Examples IFRS 9

Example-1 (Effective Interest Rate Method)

Debt is issued for $1,000. The debt is redeemable at $1,250. The term of the debt is five
years and interest is paid at 5.9% p.a. (Effective interest rate 10%)
Required: - Prepare amortization schedule using effective interest rate method and
determine interest cost of each period to be charged to Profit and Loss Account?
Example- 2 Amortized Cost
A debt security has a stated principal amount of £5,000. This will be repaid in five years at
an interest rate of 6% per year, payable annually at the end of each year. The company
purchases the security on 1 January 20X4, at a discount, for £4,670. The company
classifies the debt security as at amortized cost. (Effective interest rate is 7.65%)
Required: - Prepare amortization schedule using effective interest rate method and
determine interest income of each period to be charged to Profit and Loss Account?
Example-3 (Held for trading)
A debt security that is held for trading is purchased for £6,000. Transaction costs are £400.
Required: - Provide accounting treatment for transaction cost and at what value the
investment to be recognized?
Example-4 AT FAIR VALUE THROUGH OCI
An investment in equity of other entities classified as available-for-sale is purchased for
£5,500 and transaction costs are £500.
Required: - Provide accounting treatment for transaction cost and at what value the
investment to be recognized?
Examples-5 (Financial assets at fair value through profit or loss/OCI)
A company acquires, for cash, 500 shares at £5 per share and classifies them as at fair
value through profit or loss. At the year-end, the quoted price increases to £6. The
company sells the shares for £3,400 just after the year-end.
Required: - Provide necessary journal entries to be passed at initial recognition, balance
sheet date and on disposal of investment if investment is held for trading and / or Through
OCI?
Example-6 (Call option purchased)
A company enters into a call option contract on 1 July 20X6. The contract gives it the
right to purchase 5,000 shares issued by another company on 1 December 20X6, at a
price of £15 per share. The company’s year-end is 31 October 20X6. The cost of each
option is £1. On 31 October 20X6, the value of each option is £1.50. The share price on
this date is £16.
Required: - Provide necessary journal entries to be passed at initial recognition, balance
sheet date and on exercise of option?
Example -7 fair value hedge
A company purchases a debt instrument that has a principal amount of £1 million at a
fixed interest rate of 6% per year. The instrument is classed as an amortized cost. The fair
value of the instrument is £1 million.
The company is exposed to a risk of the decline in the fair value of the instrument if the
market interest rate increases because of the fixed interest rate.
The company enters into an interest rate swap. It exchanges the fixed interest rate
payments it receives on the bond for floating interest rate payments, in order to offset
the risk of a decline in fair value. If the derivative hedging instrument is effective, any
decline in the fair value of the bond should be offset by opposite increases in the fair
value of the derivative instrument. The company designates and documents the swap
as a hedging instrument. On entering into the swap, the swap has a fair value of zero.
Assuming market interest rates have increased to 7%, the fair value of the bond will have
decreased to £960,000. The Swap has a fair value of £ 39,000 at the same date.
Required: - Provide necessary journal entries to be passed?
Example – 8 cash flow hedge
A company trades in £ sterling. It expects to purchase a piece of plant for 1 million euros
in one year from 1 May 20X6. In order to offset the risk of increases in the euro rate, the
company enters into a forward contract to purchase 1 million euros in 1 year for a fixed
amount (£650,000). The forward contract is designated as a cash flow hedge. At
inception, the forward contract has a fair value of zero.
At the year-end of 31 October 20X6, the euro has appreciated and the value of 1 million
euros is £660,000. The machine will still cost 1 million euros so the company concludes that
the hedge is 100% effective.
Required: - Provide necessary journal entries to be passed at the date of settlement
and what will be the treatment of any gain on the contract?

