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- This topic has 1 reply, 2 voices, and was last updated 2 months ago by Stephen Widberg.
- January 8, 2023 at 3:22 pm #675502G.BrindhaParticipant
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I want help regarding the calculation of gains and losses on Financial Liabilities using Fair Value…
For example: Part (b) of question no 59 (Complexity) in BPP revision kit :
A company borrowed $47 million on 1 December 2008 when the market and effective interest rate was 5%. On 30 November 2009, the company borrowed an additional $45 million when the current market and effective interest rate was 7·4%. Both financial liabilities are repayable on 30 November 2013 and are single payment notes, whereby interest and capital are repaid on that date.
Answer to the question given:
Using amortized cost, both financial liabilities will result in single payments, which are almost identical at the same point in time in the future ($59·9 million). ($47m x 1·05 for 5 years and $45m x 1·074 for 4 years)
However, the carrying amounts at 30 November 2009 would be different. The initial loan would be carried at $47 million plus interest of $2·35 million, i.e. $49·35 million, whilst the new loan would be carried at $45 million even though the obligation at 30 November 2013 would be approximately the same.
If the two loans were carried at fair value, then the initial loan would be carried at $45 million thus showing a net profit of
$2 million (interest expense of $2·35 million and unrealised gain of $4·35 million).
I have good understanding of amortized cost method but the accounting of Fair Value model for Financial liabilities is confusing for me.
I would highly appreciate if anyone can explain how to calculate gains and losses on Financial Liabilities using Fair Value.
Thanks.January 9, 2023 at 6:50 pm #675559Stephen WidbergKeymaster
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This is based on an exam question from a previous syllabus – I think it was set about 13 years ago as part of a discussion question.
I wouldn’t spend time on it. If you are asked to do fair value accounting, they are likely to give you the fair value. What really matters is that you know the rules.
for my co9lleague’s comments.
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