PAC List of examples Financial Instruments

N. Title Location
Example 1 Financial instrument or not? Handouts
Example 2 Classification liability / equity Handouts
Example 3 Classification liability / equity II. Handouts
Example 4 Compound financial instruments Excel
Example 5 Equity instruments: Warrants Excel
Example 6 Derecognition of FA: part of asset Excel
Example 7 Derecognition of FA: continuing involvement Excel
Example 8 Derecognition of FA: REPO Excel
Example 9 Derecognition of FL: modification with no extinguishment Excel
Example 10 Derecognition of FL: modification with extinguishment Excel
Example 11 Classification of FA: IFRS 9 - Business Model Test Handouts
Example 12 Initial measurement of financial instruments Excel
Example 13 Subsequent measurement: Amortized Cost I. (Interest-free loan, below-market loan) Excel
Example 14 Subsequent measurement: Amortized Cost II. (Change in estimated cash flows) Excel
Example 15 Subsequent measurement: Amortized Cost III. (Floating rate instruments) Excel
Example 16 Subsequent measurement: Impairment Excel
Example 17 Subsequent measurement: Classification + Recognition of gains/losses Excel
Example 18 Subsequent measurement: FL at FVTPL - Credit risk Excel
Example 19 Fair value measurement: Principal vs. Most advantageous market Handouts
Example 20 Fair value measurement: Application to financial liabilities Excel
Example 21 Fair value measurement: Present Value Techniques Excel
Example 22 Derivatives: Foreign Currency Forward Excel
Example 23 Derivatives: Interest Rate Swap Excel
Example 24 Embedded derivatives Excel
Example 25 Hedge accounting: Fair Value Hedge Excel
Example 26 Hedge accounting: Cash Flow Hedge Excel
Example 27 Impairment (IFRS 9): Individual assessment, 12-month ECL+lifetime ECL Excel
Example 28 Impairment (IFRS 9): Collective assessment Excel
Example 29 Impairment (IFRS 9): Simplified approach Excel
PAC Example 4: Compound Financial Instruments Financial Instruments

Raiser plc. decided to raise cash by issuing 5 000 convertible bonds in the beginning of 20Z3. The bonds have 5-year term, are issued at par with a
face value of 1 000 per bond. The bonds carry the coupon rate of 4% p.a. and coupon payments are payable annually on 31 December each year.
Each bond is convertible into 300 common shares.
At the time of issuing the bonds:
- the average market interest rate for similar debt without option to convert into shares is 7%
- the risk-free annual interest rate is 3.5%
Advice Raiser on how to present these convertible bonds in the financial statements at the time of their issuance and show appropriate journal
entries.

1. Fair value of convertible debt as a whole

Face value per 1 bond: 1,000

N. of bonds: 5,000
FV (= proceeds): 5,000,000

2. Fair value of similar debt without call option:

Interest rate: 7%

Year Coupon Principal Total cash flow Discount factor Present value
1 200,000 200,000 0.935 186,916
2 200,000 200,000 0.873 174,688
3 200,000 200,000 0.816 163,260
4 200,000 200,000 0.763 152,579
5 200,000 5,000,000 5,200,000 0.713 3,707,528
Total 4,384,970

Alternative calculation:

Present value of principal: 3,564,931

Present value of coupon payments: 820,039

Total: 4,384,970

3. Carrying amount of equity component:

FV of convertible debt as a whole: 5,000,000

FV of liability component: 4,384,970

Equity component: 615,030

4. Accounting entry:

Debit Cash 5,000,000

Credit Liability - convertible bonds -4,384,970
Credit Equity - convertible bonds -615,030
0
PAC Example5:Equity warrants Financial Instruments

During the year 20Z4, Raiser issued 100 000 warrants at 6 cents each. The warrant gives its holders the right to purchase 1 ordinary share of Raiser
for 1 EUR, but the warrant expires on 31 December 20Z5. At the time of issue, the market value of Raiser's shares was 1.10 EUR per share.
By 31 December 20Z5, warrant holders exercised 75 000 warrants.
How should these transactions be recognized in the financial statements of Raiser at the time of issue and as of 31 December 20Z5?
Note: 1 share has a nominal value of 70 cents.

1. Initial recognition of warrant

Classification of warrant: own shares + fixed amount => equity instrument

Warrant premium: 0.06

N. of warrants: 100,000
Total consideration received: 6,000

Debit Cash 6,000

-6,000
Credit Equity - warrants
0

2. 31 December 20Z5

Number of shares:
Cash received: 75,000
Warrants exercised: 4,500
Total issue of share capital 79,500

Nominal value per share: 0.70

Issued share capital: 52,500
Issued share premium: 27,000

Lapsed warrants (25 000) 1,500

Debit Cash 75,000

4,500
Debit Equity - warrants
-52,500
Credit Equity - Share capital
-27,000
Credit Equity - Share premium 0

1,500
Debit Equity - warrants
-1,500
Credit Equity - Retained earnings
0
PAC Example 4: De-recognition part of asset Financial Instruments

On 1 January 20X1, ABC provided a loan to DEF amounting to 500 000 with maturity date on 31 December 20X7. DEF pays annual interest of 30 000 on 31
December each year in arrears. ABC recognizes the loan as a financial asset at amortized cost.

On 1 January 20X4, ABC unconditionally sells the right to receive remaining 4 interest payments to the BeeBank for the fair value of 4 future payments
amounting to 108 897. The fair value of 4 future payments was calculated based on the current market interest rate that would be available to the
borrower of 4%.

What journal entries should ABC make in relation to this transaction?

1. Assessment

LOAN

PRINCIPAL @ 31/12/20X7 INTEREST PAYMENTS @ 31/12/each year

KEEP RECOGNIZING DERECOGNIZE

2. Calculations

Carrying amount of loan: 500,000

Fair values on 1 January 20X4:

Principal (500 000*Discount factor) 427,402
Future interest payments (30 000*Annuity) 108,897
Total: 536,299

Allocation of carrying amount of loan:

Principal
(FV of principal / FV of loan*CA of loan) 398,474 KEEP RECOGNIZING

Future interest payments

(FV of interest p./FV of loan*CA of loan) 101,526 DERECOGNIZE

Total 500,000

Gain on the disposal: 7,371

3. Journal entry

Sale of future interest payments on loan:

Debit Cash 108,897
-101,526
Credit FA-loan
-7,371
Credit P/L-Gain on disposal
0
PAC Example 7: De-recogniton- continuing involvement Financial Instruments

FoodCo, big food producer, has a portfolio of trade receivables to retail chains and decides to sell a part of its portfolio to the factoring company. Carrying
amount of sold portfolio is 5 000 000, fair value of portfolio is 5 050 000 and the cash received from factoring company for the portfolio is
4 990 000. The related contract says:
- 4 970 000 represents the payment for the receivables
- 20 000 represents the payment for the guarantee. According to the guarantee, FoodCo agrees to refund the credit losses from portfolio up to
500 000 to the factoring company.
What journal entries should FoodCo make in relation to this transaction?

1. Assessment

NO NO YES

2. Measurement to the extent of continuing involvement

Transferred asset (portfolio of receivables): Related liability:

Carrying amount: 5,000,000 Guarantee amount: 500,000

Guarantee amount: 500,000 FV of guarantee: 20,000
Lower: 500,000 Total: 520,000

3. Journal entry:

FoodCo's factoring of receivables - to the extent of continuing involvement:

Debit Cash 4,990,000

-5,000,000
Credit Receivables (portfolio transferred)
500,000
Debit FA - Continuing involvement in the transferred
receivables -520,000
Credit Liability (portfolio transferred) 30,000
Debit P/L - Loss on the disposal 0
PAC Example 8: De-recogniton-repo Financial Instruments

ABC holds a government bond of 1 000 issued on 1 January 20X1, paying interest of 20 twice a year and redeemable on 31 December 20X5 at par.
ABC accounts for this bond at amortized cost.
On 1 January 20X4, ABC enters into the following REPO transaction with the BeeBank:
- the bond is sold for 900 which is the fair value of bond at the time of transaction
- ABC will purchase the same bond back on 1 January 20X5 for 930.
- BeeBank will receive bond's coupon payments (interest) on 30 June 20X4 and 31 December 20X4 (as it is a legal owner).
How should this transaction be reflected in the financial statements of ABC?

