1
Q
In Investment in Equity Securities, where to book Gain/Loss on Disposal?
A
OCI (dr - loss, cr - gain)
2
Q
In Investment in Equity Securities at FVOCI, where to transfer the accumulated FV gains/losses (OCI) at the time of disposal? [Recycling of gains]
A
Retained Earnings
3
Q
In Investment in Equity Securities, how to account for receipt of any bonus shares in form of dividend?
A
- No entry for bonus shares on date of receipt.
- Subsequently, when accounting for fair value remeasurement of the investment, we would calculate the total FV on that date like this:
- New no. of shares (including bonus ones) x FV per share
- And we would compare this FV with current carrying amount of the investment.
4
Q
What things to keep in mind when investment in equity securities are being sold?
A
- Debit Cash after netting off any transaction costs paid
- Credit Investment at carrying amount
- Balancing figure should go to OCI/PNL as per business model
5
Q
In Investment in Debt securities, how to make table for FV through OCI? [3]
A
- Make Amortization Table first, i.e. Opening + Interest - Cash = Closing (use this for journal entries of interest income and amortization)
- Then, make another table for FV,
Closing FV - [Opening FV (first year it would be equal to initial recognition) +/- Amortization (Interest - cash)] = FV Change. Also make OCI balance column
- The last year’s FV of the bond would equal to redemption value.
6
Q
In Investment in Debt securities, how to account for securities held at FV through PNL? [3]
A
- Recognize initially at Face Value + Premium (or - Discount)
- Book interest income on coupon i.e. Cash dr, Interest Income cr
- Book FV gain/loss directly to PNL.
7
Q
In investment in Debt securities at zero coupon bonds, you have been given Principal i.e. Face Value - Discount + Transaction Cost = Fair Value at start. And you have been given market interest rates for the period. How would you account for it if its FVTOCI.
A
- Recognize initially at Fair Value as per question
- I would use the calculator and find x in this equation:Principal * (1+x)^period = Redemption Value
- Use this x rate for booking interest income in the amortization entries. Investment dr, Interest Income cr
- I would find FV at respective year ends using market interest rates of those years. Using Y1 rate: Redemption value/(1+y1%)^remaining term
- And book FV gain/loss as per FV changes (as we do in Qs of FVTOCI)
8
Q
In investment in Debt securities at zero coupon bonds, you have been given Principal i.e. Face Value - Discount + Transaction Cost = Fair Value at start. And you have been given market interest rates for the period. How would you account for it if its FVTPNL.
A
- Recognize initially at Fair Value and transactoin cost expensed as per question
- Do not book any interest
- Just book FV gain/loss by finding FV for each year.
- To find FV at respective year ends, we would use market interest rates of those years. Using Y1 rate: Redemption value/(1+y1%)^remaining term
9
Q
What to do if the price is quoted like this: 1.98-2
A
- The higher amount is buying price and the lower amount is selling price
- The difference between the higher and lower is actually transaction cost
10
Q
How to recognize Financial Liability initially?
A
Face Value + Premium (minus Discount) - Transaction Cost
11
Q
What to do if a part of change in FV of a Financial Liability is due to credit worthiness of the issuer?
If its held as FVTPNL
A
Recognize that FV change pertaining to credit worthiness in OCI
Generally it would be that FV change due to change in KIBOR would go to PNL
and FV change due to change in spread would go to OCI.
12
Q
How to calculate FV change due to credit risk and FV change due to market when Old and new KIBOR and Spreads are given.
A
- Find FV of the bond using new Market Rate i.e. (New Kibor+New Spread)
- Find FV of bond using (New Kibor Rate+Old Spread)
- The difference between the two would be FV change due to PNL.
- Find Total FV change i.e. FV using new market rate - Carrying Amount
- Total FV change - FV change due to market PNL = FV change due to credit risk OCI
13
Q
Steps to account for foreign currency loans? [5]
A
- Calculate the loan amortization table in foreign currency
- Journalize the receipts and payments at SPOT RATE
- Journalize the interest at AVERAGE RATE
- Calculate the value of the balance payable/receivable at spot rate at year end
- Recognizing the difference between this value and carrying amount of the loan as foreign exchange gain or loss.
