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Hello Sir,
Dec 2018 Redback Sports Co 1(b)
Referring to the audit risks, in the answer sheet it mentions:
The loan has been issued at a deep discount and there is a risk of material misstatement in that the finance costs associated with this loan may not be accounted for in accordance with IFRS® 9 Financial Instruments. IFRS 9 requires that the finance cost associated with a deep discount – in this case the $4 million difference between the amount received by Redback Sports Co of $30 million, and the amount repayable on maturity of the debt of $34 million – should be amortised over the term of the loan.
1) How is it a deep discount loan?
A deep-discount bond is a bond that sells at a significantly lesser value than its par value.
The par value from the scenario is $30m n repayable amount is $34m.2) I failed to understand how come the $4m is treated as finance charges?
Thanks
There are many references in articles which use the terms zero coupon bond and deep discount bond interchangeably (as many deep discount bonds do not pay a coupon). So if it is confusing to you that it is called deep discount think instead that it is zero coupon.
If I lend you $30,000 today and in 10 years’ time you are to repay me $34,000 what will you call the $4,000 if not interest/finance charge?
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