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Hie Mike,
When a financial asset for the first time , do we only have to add transaction costs if the instrument is measured at armotised cost?per IFRS 9.And of course transaction costs will be deducted from the financial liability ,but again it states that only if the instrument is measured at armotised cost.
So if this notion is correct, does it mean that if the financial instruments are measred at fairvalue through OCI and profit/loss the transaction costs are simply expensed ?
I have checked IFRS 13 -fairvalue measurement .it says direct costs of acquisition are not capitalised but expensed if the asset is measured at FV.Any changes in FV is recognised in P/L. i am not so sure if this applies to financial assets as well.
Thanks in advance Mike.
Hi,
The transaction costs are included on initial measurement of the financial asset if it is at amortised cost. If it is at fair value then the transaction costs are immediately expensed through profit or loss.
Thanks
Thank you.even if an equity instrument is measured at FV ,the transaction costs are recognised .for example if entity purchases shares at a market value of $6.50 but only pays $5.The investment will be recognised at $6.50 per share plus any transaction costs under non current assets in SOFP.however the difference between the purchase price and market value is recognised in profit or loss immediately as a gain(OCI??).
May you please confirm whether my understanding is correct.
Thanks
Hi,
If you’ve paid $5 then you recognise the asset at $5. That is surely reflective of the fair value. Why are you paying less than the market value anyway?
Thanks
Hie Mike,
I think it is very common with equity instruments that the actual purchase price of the instrument may be offered at lower than the market value .Its a conplex area that I find so confusing.
You were completely right Mike. i have read the standard again.The actual issue i intended to adress was an equity instrument held under a business model to realise changes in fair value of the instrument. the example above should therefore be , the instrument was purchased at $5 per share .The total number of shares say 10,000 with a transaction cost of say $3000. At the end of the year the market value is $6.50. i intended to confirm whether i will be correct if I write off the transaction cost of $3000 to P/L,recognise a gain of ($6.5-$5.0 *10,000)=$5,000.
EXTRACT P/L $investment income 5,000
transaction costs (3,000)EXTRACT SOFP
investment in equity instrument 65,000
Also if the asssumption is that the entity has made an irrevocable election to recognise the equity instrument through other comprehnsive income, transaction costs will be capitalised .
is this treatment correct regarding equity instruments . I understand that the equity does not have to be measured at armotised cost for transaction costs to be capitalised .Yet if this was a debt instrument , the transaction costs would be expensed to profit or loss.
Hi,
If the instrument is FVTPL then the transaction costs are expensed immediately. If it is anything else then they will be capitalised. In your example you haven’t said if it FVTPL or FVTOCI, which is crucial to the initial treatment. The initial treatment is as follows
If FVTPL – Expense in SPL of $3,000 and asset of $50,000:
If FVTOCI – Asset of $53,000Hope this clears up any confusion.
Thanks
On the first of July 2017, your company issued debentures with a face value of $5 million Australian dollars. The transaction costs of issuing these instruments equalled $500,000. These instruments have a life of 4 years and pay a coupon payment of 6% of the face amount annually on the 30th of June. These instruments are classified as Fair Value Through the Profit or Loss (FVTPL).
These are the only financial instruments issued by the company. They are also the only instruments classified as FVTPL.
The table below shows the relevant interest rates over the life of the life of the debentures.
Dates Market rates LIBOR rates
1/07/2017 7.8% 3.8%
30/06/2018 8.2% 4.2%
30/06/2019 7.6% 3.3%
30/06/2020 7.8% 3.3%
30/06/2021 6.0% 3.4%Your company uses the London Interbank Offered Rate (LIBOR) as a proxy for market risk.
a) Prepare all the relevant journal entries relating to these debentures. Your entries will cover the entire life-cycle of these instruments. You must reference your journal entries.
b) Why would the standard setters require this accounting treatment? What were they worried about? Comment on the quality of this accounting treatment. When discussing the quality of this rule, you need to have a strong reference point. How can you determine whether this is a ‘good’ or ‘bad’ or ‘useless’ accounting rule?
face value 5000000/6%= 300000 every year the company should pay.
journal entry
01.01.2017
Dr Cash 5000000
Cr Acc payable 500000030.06.2018
Dr Interest expense 300000
Cr Cash 300000
untill 30.06.2020 -samethe last year 30.06.2021
Dr Interest expense 300000
Dr Acc payable 5000000
Cr Cash 5300000we should calculate the PV using the market rate. Firstly,
find the PV each year. year 2018 300000/(1+0.082)
year 2019 300000/(1+0.076)^2
year 2020 300000/(1+0.078)^3
year 2021 300000/(1+0.06)^4Am I right? Am I the right direction? Please help me thank you
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