Products

Holooly Rewards

We are determined to provide the latest solutions related to all subjects FREE of charge!

Please sign up to our reward program to support us in return and take advantage of the incredible listed offers.

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

Holooly Ads. Manager

Advertise your business, and reach millions of students around the world.

Holooly Tables

All the data tables that you may search for.

Holooly Arabia

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

Holooly Sources

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

Holooly Help Desk

Need Help? We got you covered.

Chapter 9

Q. 9.4

The X Corporation issues 1000 bonds with a nominal value of 1000 $/bond, with a 5% interest rate, payable in 2 instalments. The redemption date is in 2 years. The X Corporation also trades bonds on a short-term basis. By the end of the issue year, the market interest rate is 8%. How should the X Corporation disclose this financial instrument in its annual report?

Step-by-Step

Verified Solution

This financial liability should be measured at fair value through profit and loss, because it is traded on a short-term basis. Therefore, the liability should be re evaluated for the reporting date, at its fair value. Let’s assume that the fair value of the bond cannot be reasonably observed from an active market and the fair value is based upon the discounted cash-flows of the instrument, at the effective interest rate (market rate):

Cash-flows ($)
(1)
Discount rate
(2)
Present value
(3) = (1) * (2)
Year 1 (interest) 1 mil * 0.05 = 0.05 mil 1/(1.08) 0.046 mil
Year 2 (interest + principal) 1 mil $ + 0.05 mil = 1.05 mil 1/(1.08)² 0.900 mil
Total 0.946 mil

By the end of the first year, the financial liability should be remeasured  at its fair value, 0.946 million $, meaning that a 0.054 million $ revenue/gain (1 mil $ − 0.946 mil $) should be disclosed in the P&L Account


0.054 mil $           Financial liability (bond)         =        Profit and loss          0.054 mil $


A special case concerns the initial recognition and valuation of complex (compound) financial instruments, such as a convertible bond, from the perspective of the issuer. Suppose that a company issues bonds that are convertible at any time into its shares at a stated price, with a fixed interest rate and a specified maturity date. IAS 32 requires the issuer of the financial instrument, which contains both a liability and an equity item, to split the proceeds obtained into a loan and a written call option on the issuer’s shares. This can be done either by measuring the liability component and assigning the residual amount to the equity component or by measuring the two components separately. The IAS 32 favour the first method.