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Hi Mike,
As per lec. note page 146:
Illustration of how the “expected loss” model will work
— A portfolio of debt instruments has been acquired and recognized at its cost of $40,000. The assets satisfy both the
business model test and the cash flow characteristics test and have been accounted for at amortised cost.
— The actual and effective rate of return is 6% but there is an element of doubt about the continuing viability of the
investee entities and, although there has been no default this year, it is considered likely that the actual rate of return
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Chapter 28 Paper F7 147
IFRS 9 Financial Instruments March/June 2016 Examinations
in the long run will be only 4%
— in applying the expected loss model, only 4% return on the portfolio will be recognized in the statement of profit
or loss. The amount to be recognized before the expected loss review was 6% × $40,000 ie $2,400 but the expected
loss restricts the amount to be recognized to just 4% × $40,000 ie $1,600
— the “missing” 2% ie $800 will be credited to the asset account reducing the value of the portfolio to $40,000 – $800
ie $39,200
— the double entry will therefore be:
Dr Cash 2,400
Cr Income 1,600
Cr Asset 800My question is, what is the reason behind trying to Dr the cash and Credit the asset with 800?
In lec note, pg 148
financial liabilities ( as distinct from equity instruments )
• these may be classified as either “at amortised cost” or “at FVTPL”
• if at amortised cost ( applicable to the majority of financial instrument liabilities ) initial measurement is at fair value less any related transaction costsDoes this mean for FVTPL the initial measurement is Fair value inclusive of transaction cost?
‘My question is, what is the reason behind trying to Dr the cash and Credit the asset with 800?’
This is what the IASB has decided to be the appropriate treatment where there is sufficient doubt about the recoverability of the interest and / or capital amount of a financial instrument
If a financial liability is at amortised cost the initial measurement will be net of transaction costs
If at FVTPL initial measurement will be calculated without deduction of transaction costs
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