CLASSIFY THE FOLLOWING INSTRUEMENTS

1 Investment in marketable bond
Tamara acquires a bond. The bond is listed and matures in 18 months. Management has
purchased the bond because it expects the price to increase in the short-term. It intends
to sell the bond whenever it believes the price has peaked, but definitely within the next
30 days.
2 Investment in equity shares
Tamara acquires 5% of the equity shares in Go, a start-up business in the Netherlands,
which it believes has good prospects. She expects Go to be listed within 2 years and
hopes to make a substantial return on its investment over 3-5 years.
3 Investment in debt security
Tamara has invested surplus cash in a bond denominated in euros. The maturity of the
bond is 3 years and management intends to hold the bond to maturity, when it will use
the proceeds for a planned acquisition in Germany.
4-Fixed interest debt
Tamara issues a CHF 10m fixed-interest note with a three-year term.
5 Trade Receivable
Tamara has sold goods to a customer, which is invoiced in Singapore Dollars. The
Customer is expected to pay for the goods in 30 days.
6 Short position in securities
Tamara hears a rumor that the share price of Black Dog will fall within the next 3 days.
She borrows Black Dog shares from a broker for 5 days and immediately sells them in the
market. On day 5, she intends to buy shares at a lower price in the market and return
them to the broker.

DETERMINE THE DERECOGNITION OF FOLLOWING INSTRUEMENTS

Q-1
A)
Star sells part of its short-term trade receivable portfolio. There is full recourse in the event
of default.
Can Star de-recognize the trade receivable sold?
B)
Sun sells a non-readily obtainable equity security to Satellite. At the same time, Sun also
enters into a forward purchase agreement with Satellite to reacquire the equity security
in 6 months’ time at its then current market price.
Can Sun de-recognize its investment in the equity security?
C)
Aton owns 10.000 shares in KOT, a quoted undertaking. Aton transfers these shares to the
bank, on the following terms:
The consideration received by Aton is $20,000. Aton has a call option to buy the shares
from the bank. The repurchase will take place at fair value at the date that the option is
exercised.
Should Aton recognize the asset?
D)
Aton owns 10,000 shares in Small, an unquoted undertaking. The shares have a carrying
value of $20,000. A transfers these shares to a bank, on the following terms:
The consideration received by Aton is $20,000. Aton has a call option to buy the shares
from the bank for $25,000 in three years’ time.
Q-2
(a) AB Co sells an investment in shares, but retains a call option to repurchase those
shares at any time at a price equal to their current market value at the date of
repurchase.
(b) CD Co sells an investment in shares and enters into a 'total return swap' with the
buyer. Under a 'total return swap' arrangement, the buyer returns any increases in
value to the seller, and the seller compensates the buyer for any decrease in value
plus interest.
(c) EF Co enters into a stock lending agreement where an investment is lent to a third
party for a fixed period of time for a fee.
(d) GH Co sells title to some of its receivables to a debt factor for an immediate cash
payment of 90% of their value. The terms of the agreement are that GH Co has to
compensate the factor for any amounts not recovered by the factor after six
months.
Required: - Discuss whether the following financial instruments would be derecognized?
Should Aton recognize the asset?
Q-3
XYZ Co purchased a two year Rs. 20 million 6% debenture at par on 1 January 20X1 when
the market rate of interest was 6%. Interest is paid annually on 31 December. The market
rate of interest on debentures of equivalent term and risk changed to 7% on 31
December 20X1.
Required: - Show the charge or credit to the income statements for the two years to 31
December 20X2 if the debentures are held:
(a) at amortized cost
(b) at fair value through profit or loss
(c) at fair value as At fair value through OCI.
Fair value is to be calculated using discounted cash flow techniques.
Q-4
Green Tree Co had the following financial instrument transactions affecting the year
ended 31 December 20X2:
(1) Purchased 4% debentures in MT Co on 1 January 20X2 (their issue date) for
Rs.100,000 as an investment. Green Tree intends to hold them until their
redemption after six years at a premium of 17%. Transaction costs of Rs. 2,000 were
incurred on purchase. The internal rate of return of the bond is 6.0%.
(2) Entered into a speculative interest rate option costing Rs. 7,000 on 1 September
20X2 to borrow Rs. 5,000,000 from GF Bank commencing 31 March 20X3 for six
months at 5.5%. Value of the option at 31 December 20X2 was Rs. 13,750.
(3) Purchased 25,000 shares in EG Co in 20X1 for Rs. 2.00 each as an investment.
Transaction costs on purchase or sale are 1% purchase/sale price. The share price
on 31 December 20X1 was Rs.2.25 – Rs. 2.28. Green Tree sold the shares on 20
