Financial Instrument

Chapter # 03
Financial Instruments
CHAPTER-3 IFRS 09: Financial Instruments
LO1: INTRODUCTION
1.1 Relevant IFRS
The rules on financial instruments are set out in three accounting standards:
• IFRS 9: Financial Instruments
• IAS 32: Financial Instruments: Presentation
• IFRS 7: Financial Instruments: Disclosure
1.1.1 Revision of some previous concepts
Transaction Buyer/Borrower Seller/Lender

Purchases Dr. Debtor Dr.
Purchases/Sale
Creditor Cr. Sales Cr.
Bank Dr. Loan investment Dr.
Borrowing/Lending
Loan Cr. Bank Cr.
1.2 Definitions [IAS 32: 11]

Financial instrument is a contract that gives rise to both:
• A financial asset in one entity and,
• A financial liability or equity instrument in another entity
1.2.1 Financial Assets

A financial asset is an asset that is:
• Cash
• Bank
• An equity instrument in a company (shareholder) (equity instrument)
• A contractual right to receive cash or another financial asset from another company/entity (Debt
holder) (lender)
• A contractual right to exchange financial asset or financial liabilities with another entity under
conditions that are potentially favourable to the entity.
Financial assets Non-financial assets
• Cash • Property Plant & Equipment

• Bank • Intangible assets
• Debtor • CWIP assets
• Income receivable • Stock
• Investment in lending • Prepayments
o Debentures • Advance tax
o Bonds
o Loan stock
o Loan notes
o Redeemable preference shares
o Favourable forward currency contracts
157
Financial assets
Equity instrument Debt instrument Loan to employees
• Ordinary equity share • Debenture

• Irredeemable preference • Bonds
share • Loan notes
• Loan stock
• Redeemable preference share
1.3 Substance over form [IAS 32: 15]

Some financial instruments have the legal form of equity but are, in substance, liabilities. For example, an
issuer (company) has contractual obligation to deliver cash in case of redeemable preference shares.
Therefore, dividend on redeemable preference shares is treated as finance cost in profit or loss while
dividend on ordinary shares is presented in statement of changes in equity.
Illustration # 01: (ICAP Example # 01)
Item Financial instrument or otherwise

Trade payable A financial liability (to be settled in cash)
Investment in loan notes of another entity A financial asset
Bank loan obtained A financial liability
Ordinary shares issued An equity instrument
Irredeemable preference shares issued An equity instrument
Unfavourable forward currency contract A financial liability
Redeemable preference shares issued A financial liability
Investment in redeemable preference shares A financial asset
Prepaid rent A non-financial asset
Current tax payable A non-financial liability (statutory obligation)
Inventory A non-financial asset
1.4 Recognition [IFRS 9: 3.1.1]

An entity shall recognize a financial asset or a financial liability in its statement of financial position,
when, and only when, the entity becomes party to the contractual provisions of the instrument.
A financial asset might be an investment in debt or in equity.
158
LO2: CLASSIFICATION
2.1 Financial assets: investment in equity instruments [IFRS 9: 4.1]
An Equity instrument is any contract that evidences a residual interest in the asset of an entity
(Asset – Liabilities)
Examples:
• Ordinary Equity shares
• Irredeemable preference shares
The financial assets which are equity instruments of another entity are classified as follows:
Equity Investment
Short-term Long-term
Trading Speculation Speculation
2.1.1 Equity Investment (Short-term)
159
Example # 01:
Coke bought 400 shares of Master paints in July 2019 at a purchase price of Rs. 32 per share. Transaction
cost paid to agent as commission Rs. 600 (in total) (May be per share in some questions)
• The market value of Master paint’s share on 31.12.19 was Rs. 44
Required:
a) Prepare journal entries in the books of Coke Ltd. for 2019 & 2020, if the share investment is held for
trading purpose (short-term purpose)
b) Prepare extracts of statement of comprehensive income and statement of financial position for the
Year ended 2019 & 2020
Answer:
2019 2020
Date Description Dr. Cr. Date Description Dr. Cr.
July 19 Equity investment 12,800 July 20
Cash (400 x 32) 12,800 ×
July 19 Operating expense 600 July 20
Cash 600 ×
Dec 19 Equity investment 4,800 Dec 20 F.V loss (P/L) 3,200
F.V gain (P/L) 4,800 Equity investment 3,200
Coke Limited
Statement of comprehensive income (extracts)
For the year ended
2020 2019
G. P
Add; Other Income
Fair Value gain - 4,800
Less; Operating expenses
Transaction costs - (600)
Fair Value loss (3,200) -
160
Coke Limited
Statement of Financial Position (extracts)
As on
2020 2019
Assets
Current Assets
Investments 14,400 17,600
(W-1)
Equity investment a/c
01.01.19 Bal. b/d -
01.07.19 Cash 12,800
31.12.19 Fair Value gain (P/L) 4,800 31.12.19 Bal. c/d 17,600
17,600 17,600
01.01.20 Bal. b/d 17,600 31.12.20 Fair Value loss (P/L) 3,200
31.12.20 Bal. c/d (400 x 36) 14,400
17,600 17,600
Example # 02: (ICAP Example # 02)

Identify the classification of following financial assets:
a) Investments in shares held for trading purposes.
b) Investment in equity shares. The entity has no intention of selling these shares in foreseeable future.
Answer:
a) Fair value through profit or loss
b) Fair value through other comprehensive income
2.1.2 Equity Investment (Long-term)
161
Example # 03:
Coke bought 400 shares of Master paints in July 2019 at a purchase price of Rs. 32 per share. Transaction
cost paid to agent as commission Rs. 600 (in total) (May be per share in some questions)
Required:
a) Prepare journal entries in the books of Coke Ltd. for 2019 & 2020, if the share investment is held for
Capital appreciation (long-term purpose) and fair value model (OCI) is selected for
measurement
b) Prepare extracts of statement of comprehensive income and statement of financial position for the
Year ended 2019 & 2020
Answer:
Coke Limited
For the year ended
2020 2019
G. P
Net Profit
Other Comprehensive Income
Fair Value reserve (3,200) 4,200
Coke Limited
As on
2020 2019
Assets
Non-Current Assets
Investments 14,400 17,600
Equity and Liabilities
Share Capital
Fair Value reserve 1,000 4,200
162
2019 2020
Date Description Dr. Cr. Date Description Dr. Cr.
July 19 Equity investment 13,400 July 20
Cash (400 x 32) + 600 13,400 ×
Dec 19 Equity investment 4,200 Dec 20 F.V reserve 3,200
F.V reserve 4,200 Equity investment 3,200
(W-1)
Equity investment a/c
01.01.19 Bal. b/d -
01.07.19 Cash 13,400
31.12.19 Fair Value reserve 4,200 31.12.19 Bal. c/d (400 x 44) 17,600
17,600 17,600
01.01.20 Bal. b/d 17,600 31.12.20 Fair Value reserve 3,200
31.12.20 Bal. c/d (400 x 36) 14,400
17,600 17,600
(W-2)
Fair Value reserve a/c
- 01.01.19 Bal. b/d -
31.12.19 Bal. c/d 4,200 31.12.19 Equity investment 4,200
4,200 4,200
31.12.20 Equity investment 3,200 01.01.20 Bal. b/d 4,200
31.12.20 Bal. c/d 1,000
4,200 4,200
LO3: MEASUREMENT
3.1 Transaction costs [IFRS 9: 5.1.1, B5.4.8, Appendix A]
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal
of a financial asset or financial liability.
Incremental costs/ Avoidable cost/ Directly attributable cost/ variable cost:
An incremental cost is one that would not have been incurred if the entity had not acquired, issued or
disposed of the financial instrument
Incremental cost (Transaction cost) Non-incremental cost (non-transaction cost)
• Fees & commission paid to • Financial costs

agents/ dealers/brokers • Internal administration costs
• Levies by regulatory agencies and • General overheads
security exchanges • Holding costs
• Transfer taxes and duties
• Credit assessment fees
• Registration charges & similar
costs
163
Example # 04:
On 01 May 2017, Kangaroo Limited (KL) acquired following equity instruments:
Purchase price Transaction cost Total
Rs. in “million”
Investment A 100 2 102
Investment B 150 3 153
(i) Investment A was designated as measured at Fair value through profit or loss whereas investment B
was irrevocably elected at initial recognition as measured at Fair value through other comprehensive
income.
(ii) In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
(iii) Investment A is held for trading purpose and B is held for Capital appreciation.
As on 31 December 2017, Fair value of the investment are given below:
Fair value Transaction cost on Net amount
disposal
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4
Required: Prepare the extracts relevant to the above transaction from KL’s statement of financial
position and comprehensive income for the year ended 31 December 2017, in accordance with the IFRS.
Answer:
Kangaroo Limited
For the year ended 2017
G. P
Less; Operating expenses (2)
Add; Other Income
Fair value gain 5
Dividend income (12 + 9) 21
Other Comprehensive Income
Fair Value reserve (23)
Kangaroo Limited
As on 2017
Assets
Non-Current Assets
Investment – B 130
Current Assets
Investment – A 105
Share Capital
Fair Value reserve (23)
164
Date Description Debit Credit

01.01.17 Equity investment (A) 100
Bank 100
01.01.17 Operating expense 2
Bank 2
01.01.17 Equity investment (B) 153
Bank (150 + 3) 153
31.10.17 Bank 12
Dividend income (A) 12
31.10.17 Bank 9
Dividend income (B) 9
31.12.17 Equity investment (A) 5
Fair value gain 5
31.12.17 Fair value reserve 23
Equity investment 23
(W-1)
Equity investment – A a/c
01.01.17 Bal. b/d -
31.10.17 Cash 100
31.12.17 Fair Value gain 5 31.12.17 Bal. c/d 105
105 105
(W-2)
Equity investment – B a/c
01.01.17 Bal. b/d -
31.10.17 Cash 153 31.12.17 Fair Value reserve 23
31.12.17 Bal. c/d 130
153 153
(W-3)
Fair value reserve a/c
01.01.17 Bal. b/d -
31.12.17 Equity investment 23
31.12.17 Bal. c/d 23
23 23

An equity investment is purchased for Rs. 30,000 plus 1% transaction costs on 1 January 20X6. It is
classified as at fair value through other comprehensive income. At the end of the financial year (31
December 20X6) the investment is revalued to its fair value of Rs. 40,000. On 31 December 20X7, the fair
value had declined to Rs. 38,000.
Required: Prepare journal entries from acquisition to 31 December 20X7.
Answer:
165
Date Particulars Debit Rs. Credit Rs.

