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Hi
The answer says “IFRS 9 Financial Instruments states that in the case of an interest free loan the fair value should be measured at the present value of all future cash flows”… where / how does the IFRS specifically state this please? I can’t find it and struggling to see how I would know this to answer this part of the question. Many thanks
When you think a bit deeper about this situation, it’s no different than any other financial instrument where the coupon rate of the loan differs from the effective rate of the loan
Typically in questions (or in illustrative examples in articles about the topic) the face rate of interest is, say, 6% and the effective rate is 8%
A schedule is set up showing the fair value of the loan with all the cash flows listed, discounted and fair values calculated
In your post, we have the face value given (0%) and we have a fair value (company’s cost of capital (market interest rate)) so we can arrive at the fair value of the instrument by applying the effective rate to the face value of the instrument for the appropriate period of time
As each year then rolls by we should Dr Finance Charges with the notional interest (effective rate as applied to balance brought forward) and Cr the Loan Instrument obligation account so that, when redemption date arrives, the value of the obligation equates to the value of the loan repayment
OK?
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