December 20X2 for Rs. 2.62 each.
(4) Sold some shares in BW Co ‘short' (i.e. sold shares that were not yet owned) on 22
December 20X2 for Rs. 24,000 (the market price of the shares on that date) to be
delivered on 10 January 20X3. The market price of the shares at 31 December 20X2
was Rs. 28,000.
Required: - Show the accounting treatment and relevant extracts from the financial
statements for the year ended 31 December 20X2?
Q-5
An entity lends Rs. 1,000 to entity B for five years and classifies the asset under at amortized
cost financial asset. The loan carries no interest. Instead, entity expects other future
economic benefits, such as an implicit right to receive goods on preferential terms.
On initial recognition, the market rate of interest for similar five year loan is 10% per annum.
Required: - Calculate the amortized cost of the loan?
Q-6
On January 01, 20x5, an entity purchases 10% Rs. 10 million 5 year bonds with interest
payable on July 01 and January 01 each year. The bond’s purchase price is Rs.
10,811,100. The premium of Rs. 811,100 is due to market yield for similar bonds being 8%.
Assuming there are no transaction costs, the effective interest rate is 8%.
The entity classifies the bond as at fair value through profit or loss account. The entity
prepares its financial statements at March 31. On March 31, 20x5, the yield on bonds with
similar maturity and credit risk is 7.75%. At that date, the fair value of this bond calculated
by discounting 10 semiannual cash flows of Rs. 500,000 and principal payment of Rs. 10
million at maturity at the market interest rate of 7.75% amounted to Rs. 11,127,710.
Required: - Pass necessary journal entries at initial recognition and at March 31, 20x5?
Q-7
On January 01, 20x1, an entity whose functional currency is PKR purchase a foreign
currency (FC) denominated bond for its fair value of FC 1,000. The bond has 5 years
remaining to maturity and a principal amount of FC 1,250. Interest is payable annually at
4.7% (that is FC 59) on December 31, each year. Assuming there are no transaction costs,
the effective interest rate is 10%. The entity classifies the bond as available for sale.
The relevant exchange rates are as follows: -
Average Closing
rate rate
FC=PKR FC=PKR
1-1-x1 PKR 1.50
31-12-x1 PKR 1.75 PKR 2.00
31-12-x2 PKR 2.25 PKR 2.50
31-12-x3 PKR 2.35 PKR 2.20
 31-12-x4 PKR 2.05 PKR 1.90
31-12-x5 PKR 2.10 PKR 2.30
IMPARIMENT
Q-1
The company issuing the 4% debentures in example 3 (1) gets into financial trouble at the
end of the first year (31.12.X2 – all interest has been paid up to this date). On this date the
liquidator of the company that issued the bond informs you that no further interest will be
paid and only 75% of the maturity value will be repaid, on the original repayment date.
The probability of getting the liquidation proceeds is 80%.
The market interest rate on similar bonds is 7% on that date.
Required: - How much is the impairment and how should it be reported in the financial
statements?
Q-2
Broadfield Co purchased 5% debentures in X co. on 1 January 20x3 (The issue date) for
Rs. 100,000. The term of the debentures was 5 years and the maturity value is Rs. 130,000.
The effective rate of interest on the debentures is 10% and Broadfield classified the
investment as amortized cost under IFRS 9. At the end of 20x4 X co. went into liquidation.
All interest had been paid until that date. On December 31, 20x4 the liquidator of X co.
announced that no further interest would be paid and only 80% of the maturity value
would be repaid, on original repayment date. The credit department of the company
estimated that the chances of getting liquidation proceeds are only 50%. The market rate
on similar bonds is 8% on that date.
Required: -
a) What value should the debentures have been stated at just before the impairment
became apparent?
b) At what value should the debentures be stated at December 31, 20x4, after the
impairment?
c) How will the impairment be reported in the financial statements for the year ended
December 31, 20x4?
Q-3
On January 01, 20x3, an entity purchased Rs. 10 million 5 year bond with semiannual
interest of 5% payable on June 30 and December 31 each year. The bond’s purchase
price was Rs. 10,811,100 which resulted in a bond premium of Rs. 811,100 and an effective
interest rate of 8% (4% semiannual basis). The entity classified the bond as Held to
maturity.
On December 31, 20x5 when the interest for the half year ended received, the investee
filed for liquidation. The liquidator later confirmed that only 2% pa in arrear and 25% of
the principal amount on maturity date is expected. The probability analysis suggest that
the chances of recovery from liquidator as above is only 40% and there is a probability
of 50% that only 20% of principal will be recovered on maturity date.
Required: - calculate impairment loss and pass necessary entries at the day of
impairment and in the term of the instrument?

