3: Accounting for financial instruments WRITE YOUR ANSWERS TO QUESTION 3 IN THE INDICATED PLACES ON PAGES 10-12 OF THE ANSWER BOOKLET, WHICH INCLUDES A WORKSHEET (WORKSHEET 1). Each of the statements below is either true (T) or false (F): (a) Statement: 'Taxes payable' account on Balance sheet is not a financial instrument. (b) Information: On 1 January 2022, AF Ltd invested in a portfolio of short-term bonds for liquidity purposes. The bonds give rise to cash flows on specified dates that are solely principal and interest. The business objective is to (i) receive contractual cash flows from the bonds and (ii) sell the bonds before the expiry of the contract if extra cash is required in the business. Statement: Therefore, AF Ltd can subsequently measure this portfolio of short-term bonds at amortised costs. (c) Information: On 1 January 2022, Business Ltd purchased some shares in Star Wars Ltd. The Investment in Star Wars Ltd shares is held for trading. Statement: Therefore, Business Ltd can choose to subsequently measure this investment in Star Wars Ltd shares at fair value through OCI. (d) Statement: A stronger NZ$ is not good for NZ exporters as the foreign currency denominated accounts receivable will be converted into a higher NZ$ value. (e) Statement: In relation to exchange rate risk, fair value hedge is to hedge the transaction exposure faced by the business. (f) Information: A NZ exporter recognised an accounts receivable US$200,000, to be settled one month later. The spot exchange rate was 1$NZ = US$0.6. At the same time, the exporter entered into a one-month forward contract to fair value hedge the exchange rate risk associated with the accounts receivable. The forward contract has a contract amount of US$200,000 and a forward rate of 0.62. On the settlement date, the spot exchange rate is 0.65. Statement: Therefore, on settlement date, the total cash receipt for the exporter will be NZ$307,692. (g) Information: A NZ exporter has bought a put option contract to fair value hedge its accounts receivable HK$1,000,000. The exercise rate in the option is 1$NZ = HK$5 with a contract amount of HK$1,000,000. On the settlement date, the spot exchange rate is 5.2. Statement: Therefore, the exporter will exercise the option as the option value is worth NZ$7,692 on the settlement date. Question 3 continued: (h) Information: On 1 January 2021, High Tech Ltd issued 100,000 convertible notes. The notes have a three year term and were issued at $15 per note with a face value of $10 per note. Interest is payable annually at the end of each year at a coupon rate of 8% per annum. At the end of three years, the noteholders have the option to convert their notes into shares on a "one share for one note" basis. The market rate of interest of similar debt instruments without conversion is 10% per annum. The company has calculated that the fair value of debt component in the convertible notes is $950,244 on 1 January 2021. The balance date is 31 December. Assume now it is the financial year ended 31 December 2022. Statement: Therefore, High Tech Ltd will recognise "interest expense from the convertible notes" $95,024 on Income Statement. REQUIRED: Using WORKSHEET 1, according to NZ IFRS 7, NZ IFRS 9 and NZ IAS 32: Indicate for each of the statements above whether it is T or F; If the statement is False, rewrite the statement to make it true; If the statement is True, you do NOT need to explain. (Total for Question 3: 16 marks)