14
Q
How to allocate exchange gain and FV gain in case of Investment in shares @ fv through OCI where FV is determined in foreign currency [3]
A
- Total Gain dr [no. of shares x new FV x new forex rate) - Initial recongnition]
- Exchange gain cr (no. of shares x old FV x change in forex rate)
- FV Gain cr (no of shares x (new FV - Old fv) x new forex rate)
15
Q
How to account for buying on trade date accounting: on Trade date, on reporting date, and on Settlement date. (considering that the investment in equity instrument’s FV is in foreign currency)
A
Trade date:
Investment dr Payable to broker cr
Reporting date:
- Investment dr, Exchange gain cr, FV gain cr (Both in OCI if FVTOCI or both in PNL)
- Exchange loss (PNL) dr, Payable to broker cr
Settlement date:
- Investment dr, Exchange gain cr, FV gain cr (Both in OCI if FVTOCI or both in PNL)
- Payable to broker dr, Exchange loss (PNL) bal fig dr, Cash cr
16
Q
How to account for buying on settlement date accounting: on Trade date, on reporting date, and on Settlement date. (considering that the investment in equity instrument’s FV is in foreign currency)
A
Trade date:
No entry
Reporting date:
- Other receivable dr, ONLY FV GAIN cr (OCI/PNL as per criteria)
[We book FV Gain in the period it has incurred: matching concept]
Settlement date:
- Other receivable dr, FV Gain cr
- Other receivable dr, Exchange Gain cr
[Exchange gain is booked ONLY ON RECOGNIZED ITEMS IN F/S: other receivable was not recognized previously on R.D]
- Investment dr, Other receivable cr, Cash cr
17
Q
How to account for disposal on trade date accounting : on Trade date, on reporting date, and on Settlement date. (considering that the investment in equity instrument’s FV is in foreign currency)
A
Trade date:
Receivable from broker dr Investment in Shares cr
Reporting date:
- Receivable from broker dr Exchange gain cr [No FV gain as we have committed to sale it on FV of trade date]
Settlement date:
- Cash dr, Receivable from broker cr, Exchange gain cr: bal fig
18
Q
How to account for disposal on settlement date accounting : on Trade date, on reporting date, and on Settlement date. (considering that the investment in equity instrument’s FV is in foreign currency)
A
Trade date:
No entry
Reporting date:
- Investment in Shares dr Exchange gain ONLY cr [No FV gain as FV of this instrument is locked due to commitment to sell]
Settlement date:
- Investment in Shares dr Exchange gain ONLY cr [No FV gain as FV of this instrument is locked due to commitment to sell]
- Cash dr, Investment in Shares cr
19
Q
Convertible Bonds
How to account for cash received at 1/1/X1 Rs. 15,000 as premium of option to purchase 1000 shares of X Ltd at Rs.20/share.
Assume that consequently, option was exercised at 31/1/X1 and MV at that date was Rs. 60.
A
- Equity once issued/committed to be issued will not be adjusted for any FV change.
At 1/1/X1
* Cash 15000 dr, Equity (reserve for issuance) 15000 cr
At 31/1/X1
* Cash (20x1000) 20000 dr, Equity (reserve for issuance) 15000 cr, Share capital + premium 35000 cr
20
Q
How to account for convertible bond issued? steps [4+2]
A
- Find PV of all cashflows at market rate = FV of the bond
- Cash dr, Financial Liability (by FV amount) cr, Equity (reserve for issuance) bal fig cr
- Keep amortizing the FL
- Scenarios:
- Conversion option opted:
FL (at red value) dr, Equity (reserve) dr, SC+SP cr
- Redemption opted
FL dr, cash cr
equity (reserve) dr, RE cr
FL and FA will always be measured at FV at day 1
21
Q
How to account for convertible bonds issued where conversion is compulsory? [2]
A
- When calculating PV of financial liablity, do not include redemption value in last year as its not going to be redeemed.
