Page 125 - FR Integrated Workbook 2018-19

Financial assets and financial liabilities

Example 2

An entity issues 4% loan notes with a nominal value of $20,000.
The loan notes are issued at a discount of 2.5% and $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%. Interest is payable annually in arrears.

What amount will be recorded as a financial liability when the loan notes
are issued?

What amounts will be shown in the statement of profit or loss and
statement of financial position for year 1?

Solution

This financial liability will initially be measured at the value of net cash
received, after issue costs.

$
Nominal value 20,000
Less 2.5% discount (500)

Less issue costs (534)
––––––

18,966
––––––

The liability will be measured at amortised cost, using a table.

Balance Interest Interest Balance
b/f @ 7 % paid on SFP
Year 1 18,966 1,328 (800) 19,494

The interest of $1,328 at 7% represents the finance cost to be shown in the
statement of profit or loss for year 1, and the year-end balance is the balance
that would be shown on the statement of financial position as a non-current
liability.

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