1 Jan 20X6 Financial asset [Rs. 30,000 + 1%] 30,300
Bank 30,300
31 Dec 20X6 Financial asset [Rs. 40,000 – 30,300] 9,700
Gain (OCI & FV reserve) 9,700
31 Dec 20X7 Loss (OCI & FV reserve) 2,000
Financial asset [Rs. 38,000 – 40,000] 2,000

Momin Limited (ML) purchased 5000 shares for Rs. 100 each on 1st January 2009. Transaction costs are
2% (in both buying and selling). Fair values at different dates are as follows:
1 January 2009 Rs.100
31 December 2009 Rs.108
30 June 2010 Rs.111
31 December 2010 Rs.110
Dividend amounting Rs. 4 per share was declared on 30 June 2010. ML year-end is 31 December.
Required: Prepare necessary entries assuming ML classifies the shares under:
(a) Fair Value Through PL (b) Fair Value Through OCI
Answer:
Part (a) Classified and measured at fair value through profit or loss
1 Jan 2009 Financial asset [5,000 shares x Rs. 100] 500,000
Profit or loss [Rs. 500,000 x 2%] 10,000
Bank 510,000
31 Dec 2009 Financial asset [5,000 x Rs. (108 – 100)] 40,000
Gain (profit or loss) 40,000
30 Jun 2010 Dividend receivable [5,000 x Rs. 4] 20,000
Dividend income (PL) 20,000
Gain (profit or loss) 10,000
Part (b) Classified and measured at fair value through other comprehensive income
1 Jan 2009 Financial asset [5,000 x Rs. 100 x 102%] 510,000
Bank 510,000
Gain (OCI) 30,000
30 Jun 2010 Dividend receivable [5,000 x Rs. 4] 20,000
Dividend income (PL) 20,000
Gain (OCI) 10,000
166

On 15 October 2016, Rashid Industries Limited (RIL) made the following investments:
Percentage of shareholding *Cost of investment
Name of Investees No. of shares
acquired (Rs. in million)
Karim Limited (KL) 155,000 4% 20
Bashir Limited (BL) 135,000 2% 65
* Including transaction cost
Investment in KL was irrevocably elected at initial recognition as measured at fair value through OCI.
Investments in BL was designated as measured at fair value through profit or loss.
On 31 December 2016, the market price of shares of KL and BL as on 31 December 2016 was Rs. 80 and
Rs. 600 respectively.
RIL’s broker normally charges transaction costs of 0.2%.
Required:
Explain the accounting treatment of above transactions in accordance with International Financial
Reporting Standards.
Answer:
Investment in KL
Initial measurement: According to IFRS 9, RIL has made irrevocable election to present subsequent
changes in fair value in equity investment in other comprehensive income instead of profit or loss
account. Investment in KL would initially be recognized at fair value plus transaction costs i.e., Rs. 20
million.
Subsequent measurement: On 31 December 2016, investment in KL should be measured at fair value of
Rs. 12.4 million (155,000 shares x Rs.80/share) and a loss of Rs. 7.6 million [20 – 12.4 (155,000 × 80)]
should be booked through other comprehensive income.
Investment in BL
Initial measurement: Since the investment in BL has been designated as measured at fair value through
profit or loss, hence the same shall be measured at fair value of Rs. 64.87 million (65 ÷ 1.002) and
transaction cost of Rs. 0.13 million should be charged to profit and loss account.
Subsequent measurement: On 31 December 2016, investment in BL should be measured at fair value of
Rs. 81 million (135,000 shares x Rs.600/share) and a gain of Rs. 16.13 million [81 – 64.87] should be
booked through profit or loss account.
167
LO4: DEBT INSTRUMENTS [IFRS 9: 4.1]

4.1 Basic concepts
Transactions Coke PEL
Purchases 10,000
Coke purchased goods on credit Debtors (Coke) 10,000
Creditor 10,000
from PEL Rs. 10,000 Sales 10,000
(PEL)(L)
Bank 20,000
Coke received loan from PEL Rs. Loan to coke (A) 20,000
Loan from PEL 20,000
20,000 Bank 20,000
(L)
Bank 12,000
Coke issued 1,000 shares to PEL at Equity investment 12,000
Share capital 10,000
Rs. 12 with face value @ Rs10 Bank 12,000
Share premium 2,000
Bank 6,000
Coke issued 1,000 debentures to PEL Debenture inv. 6,000
Debentures payable 5,000
at Rs. 6 with par value @ Rs. 5 Bank 6,000
Premium 1,000
4.1.1 Overview of Debt investment
Debt investment
Non-marketable Marketable
Bank Loan Debentures/Bonds
Face Value = Loan amount Issue price (Buying/Selling price)
Premium Par Discount
Purchase Face Value + Purchase Purchase Face Value –

Price = Premium Price = Face Value Price = Discount
168
Exam focus points:

→ Interest will be calculated on par value.
→ In real life, interest earned and received may be different.
→ Premium will be added & discount will be deducted no matter at issue or redemption.
→ In debt investment, announced interest rate is coupon rate & earned interest rate is effective rate
→ Effective interest rate is actually Internal rate of return (IRR) where NPV is practically zero.
→ Interest will be received at coupon rate & will be earned at effective rate.
4.2 Measurement: financial assets (debt instruments) [IFRS 9: 5.1 & 5.2]
The financial assets which are debt instruments of another entity are classified as follows:
Investment in debt instruments
Amortised cost model FV Model (OCI) FV Model (P/L)
4.2.1 Amortised cost model
169
Example # 08:
Ali & Co. purchased debenture on 01.01.2015. Following further information is available:
• Debenture had a face value of Rs. 100,000. It is purchased at face value.
• It carries annual interest at the rate of 12% payable annually in arrears (coupon rate).
• The effective interest rate is 12%.
• Debenture will be redeemed at face value at end of 2 years that is 31 December 2016.
Required:
Prepare accounting entries for 2 years if Ali & Co. has the policy of amortised cost model for investment
in debt instruments investment.
Answer:
01.01.15 Debt investment 100,000
Bank 100,000
31.12.15 Debt investment Cash/Interest receivable 12,000
Interest Income 12,000
31.12.15 Bank 12,000
Debt investment 12,000
31.12.16 Bank 12,000
31.12.16 Bank 100,000
(W-1)
Date Effective interest @12% Cash received @12% Balance
01.01.15 100,000
31.12.15 12,000 (12,000) 100,000
31.12.16 12,000 (12,000) 100,000
31.12.16 100,000 0

MK Limited has invested in a debt instrument on 01/01/Y1, details of which are as follows:
Face value Rs. 10,000
Premium paid on the investment of the instrument Rs. 800
Transaction cost paid on the investment of the instrument Rs. 200
Coupon rate of the Instrument 12%
Term of the instrument 4 Years
IRR of the debt Instrument is 8.9188%
MK Limited has a policy to classify Investment in debt instruments at Amortized Cost.
Required:
(a) Prepare Journal entries for the year ended Y1 to Y4.
(b) Prepare statement of profit or loss and statement of financial position extracts for the financial
asset for years Y1 to Y4?
170
Answer:
MK Limited
For the year ended
2004 2003 2002 2001
G. P
Add; Other Income
Interest income 918 940 961 981
MK Limited
As on
2004 2003 2002 2001
Assets
Non-Current Assets
Debt investment 0 10,282 10,542 10,781
Journal entries
Bank 11,000
31.12.01 Debt investment Cash/Interest receivable 981
Interest Income 981
31.12.01 Bank 1,200
31.12.02 Debt investment 961
Interest Income 961
31.12.02 Bank 1,200
Interest Income 940
31.12.03 Bank 1,200
Interest Income 918
31.12.04 Bank 11,200
(W-1)
Date Effective interest @8.9188% Cash received @12% Balance
01.01.01 11,000
31.12.01 981 (1,200) 10,781
31.12.02 961 (1,200) 10,542
31.12.03 940 (1,200) 10,282
31.12.04 918 (11,200) 0
171

Jalal Limited invested in a debt instrument with a nominal value of Rs.10,000. The instrument is
redeemable in two years at a premium of Rs.2,100 and has been classified as ‘at amortised cost’. The
coupon rate is 0% while the effective interest rate is 10%.
Required: How will this be reported in the financial statements of Jalal Limited over the period to
redemption?
Answer:
01.01.01 10,000
31.12.01 1,000 (0) 11,000
31.12.02 1,100 (12,100) 0

Bilal Limited invested in a debt instrument with a nominal value of Rs.10,000. The instrument is
redeemable in two years at a premium of Rs. 1,680 and has been classified as ‘at amortised cost’. The
coupon rate is 2% while the effective interest rate is 10%.
Required: How will this be reported in the financial statements of Bilal Limited over the period to
redemption?
Answer:
01.01.01 10,000
31.12.01 1,000 (200) 10,800
31.12.02 1,080 (11,880) 0
4.2.2 Fair Value Model through OCI
172
Kaalaam Limited has invested in a debt instrument on 01/01/Y1, details of which are as follow:
Face value Rs. 10,000
Premium paid on the investment of the instrument Rs. 800
Transaction cost paid on the investment of the instrument Rs. 200
Term of the instrument 4 Years
IRR of the debt Instrument is 8.9188%
Kaalaam Limited has a policy to classify Investment in debt instruments at Fair value through OCI.
Fair Values of the Instrument year wise is as follows: Rs.
Year-1 11,500
Year-2 11,200
Year-3 10,700
Required:
Prepare Journal entries for the year ended Y1 to Y3. Entries of last year are not required.
Answer:
Bank 11,000
Interest Income 981
31.12.01 Bank 1,200
Fair value reserve 719
Interest Income 961
31.12.02 Bank 1,200
Debt investment 61
Interest Income 940
31.12.03 Bank 1,200
Debt investment 240
Interest Income 918
31.12.04 Bank 1,200
173
Effective Coupon Fair value Fair value Fair value

