Aron 6/9

Are we talking here about the convertible bond that Aron issued? Where we have a mixed instrument it is necessary to establish the liability element and the equity element. Because the equity element is incalculable in its own right, we instead calculate the liability element and the equity element is then the balancing amount

“Is equity instrument a form of selling shares to shareholders in return for cash?” No, it’s the issue of a loan note that has a conversion option. In exchange, Aron receives cash

“Also issue costs reduces Arons liability? I thought when issing convertable bonds the issuer is bound to the issue costs hence will increase the liabilty.”

What happened to double entry? The “other side” of the issue costs is the payment of money (whereas the issue of the convertible bond saw us receive money).

You may as well have asked “Surely when we issue a convertible bond, that represents money coming in so why is it a liability?” Clearly that’s nonsense! Karen, every transaction has two sides (since Fra Luca Pacioli discovered double entry at the same time as Columbus was discovering America, and the World has been a better place – thanks to our Mad Monk)

OK?

Hi Karen

I’ve already answered this but cannot now see it on the site 🙁 so here we go again

Brought forward was Z10m @ 3 zloti = $1 = $3.3m

Carried forward is Z12m @ 2 zloti = $1 = $6m

But the change from $3.3 to $6 is down to two separate elements – a change in exchange rate and a change in fair value and only the fair value change was allowed to go through Profit or Loss. The rest had to go through equity

The Profit or Loss element – the fair value change – was 2m zloti and that’s converted at the average rate of 2.5 = $800,000

The balance of the movement $6m – $3.3m – $800,000 = $1,833,333 was credited to Equity until such time as the investment is disposed of

I can’t see where you have found “( 2.5m Zloti /2.5m zloti) I don’t know what this is ?”

Does that help?

Is this a separate question to the one about Ethan to which I have just posted the answer?

“1. what does it mean by fair value through P/L? does it mean gains and losses recognized in P/L”

Yes

“2. if using FVTPL option would eliminate or signifantly reduce on accounting mismatch why is that?”

Because if you measure two related items on different bases, that would give rise to an accounting mismatch

“3. Ethan has argued that the basis of measurement of the debt & investment properties is similar, particularly as regards interest rates. The argument holds good respect of the interest and so the FV option would be allowed.

I just don’t understand why interest rates has anything got to do with investment properties. and also investment properties are measured at Fair value not FVTPL or amortised cost.”

But the debt has been borrowed to finance the purchase. Investment properties are held for their income potential or their potential for capital appreciation. When interest rates change, so too will the potential income / appreciation. Interest rates increase, attractiveness of someone buying the property (were it to be put up for sale) would likely decrease

“4. What changes will not be re- classified to P/L? and also changes in the FV attributable to the credit risk of the liability create an account mismatch, I don’t understand why?”

This is explained within the printed solution – read it again and re-post if you’re still not happy

Yes, correct