1. Assessment

BeeBank receives:
2x coupon payment 40
ABC sold the bond with repurchase transaction
Proceeds from repurchase by ABC: 930 where repurchase price was FIXED and BeeBank
Total: 970 received the return of 8% - ABC effectively retained
substantially all risks and rewards.
BeeBank pays:
FV of bond at sale 900

Net result: 70
in %: 7.78% ABC continues recognizing the bond -
NO DERECOGNITION happens.

2. Journal entries

On 1 January 20X4:

"Sale" of bonds:
Debit Cash 900
-900
Credit Liability - REPO
0

On 1 January - 31 December 20X4:

Interest on REPO liability:

Debit P/L-Interest expenses 70
-70
Credit Liability - REPO
0

Interest income on bond: Debit P/L-Interest expenses 70

Debit Financial asset - bond 40 Credit Liability - REPO -30
-40 -40
Credit P/L-Interest income Credit P/L-Interest income
0 0

Transfer of interest income on bond to liability:

40
Debit Liability - REPO
-40
Credit Financial asset - bond
0

On 31 December 20X4:

"Repurchase" of bond:
930
Debit Liability - REPO
-930
Credit Cash
0
PAC Example 9: De-recogniton Financial liability-without extinguishment Financial Instruments

On 1 January 20X1, Raiser plc. took a loan from BeeBank (at market conditions) amounting to 50 mil. with the interest of 7% p.a. to be paid in arrears on 31
December each year. Final maturity of the loan is on 31 December 20X7 and Raiser paid the fee of 500 000 covering the bank's costs for assessment of Raiser's
financial situation, opening the loan facility and drafting the loan contract.
During 20X5, Raiser suffers financial difficulties and the bank agrees to modify the existing loan. On 1 January 20X6, new terms are agreed as follows:
- Raiser will not pay any interest for the years 20X6 and 20X7
-from 20X8, Raiser will pay the interest of 8.5%
-the final maturity date is postponed to 31 December 20X10
- Raiser needs to pay the fee of 400,000 related to the modification of the loan contract.
How should this transaction appear in the financial statements of Raiser?

1. Original effective interest rate

Year Cash flow Liability b/f Interest Cash paid Liability c/f
1-Jan-20X1 0 49,500,000 49,500,000
20X1 1 -3,500,000 49,500,000 3,557,448 -3,500,000 49,557,448
20X2 2 -3,500,000 49,557,448 3,561,576 -3,500,000 49,619,024
20X3 3 -3,500,000 49,619,024 3,566,002 -3,500,000 49,685,026
20X4 4 -3,500,000 49,685,026 3,570,745 -3,500,000 49,755,771
20X5 5 -3,500,000 49,755,771 3,575,829 -3,500,000 49,831,600
20X6 6 -3,500,000 49,831,600 3,581,279 -3,500,000 49,912,880
20X7 7 -53,500,000 49,912,880 3,587,120 -53,500,000 0
7.19%

Effective interest rate

Formula used: =IRR(C16:C23)

2. PV of CF under new terms

Year Cash flow Discount factor Present value

1-Jan-20X6 0 -400,000 1.000 -400,000
20X6 1 0 0.933 0
20X7 2 0 0.870 0
20X8 3 -4,250,000 0.812 -3,451,163
20X9 4 -4,250,000 0.758 -3,219,766
20X10 5 -54,250,000 0.707 -38,343,695
-45,414,624

Discount factor
Formula used: =1/(1+7.19%)^year

3. Comparison as of 1 January 20X6

PV of original financial liability: 49,831,600

PV of new financial liability: 45,414,624 No accounting for extinguishment;
Difference: 4,416,977 instead, adjust effective interest rate accounting
Difference in %: 8.86%
PAC Example 9: De-recogniton Financial liability-without extinguishment Financial Instruments

4. Loan under new terms

Year Cash flow Liability b/f Interest Cash paid Liability c/f
1-Jan-20X6 0 45,014,624 45,014,624
20X6 1 0 45,014,624 3,235,094 0 48,249,718
20X7 2 0 48,249,718 3,467,593 0 51,717,311
20X8 3 -4,250,000 51,717,311 3,716,801 -4,250,000 51,184,112
20X9 4 -4,250,000 51,184,112 3,678,481 -4,250,000 50,612,593
20X10 5 -54,250,000 50,612,593 3,637,407 -54,250,000 0
7.19%

5. Journal entries

On 1 January 20X6:

Fee paid for modification of the loan contract:

Debit Liability - loan 4,416,977 Debit Profit or loss account 400,000
Credit profit or loss account (4,416,977) (400,000)
Credit Cash
- -

On 31 December 20X6:

Interest on loan:
Debit P/L-Interest expenses 3,235,094
-3,235,094
Credit Liability - loan
0
PAC Example 10: De-recogniton financial liability with extinguishment Financial Instruments

The same example as before - however, the new terms are agreed on 1 January 20X6 as follows:
- Raiser will not pay any interest for the years 20X6 and 20X7
-from 20X8, Raiser will pay the interest of 13%
-the final maturity date is postponed to 31 December 20X13
- Raiser needs to pay the fee of 400 000 related to the modification of the loan contract.
Fair value of the new loan based on the similar loans is 50 500 000.
How should this transaction appear in the financial statements of Raiser?
1. Original effective interest rate

Year Cash flow Liability b/f Interest Cash paid Liability c/f
1-Jan-20X1 0 49,500,000 49,500,000
20X1 1 -3,500,000 49,500,000 3,557,448 -3,500,000 49,557,448
20X2 2 -3,500,000 49,557,448 3,561,576 -3,500,000 49,619,024
20X3 3 -3,500,000 49,619,024 3,566,002 -3,500,000 49,685,026
20X4 4 -3,500,000 49,685,026 3,570,745 -3,500,000 49,755,771
20X5 5 -3,500,000 49,755,771 3,575,829 -3,500,000 49,831,600
20X6 6 -3,500,000 49,831,600 3,581,279 -3,500,000 49,912,880
20X7 7 -53,500,000 49,912,880 3,587,120 -53,500,000 0
7.19%

Effective interest rate

Formula used: =IRR(C13:C20)

2. PV of CF under new terms

Year Cash flow Discount factor Present value

1-Jan-20X6 0 -400,000 1.000 -400,000
20X6 1 0 0.933 0
20X7 2 0 0.870 0
20X8 3 -6,500,000 0.812 -5,278,249
20X9 4 -6,500,000 0.758 -4,924,348
20X10 5 -6,500,000 0.707 -4,594,175
20X11 6 -6,500,000 0.659 -4,286,141
20X12 7 -6,500,000 0.615 -3,998,759
20X13 8 -56,500,000 0.574 -32,427,928
-55,909,600

Discount factor
Formula used: =1/(1+7.19%)^year

3. Comparison as of 1 January 20X6

PV of original financial liability: 49,831,600

PV of new financial liability: 55,909,600
Difference: 6,078,000 Accounting for extinguishment
Difference in %: 12.20%
PAC Example 10: De-recogniton financial liability with extinguishment Financial Instruments