Date Interest rate Balance Fair Value reserve reserve reserve
@8.9188% @12% c/d b/d change
01.01.01 11,000
31.12.01 981 (1,200) 10,781 11,500 719 Cr. 0 719 Cr.
31.12.02 961 (1,200) 10,542 11,200 658 Cr. 719 Cr. 61 Dr.
31.12.03 940 (1,200) 10,282 10,700 418 Cr. 658 Cr. 240 Dr.
31.12.04 918 (11,200) 0
4.2.3 Fair Value Model through P/L
Example # 13:
A & Co. bought bonds on 01.01.19 with following information:
(i) It had a face value of Rs. 500,000 and purchased at a premium of 5% (means purchase price = face
value + premium).
(ii) It has an annual coupon rate of 15% annually in arrears.
(iii) The effective interest rate is 12.316%
(iv) Investment will be redeemed at a discount of 2% means (redemption= Face value – Discount) at the
end of three years on 31.12.21.
Required: Only for year ended 2019 & 2020.
a) Prepare financial statement extracts & accounting entries if the intention is to hold investment till
maturity to get contractual cashflows.
b) Prepare financial statement extracts & accounting entries if the intention is to hold investment till
maturity to get contractual cashflows and sell it if good chance will arise.
Years Fair Value
31.12.19 530,000
31.12.20 515,000
c) Prepare financial statement extracts & accounting entries if the intentions is to held for trading.
174
Answer:
Amortised cost Model
Bank 525,000
31.12.19 Debt investment Cash/Interest receivable 64,659
31.12.19 Bank 75,000
31.12.20 Bank 75,000
(W-1)
Date Effective interest @12.316% Cash received @15% Balance
01.01.19 525,000*
31.12.19 64,659 (75,000) 514,659
31.12.20 63,385 (75,000) 503,044
*Fair Value = Purchase price + premium
Fair Value = 500,000 + 25,000 (500,000 x 5%) = 525,000
A & Co
For the year ended
2020 2019
G. P
Add; Other Income
Interest Income 63,385 64,659
A & Co
As on
2020 2019
Assets
Non-Current Assets
Debt Investment 503,044 514,659
175
Fair Value Model through OCI

Bank 525,000
31.12.19 Bank 75,000
Fair value reserve 15,341
31.12.20 Bank 75,000
31.12.20 Fair value reserve 3,385
(W-1)
Effective Coupon Fair value Fair value Fair value
Date Interest rate Balance Fair Value reserve reserve reserve
@12.316% @15% c/d b/d change
01.01.19 525,000
31.12.19 64,659 (75,000) 514,659 530,000 15,341 Cr. 0 15,341 Cr.
31.12.20 63,385 (75,000) 503,044 515,000 11,959 Cr. 15,341 Cr. 3,385 Dr.
A & Co
For the year ended
2020 2019
G. P
Add; Other Income
Other Comprehensive income
Fair Value reserve (3,385) 15,341
A & Co
As on
2020 2019
Assets
Non-Current Assets
Fair Value reserve 11,956 15,341
176
Fair Value Model through P/L

Bank 525,000
31.12.19 Bank 75,000
31.12.19 Debt investment (530,000 – 525,000) 5,000
Fair value gain (P/L) 5,000
31.12.20 Bank 75,000
31.12.20 Fair value loss (P/L) 15,000
(W-1)
Debt investment a/c
01.01.19 Bal. b/d -
01.01.19 Bank 525,000
31.12.19 Fair Value gain 5,000 31.12.19 Bal. c/d 530,000
530,000 530,000
01.01.20 Bal. b/d 530,000 31.12.20 Fair Value loss 15,000
31.12.20 Bal. c/d 515,000
530,000 530,000
A & Co
For the year ended
2020 2019
G. P
Add; Other Income
Fair Value gain - 5,000
Less; Operating expense
Fair Value loss (15,000) -
A & Co
As on
2020 2019
Assets
Non-Current Assets
In Fair Value model through P/L,

× 
Debt Investment Bank
remember that whatever we
Interest Income Interest Income
are receiving will be in P/L
177

Haseena Limited has invested in a debt instrument, details of which are as follows:
Face Value of the instrument Rs. 100,000
Premium paid on the investment Rs. 8,000
Transaction cost paid on the investment Rs. 5,800
Term of the instrument 3 years
IRR of the Instrument 8.848%
Haseena Limited has a policy to classify investment in debt instrument at fair value through PL. Market
value of the Instrument at the end of year 1 is Rs. 107,000
Required: Prepare the relevant journal entries for 1st year.
Answer:
Acquisition Financial asset 108,000*
Expense (PL) 5,800
Bank 113,800
Year 1 Bank [Rs. 100,000 x 12%] 12,000
Interest income (PL) 12,000
Loss (PL) [Rs. 108,000 – 107,000] 1,000
Financial asset 1,000
Fair Value = Par Value + Premium paid = 100,000 + 8,000 = 108,000 Transaction cost will be expensed out
4.3 Conditions to use model
178
XYZ Limited makes a large bond issue to the market. Three companies (A Limited, B Limited and C
Limited) each buy identical Rs. 10,000,000 bonds. The following further information is available:
a) A Limited holds bonds for the purpose of collecting contractual cash flows to maturity.
b) B Limited holds bonds for the purpose of collecting contractual cash flows but sells them on the
market when prices are favourable.
c) C Limited buys bonds to trade in them.
Required:
How A Limited, B Limited and C Limited should classify their financial asset based on their respective
business model?
Answer:
a) Classification by A Limited: Amortised Cost
b) Classification by B Limited: Fair value through OCI
c) Classification by C Limited: Fair value through PL
Identify the classification of following financial assets?

a) Investment in interest bearing debt instruments. The instrument is redeemable in five years. The
intention is to collect cash flows (which are interest and principal amounts only).
b) Investment in interest bearing debt instruments. The instrument is redeemable in five years. The
intention is to collect cash flows (which are interest and principal amounts only). However, the entity
may sell the loan notes earlier if any good offer is received.
d) Investment in loan notes. The objective is to collect contractual cash flows which consist of interest,
changes in oil prices in next five years and principal amount at the end of year 5.
e) Investment in loan notes. The objective is to collect contractual cash flows which consist of interest,
changes in oil prices in next five years and principal amount at the end of year 5. However, the entity
may sell the loan notes earlier if any good offer is received.
Answer:
a) Amortised Cost (Business model is to hold for collection of cash flows solely consisting of principal
and interest)
b) Fair value through OCI (Business model is to hold for collection of cash flows solely consisting of
principal and interest or to sell)
c) Fair value through PL (contractual cash flows also include payments other than principal and interest)
d) Fair value through PL (contractual cash flows also include payments other than principal and interest)
179
4.4 Zero – Coupon rate
Sometimes, we may make investment in zero – coupon rate debentures. Nothing will be received as
interest income (current income). Only capital gain received.
Example # 17:
We purchased 430 debentures on 1 January 2012. Following further information is available:

(i) Face value is Rs. 100 per debenture.
(ii) It is purchased at a premium of 30%.
(iii) Transaction cost at time of purchase is Rs. 2,000.
(iv) It carries interest at the rate of 0%. (Zero coupon bond)
(v) Tenure is 3 years.
(vi) These are redeemable (repayable) at a premium of 50%.
(vii) The effective interest rate is 3.6638%.
Required: Prepare accounting entries if the intention is to hold investment till maturity to get contractual
cash flows.
Answer:
Date Effective interest @3.6638% Coupon rate @0% Balance
01.01.12 57,900
31.12.12 2,121 0 60,021
31.12.13 2,200 0 62,220
31.12.14 2,280 (64,500) 0
*Face Value = 430 x 100 = 430,000
Purchase price = Face value + Premium
Purchase price = 43,000 + 12,900 (30% of 43,000)
Purchase price = 55,900
Fair Value = 55,900 + 2,000 = 57,900
Redemption Value:
= 43,000 + 21,500 (50% of 43,000)
= 64,500
On 1 January 2021, Kashif Limited (KL) issued a deep discount debenture with a Rs. 100,000 nominal
value.
• The discount rate was 16% of nominal value, and the costs of issue were Rs. 4,000.
• Interest of 5% on par value is payable annually in arrears.
• The debenture must be redeemed on 31 December 2025 (after 5 years) at a premium of Rs. 9,223.
• The effective interest rate is 12% per annum.
Required:
Calculate the amounts to be reported in the financial statements of KL over the period to redemption?
180
Answer:
Initial recognition Rs.
Par value 100,000
Less: discount at 16% (16,000)
Fair value 84,000
Less: Cost of issue (transaction costs) (4,000)
80,000
Date Effective interest @12% Coupon rate @5% Balance

01.01.21 80,000
31.12.21 9,600 (5,000) 84,600
31.12.22 10,152 (5,000) 89,752
31.12.23 10,770 (5,000) 95,522
31.12.24 11,463 (5,000) 101,985
31.12.25 12,238 (114,223) 0
Notice that total expense recognised in profit or loss (i.e., effective interest over five years) is Rs. 54,223.
This is also difference of total payments of Rs. 134,223 and initial loan proceeds of Rs. 80,000 (i.e., Rs.
54,223 = Rs. 134,223 – 80,000). The total effective interest expense comprises of following components:
Rs.
Discount on issue 16,000
Issue costs (transaction costs) 4,000
Coupon interest (Rs. 5,000 x 5 years) 25,000
Premium on redemption 9,223
54,223
181
LO5: FINANCIAL LIABILITIES [IFRS 9: 4.2]

5.1 Definitions
A financial liability is any liability that is:
• A contractual obligation to deliver cash or another financial asset to another entity.
• A contractual obligation to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity.
Financial liability Non-financial liability
• Creditor • Income in advance

• Account payable for fixed asset • Tax payable
• Expense payable
• Borrowings;
o Debentures
o Bonds
o Loan stock
o Loan notes
• Redeemable preference shares
• Unfavourable forward currency contracts
5.2 Measurement: financial liabilities [IFRS 9: 5.1 & 5.3]
The financial liabilities are measured as follows:
Financial Liability
Amortised cost model FV Model (P/L) Irrevocable
Held for trading To Reduce accounting

mismatch
Identify the classification of following financial liabilities?

a) A 12% bank loan obtained by A Limited payable in 5 years’ time.
b) 8% loan notes issued by C Limited.
c) A short-term currency swaps agreement entered into by B4-Bank Limited which is currently
unfavourable. These types of transactions are usual feature of B4-Bank Limited’s business.
d) Trade payable.
182
Answer:
a) Amortised Cost
b) Amortised Cost
c) Fair value
d) Amortised Cost
5.2.1 Amortised Cost model
Example # 20:
Ching Chee Limited issued the following Debenture on 1st January 2019. Following further information is
available:
(i) Face value of debenture is Rs. 225,000.
(ii) It is issued at a discount of 5%.
(iii) No transaction cost has been incurred.
(iv) Coupon rate is 10% p.a.
(v) Debenture will be redeemed after 3 Years on 31st December 2021 at a premium of 10%.
(vi) The effective interest rate is 15.07% p.a.
(vii) Interest will be paid annually in arrears.
cash flows.
Answer:
Date Effective interest @12% Coupon rate @5% Balance
01.01.19 213,750 *
31.12.19 32,212 (22,500) 223,462
31.12.20 33,676 (22,500) 234,638
31.12.21 35,362 (270,000) ** 0
183
*225,000 – 11,250 = 213,750

** 225,000 + 22,500 (10% of 225,000) = 247,500
247,500 + 22,500 (paid) = 270,000

01.01.19 Bank 213,750
Financial Liability 213,750
31.12.19 Interest expense 32,212
31.12.19 Financial Liability 22,500
Bank 22,500
Bank 22,500
Bank 270,000
Example # 21:
Sara Limited (SL) issued the following Debenture on 1st January 2019. Following further information is
available:
(i) Face value of debenture is Rs. 150,000.
(ii) It is issued at a premium of 10%.
(iii) Transaction cost of Rs. 2,500 has been incurred.
(iv) Coupon rate is 15% p.a.
(v) Debenture will be redeemed after 3 Years on 31st December 2021 at par value.
(vi) The effective interest rate is 11.63% p.a.
(vii) Interest will be paid semi-annually on 30th June and 31st December every year till maturity.
cash flows.
Answer:
𝟏𝟏.𝟔𝟑% 𝟏𝟓%
Date Effective rate @ = 5.815% Coupon rate @ = 7.5% Balance
𝟐 𝟐
01.01.19 162,500*
30.06.19 9,450 (11,250) 160,700
31.12.19 9,345 (11,250) 158,795
30.06.20 9,234 (11,250) 156,779
31.12.20 9,117 (11,250) 154,646
30.06.21 8,993 (11,250) 152,389
31.12.21 8,861 (161,250) 0
Purchase Price = 150,000 + (150,000 x 10%)
Purchase Price = 165,000
Fair Value = 165,000 – 2,500
Fair Value = 162,500
184
5.2.2 Fair Value Model through P/L
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party
by failing to discharge an obligation.
Credit risk
Internal Factors External Factors
Example # 22:
Ahmad & Co. issued 10% debentures of Rs. 200,000 on 01.01.19.

