17 Lecture - Risks & Disclosure under IAS 32 and 39 & Long Term Loans and

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17 Lecture

MGT401

Midterm & Final Term Short Notes

Risks & Disclosure under IAS 32 and 39 & Long Term Loans and

IAS 32 and 39 require companies to disclose information related to risks associated with financial instruments such as long-term loans. This includes information on credit risk, interest rate risk, liquidity risk, and market risk. Companies must


Important Mcq's
Midterm & Finalterm Prepration
Past papers included

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  1. Which of the following risks are required to be disclosed under IAS 32 and 39? A) Credit risk B) Operational risk C) Market risk D) All of the above Answer: D) All of the above

  2. What is the primary goal of disclosures under IAS 32 and 39? A) To protect the company from legal liability B) To provide transparency and accountability to investors C) To generate profits for the company D) To reduce the impact of risks on the company's financial performance Answer: B) To provide transparency and accountability to investors

  3. What is the importance of disclosures related to long-term loans? A) To protect the company from default risk B) To inform investors about the risks associated with the loans C) To generate profits for the company D) To reduce the cost of borrowing for the company Answer: B) To inform investors about the risks associated with the loans

  4. Which of the following risks are associated with long-term loans? A) Credit risk B) Interest rate risk C) Liquidity risk D) All of the above Answer: D) All of the above

  5. What is credit risk? A) The risk that interest rates will increase B) The risk that a borrower will default on a loan C) The risk that the market value of an investment will decrease D) The risk that a company will run out of cash Answer: B) The risk that a borrower will default on a loan

  6. What is interest rate risk? A) The risk that a borrower will default on a loan B) The risk that interest rates will increase C) The risk that the market value of an investment will decrease D) The risk that a company will run out of cash Answer: B) The risk that interest rates will increase

  7. What is liquidity risk? A) The risk that a borrower will default on a loan B) The risk that interest rates will increase C) The risk that a company will run out of cash D) The risk that an investment cannot be sold quickly enough to meet cash needs Answer: D) The risk that an investment cannot be sold quickly enough to meet cash needs

  8. What is market risk? A) The risk that a borrower will default on a loan B) The risk that interest rates will increase C) The risk that the market value of an investment will decrease D) The risk that a company will run out of cash Answer: C) The risk that the market value of an investment will decrease

  9. What is the fair value of a financial instrument? A) The amount of cash that can be obtained by selling the instrument in the market B) The face value of the instrument C) The book value of the instrument D) The market value of the issuer's stock Answer: A) The amount of cash that can be obtained by selling the instrument in the market

  10. Why is it important for companies to provide clear and concise information in their disclosures? A) To avoid legal liability B) To reduce the impact of risks on the company's financial performance C) To ensure transparency and accountability to investors D) To maximize profits for the company Answer: C) To ensure transparency and accountability to investors



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

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  1. What is the difference between credit risk and liquidity risk? Answer: Credit risk refers to the risk that a borrower will default on a loan, while liquidity risk refers to the risk that an investment cannot be sold quickly enough to meet cash needs.

  2. Why is it important for companies to disclose information about risks associated with long-term loans? Answer: Disclosures provide transparency and accountability to investors, allowing them to make informed decisions about investing in the company.

  3. What is fair value and why is it important to disclose it under IAS 32 and 39? Answer: Fair value is the amount of cash that can be obtained by selling a financial instrument in the market. It is important to disclose fair value to provide investors with an accurate understanding of the value of the company's assets.

  4. How can companies reduce credit risk associated with long-term loans? Answer: Companies can reduce credit risk by conducting thorough credit analysis, requiring collateral, or obtaining a guarantee from a third party.

  5. What are the consequences of not disclosing information about risks associated with long-term loans? Answer: Failure to disclose information about risks can lead to legal liability and loss of investor trust.

  6. What are the three types of risks associated with long-term loans? Answer: The three types of risks are credit risk, interest rate risk, and liquidity risk.

  7. What is interest rate risk and how can it impact long-term loans? Answer: Interest rate risk refers to the risk that interest rates will increase, leading to higher borrowing costs and potentially impacting the company's ability to repay the loan.

  8. How can companies manage liquidity risk associated with long-term loans? Answer: Companies can manage liquidity risk by maintaining adequate cash reserves or diversifying their investments.

  9. Why is it important for companies to provide clear and concise information in their disclosures? Answer: Clear and concise information allows investors to make informed decisions about investing in the company, reducing the risk of misunderstandings or legal liability.

  10. What is market risk and how can it impact long-term loans? Answer: Market risk refers to the risk that the market value of an investment will decrease. This can impact the company's ability to sell the investment or use it as collateral for the loan.

Risks and disclosure are important considerations for companies when issuing long-term loans or dealing with financial instruments. The International Accounting Standards (IAS) 32 and 39 provide guidance on disclosure requirements and accounting treatments for financial instruments, including long-term loans. Under IAS 32 and 39, companies are required to disclose information about the risks associated with their financial instruments. This includes credit risk, interest rate risk, and liquidity risk, among others. By providing clear and accurate information about these risks, companies can help investors make informed decisions about investing in their organization. Credit risk is the risk that a borrower will default on a loan, resulting in a loss for the lender. Interest rate risk refers to the risk that interest rates will increase, leading to higher borrowing costs for the company. Liquidity risk refers to the risk that an investment or financial instrument cannot be sold quickly enough to meet cash needs. In addition to disclosing risks, companies must also disclose fair value information under IAS 32 and 39. Fair value is the amount of cash that can be obtained by selling a financial instrument in the market. By disclosing fair value, companies provide investors with an accurate understanding of the value of their assets. Long-term loans are one type of financial instrument that companies may use to finance their operations. Long-term loans typically have a maturity period of greater than one year and are often used to fund large capital expenditures or business expansion. When issuing long-term loans, companies must carefully consider the risks involved. They must perform thorough credit analysis to assess the creditworthiness of the borrower and require collateral or guarantees to mitigate credit risk. They must also consider interest rate risk and the potential impact of changing market conditions on the loan. Overall, the disclosure of risks and fair value information under IAS 32 and 39 is essential for companies to provide transparency and accountability to investors. By carefully managing risks associated with long-term loans and providing accurate and clear information to investors, companies can build trust and confidence in their organization.

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