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Hi,
I am reading the Financial Asset / Liability section in Kaplan and I am confused as to why the Unamortized Discount account is not used (contra liability account in the case of liabilities, valuation adjustment account in the case of an asset). None of the examples provided use the Bond Discount balance sheet account and amortisation thereof. For example in Test your understanding 8 – Magpie (pg.283). On 1 Jan 20X1, Magpie lends $2m to a supplier. The loan is interest-free, will be repaid in two years’ time. The asset is classified to be measured at amortised cost. There are no transaction costs. Market rates of interest are 8%. Loss allowance can be ignored. The solution they provide is that at inception the FV of the asset is recognised (2/(1.08^2) = $1.71m, which is fine, and they provide the following JEs.
Dr Fin. asset 1.71m
Dr P/L 0.29m
Cr Cash 2m
Why is the discount taken to P/L ? Shouldn’t we be debiting a Discount (B/S account) ?
Many thanks.Hi,
IFRS 9 recognises the difference between the amounts paid and the fair value as going through profit or loss. If we’ve paid too much for something that is only worth $1.71m then it makes sense to recognise this loss immediately through profit or loss.
Thanks
Hi ,
Thank you for the reply, that makes sense that example wasn’t correct to demonstrate my question.
My question is whether bond discount is at all used in IFRS, i.e. let’s say a company issues 1000 2% annual coupon loan notes at 95% of $1,000 par value with a 3 year maturity (eff.ir 3.8%) It receives $950,000 in cash. Would it be correct under IFRS (amortized cost) at recognition to post the following entries and then use the effective interest method to amortize the Bond discount over the term of the note?Inception:
Dr Cash 950,000
Dr Bond Discount 50,000
Cr Bonds payable 1,000,000End of Year 1:
Dr Interest expense 36,050
Cr Bond discount 16,050
Cr Cash 20,000Many thanks in advance for your time.
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