4. Loan under new terms

Year Cash flow Liability b/f Interest Cash paid Liability c/f
20X5 0 50,500,000 50,500,000
20X6 1 0 50,500,000 4,402,126 0 54,902,126
20X7 2 0 54,902,126 4,785,863 0 59,687,988
20X8 3 -6,500,000 59,687,988 5,203,050 -6,500,000 58,391,038
20X9 4 -6,500,000 58,391,038 5,089,994 -6,500,000 56,981,032
20X10 5 -6,500,000 56,981,032 4,967,083 -6,500,000 55,448,115
20X11 6 -6,500,000 55,448,115 4,833,457 -6,500,000 53,781,572
20X12 7 -6,500,000 53,781,572 4,688,183 -6,500,000 51,969,755
20X13 8 -56,500,000 51,969,755 4,530,245 -56,500,000 0
8.72%

5. Journal entries

On 1 January 20X6:

Debit Liability - original loan 49,831,600

Credit Liability - new loan -50,500,000
Credit Cash (transaction costs) -400,000
Debit P/L Loss on extinguishment of debt 1,068,400
0

On 31 December 20X6:

Interest on loan:
Debit P/L-Interest expenses 4,402,126
-4,402,126
Credit Liability - loan
0
PAC Example12: Iniital measuremtn of financial instruement Financial Instruments

On 1 January 20Z3, Raiser acquired 2 financial instruments:

1. Raiser provided a loan of 100 000 CU to its subsidiary for 3 years and classifies the resulting financial asset as measured at amortized cost. The loan is
interest -free and will be repaid on 31 December 20Z5.
2. Raiser obtained a loan from government of 200 000 for financing the construction of water cleaning station. The loan is for 4 years with maturity date
on 31 December 20Z6 and carries the interest of 3%. Raiser paid the fee for grant application and administration of loan account amounting to 10 000.
The market interest rate for similar loans is 8%.
Advice Raiser how to recognize these 2 financial instruments on their acquisition.

1. Interest-free loan

1.1 Fair value of the loan:

Principal: 100,000
Interest rate: 8%
Discount factor: 0.794
Present value: 79,383

1.2 Initial recognition:

Debit Assets - Loans 79,383

Debit P/L - Loss on the loan provided 20,617
Credit Cash -100,000
0

2. Below-market rate loan from government

2.1 Fair value of the loan:

Principal: 200,000
Interest rate: 8%

Year Interest Principal Total cash flow Discount factor Present value
1 6,000 6,000 0.926 5,556
2 6,000 6,000 0.857 5,144
3 6,000 6,000 0.794 4,763
4 6,000 200,000 206,000 0.735 151,416
Total 166,879

2.2 Initial recognition:

Debit Cash 190,000

Credit Liabilities - Loans received -156,879
Credit Asset - water cleaning station -33,121
0
PAC Example13: Amortized cost Financial Instruments

Based on the information from previous example (interest-free loan to subsidiary and below-market rate loan from government, both on 1 January 20Z3)
advice Raiser how these 2 instruments shall be recognized in the financial statements in the subsequent periods.
Information:
1. Interest-free loan to subsidiary: principal 100 000; maturity 31 December 20Z5, initially recognized at 79 383.
2. Below-market loan from government: principal 200 000, maturity 31 December 20Z6, interest 3% paid annually, initially recognized at 156 879.

1. Interest-free loan

1.1 Effective interest method:

Amortized Interest Amortized cost

Year Cash flow
cost b/f income c/f
0 -79,383 79,383
1 0 79,383 6,351 85,734
2 0 85,734 6,859 92,593
3 100,000 92,593 7,407 0
Total 8.00%

1.2 Subsequent measurement:

Interest income: years 20Z3-20Z5: 20Z3 20Z4 20Z5

Debit Assets - Loans provided 6,351 6,859 7,407
Credit Interest income -6,351 -6,859 -7,407
0 0 0

Repayment from subsidiary on 31 December 20Z5:

Debit Cash 100,000

-100,000
Credit Assets - Loans
0

2. Below-market rate loan from government

2.1 Effective interest method:

Amortized Interest Amortized cost

Year Cash flow
cost b/f expense c/f
0 156,879 -156,879
1 -6,000 -156,879 -15,323 -166,202
2 -6,000 -166,202 -16,234 -176,436
3 -6,000 -176,436 -17,233 -187,669
4 -206,000 -187,669 -18,331 0
Total 9.77%

2.2 Subsequent measurement:

Interest expense: years 20Z3-20Z6: 20Z3 20Z4 20Z5 20Z6

Debit Interest expense 15,323 16,234 17,233 18,331
Credit Liabilities - loans received -15,323 -16,234 -17,233 -18,331
0 0 0 0
Payments of interest + principal
Debit Liabilities - loans received 6,000 6,000 6,000 206,000
Credit Cash -6,000 -6,000 -6,000 -206,000
0 0 0 0
PAC Example 14: Amortized cost change in cash flow Financial Instruments

In the beginning of 20Z1, Raiser purchased the bond with maturity on 31 December 20Z5. Purchase price of the bond was 9 800 (equal to bond's fair value)
and Raiser incurred transaction cost of 150. The bond has a face value of 11 000 and pays annual coupon of 5% payable on 31 December each year in
arrears.
The contract specifies that the issuer can prepay the bond at no penalty. At inception Raiser does not expect the issuer to prepay the bond.
Raiser classified the bond at amortized cost, because it meets the business model and contractual cash flows tests.
How shall Raiser measure the bond in its financial statements?

1. Initial measurement

Fair value: 9,800 9,950

Debit Assets - Bonds
Transaction cost: 150 -9,950
Credit Cash
Total: 9,950 0

2. Subsequent measurement

Amortized Interest Amortized cost

Year Cash flow
cost b/f income c/f
20Z1 - start -9,950 9,950
20Z1 550 9,950 731 10,131
20Z2 550 10,131 745 10,326
20Z3 550 10,326 759 10,535
20Z4 550 10,535 774 10,759
20Z5 11,550 10,759 791 0
Total 7.35%

Journal entries:

Interest income- years 20Z1-20Z5: 20Z1 20Z2 20Z3 20Z4 20Z5

Debit Assets - Bonds 731 745 759 774 791
Credit Interest Income -731 -745 -759 -774 -791
0 0 0 0 0
Payments of interest + principal
Debit Cash 550 550 550 550 11,550
Credit Assets - Bonds -550 -550 -550 -550 -11,550
0 0 0 0 0

On 1 January 20Z3 the issuer announced prepayment of 30% principal on 31 December 20Z3, further 20% on 31 December 20Z4 and remaining 50% on 31
December 20Z5.
How shall this change be reflected in the financial statements of Raiser?

3. Calculation of revised amortized cost

Repayment of Coupon Total cash Discount factor Discounted

Year Principal b/f
principal payments flows (7.35%) cash flows
20Z3 3,300 11,000 550 3,850 0.932 3,586
20Z4 2,200 7,700 385 2,585 0.868 2,243
20Z5 5,500 5,500 275 5,775 0.808 4,668
Total 11,000 10,498

Original amortized cost @ 1 January 20Z3: 10,326 Debit Assets - Bonds 172
Revised amortized cost @ 1 January 20Z3: 10,498 Credit Profit or loss - Interest&similar income -172
Difference: 172 0
PAC Example 14: Amortized cost change in cash flow Financial Instruments

4. Revised subsequent measurement

Amortized Interest Amortized cost

Year Cash flow
cost b/f income c/f
20Z1 - start -9,950 9,950
20Z1 550 9,950 731 10,131
20Z2 550 10,131 745 10,326
20Z3 3,850 10,498 772 7,419
20Z4 2,585 7,419 545 5,380
20Z5 5,775 5,380 395 0
Total 7.35%

Not IRR, but original effective interest rate!

