Bawaleshie Ltd controls the following financial assets at its reporting date of 31 January 2017:
i) An investment in the equity shares of Obojo Ltd was purchased during April 2016 for GH¢2.6 million. The fair value of this investment at 31 January 2017 was GH¢2.8 million. Bawaleshie Ltd decided at the date of purchase to recognize any fair value gains and losses through other comprehensive income. (2 marks)
ii) An investment in a bond issued by Shiashie Ltd on 1 February 2016. This bond cost GH¢10 million (equal to its par value) and entitles Bawaleshie Ltd to 8% interest per annum on the anniversary of the bond’s issue. The principal is to be returned on 31 January 2021. It is the intention of Bawaleshie Ltd to retain the bond in order to collect the contracted cash flows on the due dates. (3 marks)
Required:
Recommend how the above financial assets should be accounted for at 31 January 2017 in accordance with the requirements of IFRS 9 Financial Instruments.
View Solution for (i)
The investment is revalued to fair value at the reporting date. A gain of GH¢200,000 results. This is recognised in other comprehensive income, as the entity made an election to do so at the date of purchase.
31 Jan 2017 Dr Financial assets GH¢200,000
Cr Other comprehensive income / reserves GH¢200,000
(Fair value gain on investment in shares of another entity)
View Solution for (ii)
As the cash flows due to Bawaleshie under the terms of the bond consist solely of interest and principal, the amortised cost method should be applied. Interest earned during the year ended 31 January 2017 is GH¢800,000 (8% of GH¢10m).
As this is not payable until the anniversary of the bond’s issue (1 February 2017), an accrual must be made for this amount. The fair value of the bond at 31 January 2017 is therefore irrelevant.
31 Jan 2017 Dr Interest receivable (current asset) GH¢800,000
Cr Profit or loss GH¢800,000
(Interest accrued to Bawaleshie Ltd on bond investment)