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On 1 May 2007, Ashanti purchased a $20 mil five year bond with semi annual interest of 5% payable on 31 Oct and 30 Apr. The purchase price of the bond was $21.62 mil. The effective annual interest rate is 8% or 4% on a semi annual basis. The bond is classified as available-for-sale. At 1 May 2009, the amortised cost of the bond was $21.05 mil and loss recognised in equity was $0.6 mil, resulting in a carrying value of $20.45 mil. The issuer of the bond did not pay the interest due on 31 Oct 2009 and 30 Apr 2010. Ashanti feels that as at 30 Apr 2010, the bond is impaired and that the best estimates of total future cash receipts are $2.34 mil on 30 Apr 2011 and $8 mil on 30 Apr 2012. The current interest rate for discounting cash flows as at 30 Apr 2010 is 10%.
My questions :-
1. We can straight away calculate the interest receivable using the carrying value of $20.45 mil right ? If that is the case, then what is the point examiner giving us such info : [$20 mil five year bond with semi annual interest of 5%] and [purchase price of $21.62 mil] ?2. Since the bond is not derecognized or disposed off, why should we recycled the $0.6 mil from equity to income statement ?
Please assist Mike, thks !
Stacie, has the answer been updated for the IFRS9 rules? An “available for sale” financial asset?
Hi, Mike, i copy straight from the question. Anything wrong ? What this has got to do with what i m asking ?
Hi Stacie
No, no problem. I’m just wondering whether the published question has been updated to reflect IFRS9.
I have two versions of the question in front of me – one for the International variant and another for the UK variant …. and neither of them bears much similarity to the question you are quoting to me. Both variations state that the bond has been classified as fair value through profit and loss and both have 16.5 million likely receivable on 30 April, 2013.
It looks to me that the question you are looking at has not been updated for recent changes
Hi, Mike, so can u assist me based on the question i have posted to you ? Thanks..
OK, you’ve forced me into it! I have recalculated the amortised cost figure and agree with the figure of $21.05! By deducting the $0.6 we arrive ( as you have pointed out! ) at the figure of $20.45.
As you say, we can go from there by calculating 5% and 4% but ( again, as you have pointed out ) there’s no need. Maybe the information was important when the question was first asked but the Kaplan versions of the same question have actual and effective rates the same at 8% and substantial amounts receivable in the next two years with no impairment to match your 0.6%
My calculation of the present value of the future flows is $8.74 – can you agree that? – so $20.45 needs some substantial impairment by $11.71.
As for the recycle through Income Statement from Equity – no, I have no idea again – as you correctly say, it’s not being derecognised nor disposed of.
Sorry not to be more helpful
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