Journal entries:

Interest income years 20Z3-20Z5: 20Z3 20Z4 20Z5

Debit Assets - Bonds 772 545 395
Credit Interest Income -772 -545 -395
0 0 0
Payments of interest + principal
Debit Cash 3,850 2,585 5,775
Credit Assets - Bonds -3,850 -2,585 -5,775
0 0 0
PAC Example 15: Amortized cost -floating rate Financial Instruments

On 1 January 20Z1, Raiser acquired 3 bonds. Each bond has a nominal value of 10 000, final maturity date is 31 December 20Z3.
Bond 1: Purchase price was 10 000. Coupon of LIBOR 12M+0.5% is payable annually on 31 December.
Bond 2: Purchase price was 10 046. Coupon of LIBOR 12M+0.5% is payable annually on 30 November.
Bond 3: Purchase price was 9 946. Coupon of LIBOR 12M+0.5% is payable annually on 30 November. The credit quality of the bond deteriorated and that
resulted in a rating downgrade.
LIBOR 12M was 5% on 31 December 20Z0.
Advice Raiser how to measure the bonds in 20Z1.
1. Initial measurement

Bond 1: 10,000 Debit Assets - Bond 1 10,000

Bond 2: 10,046 Debit Assets - Bond 2 10,046
Bond 3: 9,946 9,946
Debit Assets - Bond 3
Total: 29,992 -29,992
Credit Cash
0
2. Subsequent measurement

2.1 Bond 1

Nominal value: 10,000 Debit Assets - Bond 1 550

Purchase price: 10,000 Credit Interest income -550
Difference: 0 0
Debit Cash 550
Coupon payment: 550 Credit Assets - Bond 1 -550
0

2.2 Bond 2

Nominal value: 10,000

Purchase price: 10,046 Debit Assets - Bond 2 504
Difference: 46 Credit Interest income -504
Amortize over the period 0
Coupon payment: 550 to the next repricing date Debit Cash 550
Accrued coupon
Credit Assets - Bond 2
/1 month: 46 p.a. -550
Interest income /
11 months: 504 0
Accrued interest income Debit Assets - Bond 2 ???
(December 20Z1) Credit Interest income ???
2.3 Bond 3

Nominal value: 10,000

Purchase price: 9,946
Difference: -54
Amortize over the period Debit Assets - Bond 3 504
Coupon payment: 550 -504
to the next repricing date Credit Interest income
Accrued coupon
/1 month: 46 0
Interest income /
11 months: 504 Accrued interest income Debit Assets - Bond 3 ???
(December 20Z1) Credit Interest income ???
Remaining
difference: -100 Amortize over the period to
the maturity Debit Assets - Bond 3 33
Credit PL / Income -33
0

Debit Cash 550

Credit Assets - Bond 3 -550
0
PAC Example17: Classification and recognition Financial Instruments

I. Debt instruments
In the beginning of 20Z1, Raiser purchased the bond with maturity on 31 December 20Z5. Purchase price of the bond was 9 800 (equal to bond's fair value) and
Raiser incurred transaction cost of 150. The bond has a face value of 11 000 and pays annual coupon of 5% payable on 31 December each year in arrears (note:
the same bonds as in example 14).
The bond trades for 90.91 after coupon on the stock exchange as at 31 December 20Z1.
Advice Raiser how to recognize gains or losses from bond's subsequent measurement if:
1. The bond meets contractual cash flow test and is held under business model whose objective is achieved through collecting contractual cash flows.
2. The bond meets contractual cash flow test and is held under business model whose objective is achieved through collecting contractual cash flows and
selling.
3. The bond does not meet business model test.
1. Bond meets contractual cash flow tests, business model: collecting cash flows

1.1 Classification

Bond contractual
meets both cash
business
flowmodel
test + and
Measured at amortized cost
contractual
business model:
cash collecting
flows testcash flows

1.2 Initial measurement

Fair value: 9,800 9,950
Debit Assets - Bonds
Transaction cost: 150 -9,950
Credit Cash
Total: 9,950 0

1.3 Subsequent measurement

Amortized Interest Amortized cost

Year Cash flow
cost b/f income c/f
20Z1 - start -9,950 9,950
20Z1 550 9,950 731 10,131
20Z2 550 10,131 745 10,326
20Z3 550 10,326 759 10,535
20Z4 550 10,535 774 10,759
20Z5 11,550 10,759 791 0
Total 7.35%

Journal entries:

Interest income- years 20Z1-20Z5: 20Z1 20Z2 20Z3 20Z4 20Z5

Debit Assets - Bonds 731 745 759 774 791
Credit Interest Income -731 -745 -759 -774 -791
0 0 0 0 0
Payments of interest + principal
Debit Cash 550 550 550 550 11,550
Credit Assets - Bonds -550 -550 -550 -550 -11,550
0 0 0 0 0

2. Bond meets contractual cash flow tests, business model: collecting cash flows and selling

2.1 Classification

Bond contractual
meets both cash
business
flowmodel
test + and
Measured at fair value through other comprehensive income
contractual
business model:
cash collecting
flows testcash flows and
selling => In the statement of FP: fair value
=> In the profit or loss: amortized cost amounts (interest revenue)

=> In the other comprehensive income: difference between amortized cost and fair value
PAC Example17: Classification and recognition Financial Instruments

2.2 Initial measurement => In the other comprehensive income: difference between amortized cost and fair value
Fair value: 9,800 9,950
Debit Assets - Bonds
Transaction cost: 150 -9,950
Credit Cash
Total: 9,950 0

2.3 Subsequent measurement

Interest income:

Amortized Interest Amortized cost

Year Cash flow
cost b/f income c/f
20Z1 - start -9,950 9,950
20Z1 550 9,950 731 10,131
20Z2 550 10,131 745 10,326
20Z3 550 10,326 759 10,535
20Z4 550 10,535 774 10,759
20Z5 11,550 10,759 791 0
Total 7.35%

Journal entries:

Interest income- years 20Z1-20Z5: 20Z1 20Z2 20Z3 20Z4 20Z5

Debit Assets - Bonds 731 745 759 774 791 This needs to be shown in the P/L.
Credit Interest Income -731 -745 -759 -774 -791
0 0 0 0 0
Payments of interest + principal
Debit Cash 550 550 550 550 11,550
Credit Assets - Bonds -550 -550 -550 -550 -11,550
0 0 0 0 0

Change in OCI:

Market price: 90.91

Face value: 11,000
Fair value @31/12/20Z1: 10,000 This needs to be shown in the statement of FP.

Amortized cost @31/12/20Z1: 10,131

Difference: -131 Debit Other comprehensive income 131

Credit Assets-Bonds -131
0

3. Bond does not meet business model test

3.1 Classification

Bond does not meet business model test

Measured at fair value through profit or loss

3.2 Initial measurement

Fair value: 9,800 Debit Assets - Bonds 9,800
Transaction cost: n/a Debit P/L - Finance expenses 150
Total: 9,800 -9,950
Credit Cash
0
PAC Example17: Classification and recognition Financial Instruments

3.3 Subsequent measurement

Market price: 90.91

Face value: 11,000 Debit Assets - Bonds 200
Fair value: 10,000 Credit P/L - FV gain -200
0
Fair value 1/1/20Z1: 9,800
Coupon received:
Gain: 200 550
Debit Cash
-550
Credit P/L - Finance income
0

II. Equity instruments

In the beginning of 20Z1, Raiser purchased 100 000 €2 listed equity shares in ABC Corporation for the price of €3.5 per share. Raiser paid fee of 2 000 in
relation to purchase. On 14 November 20Z1, Raiser received dividend of €0.05 per share. On 31 December 20Z1, the shares were traded at €2.80 per share.
Advice Raiser how to recognize gains or losses from shares' subsequent measurement if:
1. The shares meet neither business model test nor contractual cash flows test.
2. Raiser bought shares in order to get profits from the changes in their market price.
3. Raiser bought shares in order to receive dividends from ABC Corporation. Raiser would like to avoid volatility in profit or loss resulting from changes in
market prices.

