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Tutorial Questions - Financial Instruments

An entity issued 4,000 convertible bonds with a face value of $1,000 per bond and 5-year term. Interest of 8% is paid annually. Each bond can be converted to 450 ordinary shares. When issued, similar non-convertible debt had a market rate of 12%. The question asks to show the 5-year cash flows to account for this compound instrument under IFRS 9. A second question concerns Catherine's Carpets considering early adoption of IFRS 9. It purchased a debt instrument for £42.1 million with a principal of £66 million and 1.96% annual interest payable until maturity in 5 years. The effective interest rate is 12%. The question asks

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82 views2 pages

Tutorial Questions - Financial Instruments

An entity issued 4,000 convertible bonds with a face value of $1,000 per bond and 5-year term. Interest of 8% is paid annually. Each bond can be converted to 450 ordinary shares. When issued, similar non-convertible debt had a market rate of 12%. The question asks to show the 5-year cash flows to account for this compound instrument under IFRS 9. A second question concerns Catherine's Carpets considering early adoption of IFRS 9. It purchased a debt instrument for £42.1 million with a principal of £66 million and 1.96% annual interest payable until maturity in 5 years. The effective interest rate is 12%. The question asks

Uploaded by

Alegria Gonzalez Palacios
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Question 1 – Compound Financial Instruments

An entity, whose functional currency in the Dollar, issues 4,000 convertible bonds. The
bonds have a 5-year term, and are issued at par with a face value of $1,000 per bond,
giving the total proceeds of $4,000,000 (4,000 x $1000). Interest is payable annually in
arrears as a nominal annual interest rate of 8% (i.e. $320,000 per annum). Each bond is
convertible at any time up to maturity into 450 ordinary shares. When the bonds are issued,
the prevailing market interest rate for similar debt without conversion options is 12% per
annum.

Required

Show, by way of calculations, a five year cash flow to show how this compound instrument
would be treated under IFRS 9.

(9 marks)

Question 2 - Catherine’s Carpets

Catherine’s Carpets is an industrial carpet company who is considering the early adoption of
IFRS9 Financial Instruments and is seeking advice on how IFRS will apply to a number of
transactions. The entity is particularly concerned about the requirement that, under IFRS9,
financial assets are classified as subsequently measured at either amortised cost of fair
value on the basis of the entity’s business model and the contractual cash flows test.

On 1 April 2014 Catherine’s Carpets was considering the purchase of a debt instrument for
its fair value of £42.1million, the principal amount was £66 million and the instrument carries
interest at 1.96% per annum payable at the end of each year. The debt is due to mature on
1 April 2019. The instrument’s effective interest rate is 12%. Catherine’s carpets has no
plans to dispose of the instrument before maturity.

Required

Show how Catherine’s Carpets would have accounted for the instrument over its five year
life had it gone ahead with the purchase.

(6 marks)
n/i 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229
NPV table

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