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Hi, I have question regarding below example from technical article, why using FVTPL classification we use 6% discount rate, while using amortisation cost model we use 5%?
Thank you,Illustration 1 – classification and measurement of financial assets
An entity, Suarez, purchased a five-year bond on 1 January 2010 at a cost of $5m with annual interest of 5%, which is also the effective rate, payable on 31 December annually. At the reporting date of 31 December 2010 interest has been received as expected and the market rate of interest is now 6%.Hi,
The fair value of the FA is the PV of the future cash flows discounted at the market rate of interest, hence the 6%.
The 5% is the effective rate of interest on the FA itself and does not reflect the market rate, it is merely a rate that equates the future cash flows to the initial investment and interest received calculated using IRR. It is not the market rate.
Hope that helps.
Thanks
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