- Rest of the accounting would be the same just like normal convertible bonds
22
Q
What to do when there is transaction cost on issuance of convertible bonds? [7]
A
- Calculate PV of FL at face value using market rate before trx cost
- Find equity component by deducting that FL from proceeds (face value)
- Allocate transcation cost to both components proportionately
- In Year 0, first record entry of receipt of cash at face value
- In Year 0, then record entry of payment of trx cost in proportions
- Now, FL (after deducting trx cost) needs to be amortized at the new IRR
- In conversion year, make sure that equity (reserve) being debited is netted off amount after trx cost
23
Q
How to account for early redemption or repurchase of convertible bonds by the issuer? [5+1]
A
- Normal accounting treatment until the date of repurchase.
- On repurchase, find the fair values of both the FL and Equity components
- FL: Find PV of remaning cashflows at current market rate on date of repurchase = New FV of FL
- Equity: Repurchase amount - FL FV = Equity FV
- Entries:
* FL (at CA) dr, Loss (PNL) bal fig dr, Cash (at FL FV) cr
* Equity (at FV) dr. Cash cr - If its a partial repurchase = all steps would stay the same. However, for bonds that are still not repurchased, old market rate would be applied.
24
Q
How to account for early conversion of convertible bonds by the issuer? [3]
A
- Normal accounting treatment until the date of repurchase.
- On early conversion, find the equity loss amount: fair value/share on that date x additional shares issued
- Entry:
Financial Liability (at CA) dr,
Equity Loss dr,
Equity reserve (at CA) dr,
Share capital + Premium cr
25
# Modification of Financial Liabilities
How to determine if you have to:
1. Derecognize Old FL and Recognize new FL; OR
2. Modify the existing FL
| [4]
1. Find the fair value of the new liability using the OLD IRR and new modified cashflows.
2. Incorporate any inflow/outflow of fee received/paid on date of modification.
3. Find the Change: Value found above - FL (CA)
4. If the change is greater than 10%, recognize new FL. If its less than 10%, modify the existing FL.
26
# Modification of Financial Liabilities
How to account for derecognition of Old FL and recognition of New FL [4]
| Consider test of significance is over 10% i.e. Significant
1. Find Fair Value of New FL by calculating PV of all modified cashflows using the current market rate at the date of modification.
2. Show inflow/outflow of any fee received or paid (this will impact FL, if payment is made, show cash on the other end of the double entry)
3. Derecognize the old liability at CA and book new one at FV
4. Book income/loss on extinguishment as (Old FL - New FL)
| Old FL dr, Loss dr, New FL cr, Cash (fee paid) cr
27
How to account for modification/adjustment to Financial Liability [4]
| Consider test of significance is under 10% i.e. Not Significant
1. Adjust the liability balance by the amount of fee (paid)/received
2. Find the revised present value using old irr but new cashflows
3. Recognize gain/loss as the difference between Old FL (CA) and Revised FV of new cashflows
## Footnote
Cash (FEE PAID) dr, FL cr
Loss on modification dr, FL cr
28
# Modification of Financial Assets
How to account for modification in agreement of financial asset [2]
1. Adjust it just like adjusting FL using old IRR
2. There is no test of significance in Financial Assets.
29
# Impairment of Financial Assets (ECL)
On initial recognition, if the financial asset is **not credit-impaired.**
What would be the journal entry on purchase of the financial asset and the related loss allowance assessed on initial recognition. [2]
| Tell if Debt instrument-AC and Debt instrument-FVTOCI
1. Financial Asset dr, Cash cr
Book ECL for 12 month only as the financial asset is not credit-impaired.
2. Impairment Loss (P/L) dr, Provision cr (if AC) OR OCI cr (if FVTOCI)
## Footnote
As FV already takes into account the credit risk of the Financial Asset, if we booked (credited) a contra-asset provision account, it will double deduct the credit losses from the carrying amount. Hence, OCI is credited to nullify the net effect and prevent double deduction.
30
# Impairment of Financial Assets (ECL)
On initial recognition, if the financial asset **is credit-impaired.**
What would be the journal entry on purchase of the financial asset and the related loss allowance assessed on initial recognition. [5]
| Tell if Debt instrument-AC and Debt instrument-FVTOCI
1. Financial Asset dr, Cash cr
2. No entry for loss allowance as fair value already reflects this credit-impairedness and if we book a loss, it would simply be double counting.
