266 / 488
Chapter
25 /
Financial Instruments: Recognition and Measurement (lAS 39)
257
(E) End-of-period
amortized
cost
[=
fA
J- IDJI
53,312
52,577
51,784
50,926
o
(D ) Amor tization
ojdebt premium
1= fC) -fBJI
681
735
794
857
926
20X5
20X6
20X7
20X8
20X9
Solution
The bond was acquired at a premium to par because the purchase price is higher than the par amount. An
amortization schedule that shows the amortized cost of the bond at the end of each year between 20X5
and 20X9 and reported interest income in each period follows.
Year
(A) Beginning-
(B ) Interest cash
(C) Reported
of-period
inflows (at 10%) and interest income
amortized cost
princinal cash intlmv
( =
fA)
X
8%
I
53,993
5,000
4,319
53,312
5.000
4,265
52,577
5,000
4,206
51,784
5.000
4,143
50,926
55.000
4,074
6.2.3 Fair Vallie
6.2.3.1 As already indi cated,fa ir
value
is de fined as the amo unt for which an asset could be ex–
changed, or a liability settled, between knowledgeable, willing parties in an arm 's-length transac–
tion.
6.2.3.2 Three categories of financial asse ts and finan cial liabiliti es norm ally are measur ed at fair
va lue in the balance sheet:
(I)
Financial assets at fair value through profit or loss
(2) Ava ilable-for-sale financial as sets
(3) Finan cial liabilities at fair valu e through profit or loss
6.2.3.3 Financial assets and financ ial liabil ities in these ca tegories include investment s in debt
instruments, investment s in equity instruments, and issued debt instrum ents that are cl assified or
des ignated into a ca tego ry meas ured at fair value. However, there is one exception to fa ir va lue
measurement in these ca tego ries. This exception applies to investments in equity inst ruments that
are not quoted in an active market and cannot be reliably measur ed at fai r val ue (or are deri vatives
that are linked to-and must be settled in- such an instrume nt). Such instrume nts are measured at
cost instead of fair value.
6.2.3.4 The recognition of income and ex pense item s in profi t or loss differs among the catego–
ries measured at fair value.
• For financial asse ts at fair value through profit or loss and financial liabiliti es at fair valu e
through profit or loss, all changes in fair value are recogni zed in profit or loss when they oc–
cur. Thi s includes unrealized holding gains and losses.
• For avai lable-for-sale financial assets, unrealized holding ga ins and losses are deferred as a
separate component of equity until they are realized or impairment occ urs. Onl y interest in–
come and dividend income, impa irment losses, and certain fore ign currency ga ins and losses
are recognized in profit or loss while ava ilab le-fo r-sa le financial asse ts are held. When gai ns
or losses are real ized (e.g ., thro ugh a sale), the associ ated unrealized holding gai ns and losses
that were prev iously deferred as a separate component of equity are included in pro fit or loss.
6.2.3.5 lAS
39
establishes this hiera rchy for determining fair value:
(a) The ex istence of a
published price quotation
in an active market is the best ev idence of fair
value, and when such quotations exist, they are used to determine fair valu e. A finan cial
instrument is regarded as quoted in an active market if quoted prices are readily and regu–
larly available from an exc hange , deal er , broker, indu stry group, pricin g service, or regu–
latory age ncy, and those prices represent actual and regul arly occ urring market tran sacti on s
on an arm's-length basis.
Except for offse tting position s, asse ts are measured at the currently quoted bid pr ice and
liabilities are meas ured at the currently quoted askin g price. When an entity has assets and
liabilit ies with offsetting market risks, it may use midmarket prices for the offsetting
pos itions. When current bid and asking prices are unavailabl e, the price of the most recent
transac tion provides ev idence of fair value as long as there has not been a significant
change in economic cond ition s since the time of the tran saction . If circumstances have
changed (e.g., a significant chan ge in the risk -free interest rate ) or the entity ca n