RECLASSIFICATION
Q-1
On 01 January 20x9, an entity reclassifies a Rs. 9 million bond from HFT to at Amortized
Cost. On the date of the reclassification, the bond’s amortized cost is Rs. 9,198,571 and
the original effective interest rate is 8.75%. The bond’s fair value is Rs. 9,488,165. The
coupon rate on bond is 10% pa. The new effective rate at the date of reclassification is
7% pa. The bond’s remaining term is two years.
The fair value of the bond on December 31, 20x9 and 20y0 are Rs. 9,500,200 and 9,000,000
respectively.
Required: -
a) Provide accounting for reclassification date and pass necessary accounting
entries for the next two years?
b) Assume the bond is re-classified from Amortized cost to HFT and then pass
necessary double entries for the next two years?
c) Assume the bond is re-classified from Amortized cost to at fair value through OCT
and then pass necessary double entries for the next two years?
d) Assume the bond is re-classified from at fair value through OCI to Amortized cost
and then pass necessary double entries for the next two years?
e) Assume the bond is re-classified from HFT to at FVTOCI and then pass necessary
double entries for the next two years?
f) Assume the bond is re-classified from at fair value through OCI to HFT and then
pass necessary double entries for the next two years?

DERECOGNITION
Q-1
The directors of QN Limited owes Rs. 90,000 to MN Bank on 5% interest bearing non
amortizing note payable in five years, plus accrued and unpaid interest , due
immediately, of Rs. 4,500. MN Bank agrees to a restructuring to assist QN, which is suffering
losses and is threatening to declare bankruptcy. The interest rate is reduced to 4%, the
principal is reduced to Rs. 72,500 and the accrued interest is forgiven outright. Future
payments will be normal term. However, given the QN current condition, the market rate
of interest would have been 12%.
Required: - Discuss the implications of above restructuring and pass necessary journal
entries?
Q-2
The directors of QN Limited owes Rs. 90,000 to MN Bank on 5% interest bearing non
amortizing note payable in five years, plus accrued and unpaid interest , due
immediately, of Rs. 4,500. MN Bank agrees to a restructuring to assist QN, which is suffering
losses and is threatening to declare bankruptcy. The interest rate is reduced to 4.5%, the
principal is reduced to Rs. 85,000. The loan term has been shortened to 3 years from 5
years in order to reduce the risk. QN Limited agreed to the new terms.
Required: - Discuss the implications of above restructuring and pass necessary journal
entries?
Q-3
Hungry company on July 01, 2008 enters into an agreement with Rich Company to sell a
group of its receivables without recourse. A total face value of Rs. 200,000 accounts
receivables against which a 5% provision for doubt full debts has been created is
involved. The factor will charge 20% interest computed on weighted average to maturity
of the receivables of 36 days plus a fee of 3%. A 5% holdback will be retained.
Hungry customers return goods for the value of Rs. 4,800.
Required: - Discuss the implications of above restructuring and pass necessary journal
entries?
Q-4
An entity has investment in mortgaged loans having amortized cost of Rs.14.5 million is
being sold to, but the right to service the loan retained. Servicing right requires monthly
collections of principal and interest and forwarding these to the holders of investments.
a) The present value of future servicing is Rs. 1.2 while the investment without servicing
can be sold for Rs. 13.6 million.
b) The present value of future servicing is Rs. 1.2 and the selling price of investment
without servicing is Rs. 13.1 million
c) The present value of future servicing is Rs. (1.1) and the selling price of investment
without servicing is Rs. 14.6 million.
Required: - Discuss the implications of above restructuring and pass necessary journal
entries?
CONTINUING INVOLVEMENT
Q-1
Entity A holds a portfolio of trade receivables with a carrying value of Rs. 500 million. Entity
A enters into a factoring arrangement with entity B under which it transfers the portfolio
to entity B in exchange for Rs. 490 million of cash. Entity A transfers the credit risk but retains
the late payment risk up to a maximum of 180 days. After 180 days, the receivable is
deemed to be in default and credit insurance takes effect. A charge is levied on the
entity A for these late payments using a current rate of 6%. The fair value of the guarantee
of late payment is Rs. 2 million. Apart from late payment risk, entity A does not retain any
credit risk or interest rate risk and does not carry out servicing of the portfolio. There is no
active market for the receivables.
Required: - Pass necessary journal entries if: -
a) If no default in late payment
b) The late payment occurs and Rs. 4 Million charged to entity A