3. Since credit risk is so serious on initial recognition, we will be measuring the asset's interest income and subsequent carrying amounts using credit-adjusted effective interest rate. i.e. IRR calculated by using expected cashflows rather than contractual cashflows
4. This reduced interest income will reflect the expected credit losses over the period and no loss allowance would need to be booked on the reporting dates. (as per current ECL)
5. A loss allowance will be recognied at subsequent reporting dates to **reflect cummulative change in lifetime ECL since acquisition.**
31
# Impairment of Financial Assets (ECL)
When is credit risk assessed to be increased significantly? [4]
1. Significant increase in risk of default (or probability of default) rather than the amount of ECL.
2. If low risk of default at R.D, assume no significant increase in credit risk
3. If the contractual cashflows are past due for over 30 days or more, there would be significant increase in risk of default
## Footnote
If contractual terms of Financial Asset are modified. Assessing the change in credit risk would be comparing risk of default at R.D using modified terms and risk of default at initial recognition using original terms.
32
# Impairment of Financial Assets (ECL)
Not already impaired. Stage 1 Financial Assets:
- Credit risk has not increased significantly; OR
- if the credit risk is low
Subsequent measurement? [2]
## Footnote
General Approach
1. 12-month expected ECL (Imp loss PNL dr, Provision/OCI cr)
2. Interest income: Gross Carrying Amount * IRR
33
# Impairment of Financial Assets (ECL)
Not already impaired. Stage 2 Financial Assets:
- Credit risk has increased significantly;
- but no objective evidence of it being credit-impaired
Subsequent measurement? [2]
## Footnote
General Approach
1. Lifetime ECL (Imp loss PNL dr, Provision/OCI cr)
2. Interest income: Gross Carrying Amount * IRR
34
# Impairment of Financial Assets (ECL)
Not already impaired. Stage 3 Financial Assets:
objective evidence of it being credit-impaired
Subsequent measurement? [2]
## Footnote
General Approach
1. Lifetime ECL (Imp loss PNL dr, Provision/OCI cr)
2. Interest income: (Gross Carrying Amount - Impairment) * IRR
## Footnote
Lifetime ECL = PV of contractual cashflows - PV of expected cashflows (both PVs using original IRR)
35
# Impairment of Financial Assets (ECL)
When to apply compulsorily General Approach [2]
1. Financial Assets at Amortized Cost i.e. Investments in Debt Securities held to collect
2. Financial Assets at OCI - Debt. i.e. Investments in Debt Securities held to collect and sell
36
# Impairment of Financial Assets (ECL)
When to apply compulsorily Simple Approach? [2]
1. Account Receivable - Insignificant Financing Component
2. Contract Asset - Insignificant Financning Component
37
When is it optional to apply either General or Simple Approach? [3]
1. Account Receivable - Significant Financing Component
2. Contract Asset - Significant Financning Component
3. Lease Receivables
38
# General Method: ECL
How to calculate impairment loss if chance of survival probability, loss given default %, and exposure are given. [4]
1. Find Chance of Default probability by: 1 - CSP
2. Find Marginal CDP for each year.
3. Multiply Marginal CDP * Loss given default % * Exposure for each year.
4. Find the PV of above values for each year.
39
# Simple Method: ECL - Receivables
How to account for expected lifetime losses for receivables.
For each category of receivable (like Now, upto 30 days defaulter, more than 30 days defaulter), multiply:
- Default rate * Proportion of that receivable
40
Day 1 gain/loss
- Day 1 Gain/Loss is booked in PNL regardless of recognition model. (Considering Fair Value is L1: Reliable, L2: Valued using Observable Inputs)
- Day 1 Gain/loss is deferred if Fair value is L3: Valued using unobservable inputs. Here, Investment would be valued at Transaction Price i.e. (FV - day 1 gain or + day 1 loss). The deferred loss/gain may or may not be subsequently reversed out of the FA's carrying amount and expenses in PNL (IFRS 9 B5.1.2A)
41
Recycling of gains if its **not** investment equity instrument carried at FVTOCI (if its Debt instrument at OCI)
All gains will go to Profit and Loss account
42
# Accounting for Derivatives
How to account for Future BUY contract derivates.