• Debentures are held for trading.
• Transaction costs amounting Rs. 10,000.
Year Fair Value Gain/(Loss) Due to own Credit rating (Own Credit risk)
31.12.19 50,000 40,000
31.12.20 116,000 (84,000)
*Gain → If our credit rating goes down
**Loss → If our credit rating goes up
Required:
Prepare accounting entries according to the model;
(a) Fair Value through P/L
185
Answer
01.01.19 Bank 200,000
01.01.19 Transaction expense 10,000
Bank 10,000
Bank 20,000
Fair Value reserve (OCI) 40,000
Fair Value gain (P/L) 110,000
Bank 20,000
31.12.20 Fair Value reserve (OCI) 84,000
Fair Value gain (P/L) 18,000
(W-1)
Financial Liability a/c
01.01.19 Bal. b/d -
01.01.19 Bank 200,000
31.12.19 F.V reserve (OCI) 40,000
31.12.19 F.V gain 110,000
31.12.19 Bal. c/d 50,000
200,000 200,000
01.01.20 Bal. b/d 50,000
31.12.20 F. V reserve (OCI) 84,000
31.12.20 F.V gain 18,000 31.12.20 F. V loss 18,000
31.12.20 Bal. c/d 116,000
134,000 134,000
Example # 23:
On 01.01.18, Chicken Boti Co. (CBC) issued 10,000 debentures Rs.10 each at a premium of Rs. 2 each.
• The transaction cost associated with the issuance of debentures was Rs. 1 per debenture.
• The coupon rate is 15% per annum payable annually on Dec 31 each year and debentures will be
redeemed at discount of 2% in 3 years’ time.
Malai Boti Co. (MBS) purchased 1000 of these debentures on 01.01.18.
On 01.01.18, the approximate effective interest rates were 10.352%, (CBC) and 13% for MCB.
• Purchase Price for MCB @ Rs. 11
As on 31.12.18, the debentures had a fair value of Rs. 180 per debenture.
Debentures are subsequently measured at amortised cost by CBC and F.V (P/L) by MCB.
Required: Prepare journal entries in the books of CBC and MBC for 2018.
186
Answer
Chicken Boti Company (CBC)
01.01.18 Bank (W-1) 110,000
31.12.18 Interest expense (W-2) 11,387
31.12.18 Financial Liability (W-3) 15,000
Bank 15,000
(W-1)
Purchase price = (10,000 x 10) + (10,000 x 2) = 120,000
Fair Value = 120,000 – (10,000 x 1) = 110,000
(W-2)
Incurred = 110,000 x 10.352% = 11,387
(W-3)
Paid = 100,000 x 15% = 15,000
Malai Boti Company (MBC)

01.01.18 Debt investment (W-1) 11,000
Bank 11,000
31.12.18 Bank (W-2) 1,500
Interest income 1,500
31.12.18 Debt investment (W-3) 169,000
Fair value gain (P/L) 169,000
(W-1)
Purchase price = (1,000 x 10) + (1,000 x 1) = 11,000
Fair Value = 120,000 – (10,000 x 1) = 110,000
(W-2)
Received = 10,000 x 15% = 1,500
(W-3)
F.V gain/(loss) = (1,000 x 180) – (1,000 x 11) = 169,000
Adeel Limited (AL) regularly invests in assets that are measured at fair value through profit or loss. On
January 1, 2018 AL issued 9% debentures at nominal value of Rs. 80,000 to finance a similar investment in
assets. The management has decided to classify these debentures to be measured at fair value through
profit or loss in order to avoid accounting mismatch.
The fair value of debentures was Rs. 88,000 on 31 December 2018, there was no change in own credit
risk of AL in this time period.
The fair value of debentures was Rs. 82,000 on 31 December 2019, and AL has estimated that it includes
Rs. 4,000 due to change in own credit risk as AL’s credit rating was dropped during the year.
Required:
Prepare journal entries.
187
Answer
1 Jan 2018 Bank 80,000
Debentures (financial liability) 80,000
31 Dec 2018 Interest expense [9% x Rs. 80,000] 7,200
Cash 7,200
31 Dec 2018 Profit or loss 8,000
Debentures (financial liability) 8,000
31 Dec 2019 Interest expense [9% x Rs. 80,000] 7,200
Cash 7,200
31 Dec 2019 Debentures (financial liability) 6,000
Other comprehensive income 4,000
Profit or loss 2,000
188
Practice Questions
Question # 01:
Identify which of the following are financial instruments:
(a) Inventories
(b) Investment in Ordinary shares
(c) Prepayment for goods or services
(d) Liability for income taxes
Question # 02: [Financial Asset – Debt Instrument – Amortised cost]

A Company invests Rs. 5,000 in 10% loan notes. The loan notes are redeemable after 3 years at Rs. 5,337. The
effective rate of interest is 12%. The company intends to collect the contractual cashflows which consist solely of
repayments of interest and capital.
Required: What amount will be shown in the statement of profit or loss and statement of financial position for
the financial asset for years 1-3?
Question # 03: [Financial Asset – Equity Instrument - FVTPL]
A company invested in 10,000 shares of a listed company in November 2007 at a cost of Rs. 4.20 per year. At 31
December 2007 the shares have a market value of Rs.4.90.
Required: Prepare extracts from the statement of profit or loss for the year ended 31 December 2007 and a
statement of financial position as at that date.
Question # 04: [Financial Asset – Equity Instrument - FVOCI]
A company invested in 20,000 shares of a listed company in October 2007 at a cost of Rs.3.80 per share. At 31
December 2007 the shares have a market value of Rs.3.40. The company is not planning on selling these shares
in the short term and elects to hold them and decided to measure at fair value through other comprehensive
income.
Required: Prepare extracts from the statement of profit or loss and other comprehensive income for the year
ended 31 December 2007 and a statement of financial position as at that date.
Question # 05:
On 1 January 2001, Tokyo bought Rs. 100,000 5% bonds for Rs. 95,000, incurring issue costs of Rs. 2,000. Interest
is received in arrears. The bond will be redeemed at a premium of Rs. 5,960 over nominal value on 31 December
2003. The effective rate of interest is 8%.
The fair value of the bond was as follows:
Rs.
31.12.01 110,000
31.12.02 104,000
Required:
Show extracts from financial statements how the bond will be accounted for over all relevant year if:
189
(a) Tokyo planned to hold the bond until the redemption date.
(b) Tokyo may sell the bond if the possibility of an investment with a higher return arises.
Question # 06: [Loan payable + Amortised Cost]

A debt is issued for Rs. 1,000. The debt is redeemable at Rs. 1,250. The term of the debt is five years and interest
is paid at 5.9% p.a. The effective rate of interest is 10%.
Required: Show how the value of the debt changes over its life.
Question # 07: [Loan payable + Amortised Cost]

Viking issues Rs. 100,000 5% loan notes on 1 January 2004, incurring issue costs of Re 3,000. These loan notes
are redeemable at a premium. The effective rate of interest is 8% per annum.
Required:
What is the finance cost to be shown in the statement of profit or loss for the year ended 31 December 2005?
Question # 08:
For a debt investment to be held under amortised cost, it must pass two tests. One of these is the contractual
cash flow characteristics test.
(a) What is the other test which must be passed?
(b) What is the default classification for an equity investment?
Question # 09: [Financial Asset + Equity + FVTOCI + T.C]

ABC Co purchased 10,000 shares on 1 September 2004, making the election to use the alternative treatment
under IFRS 9 i.e., Fair value change is taken to OCI. The shares cost Rs. 3.50 each. Transaction costs associated
with the purchase were Rs. 500.
At 31 December 2004, the shares are trading at Rs. 4.50 each.
Required:
What is the gain to be recognised on these shares for the year ended 31 December 2004?
Question # 10: (Financial Asset + Equity + FVTPL + T.C]

DEF Co has purchased an investment of 15,000 shares on 1 August 2006 at a cost of Rs. 6.50 each. Transaction
costs on the purchase amounted to Rs. 1,500. DEF Co intent to treat these investments as short term.
As at the year-end 30 September 2007, these shares are now worth Rs. 7.75 each.
Required: Prepare Profit & Loss extracts for the year ended 30 September 2007.
Question # 11:
(a) A Company issues 5% loan notes at their nominal value of Rs. 20,000 with an effective rate of 5%. The
loan notes are repayable at par after 4 years.
Required:
(i) What amount will be recorded as a financial lability when the loan notes are issued?
(ii) What amounts will be shown in the statement of profit or loss and statement or financial portion for
years 1-4?
190
(b) A company issues 0% loan notes at their nominal value of Rs. 40,000. The loan notes are repayable at a
premium of Rs. 11,800 after 3 years. The effective rate of interest is 9%.
Required:
(i) What amount will be recorded as a financial liability when the loan notes are issued?
(ii) What amounts will be shown in the statement of profit or loss and statement of financial position for
years 1-3?
(c) A company issues 4% loan notes with a nominal value of Rs. 20,000. The loan notes are issued at a
discount of 2.5% and Rs. 534 of issue costs are incurred.
The loan notes will be repayable at a premium of 10% after 5 years. The effective rate of interest is 7%.
Required:
(i) What amount will be recorded as a financial liability when the loan notes are issued?
(ii) What amounts will be shown in the statement of profit or loss and statement of financial position for
year 1?
Question # 12:
On 1 April 2007, a company issued 40,000 Rs. 1 redeemable preference shares with a coupon rate of 8% at par.
They are redeemable at a large premium which gives them an effective finance cost of 12% per annum.
Required: How would these redeemable preference shares appear in the financial statements for the years
ending 31 March 2008 and 2009?
Question # 13: (Financial Liability + Amortised cost)

