,600
C. $1,012,000
D. $961,400

Question # 49

RS is a listed entity that has no subsidiaries although its Finance Director is also a director of TU, an unconnected entity. It is preparing its financial statements to 30 September 20X6. Which of the following substantial transactions must be disclosed in these financial statements in accordance with IAS 24 Related Party Disclosures?

A. Pension payments made on behalf of the Managing Director of RS.  
B. Purchase of production materials from TU at a discounted price to the current market value. 
C. Sale of finished goods to TU at normal selling price.  
D. Performance related bonus payments made to the office staff for the year.  

Question # 50

Ratios have been produced below for EF for the year to 31 March:  Which TWO of the following could explain the movement in both gearing and ROCE? 

A. A rights issue on 31 March 20X3.  
B. A debt issue on 31 March 20X3.  
C. A revaluation upwards on the head office property on 1 April 20X2.  
D. A bonus issue of shares on 1 April 20X2.  
E. A bank loan to purchase new machinery on 31 March 20X3.  

Question # 51

UV has raised $100,000 through the issue of two irredeemable financial instruments:• 6% debentures with a current market value of $101.50 per $100 nominal value; and• 8% preference shares with a current share price of $2.20 each.The corporate income tax rate is 20%What is the post tax cost of debt for each of these instruments?

A. Option A  

Question # 52

Which TWO of the following are TRUE in respect of preparing a consolidated statement of cash flows where there has been an acquisition of a subsidiary part way through the year?

A. Investing activities will include a total cash outflow for the acquisition comprising the cash paid for the subsidiary less the cash held by the subsidiary at the acquisition date.
B. The working capital held by the subsidiary at acquisition will be excluded from the year end figures based on the percentage shareholding in the subsidiary.
C. Non-controlling interest will arise in relation to the subsidiary and any dividends paid to the non-controlling interest will be shown within financing activities as a cash outflow.
D. Any shares that were issued on acquisition of the subsidiary will be shown separately on the statement of cash flows within financing activities.
E. The year end cash and cash equivalents balance will be reduced by the cash and cash equivalents that were held by the subsidiary at the acquisition date.

Question # 53

RS has issued an instrument with a nominal value of $1 million, at a discount of 2.5%, and a coupon rate of 6%. The terms of the issue are that the instrument must either be redeemed at par, at the option of the holder, in three years' time, or alternatively converted into equity shares in RS. The characteristics of this instrument taken as a whole indicates that it would beclassifiedas which of the following?

A. Compound instrument
B. Debt instrument
C. Equity instrument
D. Discounted instrument

Question # 54

Which THREE of the following statements are true in relation to financial assets designated as fair value through profit or loss under IAS 39 Financial Instruments: Recognition and Measurement?

A. Shares in another entity held for short term trading purposes fall within this category.  
B. Transaction costs in relation to these assets are expensed to profit or loss on acquisition. 
C. Transaction costs in relation to these assets are added to the initial cost of the asset on acquisition. 
D. The gain or loss on the subsequent measurement of these assets is recorded within other comprehensive income.
E. The gain or loss on the subsequent measurement of these assets is recorded within profit for the year. 
F. Once the asset has been subsequently measured to fair value an impairment review is undertaken.

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