Assume the underlying is a commodity, and an initial deposit is paid at time of inception of the future contract. [3]
1. Initial deposit: Receivable dr, Cash cr
2. If fall in spot at reporting date: PNL dr, Derivative Liability cr
3. At time of close out:
DL dr, Receivable cr, Cash cr (bal fig)
43
Accounting for Derivatives, where is the gain/loss carried to?
Always in **PNL** as it does not have any payments of principal and interest which makes it fail the contractual cashflow test.
44
# Accounting for Derivatives
How to account for Forward SALE contract derivates.
Assume the underlying is a commodity. [3]
1. Contract date: No entry
2. Reporting date: (if spot fell): DA dr, PNL cr
3. At sale date:
- Cash settled: Cash dr, DA cr
Cash dr, Sales cr
- Delivery settled
Cash dr, DA cr, Sales cr
45
# Accounting for Derivatives
How to deal with credit sales in USD, where future USD receipts have been hedged in forward/future contract? [4]
1. Receivable (at spot) dr, Sales cr
2. Exchange loss (if spot fell) dr, Receivable cr
3. DA dr, PNL cr (if forward rate new < contract fwd rate)
4. Settlement: Cash (at spot) dr, Receivable cr, DA cr
46
# Accounting for Derivatives
What to do if a foreign loan is hedged with future contract?
1. Keep forex exchange rate gain/losses entries for loan same as we normally do.
2. The total payment in USD i.e. Principal and Coupon Interest will be hedged. Hence, DA/DL shall be created for those dollars on each reporting date.
47
# Accounting for Derivatives
Call option, how to account for it (4+2)
1. A premium is paid at start. Which is equal to Intrinsic Value and Time value.
2. Derivative Asset (Premium) dr, Cash cr
3. On Reporting Date, if Premium's FV increased: DA dr, PNL cr
4. On settlement:
- Exercised:
Investment in Equity (at FV) dr, Day 1 loss/gain dr/cr
Cash cr (at EP), DA cr
- Lapsed:
PNL dr, DA cr
## Footnote
Current FV - Exercise Price = Intrinsic Value
48
# Accounting for Derivatives
Put option, how to account for it (4+2)
1. A premium is paid at start. Which is equal to Intrinsic Value and Time value.
2. Derivative Asset (Premium) dr, Cash cr
3. On Reporting Date, if Premium's FV increased: DA dr, PNL cr
4. Settlement:
- Exercised:
Cash dr, DA cr
Cash dr, Investment in Equity (at FV) cr
- Lapsed:
PNL dr, DA cr
49
# Accounting for Derivatives
Rights Shares, how to account for it? (4)
1. On announcement date of rights isse: Do nothing for rights issue i.e. Investment in Equity dr, OCI cr (on old no. of shares)
2. On book closure date:
- Investment in Equity dr, OCI cr (on old no. of shares)
- Rights dr, Investment in Equity cr (old no. of shares * rights-adjusted MV/share)
3. On reporting date:
- Investment in Equity dr, OCI cr (on old no. of shares x (Current FV-Rights adjusted MV))
- Rights dr, PNL cr (no. of rights shares x MV of rights) - Previous carrying amount of rights asset
4. Rights exercise date:
- Investment in Equity dr, OCI cr (old no. of shares x FV gain per share)
- Investment in Equity (at FV) dr, Cash cr (EP x no. of rights shares), Rights asset cr [Gain/Loss PNL: bal fig]
## Footnote
**rights-adjusted MV/share** (Inv in Equity of old shares @ FV + Rights shares @ EP)/post-rights no. of shares
**MV of rights** Current FV of shares - EP of rights = MV of rights
50
# Accounting for Derivatives
Interest rate swap on financial asset - debt instrument at FVTPL? [6]
Instrument interest receivable: 7%
Swap:
Pay: 5%
Receive: KIBOR current year
## Footnote
Assume if kibor during the year is 4.562%
1. Loan date: Investment in Debenture dr, Cash cr
2. Brokerage Fee on Swap: Broker exp (PNL) dr, Cash cr
3. Calculate Interest rate receivable as a result of SWAP:
Receivable interest - Payable interest from SWAP + Kibor
So, interest income % would be: 7-5+4.562 = 6.562%
4. Cash dr, Interest Income cr @ 6.562%
5. Any changes in FV of the instrument shall be booked in PNL (as per model)
6. Any changes in the fair value of swap (given in question) will be booked in PNL
51
# Hedge Accounting
How to account for fair value hedge, considering its forward contract on a product.
