Explain how the instrument will be initially and subsequently measured.

Transcription

1 Example 1 Requirement (i) Explain how the instrument will be initially and subsequently measured. Cumulative preference shares Redeemable on 31 December 2016 Obligations, therefore instrument is a financial liability Initial measurement Cash received less transaction costs associated with issue = 6 million 200,000 = 5.8 million Subsequent measurement Amortised cost using effective interest method = opening liability + finance cost (based on effective interest) cash paid (based on coupon rate)

2 Requirement (ii) Prepare financial statement extracts for the instrument reflecting how it would be recognised in ABC s statement of financial position and statement of comprehensive income in the year ended 31 December Statement of financial position at 31 December 2012 Non current liabilities 6% cumulative preference shares 5,800, , ,000 5,918,500 Opening effective rate cash paid 5.8m x 8.25% 6m x 6% Statement of comprehensive income for year ended 31 December 2012 Finance costs 478,500 Based on effective rate

3 Example 2 Required: Explain, with calculations, how this convertible instrument would be initially and subsequently measured in the financial statements of XYZ for the year ended 31 December Initial measurement split instrument into separate components, based on fair values. Liability component fair value = present value Year ended 31 December Cash flow (4% x 10m) Discount formula (rate = 7%) Discount factor Present value ,000 1/ , ,000 1/ , ,400,000 1/ ,486,400 9,209,600

4 Journal entry for initial recognition Dr Bank 10m Cr Liability 9,209,600 Cr Equity 790,400 Subsequent measurement Equity not remeasured Liability amortised using effective interest method

5 Statement of financial position extract at 31 December 2010 Equity Other reserves 790,400 Non current liabilities 4% convertible bonds 9,209, , ,000 9,454,272 Opening 7% x opening cash paid Statement of comprehensive income extract for year ended 31 December 2010 Finance costs 644,672

6 Example 3 Required: Explain how these instruments would be reflected in MNO s financial statements for the year ended 31 March 2013 in accordance with the following accounting standard: (i) IAS 39 (relevant to CIMA students) (a) Intention to sell shares to make profit => held for trading purposes Classification is therefore Financial assets at fair value through profit and loss (b) No intention to sell shares in the short term => Available for sale financial assets Measurement: Fair value with changes recognised in other comprehensive income (c) Instrument has fixed payments and MNO intend to hold until redemption => Held to maturity financial asset Measurement: Amortised cost using effective interest method

7 Financial statement extracts (IAS 39) Statement of financial position at 31 March 2013 Non current assets Financial assets (41,500 (W2) + 157,197 (W3)) 198,697 Current assets Financial assets (W1) 97,300 Statement of comprehensive income for year ended 31 March 2013 Within P&L Finance income (W3) 10,197 Finance costs (W1) (2,468) Gain on financial assets (W1) 15,050 Within OCI Loss on financial assets (W2) (4,850) Net effect 17,929

8 Workings (W1) Held for trading investment (FV through P&L) Initial recognition 35,000 x ,250 Gain (balancing figure) 15,050 Measurement at reporting date 35,000 x ,300 Transaction costs are expensed = 3% x 82,250 = 2,468 (W2) Investment in shares with no intention to sell (Available for sale) Opening balance (10,000 x 4.50) + 1,350 (3% transaction costs) 46,350 Loss (balancing figure) (4,850) Measurement at reporting date 10,000 x ,500

9 (W3) Investment in bonds (held to maturity) Opening balance 150, ,500 (3% transaction costs) 154,500 Finance income at effective rate 154,500 x 6.6% 10,197 Cash received 150,000 x 5% (7,500) Closing balance 157,197

10 Required: Explain how these instruments would be reflected in MNO s financial statements for the year ended 31 March 2013 in accordance with the following accounting standard: (ii) IFRS 9 (relevant to ACCA students) (a) Intention to sell shares to make profit => held for trading purposes Classification is therefore Financial assets at fair value through profit and loss (b) Amortised conditions not satisfied (no contractual cashflows) => cannot amortise Measurement: Fair value in SFP with changes recognised in P&L (benchmark treatment); or Other comprehensive income if irrevocable election made (as investment is in equity and not held for trading purposes) (c) Instrument has fixed payments and MNO intend to hold until redemption => amortised cost conditions are satisfied Measurement: Amortised cost using effective interest method

11 Financial statement extracts (IFRS 9) Statement of financial position at 31 March 2013 Non current assets Financial assets (41,500 (W2) + 157,197 (W3)) 198,697 Current assets Financial assets (W1) 97,300 Statement of comprehensive income for year ended 31 March 2013 Within P&L Finance income (W3) 10,197 Finance costs (2,468 (W1) + 1,350 (W2) (3,818) Gain on financial assets (W1) 15,050 Loss on financial assets (W2) (3,500) Net effect 17,929

12 Workings (W1) Held for trading investment (FV through P&L) Initial recognition 35,000 x ,250 Gain (balancing figure) 15,050 Measurement at reporting date 35,000 x ,300 Transaction costs are expensed = 3% x 82,250 = 2,468 (W2) Investment in shares with no intention to sell (FV through P&L) Opening balance (10,000 x 4.50) 45,000 Loss (balancing figure) (3,500) Measurement at reporting date 10,000 x ,500 Transaction costs are expensed = 3% x 45,000 = 1,350 This assumes that no election has been made to record changes in FV through OCI

13 (W3) Investment in bonds (amortised cost method) Opening balance 150, ,500 (3% transaction costs) 154,500 Finance income at effective rate 154,500 x 6.6% 10,197 Cash received 150,000 x 5% (7,500) Closing balance 157,197 Nb. If election had been made to recognise gains/losses on second investment (in 10,000 shares) in OCI, the impact in the Statement of Comprehensive Income would match the impact shown under the IAS 39 rules.

14 Example 4 Required: Briefly explan how each of the above instruments would be classified in the individual financial statements of RST. (1) Issue of redeemable 7% debentures Financial liability (ongoing measurement at amortised cost) (2) Acquisition of shares in a listed entity with plan to sell in the short term for a profit Financial asset at fair value through profit and loss (3) Issue of convertible 3% loan stock Compound instrument (recognise liability component and equity component separately) (4) Issue of 200,000 1 ordinary shares Equity instrument (no remeasurement after initial recognition)

15 (5) Acquisition of 80% of shares in an entity with no intention of selling investment in the short term (thereby gaining control) Under IAS 39 rules Under IFRS 9 rules Available for sale financial asset (FV through OCI) Financial asset at fair value Record gains/losses through P&L unless irrevocable election made to recognise through OCI instead (6) Loan of money to subsidiary at an interest rate of 4% with plans to recover the interest and principal in full Under IAS 39 rules Under IFRS 9 rules Loans and receivables (measure using amortised cost method) Financial asset subsequently measured at amortised cost

16