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Chapter
25 /
Financial Instruments: Recognition and Measurement (lAS 39)
259
7,000
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
Case Study 9
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.
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 .)