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fazeel93
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I have been doing exercised related to IAS 39 and have a question in this regard. As per the amortised cost method one has to discount the interest payments and the redemption value with the effective rate of interest and subsequently unwind the discount. However in one question the interest payments are and the redemption value are not discounted. The question says that this is a held-to-maturity asset that is to be measured at am-mortised cost. I wanted to know that why did we not discount the values as is done normally.
Thank You and Warm Regards
P2-D2
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Hi,
We do not technically discount the interest and redemption value. We recgonise the financial asset or liability initially at fair value, being the amount paid or received.
To then subsequently account for the coupon interest and redemption of the instrument we then have to use the effective rate, being the IRR of the cash flows. We will always be given this figure in the question so it is not necessary to calculate it.
So to answer your question there is no reason to do any discounting back to present value in the questions.
Hope this helps clear up any confusion.
Thanks
fazeel93
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Thank You for your speedy reply. Yes I understand what you mentioned but I just wanted to know that is this method of discounting the cash flows using the coupon rate utilized for assets as well,
P2-D2
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Hi,
The treatment for assets is just the reverse of what is done for the liabilities. just one point of note in that any discounting to present value is done using the effective rate and not the coupon rate.
Thanks
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