Page 443 - SBR Integrated Workbook STUDENT S18-J19

Answers

Example 11

Debt factoring

Mutton has transferred its rights to receive cash flows. However, it has
guaranteed that it will compensate the bank for uncollected amounts. As such,
it has retained credit risk associated with the asset.

Additionally, Mutton has retained late payment risk as it will receive less
money the longer the debts remain unpaid.

It would seem that Mutton has not transferred substantially the risks
associated with the receivable and so the receivable should not have been
derecognised.

The receivables of $5 million should be re-instated in the financial statements.
Mutton should recognise a liability of $4 million for the cash proceeds received
and remove the charge of $1 million from profit or loss.
Dr Receivables $5m

Cr Liability $4m
Cr Profit or loss $1m

Example 12

Investment in convertible bond

The bond is a non-derivative host contract and the option to convert to shares
is a derivative element.

The host contract – the bond – is in the scope of IFRS 9 Financial Instruments
and so the whole contract must be classified in accordance with that standard.

The contractual cash flows characteristics test is failed because the interest
receipts are below market rate and so do not provide adequate compensation
for risk and the time value of money. As such, the bond will be measured at
fair value through profit or loss.

437