Aarhus Limited issued 80,000 12% debentures of Rs. 2 each on 1 July 20X3 at a premium of 3%. The debentures
have been issued at an effective interest rate of 11.48029%. These debentures will be redeemed at par in 10
years’ time, on 30 June 20Y3. The debentures are unsecured.
Required: Show the relevant extracts from the statement of comprehensive income and statement of financial
position of Aarhus Limited for the years ended 30 June 20X4, 20X5 and 20X6.
Question # 14: [Financial Liability]

ELK Limited issued Rs. 100,000 debentures on 1 January 2001 at par. Interest at the rate of 12 % pa. n payable
on 31 December each year. The debentures are to be redeemed at a premium of 26.262% on 31 December
2006. The premium was calculated so that the effective cost of the debentures and providing for the premium
on redemption, would be 15% p.a. The amount that will be required for the premium on the redemption of the
debentures is to be provided for over the life of the debentures using the effective rate of interest method.
The debentures are secured over the land and buildings of the company.
The company's financial year end is 31 December.
Required:
(a) Prepare all the journal entries relating to the debentures from the 2001 financial year to the end of 2003.
(b) Prepare an amortisation table showing the amount of premium that would be provided each year over the
life of the debentures.
(c) Show how matters relating to the debentures would be disclosed in the financial statements for the 2003
financial year end.
191
Practice Answers
Answer # 01:
a) Inventory (or any other physical asset such as non-current assets) is not a financial instrument since there
is no right to receive cash or other financial asset.
b) An investment in ordinary shares is a financial asset since it is an equity instrument of another entity.
c) Prepayments for goods or services are not financial instruments since there is no right to receive cash or
other financial asset rather there is a right to receive services.
d) A liability for income taxes is not a financial instrument since the obligation is statutory rather than
contractual.
Answer # 02:
Note:
This financial instrument appears to be a debt instrument which passes both the business model test and the
contractual cash flow characteristics test. It will be measured at amortised cost.
ABC Co
Statement of Financial Position (Extracts only)
As at year ended
3 2 1
Assets
Non-current assets
Investment in loan notes 0 5,100
Current Asset
Investment in loan notes 5,212
ABC Co
Statement of Profit and Loss (Extracts only)
For the year ended
3 2 1
Interest Income 625 612 600
Amortization schedule:
Effective Interest Cash flows coupon
Date Balance
Income @ 12% Received @ 10%
01.01.Y-1 5,000
31.12.Y-1 600 (500) 5,100
31.12.Y-2 612 (500) 5,212
(500 + 5,337) 31.12.Y-3 625 (5,837) -
Answer # 03:
Note:
This financial instrument should be measured at fair value through profit or loss.
192
ABC Co
As at 31 December 2007
2007
Assets
Current Asset
Investments in shares at FVTPL (W-1) 49,000
ABC Co
For the year ended 31 December 2007
2007
Other income:
Fair value gain on investment (W-1) 7,000
(W-1)
Dr. Investment in shares A/c Cr.
01.11.07 Cash (10,000 × 4.2) 42,000
Fair value gain - P/L (bal.) 7,000
31.12.07 c/d (10,000 x 4.9) 49,000
49,000 49,000
Answer # 04:
ABC Co
2007
Assets
Non-Current assets
Investments in shares at FVTOCI (W-1) 68,000

Equity
Fair value reserve (W-1) (8,000)
ABC Co
Statement of Comprehensive Income (Extracts only)
2007
Profit after tax N/A
Add: Other comprehensive Income
Change in fair value reserve - gain/(loss) (8,000)
Total comprehensive Income N/A
193
(W-1)
01.10.07 Cash 76,000
Fair value reserve – 8,000
OCI (bal.) (loss)
31.12.07 c/d (20,000 x 3.4) 68,000
76,000 76,000
Answer # 05:
(a) The business model is to hold the asset until redemption and receive contractual cash flows i.e., interest
and principal. Therefore, the debt instrument will be measured at amortised cost.
ABC Co
As at year ended
2003 2002 2001
Assets
Non-current assets
Investment in debt instruments – Bonds 0 0 99,760
Current Asset
Investment in debt instruments – Bonds 0 102,741 0
ABC Co
For the year ended
2003 2002 2001
Interest Income 8,219 7,981 7,760
Date Balance
(95,000 + 2,000) * 01/01/01 97,000
31/12/01 7,760 (5,000) 99,760
31/12/02 7,981 (5,000) 102,741
(5,800 +100,000 + 5,960) 31/12/03 8,219 (110,960) -
In case of Financial Asset kept at amortised cost transaction cost is a part of cost of asset.
b) The business model is to hold the asset until redemption, but sales may be made to invest in other assets
with higher returns. Therefore, the debt instrument will be measured at fair value through other
comprehensive income.
ABC Co
As at year ended
2003 2002 2001
Assets
Investment in debt instruments – Bonds 0 104,000 110,000
Equity
Fair value reserves 0 1,259 10,240
194
ABC Co
For the year ended
2003 2002 2001
Interest income 8,219 7,981 7,760
Change in fair value reserve - gain/(loss) (1,259) (8,981) 10,240
Total comprehensive Income N/A N/A N/A
Effective Cash flows
Fair Value Change in fair
Date Interest coupon Balance Fair Value
reserve value reserve
01/01/01 97,000*
31/12/01 7,760 (5,000) 99,760 110,000 10,240 10,210
31/12/02 7,981 (5,000) 102,741 104,000 1,259 (8,981)
31/12/03 8,219 (110,960) 0 (1,259)
* (95,000 + 2,000)
** (5,000 + 100,000 + 5,960)
Answer # 06:
This financial liability should be valued at amortised cost.
Date Balance
expense @ 10% paid @ 5.9%
01.01. Y.1 1,000
31.12. Y.1 100 (59) 1,041
31.12.Y 2 104 (59) 1,086
31.12. Y.3 109 (59) 1,136
31.12.Y 4 113 (59) 1,190
(59 + 1,250) 31.12. Y.5 119 (1,309) -
Answer # 07:
Viking
For the year ended 31.12.2005
2005
Interest expense (W-1) 7,981
(W-1) Amortization schedule:
Date Balance
expense @ 8% paid @ 8%
(100,000 - 3,000) 01.01.2004 97,000
31.12.2004 7,760 (5,000) 99,760
31.12.2005 7,981 (5,000) 102,741
195
Answer # 08:
(a) The business model test must also be passed, which means that the objective is to hold the instrument to
collect cash flows rather than to sell the asset.
(b) The default position for equity investment is fair value through profit and loss, meaning investment is
revalued each year end, with the gain or loss being taken to the statement of profit and loss
Answer # 09:
The investment should be classified as fair value through other comprehensive income.
ABC Co.
2005
Change in fair value reserve (W-1) 9,500
Total comprehensive Income N/A
(W-1)
Bank [(10,000 x 3.5) + 500] 35,500
Fair value reserve - OCI (Bal.) 9,500 c/d (10,000 x 4.5) 45,000
45,000 45,000
Answer # 10:
Financial asset held for trading will be valued at fair value through profit and loss. These are therefore valued
excluding any transaction costs (Which will be expensed to profit and loss).
DEF Co
2006
Transaction cost (1,500)
Fair value gain on investment (W-1) 18,750
N/A
(W-1)
Bank (15,000 x 6.5) 97,500
Fair value gain – P/L (bal.) 18,750 c/d (15,000 x 7.75) 116,250
116,250 116,250
Answer # 11:
(a) ABC Co
For the year ended
4 3 2 1
Interest expense (1,000) (1,000) (1,000) (1,000)
196
ABC Co
As at year ended
4 3 2 1
Non-current liabilities 0 0 20,000 20,000
Financial liability- Loan Notes
Current liabilities
Financial liability- Loan Notes 0 20,000 0 0
Date Balance
01.01. Y.1 20,000
31.12. Y.1 1,000 (1,000) 20,000
31.12. Y.2 1,000 (1,000) 20,000
31.12. Y.3 1,000 (1,000) 20,000
(1,000 + 20,000*) 31.12. Y.4 1,000 (21,000) -
*The loan notes are repaid at par i.e., Rs. 20,000 at the end of year 4.
(b)
ABC Co
As at year ended
3 2 1
Non-Current liabilities
Financial liability - Loan Notes 0 0 43,600
Current liabilities
Financial liability - Loan Notes 0 47,524 0
ABC Co
For the year ended
3 2 1
Interest expense (4,276) (3,924) (3,600)
Date Effective Interest Cash flows coupon Balance
1.1. Yr1 40,000
31.12. Yr1 3,600 0 43,600
31.12. Yr2 3,924 0 47,524
(40,000 +11,800) 31.12. Yr3 4,276 (51,800) -
The loan notes are repaid at par i.e., Rs. 40,000, plus a premium of Rs. 11,800 at the end of year 3.
197
(c)
ABC Co
As at year ended
1
Non-current liabilities
Financial liability at amortized cost - Loan Notes 19,494
ABC Co
For the year ended
1
Interest expense (1,328)
Date Balance
20,000 – (20,000 × 2.5%] – 534} 1.1. Y.1 18,966
31.12. Y.1 1,328 (800) 19,494
31.12. Y.2 1,365 (800) 20,059
31.12. Y.3 1,404 (800) 20,663
31.12. Y.4 1,446 (800) 21,309
100 + 20,000 + 10% × 20,000 31.12. Y.5 1,491 (22,800) -
Answer # 12:
ABC Co
As at year ended
2009 2008
Financial liability at amortized cost - (W-1) 43,392 41,600
Redeemable preference shares
ABC Co
For the year ended
2009 2008
Finance cost (Dividend on Redeemable preference shares) (W-1) (4,992) (4,800)
Date Balance
(40,000 x Rs. 1) 1/04/07 40,000
31/03/08 4,800 (3,200) 41,600
31/03/09 4,992 (3,200) 43,392
198
Answer # 13:
Aarhus limited
Statement of comprehensive income (Extract)
for the year ended 30 June
2006 2005 2004
Interest Expense 18,851 18,887 18,920
Aarhus limited
The Statement of Financial position (Extract)
As At 30 June
2006 2005 2004
Financial liability- Debentures 163,858 164,207 164,520

Date Balance
Expense @ 11.48029% Paid@ 12%
(80,000 × Rs.2 = 160,000 1/07/03 164,800
+ 160,000 x 8%)
30/06/04 18,920 (19,200) 164,530
30/06/05 18,887 (19,200) 164,207
30/06/06 18,851 (19,200) 163,851
Answer # 14:
(a) Journal entries
Date Particulars Dr. Cr.

