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Dec 2018 – Audit risks

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › Dec 2018 – Audit risks

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by Kim Smith.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • July 21, 2020 at 2:17 am #577513
    yahweh
    Member
    • Topics: 23
    • Replies: 20
    • ☆

    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

    July 21, 2020 at 7:19 am #577518
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8298
    • ☆☆☆☆☆

    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?

    July 26, 2020 at 6:40 am #578073
    yahweh
    Member
    • Topics: 23
    • Replies: 20
    • ☆

    Clearer now.
    Thank you.

    July 26, 2020 at 8:49 am #578084
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8298
    • ☆☆☆☆☆

    You are welcome!

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Dec 2018 – Audit risks’ is closed to new replies.

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