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Hi,
For Question 20 in BPP revision Kit, there is this information:
“A company borrowed $47 million on 1 December 20X4 when the market and effective interest rate was 5%. On 30 November 20X5, the company borrowed an additional $45 million when the current market and effective interest rate was 7.4%. Both financial liabilities are repayable on 30 November 20X9 and are single payment notes, whereby interest and capital are repaid on that date.
Required
Discuss the accounting for the above financial liabilities under current accounting standards using amortised cost, and additionally using fair value as at 30 November 20X5.”I dont really know how can we calculate of fair value of the first liability on 30 Nov 2015 and would appreciate if you can explain how to calculate fair value for financial liability. Also can you help clarify for me whether if the financial liability is initially measured at fair value, it will be the cash amount that it borrowed?
Hi,
If carried at fair value then the initial entry will be measured using the PV of the future cash flows as its fair value, which may be different to the initial cash proceeds. Any difference is recognised through profit or loss.
The fair value of the first loan on 30 Nov 2015 would be the present value of the final payment of $59.98m discounted back to present value using the current market rate of interest (7.4%). As both loans are repaid on the same date and at the same amounts, their present value of 30 Nov will both be the same as we are discounting the same figure by the same amount.
Thanks
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