1/1/01 Bank 100,000
Financial liability - debentures 100,000
31/12/01 Interest expense 15,000
31/12/01 Financial liability - debentures 12,000
Bank 12,000
Bank 12,000
Bank 12,000
199
(b) Amortization schedule:

Date Balance
Expense @ 15% Paid@ 12%
1.1.01 100,000
31.12.01 15,000 (12,000) 103,000
31.12.02 15,450 (12,000) 106,450
31.12.03 15,968 (12,000) 110,418
31.12.04 16,563 (12,000) 114,981
31.12.05 17,247 (12,000) 120,228
31.12.06 18,034 (138,262) -
(12,000 + 100,000 + 26.262% x 100,000)
(c)
ELK Limited
Statement of Financial position
Note Rupees
Financial liability at amortized cost - Debentures 11 110,418
ELK Limited
Statement of Comprehensive income (Extracts)
Rupees
Interest expense 15,968
200
Past Paper Questions

Question # 01:
Zinc Limited (ZL) has entered into the following transactions:

(i) On 1 January 2022, ZL purchased 1.5 million bonds of Copper Limited having face value of Rs. 100 each at
a premium of Rs. 5 each with maturity of five years. The transaction cost associated with the purchase of
these bonds was Rs. 2 each. The coupon interest rate is 13% per annum payable annually on 31
December while the effective interest rate was approximately 11.1% per annum. The investment was
classified at fair value through other comprehensive income. At 31 December 2022, the bonds were
quoted at Rs. 103 each on stock exchange.
(ii) On 1 July 2022, ZL issued 2 million 10% redeemable preference shares having face value of Rs. 100 each
at a discount of Rs. 10 each. The transaction cost associated with the issuance of these shares was Rs. 3
million. ZL measured preference shares at fair value through profit or loss. At 31 December 2022, the
shares were quoted at Rs. 80 each on stock exchange and ZL has estimated that 70% reduction in the fair
value is due to drop in ZL’s credit rating. No dividend was declared during 2022 in respect of these shares.
Required:
Prepare journal entries in the books of ZL for the year ended 31 December 2022 in accordance with IFRSs. (08)
{Spring-23, Q # 01}
Question # 02:
While reviewing the draft financial statements of Hexagon Industries (HI) for the year ended 30 June 2022,
following mistakes were identified:
(i) Investment in bonds of Oval Limited (OL) was accounted for as a financial asset subsequently measured
at fair value through profit or loss instead of measuring the investment at amortised cost.
On 1 July 2021, HI purchased 1 million bonds of OL of Rs. 100 each at a discount of Rs. 5 each with
maturity in three years. Transaction cost of Rs. 2 million was also incurred on purchase of these bonds.
The coupon interest rate is 12% per annum payable annually on 30 June while the approximate effective
interest rate was 13.28% per annum. The fair value of each bond of OL was Rs. 99 on 30 June 2022.
(ii) HI has accounted for investment in shares of Kite Limited (KL) as a financial asset subsequently measured
at fair value through other comprehensive income instead of applying its policy of equity method for
investment in associates.
On 1 September 2021, HI purchased 500,000 shares (par value at Rs. 10 each) of KL representing 20%
shareholdings at Rs. 60 per share. On 30 April 2022, KL paid interim cash dividend of Rs. 3 per share. KL
reported net profit of Rs. 15 million for the year ended 30 June 2022. The fair value of each share of KL
was Rs. 67 on 30 June 2022.
Required:
Prepare correcting entries in the books of HI for the year ended 30 June 2022. (08)
{Autumn-22, Q # 05}
201
Question # 03:
Draft financial statements of Determined Limited (DL) for the year ended December 2021 show the following
amounts:
Rs in '000
Total assets 43,500
Total liabilities 12,300
Net profit for the year 4,573
While reviewing the draft financial statements, following issues were identified;
(i) DL has classified investment in Jubilant Limited (IL) as an investment in associate and accounted for
using equity method despite having no significant influence over JL.
On 1 February 2021, DL purchased 40,000 shares of JL representing 15% shareholdings at Rs. 80 per
share. On 30 September 2021, JL announced interim cash dividend of Rs. 5 per share. IL reported net
profit of Rs. 2.4 million for the year ended 31 December 2021. The fair value of each share of JL was Rs.
70 as on 31 December 2021
(ii) Transaction cost incurred on bonds issued by DL was recorded as an asset and being amortized over five
years. Further, half of interest to be paid on 30 June 2022 has been accrued.
On 1 July 2021, DL issued 6,000 bonds of Rs. 1,000 each at a discount of Rs. 50 each with maturity in five
years. The transaction cost associated with the issuance of these bonds was Rs. 20 per bond. The
coupon interest rate is 11% per annum payable annually on 30 June. The approximate effective interest
rate was 13% per annum. Bonds are subsequently measured at amortized cost.
Required: Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the
required corrections. (07)
{Spring-22, Q # 03}
Question # 04: (ICAP Example # 19)
Rabbi Limited (RL) has made the following investments for the first time:
(a) RL purchased 1 million ordinary shares of Kholas Limited at the fair value of Rs. 23 per share. RL also
incurred transaction cost of Rs. 0.5 million. RL considers this investment as a strategic equity investment
and not held for trading.
(b) RL also purchased 1 million bonds of Barhi Limited having face value of Rs. 100 each at Rs. 95. These
bonds are redeemable in five years' time. RL also incurred transaction cost of Rs. 0.8 million. RL intends
to hold the bonds till maturity in order to collect contractual cash flows.
Required:
In respect of each of the above investments, discuss the possible classification option(s) available to RL for
accounting purposes. Also compute the amount at which these investments would be initially recognised under
each option. (08)
{Autumn-21, Q # 03}
202
On 1 January 2019, Jannat Limited (JL) issued 1.6 million debentures of Rs. 100 each at a premium of Rs. 10
each. The transaction cost associated with the issuance of these debentures was Rs. 5.5 per debenture. The
coupon interest rate is 16% per annum payable annually on 31 December. Khushi Limited (KL) purchased 0.32
million of these debentures on 1 January 2019.
On 1 January 2019, the approximate effective interest rates were 15% and 14% per annum for JL and KL
respectively. As on 31 December 2019, the debentures were quoted on Pakistan Stock Exchange at Rs. 112 each.
Debentures are subsequently measured at amortized cost by JL and fair value through profit or loss by KL.
Required: Prepare journal entries in the books of JL and KL for the year ended 31 December 2019. (07)
{Autumn-20, Q # 01}
Bilal has recently joined your organization. He has prepared a summary of classification and measurement
requirements of financial assets which will help him in handling the transactions related to the financial assets.
He has requested you to review the following summary:
Amortized cost FV through OCI FV through P/L
Business model Hold to collect and sell Hold to collect Hold to sell
Solely payment of
Cash flows No condition No condition
principal and interest
Debt and equity
Categories Debt securities Equity securities
securities
Fair value plus Fair value plus
Initial measurement Fair value
transaction cost transaction cost
Subsequent Fair value less
Amortized cost Fair value
measurement transaction cost
Required: Prepare the corrected summary in the light of IFRSs. (07)
{Spring-20, Q # 02}
On 1 July 2018, Gypsum Limited purchased 5,000 debentures issued by Iron Limited at par value of Rs. 100 each.
The transaction cost associated with the acquisition of the debentures was Rs. 24,000. The coupon interest rate
is 11% per annum payable annually on 30 June. On 1 July 2018 the effective interest rate was worked out at
9.5% per annum whereas the market interest rate on similar debentures was 11% per annum.
As on 30 June 2019, the debentures were quoted on Pakistan Stock Exchange at Rs. 96 each.
Required: Prepare journal entries for the year ended 30 June 2019 if the investment in debentures is
subsequently measured at;
(a) Amortized cost (03)
(b) Fair value through profit or loss (03)
{Autumn-19, Q # 03}
203
On 1 January Year 1 Aji Panca Limited has the following capital and reserves:
Equity Rs.
Share capital (Rs. 1 ordinary shares) 1,000,000
Share premium 200,000
Retained earnings 5,670,300
6,870,300
During Year 1 the following transactions took place:
An issue of Rs. 100,000 8% Rs. 1 redeemable preference shares at a premium of 60%. Issue
1 January costs are Rs. 2,237. Redemption is at 100% premium on 31 December Year 5. The effective
rate of interest is 9.5%.
31 March An issue of 300,000 ordinary shares at a price of Rs. 1.30 per share. Issue costs, net of tax
benefit, were Rs. 20,000.
30 June A 1 for 4 bonus issue of ordinary shares.
Profit for the year, before accounting for the above, was Rs. 508,500. The dividends on the redeemable
preference shares have been charged to retained earnings.
Required: Set out capital and reserves and liabilities resulting from the above on 31 December Year 1.
204
Past Paper Answers

Answer # 01:
We are waiting for ICAP suggested Solution
Answer # 02:
Hexagon Industries
Correcting entries
(i)
Debit Credit
S. No. Description
----- Rs. in '000 -----
(i) Investment / Financial asset 2,000
Transaction cost (P&L) 2,000
(ii) Investment / Financial asset 882
Interest Income (P&L) 882
[12,882 (97,000 × 13.28%) – 12,000 (100,000 × 12%)]
(iii) Gain on FV adj. (P&L) [1,000 × 4 [99 – 95 (100 – 5)] 4,000
Investment / Financial asset 4,000
(ii)
Debit Credit
S. No. Description
----- Rs. in '000 -----
(i) Dividend income (P&L) (500 × 3) 1,500
(ii) Investment / Financial asset (15,000 × 20% × 10/12) 2,500
Share of Profit (P & L) 2,500
(iii) Fair value reserve (OCI) [500 × 7 (67 – 60)] 3,500
Answer # 03:
Net Profit Total Assets Total Liabilities
Rs. ‘000’
As per Question 4,573 43,500 12,300
(i) Decrease in profit (W-1) (530)
(i) Decrease in investment (W-1) (530)
(ii) Decrease in liability (W-2) (87)

(ii) Decrease in profit (W-2) (21)
(ii) Decrease in prepaid asset (W-2) (108)
Revised amounts 4,022 42,862 12,213
205
(W-1)
Date Original Dr. Cr.
Investment in shares 3,200
Cash 3,200
(40,000 shares × Rs. 80)
Cash 200
Dividend income (P/L) 200
(40,000 shares × Rs.5)
Fair value loss (P/L) 400
Investment in shares 400
[3,200,000 vs (40,000 shares x Rs. 70)
Date Wrong Dr. Cr.