1. The shares meet neither business model nor contractual cash flows tests.

Only debt instruments are assessed for business

model / contractual CF tests, not equity Look to points 2 and 3!
instruments

2. The shares bought in order to get profits from the changes in their market price.

2.1 Classification

Shares were bought for trading Measured at FV thought P/L

2.2 Initial measurement

Market price: 3.5 350,000
Debit Assets - Shares
Amount purchased: 100,000 2,000
Debit P/L - Finance expenses
Fair value: 350,000 -352,000
Credit Cash 0
2.3 Subsequent measurement

Market price: 2.80

Amount purchased: 100,000 Debit P/L - FV loss 70,000
Fair value: 280,000 Credit Assets - Shares -70,000
0
Fair value 1/1/20Z1: 350,000
Dividend received:
Loss: -70,000 Debit Cash 5,000
Credit P/L - Finance income -5,000
0
PAC Example17: Classification and recognition Financial Instruments

3. The shares bought in order to receive dividends

3.1 Classification

Shares were bought to receive dividends

+ Raiser wants to avoid volatility in P/L Measured at FV thought OCI

3.2 Initial measurement

Market price: 3.5
Amount purchased: 100,000 Debit Assets - Shares 352,000
Fair value: 350,000 Credit Cash -352,000
0
3.3 Subsequent measurement

Market price: 2.80

Amount purchased: 100,000 Debit OCI - Reval. of shares 70,000
Fair value: 280,000 Credit Assets - Shares -70,000
0
Fair value 1/1/20Z1: 350,000
Dividend received:
Loss: -70,000 Debit Cash 5,000
Credit P/L - Finance income -5,000
0
PAC Example 18: Financial liabiliyt credit risk Financial Instruments

On 1 January 20Z1, Raiser issues at par bonds with total face value of 500 000, annual coupon of 5% and 5-years maturity. These conditions are consistent
with market rates for bonds with similar characteristics. The bonds are issued in a private placement and are BB-rated. Raiser designated these bonds as
financial liabilities as at fair value through profit or loss.
Raiser uses LIBOR as it is observable (benchmark) interest rate. At the time of bond's inception, LIBOR is 3.2%.
On 31 December 20Z1, LIBOR is 3.0% and the fair value of the bond is 489 509 (due to worsening of Raiser's own credit risk).
How should Raiser recognize the change in fair value of the bond for the year 20Z1?

1. Initial measurement

Fair value: 500,000 Debit Cash 500,000

Credit Liabilities - bonds -500,000
0
2. Subsequent measurement

2.1 Determining instrument-specific component of IRR

Bond's IRR at the inception:

Year Interest Principal Total cash flow

0 500,000 500,000
1 -25,000 -25,000
2 -25,000 -25,000
3 -25,000 -25,000
4 -25,000 -25,000
5 -25,000 -500,000 -525,000
5.00%

Benchmark rate at the inception: 3.20%

Difference = instrument-specific component of IRR: 1.80%

2.2 Determining change in FV attributable to changes in market conditions

Discount rate to determine PV:

Benchmark rate on 31 December 20Z1: 3%
Instrument-specific component of IRR: 1.80%
Discount rate: 4.80%

Year Interest Principal Total cash flow Discount factor Present value
1 -25,000 -25,000 0.954 -23,855
2 -25,000 -25,000 0.910 -22,762
3 -25,000 -25,000 0.869 -21,720
4 -25,000 -500,000 -525,000 0.829 -435,225
-503,562

2.3 Determining change in FV attributable to credit risk

FV of bond as at 31 December 20Z1: -489,509

FV of bond as at 1 January 20Z1: -500,000 Debit Liabilities - bonds 10,491
Change in FV: 10,491 Debit P/L - change in FV of bond 3,562
thereof: Credit OCI - change in FV of bond -14,053
attributable to changes in market conditions: -3,562 0
attributable to credit risk: 14,053
PAC Example 20: IFRS 13 Liabilities Financial Instruments

Q1: On 1 January 20Z1, BeeBank issues at par exchange-traded bonds with total face value of 500 000, annual coupon of 5% and 5-years maturity. The
bonds are BB-rated. BeeBank designated these bonds as financial liabilities as at fair value through profit or loss.
On 31 December 20Z1, these bonds are traded as an asset on the stock exchange at 98.86 after payment of accrued interest and credit rating did not
change at all.
What is the fair value of BeeBank's financial liability from bonds issued as at 31 December 20Z1?

Solution:

Face value: 500,000 BeeBank needs to evaluate whether the quoted price of bonds includes some effect of
Quoted price: 98.86
factors not applicable to the fair value measurement of a liability.
Fair value: 494,300

Q2: On 1 January 20Z1, Raiser issues at par bonds with total face value of 500 000, annual coupon of 5% and 5-years maturity. The bonds are issued in a
private placement and are BB-rated. Raiser designated these bonds as financial liabilities at fair value through profit or loss.
On 31 December 20Z1, market conditions have not changed, but Raiser's credit spread has deteriorated by 60 basis points because the risk of non-
performance has increased. Raiser concludes that if these bonds would have been issued on 31 December 20Z1, Raiser would need to pay interest rate of
5.6% or Raiser would need to issue these bonds at discount.
What is the fair value of Raiser's financial liability from bonds issued as at 31 December 20Z1?

Solution:

Year Interest Principal Total cash flow Discount factor Present value
1 25,000 25,000 0.947 23,674
2 25,000 25,000 0.897 22,419
3 25,000 25,000 0.849 21,230
4 25,000 500,000 525,000 0.804 422,186
Total 489,509
PAC Example 21: IFRS 13 PV techbiques Financial Instruments

Q1: Raiser provided an interest-free loan to its subsidiary amounting to 100 000. The loan is payable after 3 years. Based on market data, Raiser selected
several debt securities to determine the fair value of interest-free loan:
- corporate bond with face value of 500 000 issued by the company operating in the same industry as Raiser's subsidiary trades for 98.67, it pays annual
coupon of 5% and it is repayable at par after 3 years;
- government bond with face value of 100 000 trades for 99.52, it pays annual coupon of 3% and is repayable at par after 3 years.
What is the fair value of interest-free loan?

1.1 Selection of market discount rate

Year Interest Principal Total cash flow

0 -493,350 -493,350
1 25,000 25,000
2 25,000 25,000
3 25,000 500,000 525,000
Total 5.49% Market yield

1.2 FV of loan

Loan principal: 100,000

In reality: select a few similar securities and draw a yield curve (see bonus video in IFRS
Discount rate: 5.49%
Present value: 85,179 Starter Kit on extrapolating along yield curves)

Q2: Raiser expects to receive certain cash flows from an asset A in 1 year:
- cash flow of 10 000 with probability of 20%
- cash flow of 12 000 with probability of 45%
- cash flow of 15 000 with probability of 35%.
The applicable risk-free rate for cash flows with a 1-year horizon is 4% and the systematic risk premium for an asset with the same risk profile is 2%.
Calculate asset's fair value using both Method 1 and Method 2.

