IFRS 9 - Financial Asset - Loan — OpenTuition Forums

HHarry7y ago

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.

P2-D2Tutor7y ago#1

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

HHarry7y ago#2

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 1,000,000 End of Year 1: Dr Interest expense 36,050 Cr Bond discount 16,050 Cr Cash 20,000 Many thanks in advance for your time.

P2-D2Tutor7y ago#3

Hi, No, IFRS 9 states that the FL is recognised as fair value, which here is $950,000. Thanks

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