Investment in shares 3,200
Cash 3,200
(40,000 shares × Rs. 80)
Cash 200
Dividend income (P/L) 200
(40,000 shares × Rs.5)
Investment 330
P/L 300
[2,400,000 × 15% × 11/12]
Date Rectifying Dr. Cr.

P/L (200 – 400 – 330) = Expense of 530 530
Investment (3,200 – 400 – 3,200 +200 – 330) = Decrease 530 530
(W-2)
Rs in “000”
Date Original Dr. Cr.
Cash 5,580
Financial liability 5,580
Interest expense (P/L) (725 x 6/12) 363
Financial liability 363
Date Wrong Dr. Cr.

Cash 5,700
Financial liability (6,000 × Rs. 950) 5,700
Prepaid asset (6,000 x Rs.20) 120
Cash 120
Expense (P/L) 12
Prepaid asset 12
[120/5 x 6/12]
Interest expense (P/L) (660 x 6/12) 330
Financial liability 330
206
Date Rectifying Dr. Cr.

Financial liability (5,580 + 363 – 5,700 – 330) = Decrease by 87 87
P/L (363 – 12 – 330) = Expense of 21 21
Prepaid asset (-120 + 12) = Decrease asset by 108 108
Amortization schedule
Face value = 6,000 × Rs. 1,000 = 6,000
Date Balance
Expense @ 13% Paid @ 11% of 6,000
01/07/21 *5,580
30/06/22 725 660 5,645
*(6,000 x Rs. 950 – 6,000 x Rs.20) = 5,580
Answer # 04:
(a) Option (i)
As this investment is not "held for trading", the investment can be irrevocably elected to measure at fair
value through other comprehensive income. In this case, investment should initially measured at fair
value plus transaction cost i.e. Rs. 23.5 million.
Option (ii)
If election under option (i) is not made then it should be classified as measured at fair value through
profit or loss and will initially be measured at fair value i.e. Rs. 23 million.
(b) Option (i)

Since the objective of business model is to hold the investment till maturity, the investment be classified
as financial asset at amortized cost and will initially be measured at fair value transaction cost i.e., Rs.
95.8 million. (Rs. 95 x 1 million + Rs. 0.8 million)
Option (ii)
The investment can be designated as financial asset at fair value through profit or loss classifying at
amortized cost would have caused an accounting mismatch. In this option, bonds will initially be
measured at fair value i.e., Rs. 95 million.
Answer # 05:
Books of Jannat Limited (JL)
----- Rs. in Million -----
01.01.19 Bank 167.2
Financial liability - Debentures (W-1) 167.2
31.12.19 Interest Expense 25.08
Financial liability - Debentures (W-2) 25.08
31.12.19 Financial liability - Debentures (W-3 25.6
Bank 25.6
207
(W-1) Purchase price

= (1.6 x 100) + (1.6 x 10) = 176
Fair Value = 176 – (1.6 x 5.5) = 167.2
(W-2) Interest expense

= 167.2 x 15% = 25.08
(W-3)
= (1.6 x 100) x 16%
= 25.6
Books of Khushi Limited (KL)

----- Rs. in Million -----
01.01.19 Debt Investment (W-1) 35.2
Bank 35.2
31.12.19 Bank [(0.32 x Rs.100) x 16%] 5.12
Interest income 5.12
31.12.19 Debt Investment (W-2) 0.64
Fair value gain - P/L 0.64
(Recognition of FV gain)
(W-1) Purchase price

= 0.32 x (100 + 10) = 35.2
(W-2)
Dr. Investment in debentures a/c - KL Cr.
01/01/19 Cash 35.2
[0.32mill × (100 + 10)]
Fair value gain - P/L (bal.) 0.64 31/12/19 c/d (0.32mill x Rs 112) 38.84
38.84 38.84
Answer # 06:
Amortized cost FV through OCI FV through P/L
Business model Hold to collect Hold to collect and sell Hold to sell
Solely payment of Solely payment of
Cash flows No condition
principal and interest principal and interest
Debt and equity Debt and equity
Categories Only debt securities
securities securities
Fair value plus Fair value plus
Initial measurement Fair value
transaction cost transaction cost
Subsequent
Amortized cost Fair value Fair value
measurement
208
Answer # 07:
(a)
Amortised Cost model
01.07.18 Debt Investment 524,000
Bank (5,000 x 100) + 24,000 524,000
(Initial recognition of investment)
Interest income (524,000 x 9.5%) 49,780
(Recording of Interest income)
30.06.19 Bank (500,000 x 11%) 55,000
Investment in debt instruments 55,000
(Receipt of interest)
b)
Fair Value model through P/L
Bank (5,000 x 100) 500,000
(Initial recognition of investment)
01.07.18 Transaction cost - P/L 24,000
Bank 24,000
(Recording of transaction cost)
30.06.19 Bank 55,000
Interest income 55,000
(Receipt of interest)
30.06.19 Fair value loss - P/L 20,000
Investment in debt instruments 20,000
(Fair value loss on Investment on Reporting date)
Dr. Investment in debt instrument Cr.

01.07.18 Bank (5,000 × 100) 500,000
30.06.19 Fair value Rs - P/L (Bal.) 20,000
30.06.19 c/d (5,000 x 96) 480,000
Answer # 08:
Capital, Reserves and liabilities Rs.
Share capital (Rs. 1 ordinary shares) (W-2) 1,625,000
Share premium (W-3) -
Retained earnings (W-4) 6,116,813
Liabilities (redeemable preference shares) (W-1) 164,751
209
W1 - Redeemable preference shares (Liability) Rs.

Par value 100,000
Add: Premium 60% 60,000
160,000
Less: Transaction costs (2,237)
Initial measurement 157,763
Add: Effective interest [157,763 x 9.5%] 14,987
Less: Cash paid [Rs. 100,000 x 8%] (8,000)
164,750
W2 - Share Capital Rs.

At 1 January 1,000,000
Share issue (31 Mar) [Re. 1 x 300,000] 300,000
1,300,000
Bonus shares [1,300,000 x 1/4] 325,000
1,625,000
W3 - Share premium Rs.

At 1 January 200,000
Share issue (31 Mar) [Re. 0.3 x 300,000] 90,000
Issue costs (20,000)
270,000
Less: Bonus shares (270,000)
0
W4 - Retained earnings Rs.

At 1 January 5,670,300
Add back: Pref. Div. [Rs. 100,000 x 8%] 8,000
Profit for the year
As given 508,500
Less: Finance cost [157,763 x 9.5%] (14,987)
493,513
Less: Bonus shares [325,000 - 270,000] (55,000)
6,116,813
210
ICAP MULTIPLE CHOICE QUESTIONS (MCQs)

01. For a debt investment to be held under amortized cost, it must pass two tests. One of these is the
contractual cash flow characteristics test.
What is the other test which must be passed?
(a) The purchase agreement test (b) The amortized cost test
(c) The business model test (d) The fair value test
02. What is the default classification for an equity investment?

(a) Fair value through profit or loss
(b) Fair value through other comprehensive income
(c) Amortized cost
(d) Net proceeds
03. Diamond Limited purchased 10,000 shares on 1 September 2014, making the election to use the alternative
treatment under IFRS 9. The shares cost Rs. 35 each. Transaction costs associated with the purchase were
Rs. 5,000. At 31 December 2014, the shares are trading at Rs. 45 each.
What is the gain to be recognized on these shares for the year ended 31 December 2014?
(a) Rs. 100,000 (b) Rs. 450,000
(c) Rs. 95,000 (d) Rs. 350,000
04. Copper Limited has purchased an investment of 15,000 shares on 1 August 2016 at a cost of Rs. 65 each.
Copper Limited intend to sell these shares in the short term and are holding them for trading purposes.
Transaction costs on the purchase amounted to Rs. 15,000. As at the year-end 30 September 2016, these
shares are now worth Rs. 77.5 each. What is the gain on this investment during the year ended 30
September 2016, and where in the Financial Statements will it be recognized?
(a) Rs. 187,500 in Other Comprehensive Income
(b) Rs. 187,500 in Profit or Loss
(c) Rs. 172,500 in Other Comprehensive Income
(d) Rs. 172,500 in Profit or Loss
05. For which category of financial instruments are transaction costs excluded from the initial value, and
instead expensed to profit or loss?
(a) Financial Liabilities at amortized cost
(b) Financial Assets at fair value through profit or loss
(c) Financial Assets at fair value through other comprehensive income
(d) Financial Assets at amortized cost
211
06. If a company had incurred transaction costs in issuing debentures, how should these have been accounted for?
(a) Added to the proceeds of the debentures
(b) Deducted from the proceeds of the debentures
(c) Amortized over the life of the debentures
(d) Charged to finance costs
07. Sodium Limited (SL) purchased a debt instrument which will mature in five years' time. SL intends to hold
the debt instrument to maturity to collect interest payments. How should this debt instrument be
measured in the financial statements of SL?
(a) As a financial liability at fair value through profit or loss
(b) As a financial liability at amortized cost
(c) As a financial asset at fair value through profit or loss
(d) As a financial asset at amortized cost
08. A 5% debenture was issued on 1 April 2010 at total face value of Rs. 20 million. Direct costs of the issue
were Rs. 500,000. The debenture will be redeemed on 31 March 2013 at a substantial premium. The
effective interest rate applicable is 10% per annum.
At what amount will the debenture appear in the statement of financial position as at 31 March 2012?
(a) Rs. 21,000,000 (b) Rs. 20,450,000
(c) Rs. 22,100,000 (d) Rs. 21,495,000
09. How does IFRS 9 Financial Instruments require investments in equity instruments to be measured and
accounted for (in the absence of any election at initial recognition)?
(a) Fair value with changes going through profit or loss
(b) Fair value with changes going through other comprehensive income
(c) Amortized cost with changes going through profit or loss
(d) Amortized cost with changes going through other comprehensive income
10. On 1 January 2011 Oxygen Limited purchased a debt instrument for its fair value of Rs. 500,000. It had a
principal amount of Rs. 550,000 and was due to mature in five years. The debt instrument carries fixed
interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held at amortized cost.
At what amount will the debt instrument be shown in the statement of financial position of Oxygen Limited
as at 31 December 2012?
(a) Rs. 514,560 (b) Rs. 566,000
(c) Rs. 564,560 (d) Rs. 520,800
11. Which of the following are not classified as financial instruments under IAS 32?
(a) Share options (b) Intangible assets
(c) Trade receivables (d) Redeemable preference shares
212
12. In order to hold a debt instrument at amortized cost, which TWO of the following tests must be applied?
(a) Fair value test
(b) Contractual cash flow characteristics test
(c) Investment appraisal test
(d) Business model test
13. Nickel Limited is uncertain of how to treat professional fees. For which of the following investments should
professional fees NOT be capitalized as part of initial value of the asset?
(a) Acquisition of a patent
(b) Acquisition of investment property
(c) Acquisition of fair value through other comprehensive income investments
(d) Acquisition of fair value through profit or loss investments
14. Iron Limited has 5% Rs. 30 million redeemable preference shares in issue which will be redeemed in 5
years’ time. How should the preference share capital and preference dividend be presented in the financial
statements of Iron Limited?
(a) Preference share capital as equity and preference dividend in the statement of changes in equity
(b) Preference share capital as equity and preference dividend in the statement of profit or loss
(c) Preference share capital as a liability and preference dividend in the statement of changes in equity
(d) Preference share capital as a liability and preference dividend in the statement of profit or loss
15. Mercury Limited purchased 1 million shares in Jupiter Limited, a listed company, for Rs. 40 million on 1
January 2017. By the year end, 31 December 2017, the fair value of a Jupiter Limited’s share had moved to
Rs. 48. If Mercury Limited were to dispose of the shares, broker fees of Rs. 500,000 would be incurred.
What is the correct treatment for shares at year end?
(a) Hold shares in investments at Rs.47.5 million, with Rs. 7.5 million gain being taken to the statement
of profit or loss
(b) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain being taken to the statement of
profit or loss
(c) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain shown in the statement of
changes in equity
(d) Hold shares in investments at Rs. 48 million, with Rs. 7.5 million gain shown in the statement of
changes in equity
16. Gold Limited’s draft statement of financial position as at 31 March 2018 shows financial assets at fair value
through profit or loss with a carrying amount of Rs. 12.5 million as at 1 April 2017.These financial assets are
held in a fund whose value changes directly in proportion to a specified market index. At 1 April 2017 the
relevant index was 1,200 and at 31 March 2018 it was 1,296. What amount of gain or loss should be
recognized at 31 March 2018 in respect of these assets?
213
(a) Rs. 1,000,000 gain (b) Rs. 960,000 gain

