Professional Documents
Culture Documents
• According to AASB 9:
– Financial instruments are initially to be measured at fair
value
– How they are subsequently measured, and how any gain or
loss is treated, is then dependent upon how the financial asset
is classified
• Categories of financial instruments
Depending upon the entity’s business model for managing its
financial assets and the contractual cash flows of the financial
asset, financial assets shall subsequently be measured at either:
– Amortised cost
– Fair value through other comprehensive income
– Fair value through profit or loss
REQUIRED
(a) Explain why the company was prepared to pay $1 066 242 for
the bonds given that, apart from the interest, they expect to receive
only $1 million back in four years.
(b) Determine whether Jack Ltd can measure the government
bonds at amortised cost.
(c) Calculate the amortised cost of the bonds as at 30 June 2019,
2020, 2021 and 2022.
(d) Provide the accounting journal entries for the years ending
30 June 2019 and 2020.
(a) In this instance the market was requiring an 8 per cent return on
securities such as these. However, McCoy Ltd was offering a 10 per
cent return. In this case, and using present values, the issue price will
be $1 066 242, (because the market rate is higher) determined as
follows:
(b) Jack Ltd can use amortised cost as the basis for measuring
government bonds as:
• The government bonds are held within a business model whose
objective is to hold them in order to collect contractual cash
flows, and
• The contractual terms of the government bonds give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
On 1 July 2018, Bear Ltd acquired 100 000 shares in Island Ltd at
a price of $10 each. There were brokerage fees of $1500. The
closing market price of Island Ltd shares on 30 June 2019—which
is the entity’s financial year end—was $12. Bear Ltd has not made
the election to account for its equity investments at fair value
through OCI.
REQUIRED
Provide the required accounting journal entries for Bear Ltd to
account for the investment in Island Ltd using fair value through
profit or loss.
1 July 2018
The financial asset would initially be recorded at fair value. If
the financial asset is measured at fair value through profit or
loss then transaction costs associated with the acquisition of
the asset shall be treated as an expense within profit or loss.
Dr Investment in Island Ltd 1 000 000
Dr Brokerage fee expense 1 500
Cr Cash 1 001 500
30 June 2019
Dr Investment in Island Ltd 200 000
Cr Gain in fair value of equity investments (profit or loss) 200 000
The facts are the same as those in Worked Example 14.6 except
this time Bear Ltd has made the decision to measure the equity
investment at fair value through other comprehensive income.
REQUIRED
Provide the required accounting journal entries for Bear Ltd to
account for the investment in Island Ltd using fair value through
other comprehensive income.
30 June 2019
Dr Investment in Island Ltd 200 000
Cr Gain in fair value included within OCI 200 000
There would be a reserve that is part of equity, which would
accumulate the gains that are included within OCI. For equity
instruments, this reserve cannot subsequently be transferred to
profit or loss.
Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd
Deegan, Financial Accounting, 8e 14-24
Recognition and measurement of financial
liabilities
• Initially to be measured at fair value
• Most financial liabilities will then—in the
period after initial recognition—be
measured at amortised cost
• However, some financial liabilities shall
be measured at fair value through profit
or loss, for example, some derivatives
30 June 2019
Dr Interest expense 11 272
Cr Bond payable 1 272
Cr Bank 10 000
(interest payment and amortisation of bond payable using effective
interest rate of 12 per cent)