Accounting for Derivatives. Ramirez Juan
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Название: Accounting for Derivatives
Автор: Ramirez Juan
Издательство: Автор
Жанр: Зарубежная образовательная литература
isbn: 9781118817964
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However, for financial assets at FVTPL, and entity is not required to separately recognise interest income. When reclassifying a financial asset out of the FVTPL category, the effective interest rate would be determined based on the fair value carrying amount at the reclassification date.
Figure 1.4 Reclassification of financial assets.
1.2 THE AMORTISED COST CALCULATION: EFFECTIVE INTEREST RATE
It was mentioned earlier that some assets and liabilities are measured at amortised cost. The amortisation is calculated using the effective interest rate (EIR). This rate is applied to the carrying amount at each reporting date to determine the interest expense for the period. The EIR is the rate that exactly discounts the stream of principal and interest cash flows to the initial net outlay (in the case of assets) or proceeds (in the case of a liability). In this way, the contractual interest expense in each period is adjusted to amortise any premium, discount or transaction costs over the life of the instrument.
The carrying amount of an instrument accounted for at amortised cost is computed as:
• the amount to be repaid at maturity (usually the principal amount); plus
• any unamortised original premium, net of transaction costs; or less
• any unamortised original discount including transaction costs; less
• principal repayments; less
• any reduction for impairment or uncollectability.
Transaction costs include fees, commissions and taxes paid to other parties. Transaction costs do not include internal administrative costs.
Suppose that an entity issues a bond with the following terms:
The EIR is computed as the rate that exactly discounts estimated future cash payments through the expected life of the financial instrument:
Solving this equation, we get EIR = 9.96 %. The amortised cost of the liability at each accounting date is computed as follows:
IFRS 9 does not specify how the EIR is calculated for floating rate debt instruments. The EIR of a floating rate instrument changes as a result of periodic re-estimation of determinable cash flows to reflect movements in market interest rates. Two approaches can be used to calculate the EIR in a floating rate debt instrument:
• calculation based on the actual benchmark rate that was set for the relevant period; or
• calculation using the method employed for fixed rate debt (i.e., estimating the EIR at the beginning of each interest period taking into account the expected interest rates in each future interest period).
When the floating rate instrument is recognised at an amount equal to the principal receivable or payable on maturity, this periodic re-estimation does not have a significant effect on its carrying amount. Therefore, for practical reasons the first approach is used, and in such cases the carrying amount is usually not adjusted at each repricing date, because the impact is generally insignificant. According to this method, the interest income for the period is calculated as follows:
Similarly, for floating rate debt liabilities, the following method is used to calculate interest expense for the period:
The treatment of an acquisition discount or premium on a floating rate instrument depends on the reason for that discount or premium. For example:
• When the discount (or premium) reflects changes in market rates since the last repricing date, it is amortised to the next repricing date.
• When the discount (or premium) results from a change in the credit spread over the floating rate as a result of a change in credit risk, it is amortised over the expected life of the instrument.
IFRS 9 does not prescribe any specific methodology for how transaction costs should be amortised for a floating rate instrument. Any consistent methodology that would establish a reasonable basis for amortisation of the transaction costs may be used. For example, it would be reasonable to determine an amortisation schedule of the transaction costs based on the interest rate in effect at inception. In my view, this approach also could be applied for a floating rate instrument recognised at amortised cost with an embedded derivative that is not separated (e.g., a floating rate bond with a cap). Another reasonable approach would be to linearly amortise the transaction costs over the life of the instrument.
1.3 EXAMPLES OF ACCOUNTING FOR FIXED RATE BONDS
Suppose that an investor bought, at a discount, a fixed rate bond with the following terms:
Let us assume that the bond was recognised at amortised cost, and that no impairments were recognised. The calculation of the effective interest rate was performed as follows (in EUR millions):
EIR was 5.7447 %.
The related accounting entries were as follows:
Let us assume that the bond was recognised at FVOCI, and that no impairments were recognised. Let us assume further that the fair value of the bond on 31 December 20X0 and 31 December 20X1 was EUR 97 million and EUR 101 million, respectively. The change in the bond's clean fair at each reporting date was:
In order to account for the bond the investor had to keep track of both the bond's amortised cost and its fair value. The bond's amortised cost profile, which was identical to that in the previous example, determined the interest expense to be recognised at each period.
Any difference between the bond's clean fair value (i.e., excluding accrued interest) and its amortised cost was recognised in the FVOCI reserve in OCI.
The related accounting entries were as follows:
1.4 ACCOUNTING CATEGORIES FOR FINANCIAL LIABILITIES
A financial liability is any liability that is a contractual obligation to deliver cash or some other financial asset to another entity or to exchange financial СКАЧАТЬ