IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 25 / Financial Instruments: Recognition and Measurement (lAS 39)

7,000 Available-far-Sale Financial Ass ets If Entity A instead had classified the shares as available fo r sale, the j ournal entries would be December J 5 2006 Dr A vailable-for-sale fi nancial assets 55,000 Cr Cash 55,000 December 3 J 2006 Dr A vailable-for-sale finan cial assets Cr Equity l anuao ' J 2007 Dr Cash Dr Equity Cr Available-for-sale finan cial assets Cr Gain on sale (available-for-sale fina ncial asset) 62,000 7,000 62,000 7,000 This case illustrates how to determine the fa ir value ofa financial instrument, Facts Entity A is considering how to determine the fair value of the following financial instruments: (a) A share that is actively traded on a stock exchange (b) A share for which no active market exists but for which quot ed price s are avai lable (c) A loan asset originated by the entity (d) A bond that is not actively traded but whose fair value can be determined by reference to quoted interest rates for gove rnment bonds (e) A complex derivative that is tailor-made for the entity Required In each of these cases, discuss whether fair value would be determined using a quot ed market price or a valuation technique under lAS 39, Solution (a) The fair value of a share that is actively traded on a stock exc hange equals the quoted market price. (b) The fair value of a share for which no active market exists, but for which quoted prices are available, would be determ ined using a valuation techn ique. (c) The fair value of a loan asset originated by the entity would be determined using a valuation technique. (d) The fair value of a bond that is not actively traded, but whose fair value can be determined by reference to quoted interest rates for government bonds, would be determined using a valuation technique. (e) The fair value of a compl ex derivative that is tailor-made to the entity would be determined us– ing a valuation technique. 7,000 Case Study 9

Case Study 10

This case illustrates how to account fo r available-for-sale financial assets. Facts

On August I, 2006, Entity A purchased a two-year bond, which it clas sified as available for sale. The bond had a stated principal amount of $ 100,000, which Entity A will receive on August 1, 2008 . The stated coupon interest rate was 10% per year, which is paid semiannually on December 31 and Ju ly 31. The bond was purchased at a quot ed annual yield of 8% on a bond-equivalent yield basis. Required (a) What price did Entit y A pay for the bond? (Hint: Compute the present value using a semiannual yield and semiannual periods.) (b) Did Entity A purchase the bond at par, at a discount, or at a premium? . (c) Prepare the journal entry at the date Entity A purchased the bond. (Entity A paid cash to acquire the bond. Assume that no transaction costs were paid .)