We have inventory, we enter into a forward contract to sell it in 3 months at a fixed rate.
1. On contract date: No entry
2. On reporting date (assuming FV of product fell)
- DA dr, PNL cr (Change in FV of forward rate)
- PNL dr, Inventory cr, (change in spot rate from date of hedging contract till reporting date)
3. On settlement date
- repeat the above for fair value changes
- Cost of Sales dr, Inventory cr
- Cash dr, Sales cr (at current spot)
- Cash dr, DA cr (fwd rate - settlement date spot)
52
How to account for cash flow hedge, considering its forward contract on a product.
We have inventory, we enter into a forward contract to sell it in 3 months at a fixed rate.
1. On contract date: No entry
2. On reporting date (assuming FV of product fell)
We will see the effective and ineffective portions.
- DA dr (overall change in forward), OCI cr (change up to the extent of change in spot), PNL cr (change in forward exceeding the change in spot)
3. On settlement date
- repeat the above for fair value changes
- Cash dr, Sales cr (at current spot)
- Cost of Sales dr, Inventory cr
- Cash dr, DA cr
- **OCI dr, Sales cr (Recycling)**
## Footnote
Effective portion: Change in Forward (increase/decrease)
Ineffective portion: Change in Spot (decrease/increase) exceeding the change in forward
53
How to account for fair value hedge, considering its firm commitment to import a machine using foreign currency.
So, we enter into a forward contract to to buy USD on date of payment at fixed rate.
1. On contract date: No entry
2. On Reporting date:
- DA dr, PNL cr (at forward)
- PNL dr, Firm Commitment Liability cr (at spot)
3. On delivery date:
- Repeat the above
- Cash dr, DA cr
- PPE dr (at spot), Cash cr
- Firm Commitment Liability dr, PPE cr
54
How to account for cash flow hedge, considering its firm commitment to import a machine using foreign currency.
So, we enter into a forward contract to to buy USD on date of payment at fixed rate.
1. On contract date: No entry
2. Reporting date:
- DA dr, OCI cr (at forward)
3. Delivery date:
- Repeat the above
- PPE dr, Cash cr (at spot)
- Cash dr, DA cr
- OCI dr, PPE cr
## Footnote
if delivery is before payment.
on delivery date:
- repeat above
- ppe dr, payable cr (at spot)
- oci dr, ppe cr
on settlement date:
- payable dr, exchange gain cr cash cr
- da dr, pnl cr
- Cash dr, DA cr
55
Where do we account for gain/loss on hedging instrument (both FV or cashflow) for equity instrument at FVTOCI?
The gain loss will go to OCI for both hedged item and hedging instrument
56
Which hedging technique should be used if its a firm commitment in foreign currency
Any of the two, cash flow or fair value hedge. However, cash flow hedge is preferred.
57
Which hedging technique should be used for a highly probable forecast transaction in foreign currency?
Cashflow hedge
58
Which hedging technique is to be used for a firm commitment other than those in foreign currency
Fair Value Hedge
59
Which hedging technique is to be used for a highly probable forecast transaction other than those in foreign currency
Cashflow hedge
60
Which hedging technique is to be used if our original interest rate is fixed and we enter into a variable rate swap agreement. [3]
1. Fair Value Hedge
2. As interest receipts would be constant (cash inflows), there would be no cash flow risk
3. If market rate increases or decreases above or below the fixed rate of our instrument, its FV would fluctuate, resulting in fair value risk, hence creating a need for FV hedge.
