- 9 Marks
Question
Kombra Ltd (Kombra) is a market leader in the printing and publishing industry. To benefit from a potential future decline in interest rates, Kombra invests in bonds and issues callable bonds. It occasionally trades these bonds by immediately flipping them for a profit. Others are held for the long term.
Kombra purchased two bonds on 1 January 2023. Details of the two particular bonds are as follows:
| Sikapa Bond | Cocoa Bond | |
|---|---|---|
| Nominal value of bond | GH¢47.25 million | GH¢31.5 million |
| Coupon rate | 4% | 5% |
| Purchase price of bond | GH¢40.425 million | GH¢29.4 million |
| Effective yield to maturity | 6.75% | 7.8% |
The Sikapa bond was bought with the intention of keeping it for a long time and withdrawing the interest and principal as they fall due.
The Cocoa bond was bought at a deep discount, and the aim is to wait until the market value increases, and then sell it at a profit. The Cocoa bond had a fair value of GH¢28.875 million as of December 31, 2023.
In both situations, the coupon, which is due on December 31 each year, has been paid as agreed.
Required:
In the case of each bond above, show the financial reporting treatment required by IFRS 9: Financial Instruments for the year ended 31 December 2023. Show all workings clearly.
Answer
| Sikapa Bond | ||
|---|---|---|
| Initial Recognition | Dr Financial assets: GH¢40.425 million | Cr Cash: GH¢40.425 million |
| Subsequent Measurement | Finance income at 6.75% of GH¢40.425 million = GH¢2.7 million | Dr Financial assets: GH¢2.7 million |
| Cr Profit or loss (finance income): GH¢2.7 million | ||
| Interest Payment | Dr Cash: GH¢1.89 million (4% of GH¢47.25 million) | Cr Financial assets: GH¢1.89 million |
For the Sikapa bond, as it was purchased with the intention of holding it for the long term and receiving the interest and principal as they fall due, it meets the criteria for classification under the amortised cost model.
| Cocoa Bond | ||
|---|---|---|
| Initial Recognition | Dr Financial assets: GH¢29.4 million | Cr Cash: GH¢29.4 million |
| Interest Payment | Dr Cash: GH¢1.575 million (5% of GH¢31.5 million) | Cr Finance income: GH¢1.575 million |
| Fair Value Adjustment | Fair value at year-end: GH¢28.875 million | Dr Profit or loss (finance costs): GH¢0.525 million |
| Cr Financial assets: GH¢0.525 million |
The Cocoa bond was purchased with the intention of being sold at a profit. Thus, under IFRS 9, this bond must be measured at fair value.
Workings:
- Sikapa Bond:
- Effective interest rate: 6.75%
- Coupon payment: 4% of GH¢47.25 million = GH¢1.89 million
- Finance income: 6.75% of GH¢40.425 million = GH¢2.7 million
- Cocoa Bond:
- Fair value at year-end: GH¢28.875 million
- Loss on fair value: GH¢29.4 million – GH¢28.875 million = GH¢0.525 million
- Tags: Amortised Cost, Bonds, Fair Value, Financial instruments, Financial Reporting, IFRS 9
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: MAR 2024
- Uploader: Dotse