2.1 Expected value of cash flows

Cash flow Probability Weighted CF

10,000 20% 2,000
12,000 45% 5,400
15,000 35% 5,250
Total 12,650 Expected cash flows

2.2 Method 1

Expected cash flows: 12,650

Risk-free rate: 4%
Risk premium: 2%
Adjusted expected CF
(12 650 x (1.04/1.06)) 12,411
Discount rate: 4%
Present value: 11,934

2.3 Method 2

Expected cash flows: 12,650

Adjusted discount rate: 6%
Present value: 11,934
PAC Example 22: Derivative Currency Forward Financial Instruments

On 1 October 20X1, ABC Corp., US-based producer of equipment sold goods to its European customer for 20 mil. EUR. The invoice is due on 30 June 20X2.
ABC Corp. is concerned about weakening of EUR in the future and therefore, it enters into forward contract with BeeBank with the following terms:
1. ABC will pay 20 mil. EUR to BeeBank on 30 June 20X2.
2. BeeBank will pay 25.6 mil. USD to ABC on 30 June 20X2.
Calculate the fair value of this contract as of 31 December 20X1 and advise ABC how to recognize forward contract in the financial statements as of 31
December 20X1.
Note: risk-free rate on US treasury bills is 0.2% p.a. and risk-free rate in EURO area is 1% p.a. Spot rate of USD / EUR as of 31 December 20X1 is 1.30 USD /
EUR.

1. Fair value of the forward contract as of 31 December 20X1

1.1 Using single formula

1 = EUR FV = fair value

2 = USD A = amount in EUR
F = forward rate K = strike (contractual rate)
S = spot rate
e = the base of natural logarithms (2.718)
r = interest rate
T = time to settlement

As of 31 December 20X1:
Spot rate (S): 1.30
Time to settlement (T): 0.50
Strike rate (K): 1.28
Rate 1 (EUR): 1.00%
Rate 2 (USD): 0.20%
Amount in EUR (A) -20,000,000

Forward rate: 1.295

Fair value: -295,912 USD

1.2 Using discounting

As of 31 December 20X1: ABC pays ABC receives

Amount in currency: -20,000,000 25,600,000

Currency: EUR USD
Risk-free rate: 1.00% 0.20%
Continuous discounting
Present value: -19,900,250 25,574,413
Spot rate: 1.300 1.000
Amount in USD: -25,870,324 25,574,413
Fair value: -295,912

2. Journal entries

Debit P/L - financial expenses 295,912

Credit Liabilities - derivatives -295,912
0
PAC Example 23: Derivative Interest rate swap Financial Instruments

On 1 January 20X1 Swap Corp. enters into interest rate swap with BeeBank with the following terms:
1. Notional amount of swap is 10 mil. EUR.
2. Swap Corp. receives LIBOR 12 M from BeeBank.
3. Swap Corp. pays 1% fixed to BeeBank.
4. Settlement is realized once per year on 31 December on the net basis.
5. Maturity date of swap is 31 December 20X5.
Calculate the fair value of this contract as of 31 December 20X1 and advise ABC how to recognize interest rate swap in the financial statements as
of 31 December 20X1.
Note: Yields derived from LIBOR curve as of 31 December 20X1 are below.
Maturity Annual Yield
1 0.80%
2 0.87%
3 0.93%
4 1.02%
1. Floating leg of interest rate swap

F = face value / notional amount 10,000,000

m = number of payment periods per year 1
n = number of years 4
r = discount rate 1.02%

PV = present value of floating leg 397,805

2. Fixed leg of interest rate swap

Year Discount rate Discount factor Cash flow Present value

1 0.80% 0.992 -100,000 -99,206
2 0.87% 0.983 -100,000 -98,282
3 0.93% 0.973 -100,000 -97,261
4 1.02% 0.960 -100,000 -96,022
Total -390,772

3. Fair value of swap as of 31 December 20X1

Fair value of floating leg: 397,805

Fair value of fixed leg: -390,772
Total: 7,033

Fair value of swap as of 1 January 20X1 (inception): 0

Change: 7,033
4. Journal entry

If this interest rate swap is NOT a hedging instrument in a cash flow hedge:

Debit Assets - derivatives 7,033

-7,033
Credit P/L - financial income
0
PAC Example 24: Embeded Derivative Financial Instruments

On 1 October 20X4, PetroKing Corp. operating in Saudi Arabia agreed to sell 10 000 barrels of oil to a company operating in Germany for total
payment of 900 000 Swiss Francs, with physical delivery on 31 March 20X5 and the payment required by 30 June 20X5.
The contract will be settled by making and taking delivery in the normal course of business and is NOT accounted for as a financial instrument, but
as a normal sale contract.
Advice PetroKing Corp. whether there is any embedded derivative and if yes, how to recognize it in its financial statements as of
31 December 20X4.
Note: Forward currency rate SAR / CHF are as follows:
1 October 20X4: 6 months - 4.208 SAR / CHF; 9 months - 4.311 SAR / CHF
31 December 20X4: 6 months - 4.307 SAR / CHF; 9 months - 4.331 SAR / CHF.
Risk free rate in Saudi Arabia is 2%.
1. Is there an embedded derivative?

Contract is denominated in CHF

-> it is a functional currency neither in Saudi Arabia (SAR) nor in Germany (EUR)
-> oil is routinely traded in USD world-wide, not in CHF

There is an embedded derivative and needs to be separated (not closely related to host)

2. Separating the host contract as at 31 December 20X4

Host = contract to sell oil => outside the scope of IFRS 9

Revenues from sale of goods => in line with IAS 18
No accounting on 31 December 20X4

3. Separating the embedded derivative as at 31 December 20X4

Forward rate SAR / CHF @ 31 December 20X4: 4.307 F

Notional amount: 900,000 A
Forward rate SAR / CHF @ 1 October 20X4: 4.311 K
Risk-free rate in Saudi Arabia: 2% r2
Time to settlement: 0.5 T

Fair value: -3,564

4. Journal entry

Debit P/L - Change in FV of derivatives 3,564

-3,564
Credit Liabilities - Embedded derivatives
0
PAC Example 25: Hedge Accounting Financial Instruments
(Fair Value Hedge)

On 1 October 20Z1, CoffeeToffee acquired 25 000 pounds of coffee beans at USD 1.5 / pound. CoffeeToffee's managers are concerned about falling prices of
coffee beans on the market and therefore, they decided to enter into commodity forward contract to sell 25 000 pounds of coffee beans at USD 1.525 /
pound with the delivery on 31 March 20Z2.
On 31 December 20Z1, the market price of coffee beans is USD 1.518 / pound and similar commodity forward contracts with delivery on 31 March 20Z2 sell
for USD 1.540 / pound. CoffeeToffee held 30 000 pounds of coffee beans in its inventory on 31 December 20Z1.
How shall CoffeeToffee report these transactions in its financial statements as of 31 December 20Z1? Assume all hedge accounting criteria are met.

1. Changes in fair value

1.1 Hedging instrument

Strike price of forward contract @ 1-Oct-20Z1 1.525 USD / pound

Strike price of forward contract @ 31-Dec-20Z1 1.540 USD / pound
Notional amount of forward contract 25,000 pounds

Loss on forward contract (= Fair value) -375 USD

1.2 Hedged item

Amount of inventory hedged 25,000 pounds
As of 1 October 20Z1:
Cost: 1.500 USD / pound
Carrying amount: 37,500

As of 31 December 20Z1:
Spot rate: 1.518 USD / pound
Carrying amount: 37,950

FV gain on inventory: 450 USD

1.3 Hedge effectiveness

Loss on hedging instrument: -375
Gain on hedged item: 450

Hedge effectiveness: 83.33%

2. Journal entries

2.1 Hedging instrument

Debit P/L - Loss on commodity forward 375

Credit Liabilities - derivatives -375
0

2.2 Hedged item

Debit Inventories 450

-450
Credit P/L - Gain from FV change in inventories
0

On 31 March 20Z2, CoffeeToffee sold the inventory of coffee beans and closed out the commodity forward at the spot price of USD 1.626 / pound by cash
settlement.
What journal entries shall CoffeeToffee make with respect to this transaction?
3. Selling inventories
PAC Example 25: Hedge Accounting Financial Instruments
(Fair Value Hedge)

