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Is there a rule for discounting amounts to future value?
I ask this question as in the text book they discount convertible loans for the relevant periods but I have seen examples when the convertible loans have been kept and issue costs and not been discounted for future value.
Can someone please help?Surely not in F7!
Give me a question name and / or reference because I suspect that you have misinterpreted something along the line
OK?
Thanks for the reply, example as follows:
From ACCA What is a financial instrument.
Example 3: Accounting for a financial liability at amortised cost
Broad raises finance by issuing $20,000 6% four-year loan notes on the first day of the current accounting period.No present value of the liability in the answer.
However in BPP Financial instrument chapter 11 Q2.4 a convertible bonds is issued with the option to convert to shares. Guess present value is calculated here to workout the equity portion.
In the example from ACCA why does the loan not get valued at present value at year 4 and held on the balance sheet allocating the necessary interest and value as the periods move on?
Many Thanks
In the example Broad it would be necessary to calculate the present value of the future cash flows involved in servicing this bond
So 1,200 paid in each of the next 4 years and a final amount of 20,000 paid at the end of year 4
Now compare that with the 20,000 received from the issue of the bond and the difference is treated as equity
There is no concept involved here of calculating the FUTURE values of a bond issue!
It’s important that you properly understand this!
OK?
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