61
Which hedging technique is to be used if our original interest rate is variable (K+2%) and we enter into a fixed rate swap agreement. [2]
1. Cashflow Hedge
2. As interest receipts would be variable (cash inflows), there would be a cash flow risk as the inflows would be fluctuating
62
# Derecognition of investment in debt instruments
Outright Sale:
- Rights to Cashflows transferred
- Risk and Reward i.e. Credit Risk is transferred
Fully derecognise
63
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- But the compulsory repurchase price is fixed
| Assume coupon is withheld by the repo party
We would not derecognize the investment in debt security because the risk and rewards of the instrument have not been transferred. If on repurchase date the bond is overvalued or its fv becomes zero, we would still pay the repo party the fixed price agreed.
Agreement date: Cash dr, Repo Liability cr
Reporting date: Int Exp dr, Repo liability cr
- Amortization: Investment bal fig dr, Repo liab (coupon) dr, Int income cr
64
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- But the compulsory/optional repurchase price is as per FV on repurchase date
Always derecognize it on agreement date. As credit risk of FV changes is transferred.
| derecognie in both cases optional or compulsory
65
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- The repurchase is at the option of seller (transferring to repo party).
- Seller believes that the FV will fall in the future below the fixed repo price, so he won't exercise it. (Deeply out the money)
Derecognize
66
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- The repurchase is at the option of seller (transferring to repo party).
- Seller believes that the price will rise in the future above fixed repo price, so he will exercise it. (Deeply in the money)
Dont derecognize as we would repurchase it in the future in expectation that its FV will rise more than the fixed price in repo.
Agreement date: Cash dr, Repo Liability cr
Reporting date: Int Exp dr, Repo liability cr
- Amortization: Investment bal fig dr, Cash (coupon) dr, Int income cr
67
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- The repurchase is at the optional.
- Seller cannot forecast if the future fv of this bond is going to be above or below the repo fixed price.
- The control of such bond is transferable (tradable security in the market)
Derecognize as control is passed on because this security can be repurchased by the other party again from active market and sold back to us if we want to buy it back on the repo date.
68
# Derecognition of investment in debt instruments
Repurchase/Repo Agreements:
- Where rights to c/fs (name in bond register) is transferred
- The repurchase is at the optional
- Seller cannot forecast if the future fv of this bond is going to be above or below the repo fixed price.
- The control of such bond is not-transferred (tradable security in the market)
Do not derecognize as you still have the control. Because if the repo party decided to sell it to someone else before the repo date. And I asked to buy it again on repo date, where would he get the security from to sell to me? Hence, I still have the control.
69
# Factoring: Selling Receivables
Without recourse
Derecognize as its similar to outright sale where all rights to c/f as well as risk and reward is transfered.
Cash dr, Receivable cr
70
# Factoring: Selling Receivables
With recourse
## Footnote
Receivable 127
Factoring Co. gives some advance 102
We have to keep on giving payments received from the receivables (received 127)
We also have to pay interest on factoring co.'s advance 10%
[FACTORING CO DOES NOT HAVE TO PAY ANY INTEREST TO US AS PER MARKET NORMS]
Bad debt risk still stays with us.
Do not derecognize because risk and reward is with us.
## Footnote
- Cash 102 dr, Factoring co 102 cr
- Cash 127 dr, Receivables 127 cr
- Factoring co 127 dr, Cash 127 cr
- Interest expense 2.55 dr, Factoring Co. 2.55 cr (102*10%*3/12)
- Cash 22.45 dr, Factoring co 22.45 cr
71
# Factoring: Selling Receivables
With recourse:
- CA of Receivable 5,000,000
- Cash from factoring: 4,990,000
- Agreement: 4,970,000 pertains to receivable, 20,000 pertains to guarantee. According to which company will refund credit losses upto 500,000
- Cash 4,990,000 dr
- Loss on receivables 30,000 dr
- Receivables 4,500,000 cr (without recourse)
- Factoring Co. 500,000 cr (with recourse)
- Guarantee Liability 20,000 cr
AAFR
flashcards
Decks in class (6)
# Cards