Q-2
Entity A has a portfolio of high yielding corporate bonds with an amortized carrying value
of Rs. 102 million. The bonds are not traded in the market place and are not readily
obtainable. On January 01, 20x6, entity A sells the bonds to entity B for a consideration of
Rs. 100 million, but retain a call option to buy the portfolio at Rs. 105 million on December
31, 20x6. On that date the amortized cost of the bonds will be Rs. 106 million. The fair value
of the bonds at the date of transfer amounted to Rs. 104 million.
Required: -
Pass necessary entries initially and on maturity date?
Q-3
Entity A has 15% equity holding in entity B acquired few years back for Rs. 40 million. This
holding is treated as an OCI Investment and current fair value is Rs. 104 million. There is no
active market in entity B shares. On January 01, 20x6, the entity A sells its 15% investment
in entity B to bank C for a consideration of Rs. 100 million, but retains a call option to
purchase the investment for Rs. 105 million on December 31, 20x7. The asset’s fair value
has increased to Rs. 106 million on December 31, 20x6
Required: -
Pass necessary entries initially and on maturity date?
HEDGING
Q-1
Bruntal is a manufacturer and retailer of gold jewellery. On 1 October 20X1, the cost of
Bruntal's inventories of finished jewellery was Rs. 8.280 million with a gold content of 24,000
troy ounces. At that date their sales value was Rs. 9.938 million.
The selling price of gold jewellery is heavily dependent on the current market price of
gold (plus a standard percentage for design and production costs).
Bruntal's management wished to reduce their business risk of fluctuations in future cash
inflow from sale of the jewellery by hedging the value of the gold content of the jewellery.
In the past this has proved to be an effective strategy.
Therefore it sold futures contracts for 24,000 troy ounces of gold at Rs. 388 per troy ounce
at 1 October 20X1. The contracts mature on 30 September 20X2.
The jewellery was sold for Rs. 9.186m on 30 September 20X2 when the spot price of gold
per troy ounce was Rs. 352.
Required: - Discuss how the above transaction would be treated in the financial
statements for the year ended 30 September 20X2?
Q-2
Beta Company sign a contract on 01 November 20x1 to purchase an asset on 01
November 20x2 for Euro 60,000,000. Beta reports in US $ and hedges this transaction by
entering into a forward contract to buy Euro 60,000,000 on 01 November 20x2 at Euro 1=
$ 1.5.
Spot and forward exchange rates at the following dates are: -
Spot Forward(for delivery on 1-
11-x2)
1-11-x1 US$ 1.5 =Euro 1 US$ 1.5=Euro 1
31-12-x1 US$ 1.2 =Euro 1 US$ 1.24=Euro 1
1-11-x2 US$ 1.0 =Euro 1 US$ 1.10=Euro1

Required: -
Show the double entries to these transactions at 01 November x1, 31 December x1 and
1 November x2?
Q-3
Artright, a public limited company, produces artifacts made from precious metals. Its
customers vary from large multinational companies to small retail outlets and mail order
customers.
On 1 December 2003, Artright has a number of finished artifacts in inventory which are
valued at cost $4 million (selling value $5·06 million) and whose precious metal content
was 200,000 ounces. The selling price of artifacts produced from a precious metal is
determined substantially by the price of the metal. The inventory value of finished
artifacts is the metal cost plus 5% for labor and design costs. The selling price is normally
the spot price of the metal content plus 10% (approximately). The management were
worried about a potential decline in the price of the precious metal and its effect on the
selling price of the inventory. Therefore it sold futures contracts for 200,000 ounces in the
metal at $24 an ounce at 1 December 2003. The contracts mature on 30 November 2004.
The management have designated the futures contracts as cash flow hedges of the
anticipated sale of the artifacts. Historically this has proved to be highly effective in
offsetting any changes in the selling price of the artifacts. The finished artifacts were sold
for $22·8 per ounce on 30 November 2004. The costs of setting the futures contracts in
place were negligible.
The metal’s spot and futures prices were as follows:
Spot price Funds price per ounce
Per Ounce For delivery 30 Nov 2004
$ $
01 December 2003 23 24
30 November 2004 21 21

Using the principles of IFRS 9 ‘Financial Instruments: recognition and measurement’:

Discuss whether the cash flow hedge of the sale of the inventory of artifacts is effective
and how it would be accounted for in the financial statements for the year ended 30
November 2004?