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3101AFE Accounting Theory and Practice Assignment
1. Loan receivable is a amount that has to be recovered by the company so it is classified as financial assets
2. Loan Payable refers to the amount that to be paid by the company at any future period so it means it is a financial management liability.
3. Ordinary shares classified as equity as it represents shareholder’s capital
4. Investment in ordinary shares is type of financial asset for any company (Deegan, 2013)
5. It is a financial liability due to obligation on company
6. Investment is preference share is financial assets as it guarantee inflow of economic resources
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).
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).
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).
The right to set-off is also known as reconciliations regarded as the right possessed by a debtor to meet the mutual debts with a creditor. The right to set-off is said to exist when a remained due amount of any of the parties is still owned but the remaining of the mutual debts has been set-off (Sangiuolo, 2008).
The main reason why company wants to set off the debt own by the company because it will reduce the debt to assets ratio i.e. leverage position will improve.
a. Preset off debt to assets ratio: $1000000/$2000000 = 0.50 or 50%
b. Post set off debt to assets ratio: $700000/$1700000= 0.412 or 41.20%
So it is advised to the company to make use the right to set off the debt (Deegan, 2013).
1. Deegan, C., (2013). Financial accounting theory. McGraw-Hill Education and Care Australia.
2. Deegan. C. (2016). Financial Accounting, 8th Edition. McGraw-Hill Education Australia.
3. Henderson, S. (2015).Issues in Financial Accounting. Pearson Higher Education AU.
4. Sangiuolo, R. (2008).Financial Instruments: A Comprehensive Guide to Accounting and Reporting.CCH.