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Sir
Financial liability is initially measured at fair value. Fair value is known as nominal value – discount OR fair value is known as nominal value – discount – issue cost?
Similarly financial asset is initially measured at fair value. Fair value is known as nominal value – discount OR fair value is known as nominal value – discount + issue cost?
Hi,
The issue costs are added to the financial asset and deducted from the financial liability, so what you have above is correct.
Thanks
Ok but sir when we say fair value of financial asset so the term fair value just means nominal value – discount ? Or does fair value means nominal value – discount + issue cost?
Similarly when we say fair value of financial liability so the term fair value just means nominal value – discount? Or does fair value means nominal value – discount – issue cost?
Hi,
Fair value is what we will have paid to acquire the financial asset, which is not the same as the nominal value. I can buy a share (financial asset) for $10 but its nominal value as shown in the company’s financial statements is $1 (say).
Fair value for the financial liability will be what we have received on issuing the instrument, and again this is not the same as the nominal value. The amount received is usually at a discount to the nominal value, so if we have a $100 nominal value bond then this can be issued at a 5% discount to the nominal value and so we will receive $95. The £95 is the fair value.
Thanks
Suppose nominal value of bond is $100, discount is $5 and issue cost is $10, so the fair value would be $95 or would it be $85?
Similarly nominal value of financial asset is $100, discount is $5 and issue cost is $10, so the fair value would be $95 or would it be $105?
Hi,
If the bond is being issued as a financial liability then we receive $95 and pay $10 issue costs, so it would be $85.
For the purchase of the financial asset we pay $95 and a further £10 of issues costs that are then added to the $95 to give $105.
Thanks
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