IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

(a) A share quoted on a stock exchange

(b) A bond quoted in an active bond market

(d) A share that is not quoted in an active market but whose fair value can be estimated using

valuation techniques

(e) A share that is not quoted in an active market and whose fair value cannot be measured reliably

(f)

A derivative that is linked to and must be settled by an unquoted equity instrument whose fair

value cannot be measured reliably

Required

Indicate which of the above items would be measured at cost.

Solution

Only (e) and

(f)

would be measured at cost.

(a) A share quoted on a stock exchange would always be measured at fair value, assuming the mar–

ket is active.

(b) A bond quoted in an active bond market would be measured at fair value or amortized cost, de–

pending on its classification.

cost, depending on its classification.

(d) A share that is not quoted in an active market, but whose fair value can be estimated using

valuation techniques, would always be measured at fair value.

(e) A share that is not quoted in an active market and whose fair value cannot be measured reliably

would be measured at cost.

(f)

A derivative that is linked to and must be settled by an unquoted equity instruments whose fair

value cannot be measured reliably would be measured at cost.

6.2.2 Amortized Cost

6.2.2.1 Amortized cost

is the cos t of an asset or liability as adjusted, as necessary, to achieve a

co nstant effecti ve interest rate over the life of the as set or liabil ity (i.e., co nstant interest income or

constant interest expense as a perc ent age of the ca rrying amount of the financial asset or finan cial

liability).

Example

the amortized cost of an investment

a debt instrument fo r which no interest or principal pay–

ments are made during the year at the beginning of 20X4

$100,000 and the effe ctive interest rate

is 12%,

the amortized cost at the end of20X4

$112,000 [100,000

(12% x

100,000)J.

6.2.2.2 Sub sequ ent to initial measurement, the se catego ries of financial assets and financial li-

abilities are measured at amo rtized cost in the balance sheet:

• Held -to-maturity investment s

• Loans and recei vables

• Financ ial liabilities not measured at fair value through pro fit or loss

6.2.2.3 It is not possible to compute amortized cost for instrument s that do not have fixed or de–

terminabl e payments, such as for equity instruments. Therefore, such instruments ca nnot be classi–

fied int o these categories.

6.2.2.4 For held-to-maturity inve stments and loans and receivables, income and exp ense items

include interest income and imp airment losse s. In addition, if a held -to-maturity investment or loan

or receivable is sold, the realized gain or los s is recognized in profit or loss. Note, however, that, as

discus sed , sale s of held-to-maturity investment s normally will disqualify the entity from usin g that

cl assification for any other ass ets that would otherwise have been classifi ed as held to maturity.

6.2.2.5 Financial liabilities measured at amortized co st are all finan cial liabilities other than those

measured at fair value. For finan cial liabilities measured at amo rtized cos t, the most significant

item of expense is interest expen se. In addition, if finan cial liabil ities are repaid or repurchased be–

fore their maturity, extinguishment gains or losses will result if the repu rchase price is different

from the ca rry ing amount.

6.2.2.6 In order to determine the amortized cos t of an asset or liability, an entity applies the

ef–

f ectiv e interest rate meth od.

Th e effective interest rate meth od also determines how much interest