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I am simply confused. In the example shown, why is he discounting the receipts under amortised cost method. We do that only when the loan is below market rate.
Under the amortised cost method. Effective rate and cash receipt would be same. So every year the amortised debt would remain at 5 m
Please help
Hi,
If the asset is held at fair value, as it is in the first scenario, then the fair value needs to be recalculated each year based upon the present value of the future cash flows, discounted at the effective rate at each reporting date. The effective rate will have changed due to market conditions and so needs to be used to work out the fair value.
The receipts under the amortised cost method are being discounted to demonstrate that the value of $5 million each year will not change.
Thanks
oh ok ! thanks to your second paragraph , i red it carefully and now im at peace 🙂
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