(c) Rs. 1,000,000 loss (d) Rs. 960,000 loss
17. On 1 January 2018 Silver Limited purchased 40,000 Rs. 10 listed equity shares at a price of Rs. 30 per share.
An irrevocable election was made to recognize the shares at fair value through other comprehensive
income. Transaction costs were Rs. 30,000. At the year end of 31 December 2018, the shares were trading
at Rs. 60 per share.
What amount in respect of these shares will be shown under 'investments in equity instruments' in the
statement of financial position as at 31 December 2018?
(a) Rs. 2,430,000 (b) Rs. 2,400,000
(c) Rs. 2,370,000 (d) Rs. 3,000,000
18. An entity acquires a 6% Rs. 1,000 Term Finance Certificate (TFC), a financial asset, for Rs. 970 at the
beginning of Year 1. Interest is receivable annually in arrears.
The TFC is redeemable at the end of Year 3 at a premium of 3%. The financial asset is measured at
amortized cost. The effective interest rate of the financial instrument has been calculated at 8.1%.
Calculate the closing statement of financial position figure at the end of Year 2. Work to the nearest Rupee.
(a) Rs. 970 (b) Rs. 989
(c) Rs. 1,009 (d) Rs. 1,000
19. Wasim Limited issued Rs. 10 million 5% debentures on 1 January 2019, incurring issue costs of Rs.400,000.
The debentures are redeemable at a premium, giving them an effective interest rate of 8%.
What expense should be recorded in relation to the debentures for the year ended 31 December 2019?
(a) Rs. 480,000 (b) Rs. 800,000
(c) Rs. 500,000 (d) Rs. 768,000
20. Platinum Limited issues Rs.100 million 5% debentures on 1 January 2014, incurring issue costs of Rs.3
million. These debentures are redeemable at a premium, meaning that the effective rate of interest is 8%
per annum. What is the finance cost to be shown in the statement of profit or loss for the year ended 31
December 2015?
(a) Rs. 7.98 million (b) Rs. 8 million
(c) Rs. 8.24 million (d) Rs. 7.76 million
214
ICAP MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS
01. (c) The business model test must also be passed, which means that the objective is to
hold the instrument to collect the cash flows rather than to sell the asset.
02. (a) The default position for equity investments is fair value through profit or loss,
meaning the investment is revalued each year end, with the gain or loss being taken
to the statement of profit or loss.
03. (c) The investment should be classified as Fair Value through other comprehensive
income.
As such, they will initially be valued inclusive of transaction costs.
Therefore, the initial value is 10,000 × Rs. 35 = Rs. 350,000 + Rs. 5,000 = Rs. 355,000.
At year-end, these will be revalued to fair value of Rs. 45 each, therefore 10,000 x Rs.
45 = Rs. 450,000.
The gain is therefore Rs. 450,000 – Rs. 355,000 = Rs. 95,000.
04. (b) Financial Assets held for trading will be valued at Fair Value through Profit or Loss.
These are therefore valued excluding any transaction costs (which will be expensed
to profit or loss). The initial value of the investment is therefore 15,000 × Rs. 65 = Rs.
975,000
The shares will be revalued to fair value as at year end, and the gain will be taken to
profit or loss. The year-end value of the shares is 15,000 × Rs. 77.5 = Rs. 1,162,500,
giving a gain of Rs. 187,500. This is recognized within profit or loss.
05. (b) Transaction costs are included when measuring all financial assets and liabilities at
amortized costs, and when valuing financial assets valued at fair value through other
comprehensive income.
Financial assets valued at fair value through profit or loss are expensed through the
profit or loss account on initial valuation and not included in the initial value of the
asset.
06. (b) Deducted from the proceeds of the debentures. The effective interest rate is then
applied to the net amount.
07. (d) As a financial asset at amortized cost
215
08. (d)
Rs. '000
Proceeds (20m – 0.5m) 19,500
Interest 10% 1,950
Interest paid (20m × 5%) (1,000)
Balance 31 March 2011 20,450
Interest 10% 2,045
Interest paid (20m × 5%) (1,000)
Balance 31 March 2012 21,495
09. (a) Fair value with changes going through profit or loss. Fair value through OCI would be
correct if an election had been made to recognize changes in value through other
comprehensive income. Amortized cost is used for debt instruments, not equity
instruments.
08. (d)
Rs. '000
1 January 2011 500,000
Interest 8% 40,000
Interest received (550,000 × 6%) (33,000)
31 December 2011 507,000
Interest 8% 40,560
Interest received (33,000)
31 December 2012 514,560
11. (b) Intangible assets. These do not give rise to a present right to receive cash or other
financial assets. The other options are financial instruments
12. (b) & (d) The other options are irrelevant.
13. (d) Transactions costs including professional fees are expensed in case of investments
classified as fair value through profit or loss
216
14. (d) Redeemable preference shares will be shown as a liability, with the payments being
shown as finance costs.
15. (b) The default category for equity investments is fair value through profit or loss so the
investments should be revalued to fair value (not fair value less costs to sell), with
the gain or loss taken to the statement of profit or loss.
16. (a)
Rs. '000
Rs. 12,500 × 1,296 / 1,200 13,500
Carrying amount (12,500)
Gain 1,000
17. (b) 40,000 shares @ Rs. 60 = Rs. 2,400,000
18. (c)
Rs. '000
1 January Y1 970
Interest 8.1% 79
Interest received (1,000 × 6%) (60)
31 December y1 989
Interest 8.1% 80
Interest received (1,000 × 6%) (60)
31 December Y2 1,009
19. (d) The initial liability should be recorded at the net proceeds of Rs. 9.6 million. The
finance cost should then be accounted for using the effective rate of interest of 8%.
Therefore, the finance cost for the year is Rs. 768,000 (Rs. 9.6 million × 8%).
20. (a) Initial recognition Rs. 100 million – Rs. 3 million = Rs. 97 million
217

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Chapter # 03

1.1.1 Revision of some previous concepts

Transaction Buyer/Borrower Seller/Lender

1.2 Definitions [IAS 32: 11]

1.2.1 Financial Assets

Financial assets Non-financial assets

• Cash • Property Plant & Equipment

Equity instrument Debt instrument Loan to employees

• Ordinary equity share • Debenture

1.3 Substance over form [IAS 32: 15]

Illustration # 01: (ICAP Example # 01)

Item Financial instrument or otherwise

1.4 Recognition [IFRS 9: 3.1.1]

Trading Speculation Speculation

2.1.1 Equity Investment (Short-term)

Example # 02: (ICAP Example # 02)

2.1.2 Equity Investment (Long-term)

Incremental costs/ Avoidable cost/ Directly attributable cost/ variable cost:

Incremental cost (Transaction cost) Non-incremental cost (non-transaction cost)

• Fees & commission paid to • Financial costs

Date Description Debit Credit

Example # 05: (ICAP Example # 06)

Date Particulars Debit Rs. Credit Rs.

Example # 06: (ICAP Example # 07)

Example # 07: (ICAP Example # 08)

LO4: DEBT INSTRUMENTS [IFRS 9: 4.1]

4.1.1 Overview of Debt investment

Bank Loan Debentures/Bonds

Face Value = Loan amount Issue price (Buying/Selling price)

Premium Par Discount

Purchase Face Value + Purchase Purchase Face Value –

Exam focus points:

Investment in debt instruments

Amortised cost model FV Model (OCI) FV Model (P/L)

4.2.1 Amortised cost model

Example # 09: (ICAP Example # 11)

Example # 10: (ICAP Example # 09)

Example # 11: (ICAP Example # 10)

4.2.2 Fair Value Model through OCI

Example # 12: (ICAP Example # 12)

Effective Coupon Fair value Fair value Fair value

4.2.3 Fair Value Model through P/L

Fair Value Model through OCI

Date Description Debit Credit

Fair Value Model through P/L

Date Description Debit Credit

In Fair Value model through P/L,

Example # 14: (ICAP Example # 13)

4.3 Conditions to use model

Example # 15: (ICAP Example # 03)

Example # 16: (ICAP Example # 04)

Identify the classification of following financial assets?

4.4 Zero – Coupon rate

We purchased 430 debentures on 1 January 2012. Following further information is available:

Fair Value = 55,900 + 2,000 = 57,900

Example # 18: (ICAP Example # 14)

Date Effective interest @12% Coupon rate @5% Balance

LO5: FINANCIAL LIABILITIES [IFRS 9: 4.2]

Financial liability Non-financial liability