8.5 Standard setters have been struggling for several years with the practical issues of the dis- closure, recognition and measurement of financial instruments. The ASB has issued a Discussion Paper on Derivatives and Other Financial Instruments and Financial Reporting Standard 13 on the disclosure of such instruments. The dynamic nature of international financial markets has resulted in the widespread use of a variety of financial instruments but present accounting rules in this area do not ensure that the financial statements portray effectively the impact and risks of the instruments currently being used. Required (a) (i) Discuss the concerns about the accounting practices used for financial instru- ments which led to demands for an accounting standard. (7 marks) (ii) Explain why regulations dealing with disclosure alone cannot solve the problem of accounting for financial instruments. (4 marks) (b) (i) Discuss three ways in which gains and losses on financial instruments might be recorded in the financial statements, commenting on the relative merits of each method. (8 marks) (ii) AX, a public limited company, issued a three-year £30 million 5% debenture at par on 1 December 1998 when the market rate of interest was 5%. Interest is paid annually on 30 November each year. Market rates of interest on debentures of equivalent term and risk are 6% and 4% at the end of the financial years to 30 November 1999 and 30 November 2000. (Assume that the changes in interest rates took place on 30 November each year.) Show the effect on ‘profit’ for the three years to 30 November 2001 if the deben- ture and the interest charge were valued on a fair value basis. (6 marks) ACCA, Financial Reporting Environment (UK Stream), December 1999 (25 marks)
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