Quantity: 25,000 pounds

Carrying amount: 37,950 USD
Spot rate @31-Mar-20Z2 1.626 USD / pound
FV of inventories @31-Mar-20Z2 40,650 USD

FV gain on inventory: 2,700 USD

Debit Inventories 2,700

Credit P/L - Gain from FV change in inventories -2,700
0
Debit P/L - Cost of sales 40,650
Credit Inventories -40,650
0
40,650
Debit Cash or Receivables
-40,650
Credit P/L - Revenue from sale of goods
0

4. Closing out the commodity forward

Notional amount: 25,000 pounds

Strike price 1.525 USD / pound
Spot rate @31-Mar-20Z2 1.626 USD / pound
Loss on the commodity forward contract -2,525 USD
Carrying amount of forward contract -375 USD

Change in FV on forward contract: -2,150 USD

Debit P/L - Loss on commodity forward 2,150

Credit Liabilities - derivatives -2,150
0
Debit Liabilities - derivatives 2,525
Credit Cash - settlement -2,525
0
PAC Example 26: Cashflow hedge Financial Instruments

On 1 October 20X1, ABC Corp., US-based producer of equipment deals with the European customer and based on negotiations, ABC assumes to sell goods
for 20 mil. EUR. The goods would be delivered on 30 June 20X2 together with cash payment. ABC Corp. is concerned about weakening of EUR in the future
and therefore, it enters into forward contract with BeeBank with the following terms:
1. ABC will pay 20 mil. EUR to BeeBank on 30 June 20X2.
2. BeeBank will pay 25.6 mil. USD to ABC on 30 June 20X2.
Show the accounting entries related to the hedge as of 31 December 20X1.
Note: The rates USD / EUR are stated in the table below. Ignore discounting of any kind.
Forward rate
Date Spot rate (settlement
30-Jun-20X2)
1 October 20X1 1.272 1.280
31 December 20X1 1.300 1.295

1. Gains / losses on hedging components

1.1 Hedging instrument

Notional amount 20,000,000 EUR

As of 1 October 20X1:
Forward rate: 1.280
Value of forward contract 25,600,000 USD

As of 31 December 20X1:
Forward rate: 1.295
Value of forward contract 25,900,000 USD

Loss on forward contract: -300,000 USD

1.2 Hedged item

Forecast transaction - future receivable 20,000,000 EUR
As of 1 October 20X1:
Spot rate: 1.272
Value of forecast transaction: 25,440,000 USD

As of 31 December 20X1:
Spot rate: 1.300
Value of forecast transaction: 26,000,000 USD

Change in expected cash flows: 560,000 USD

1.3 Hedge effectiveness

Loss on hedging instrument: 300,000 Loss on hedging instrument < gain on hedged item
Gain on hedged item: 560,000
=> hedge is effective

2. Journal entries @31-Dec-20X1

Re-measuring the hedge efectiveness:

Debit OCI - Cash flow hedge reserve 300,000

Credit Liabilities - derivatives -300,000
0
PAC Example 26: Cashflow hedge Financial Instruments

On 30 June 20X2, ABC Corp. receives 20 mil. EUR from its customer and closes the forward contract with the bank. The actual spot rate on 30 June 20X2 is
1.330 USD / EUR. What journal entries shall ABC make with respect to this cash flow hedge?

3. Gains / losses on hedging components

3.1 Hedging instrument

Notional amount 20,000,000 EUR

As of 31 December 20X1:
Forward rate: 1.295
Value of forward contract 25,900,000 USD

As of 30 June 20X2:
Spot rate: 1.330
Value of forward contract 26,600,000 USD

Further loss on forward contract -700,000 USD

3.2 Hedged item

Forecast transaction - receivable from sale 20,000,000 EUR

As of 31 December 20X1:
Spot rate: 1.300
Value of forecast transaction: 26,000,000

As of 30 June 20X2:
Spot rate: 1.330
Value of forecast transaction: 26,600,000

Change in expected cash flows: 600,000

3.3 Hedge effectiveness

Loss on hedging instrument: -700,000
Gain on hedged item: 600,000

Hedge effectiveness: 116.67% => hedge is still highly effective

86%
4. Journal entries @30-Jun-20X2

Re-measuring the cash-flow hedge:

Debit OCI - Cash flow hedge reserve 600,000 Lower of:

Debit P/L - Ineffective portion of CF hedge 100,000 - cummulative gain/loss on hedging instrument 900,000
Credit Liabilities - derivatives -700,000 - cummulative change in FV of hedge item 1,160,000
0
Both from the inception of the hedge.
Cash sale of goods to EU customer:

Debit Cash 26,600,000

Credit P/L Revenue from sale -26,600,000
0
Settlement of forward with the bank: Reclassification adjustment:

Debit Liabilities - derivatives 1,000,000 Debit P/L Reclassification of CF hedge reserve 900,000
Credit Cash -1,000,000 Credit OCI - Cash flow hedge reserve -900,000
0 0
PAC Example 27: Impairment IFRS 9 Financial Instruments

On 1 January 20X1, BeeBank provided a loan to Raiser Co., amounting to CU 50 mil. with annual installments of CU 9 mil. The final maturity date is 31 December 20X7. BeeBank
estimates that the probability of Raiser's default is 0.3% over the next 12 months, at both initial recognition and 31 December 20X1 and in this case, BeeBank would lose 30%. The
installment due on 31 December 20X1 was paid on time.
Calculate the loss allowance in line with IFRS 9.
The loan
Loan is "Stage
is in in Stage
1"1 12-month expected credit loss

1.1 Effective interest method:

Amortized cost Amortized cost

Year Cash flow Interest revenue
b/f c/f
0 -50,000,000 50,000,000
1 9,000,000 50,000,000 3,067,852 44,067,852
2 9,000,000 44,067,852 2,703,873 37,771,725
3 9,000,000 37,771,725 2,317,561 31,089,287
4 9,000,000 31,089,287 1,907,547 23,996,833
5 9,000,000 23,996,833 1,472,375 16,469,208
6 9,000,000 16,469,208 1,010,502 8,479,710
7 9,000,000 8,479,710 520,290 0
Total 6.14%

1.2 Measuring loss allowance @31 December 20X1:

A B C=A*B
Expected
Default within 12 Credit loss (%
Probability Credit loss (CU) credit loss
months? on gross CA)
(CU)
Yes 0.30% 30% 13,220,356 39,661 Debit P/L - Impairment of FA 39,661
No 99.70% 0% 0 0 Credit Assets - Loss allowance (loans) -39,661
Total 39,661 0

During 20X3, Raiser suffered serious financial difficulties and as a result, BeeBank concluded that the credit risk of the loan has increased significantly since the initial recognition. Based
on discussions with bank's lawyers and detailed assessment of Raiser's situation, BeeBank concluded that:
- probability of default occurring within 12 months after the reporting date is 20% and in this case, BeeBank could recover CU 3 mil. from the bankruptcy proceedings (estimated timing:
31 December 20X5)
- probability of default occurring between 1-2 years after the reporting date is 25% and in this case, BeeBank could recover CU 2 mil. from the bankruptcy proceedings (estimated
timing: 31 December 20X7)
- probability of default occurring later than 2 years is 20 % and BeeBank would not recover anything.
At 31 December 20X3, the annual installment was paid on time and no change in contractual terms of loan occurred.

Calculate the loss allowance at 31 December 20X3.

