IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley IFRS: Practical Implementation Guide and Workbook

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Practical Insight When goods or services are sold, the seller often gives the buyer some specified time to pay the invoice amount, such as 60 days, with no stated interest. This means that the seller obtains a short-term receivable and that the buyer obtains a short-term payable that meet the definition of financial instruments and are accounted for under lAS 39. Conceptually, such a receivable or payable should be measured at its present value (i.e., the present value of the invoice amount discounted using applicable current market interest rates). In that case, interest would be accrued over the term of the receivable for the difference between the initial present value and the invoice amount. As a practical accommodation, however, lAS 39 permits measuring short-term receivables and short-term payables with no stated interest at the original invoice amount if the effect of discounting is immaterial. For longer-term receivables or payables that do not pay interest or pay a below-market interest, lAS 39 does require measurement initially at the present value of the cash flows to be received or paid. This case illustrates how to measure a financial asset or financial liability on initial recognition. Facts During 20X5, Entity A acquires and incurs these financial assets and financial liabilities: (a) A debt security that is held for trading is purchased for $50,000. Transaction costs of $200 are incurred. (b) Equity securities classified as at fair value through profit or loss are purchased for $20,000. The dealer fee paid is $375. (c) A bond classified as available for sale is purchased at a premium to par. The par value is $100,000 and the premium is $1,000 (such that the total amount paid is $10 I,000). In addition, transaction costs of $1,500 are incurred. (d) A bond measured at amortized cost is issued for $30,000. Issuance costs are $600. Required Determine the initial carrying amount of each of these financial instruments. Solution (a) The initial carrying amount is $50,000. The transaction costs of $200 are expensed. This treat– ment applies because the debt security is classified as held for trading and, therefore, measured at fair value with changes in fair value recognized in profit or loss. (b) The initial carrying amount is $20,000. The dealer fee of $375 is expensed as a transaction cost. This treatment applies because the equity securities are classified as at fair value with changes in fair value recognized in profit or loss. (c) The initial carrying amount is $102,500 (i.e., the sum of the amount paid for the securities and the transaction costs). This treatment applies because the bond is not measured at fair value with changes in fair value recognized in profit or loss. (d) The initial carrying amount is $29,400 (i.e., the amount received from issuing the bond less the transaction costs paid). For liabilities, transaction costs are deducted, not added, from the initial carrying amount. This treatment applies because the bond is not measured at fair value with changes in fair value recognized in profit or loss. 6.2 Subsequent Measurement 6.2.0.1 Subsequent to initial recognition, financial assets and financial liabilities are measured using one of these three measurement attributes: (I) Cost (2) Amortized cost (3) Fair value 6.2.0.2 Whether a financial asset or financial liability is measured at cost, amortized cost, or fair value depends on its classification into one of the four categories of financial assets or two catego– ries of financial liabilities defined by lAS 39 and whether its fair value can be reliably determined. Case Study 6