Financial reporting

Written By indy

Q38 - Earthstor:

  • Traynor Co Suffered cash flow problem.

  • 1 Jul 20x5 - interest free loan MYR20m repayable 30 Jun 20x7 (2 years)

  • MYR5 = £1, average rate =5.5, YE rate =6

  • Loans EIR of 6%

  • Henrymin agreed to sell 10% shareholding of TraynerCo to Earthstore for MYR45m 1 Oct 20x5

Loan to Traynor is a financial asset for Earthstor

IFRS 9 financial asset

  • Measured intially at fair value - 20m/(1.06)^2 = 17.8m/5 and translated to £3.56m

  • 20m/5=£4m less £3.56= £0.44m is recognised in trade and other receivables and £3.56m recognised as expenses in P&L

  • Zero interest rate loan issued at par - not result in arms length transaction and IFRS9 requires to be determined as the PV of cash receipts under EIR method.

  • Discount rate should be similar to loans

  • Loan meets the business model test and contractual cash flows test being the initial fv and interest being interest accrued using EIR

  • Subsequently measured at amortised cost

  • Each year the unwinding treated as finance income 30 Jun 20x6 = 17.8m*1.06=18.87mMYR

  • Monetary asset and translated at YE £1=6MYR then - 18.87/6=£3.15m

Finance income recongised at the effective rate - as the interest accrues over time - it is translated at the average exchange rate

  • 17.8m *6%=1.07m translated at average rate = 1.07m/5.5=£0.2m Translated at YE rate 30 Jun 20x5 =1.07m/6=£0.1783

  • Difference = exchange loss on the interest of £0.02m

exchange loss on the loan

  • 17.8m/5 less 17.8m/6 = Difference is £0.59m

Hence the finance income= £200k less exchange loss on interest and loan (610k) Gives the negative (410k)

Current loan is recognised as MYR20m/5=£4m and should be recongised as £3.15m

DR finacnail assets £3.15m YE

CR trade receivables £4m

DR exchange different £610k

CR finance income £200k

DR finance cost £4m-3.56m=£0.44m

Equity investment recognised as financial asset at cost of £9.5m (MYR45m) translated at YE 20x6 at £1=6 (loss of £1.5m in OCI), Min sold another 10% for MYR36m

This is equity investment held for long term - irrevocable election made to recognisee the FV in OCI - including currency exchange gains and losses.

Under IFRS 9 Earthstor chosen to record FV changes in OCI unless there’s impairment. Transaction costs are added to value of investment

FV - is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. FV is market based measurement not entity specific. Looks amount holder of asset could sell it and amount the holider of liability willing to pay to transfer it. Valuation techniques sufficient date, appropriate. Maximise the use of observable inputs and minimise use unobservable inputs.

No observable quoted price for shares - Min sold another 10% stake for less - suggesting the fv has dropped by 30 Jun 20x6

Reasons for fall could be market conditions - the loss is recognised in OCI not P&L, underperforming, earlier price overstated, intentionally/unintentionally

  • Intial recognition: 45/5=£9.5m

  • 36/6 at YE =£6m

  • Gives difference of loss of £3.5m

  • DR equity investment £1.5m

  • CR translation reserve £1.5m

  • CR equity investmnet £3.5m

  • DR OCI £3.5m

indy
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