Loan is in "Stage 2" Lifetime expected credit loss, interest on gross CA (i.e. loss allowance NOT taken into account)

2.1 Measuring loss allowance @31 December 20X3:

Estimated outcomes:
Outcome 1 - default in 20X4 Outcome 2 - default in 20X5 Outcome 3 - default in 20X6 Outcome 3 - default in 20X7 Outcome 4 - no default at all
Year
Discount Discount Discount Discount
Cash flow Discount factor Present value of CF Cash flow Present value of CF Cash flow Present value of CF Cash flow Present value of CF Cash flow Present value of CF
factor factor factor factor
4 0 0.942 0 9,000,000 0.942 8,479,710 9,000,000 0.942 8,479,710 9,000,000 0.942 8,479,710 9,000,000 0.942 8,479,710
5 3,000,000 0.888 2,663,166 0 0.888 0 9,000,000 0.888 7,989,498 9,000,000 0.888 7,989,498 9,000,000 0.888 7,989,498
6 0 0.836 0 0 0.836 0 0 0.836 0 9,000,000 0.836 7,527,625 9,000,000 0.836 7,527,625
7 0 0.788 0 2,000,000 0.788 1,576,101 0 0.788 0 0 0.788 0 9,000,000 0.788 7,092,453
Total 6.14% 2,663,166 6.14% 10,055,811 6.14% 16,469,208 6.14% 23,996,833 31,089,287

PV of contractual cash flows 31,089,287 31,089,287 31,089,287 31,089,287 31,089,287

Credit loss (difference) 28,426,121 21,033,476 14,620,079 7,092,453 0

Probability of default: 20% 25% 10% 10% 35%

Expected credit loss: 5,685,224 5,258,369 1,462,008 709,245 0

13,114,846
The difference between ECL @31/12/20X3 and already recognized ECL => recognize in P/L
 PAC Example 27: Impairment IFRS 9 Financial Instruments

2.2 Interest revenue

2,317,561
Debit Assets - Loans
as in the table above (effective amortized cost) -2,317,561
Credit P/L - Interest revenue 0

In December 20X5, Raiser went into bankruptcy proceedings and the annual installment for 20X5 was not paid. There's 50% chance that BeeBank will recover CU 4 mil from bankruptcy proceedings.
Loss allowance as of 31 December 20X4 was CU 14 500 000. Estimated time of recovery is 31 December 20X7.

Calculate the loss allowance at 31 December 20X5.

Loan is in "Stage 3" Lifetime expected credit loss, interest on amortized cost (loss allowance taken into account)

3.1 Measuring loss allowance @31 December 20X5:

Outcome 1 - 50% to recover CU 4 mil. Outcome 2 - 50% chance of 0

Year Cash flow Discount factor Present value Present value
6 0 0.942 0 0
7 4,000,000 0.888 3,550,888 0
Total - PV of exp.CF 6.14% 3,550,888 0

original effective interest rate

PV of contractual cash flows:

Amortized cost @31/12/20X5: 16,469,208
Add back unpaid installment: 9,000,000
Total: 25,469,208 25,469,208

Less PV of expected cash flows: -3,550,888 0

Credit loss 21,918,320 25,469,208

Probability: 50% 50%

Expected credit loss 10,959,160 12,734,604

Loss allowance: 23,693,764 Debit P/L - Impairment of FA 9,193,764 (deduct CU 14.5 mil. being loss allowance @31/12/20X4)
Credit Assets - Loss allowance (loans) -9,193,764
0
3.2 Interest revenue:

Gross carrying amount @ 31/12/20X5: 25,469,208

Less loss allowance: -23,693,764
Amortized cost: 1,775,444
Original effective interest rate: 6.14%
Interest revenue in 20X6: 108,936

Debit Assets - Loans 108,936

-108,936
Credit P/L - Interest revenue
0
PAC Example 28: Impairment IFRS 9 collective Financial Instruments

During 20X1, BeeBank provided 500 loans to the individual clients with total gross carrying amount of CU 1 mil. (CU 2 000 in average). These loans share the same credit risk and are
grouped into 1 portfolio based on their credit rating and collateral. Based on a historical information and considering forward-looking information, BeeBank's loss rate is 0.55%
(please revise the data below table).
However, at 31 December, BeeBank assumes 8 defaults in this portfolio.
Credit risk has not significantly increased since the initial recognition (i.e. loans are in Stage 1).
Based on the information below, calculate loan loss provision as at 31 December 20X1. Total gross carrying amount of 500 loans at 31 December 20X1 is CU 800 000.

Original data Revised data

Loan portfolio:
Number of loans: 500 500

Estimated gross CA at default

per loan: 870 870
total: 435,000 435,000

Defaults:
N. of defaults (12 months, per 500 loans) 6 8

Credit loss at default

per loan: 400 400
total (per 500 loans) 2,400 3,200

Loss rate: 0.55% 0.74%

Loss allowance @31/12/20X1

Total gross carrying amount of loans: 800,000
Loss allowance (at loss rate) 5,885
PAC Example 29: Impairment IFRS 9 simple Financial Instruments

Raiser has trade receivables with gross carrying amount of CU 500 000 at the end of 20X1. None of these receivables has a significant financing component in line with IFRS 15.
Careful analysis of the trade receivables showed the following:
One of Raiser's customers, debtor A, filed for bankruptcy proceedings during 20X1. Raiser’s receivable to debtor A amounts to CU 2 200 and Raiser expects to recover close to nil.
Aging structure of remaining trade receivables is shown in a table below. The table also contains the information about the loss rates based on past experience - historical
statistics about defaults over the life of receivables, average amount of credit losses per default etc. However, forward-looking estimates were taken into account when setting
the loss rates.
Calculate the loss allowance for Raiser's trade receivables in line with IFRS 9.

Loss rate
Receivables past due Carrying amount Loss allowance
(lifetime)
Within maturity 392,200 0.50% 1,961
1-30 days 52,300 0.80% 418
31-90 days 27,600 5.60% 1,546
91-180 days 13,200 8.90% 1,175
181-365 days 7,500 20.30% 1,523
365+ days 5,000 70.00% 3,500
Debtor A 2,200 n/a 2,200
Total 500,000 12,322
 A company has given loan of Rs. 100 million @ 10% pa on January 01, 20x1 for four years however, interest will be
basis. The loan became credit impaired few days after the date of issuance moved to stage three loan category. The
Question amount at the end of four years is Rs. 60 million. At the end of four years un-expectedly full amount interest plus prin
from borrower.
Required: Provide accounting treatment and pass necessay double entries to record the impairment loss and revers
Answer
Caculation of impairment loss

20x1 20x2 20x3 20x4 Total

contractual cash flow 10 11 12 146 146
expected cash flows - - - 60 60
expected shortfall 10 11 12 86 86
Discount factor 0.9 0.8 0.8 0.7
ECL 9 9 9 59 86

Stage 3 accounting 20x1 20x2 20x3 20x4

Gross carrying amount-opening 100 110 121 133
Interest 10 11 12 13
Receipt - - - (146)
Gross carrying amount-closing 110 121 133 0
ECL (59) (65) (71) (79)
Un-winding (6) (6) (7) (8)
Reversal of allowance - - - 86
ECL -closing balance (65) (71) (79) (0)

Amortized cost -opening 41 45 50 55

Interest income @ 10% 4 5 5 5
Settlement - - - (60)
Amortized cost -closing 45 50 55 0

Double entries Rs. (m) Rs. (m)

20x1
1-Jan
Amortized cost asset 100
Bank 100
Impairment expense 59
Provision for impairment loss 59
31-Dec
Impairment expense 6
Provision for impairment loss 6
Amortized cost asset 4
interest income 4

20x4
Provision for impairment loss 86
Profit or loss account 86
Bank Account 146
Amortized cost asset 146
ars however, interest will be paid on annual
age three loan category. The total expected
full amount interest plus principal recovered

e impairment loss and reversal thereof?