Page 359 - FR Integrated Workbook 2018-19
P. 359

Answers










                   Example 3 cont.




                   Solution


                   (i)   The initial financial liability is to be measured at the present value of the
                         cash flows, discounted using the market rate of interest.

                   N.B. Do not use the rate of interest paid to discount the payments.

                                                                              Discount      Present
                   Year      Cashflow                                       factor @ 8%      value

                   20X5      Interest paid: $5,000 × 5% =           $250        0.93           233
                   20X6      Interest                               $250        0.86           215
                   20X7      Interest plus capital                $5,250        0.79         4,147

                                                                                            ——–

                                                                 Liability                   4,595
                                                                                            ——–

                   The equity balance at inception will be $5,000 – $4,595 = $405.

                   (ii)  Extracts from the financial statements year ended 31 December 20X5

                   Statement of profit or loss                   $

                   Finance cost ($4,595 × 8%)                 (368)


                   Statement of financial position               $

                   Equity: conversion options                  405

                   Non-current liability

                   Convertible loan                          4,713
                   ($4,595 + $368 – $250)

                   Liability is measured at amortised cost, so initial value plus effective (market-
                   rate) interest less interest paid.









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