ACCA SBR · Guided practice (Show me how)
Chapter 14: Financial Instruments (IAS 32, IFRS 7 and IFRS 9)
Expected credit losses and hedge effectiveness
Illustration - expected credit losses. An investor holds an investment in debt at amortised cost. On initial recognition the lifetime expected credit losses are calculated as $200,000, using a 5% discount factor, and the probability of the issuer defaulting in the next 12 months is estimated as 2%. At the end of the first year the 12-month expected credit loss is unwound at the 5% rate. Later, the credit risk of the investment increases significantly, and later still there is objective evidence that the investment is impaired.
Illustration - hedge effectiveness (cash flow hedges). In an over-hedge, the gain on the hedging instrument is $0.5 million and the loss on the hedged item is $0.4 million. In an under-hedge, the gain on the hedging instrument is $0.8 million and the loss on the hedged item is $1.0 million.
Give the credit-loss figures in $ and the hedge figures in $000 ($1 million = 1,000).
Expected credit losses
Calculate the loss allowance on initial recognition, the unwinding of the discount in the first year and the loss allowance at the end of the first year, and state how the allowance and the interest income are measured in stages 2 and 3.
Hedge effectiveness
Calculate the amounts recognised in other comprehensive income and in profit or loss for the over-hedge, and the amount recognised in other comprehensive income for the under-hedge.
Opening this exercise…