FINANCIAL INSTRUMENTS: CLASSIFICATION, RECOGNITION AND MEASUREMENT —- UJ
CoA seeks your expert advice on the financial statement effects under each of the three classifications.
Identify the following key issues:
(i) The effective interest rate to determine amortized premium is at the date of issue.
(ii) The effective interest rate method should be used to recognize interest income regardless of which
classification is adopted (IAS 18:30 and IAS 39:9).
(iii) An amortization table is required to determine the effective interest income for all three classifications.
(iv) Since the premium is amortized for AFS and FVTPL as well, the fair value adjustment will be the
difference between the fair value at a point in time and the carrying amount of the investment after
adjustment for the amortization.
Required:
1. Determine the “effective interest rate” as defined by IAS 39 paragraph 9.
2. Prepare the amortization table for the MRPS from 1 July 20x6 to 30 June 20x11 using the effective
interest rate as at 1 July 20x6.
What was the fair value of the MRPS as at 31 Dec 20x6 and 30 June 20x7?
Show the effects on the income statement for the year ended 31 December 20x6 and the half-year
ended 30 June 20x7 under each of the three classifications.
5. Show the effects on the statement of financial position as at 31 December 20x6 and 30 June 20x7
under each of the three classifications.
P9.6 Accounting for mandatorily convertible redeemable preference shares
Co B is the issuer of a tranche of mandatorily redeemable convertible preference shares (MRCPS) that
was issued on the following terms:
Date of issue . 1 July 20%6
fear cos
Notional amount $12,000,000
Issue price: $12,500,000
Coupon rate ... 2% per annum
31 December and 30 June of each year
30 June 20x11
Payment of interest.
Redemption date seeeseeeees poco
ig interest rate on pure loan instruments issued by Co B:
Prevai
AAs at 1 July 20x6. oo 3% per annum
Conversion ratic 1 ordinary share for each $1 notional amount
of MRCPS
Required:
1. Identify the elements included in the MRCPS.
2. Prepare the amortization table from issue date to redemption.
3. Show the journal entries for the above issue in Co B’ s books for the year ended 31 December 20x6
in accordance with the principle in IAS 32 paragraph 28 and IAS 32 paragraph 29.
4. If 50% of the MRCPS was converted on 31 December 20x8, show the journal entries to effect the
conversion.