Examples Self IFRS 9 PDF
Examples Self IFRS 9 PDF
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