IFRS 9: Financial Instruments – Chapter 21

Week 2 of 2
Financial Accounting 22B2
Semester 2 – Learning Unit 1
Learning Outcomes
Financial Instruments Learning Outcomes – Week 1
1. Introduction to Financial Instruments: know and understand the relevant definitions for financial
instruments (Identify financial instruments):
a. Financial asset (FA),
b. Financial liabilities (FL) and
c. Equity instruments (EI)
Financial Assets
2. Define and identify financial assets
3. Understand the recognition of financial assets
4. Understand the classification of financial assets
5. Initial measurement and recognition of financial instruments (calculate and journalise)
a. At fair value
b. At amortised cost
c. Transaction costs (capitalized or expensed)
6. Subsequent measurement (calculate and journalise)
a. Investment in shares at FVPL
b. Other financial instruments at amortised costs
c. Accounts receivable/Loan commitments – cost less loss allowance/impairment

3
Financial Instruments Learning Outcomes – Week 2
Financial Liabilities
1. Understand the definition of a financial liability
2. Know and understand how to recognize and classify a financial liability
3. Initial Measurement: Understand how to
a. Initially measure and journalise a financial liability and
b. Account for transaction costs
4. Understand how to complete an amortization schedule
5. Subsequent Measurement: Understand how to recognize, calculate and journalize a financial liability at amortised
cost if the financial liability is:
a. A government bond; or
b. A long term loan

Presentation and Disclosure

6. Understand how to present financial assets (FVPL and AC) and financial liabilities (AC) in the following statements:
a. Statement of financial position
b. Statement of profit or loss

4
IFRS 9 – Out of Scope
- Section 6.3.1.2 to Section 6.3.2 (Classification at
FVPL)
- Section 6.6.3 to Section 6.6.4 (Subsequent
measurement through FVPL)
- Section 6.7 – Derecognition of FL
- Section 7 – Reclassification of FI
- Section 8 – Compound FI
- Section 9 – Settlement in entity’s own equity
instrument
- Section 11 – Derivates
- Section 12 – Offsetting FA and FL
- Section 13 – Deferred tax
- Section 14 – Financial risks
- Section 15 – Disclosure

5
Learning Outcome 1 – Definition of Financial Liability

Chapter 21: Section 6.1

Definitions
Definition Explanation
Financial A Financial Liability is
Liability • A contractual obligation:
✓to deliver cash or another financial asset to another entity; or
✓to exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the entity; or
• a contract that will or may be settled in the entity's own equity instruments and is
✓a non-derivative for which the entity is or may be obliged to deliver a variable number
of the entity's own equity instruments or
✓a derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity's own equity
instruments. (Out of scope for FAC2)
Equity Any contract that evidences a residual interest in the assets of an entity after deducting all of
Instrument its liabilities
• No contractual obligation to pay cash
• Has the unconditional right to avoid paying cash

GG Section 6.1 Page 1027 7

Definition: Financial Liability

Not
Not applicable
applicable for
for FAC22B2
FAC22B2
Examples of financial liability include:
• Trade creditors
• Government bonds issued
• Loans payable
• Interest-bearing debt

Gripping GAAP,
Section 6 Page 1027 Chapter 21, Section 6
8
NB
NB:Anything
Anythingrelated to derivates
related and non-derivates
to derivates is out of scope for
and non-derivates isFAC2B
out of scope for FAC2B
Basic Examples – Difference between Financial Asset and Financial Liability
Scenario/Example
Company A holds 100 000 ordinary
shares in Company B.
Company A borrowed R50 000 from
Company/Bank B. Interest on the amount
borrowed is payable annually and the
capital amount of R50 000 is repayable
after 2 years.
Source of examples: Descriptive Accounting IFRS
Company B’s Financial
Company A’s Financial Statements
Statements
Financial Asset Equity Instrument
The 100 000 ordinary shares will be Company B’s own ordinary share
classified as a financial asset in issue would be an equity
Company A’s statement of financial instrument.
position (SFP).
Financial Liability Financial Asset
The loan amount of R50 000 will be Company/Bank B has a contractual
classified as a financial liability (since right to receive the loan amount of
there is a contractual amount to pay R50 000
cash) in Company A’s statement of
financial position (SFP).
9
Basic Examples – Difference between Financial Asset and Financial Liability

Source of examples: Descriptive Accounting IFRS 10

Example of Financial Liabilities
Financial
Example Liability Reason
(Yes/No)
Trade creditors Yes Contractually obliged to settle the creditor with cash
They are a financial liability because they are redeemable (at the option of
Redeemable preference
the shareholder). This means that the entity has an obligation to redeem the
shares (at the option of the Yes
shares in the future and refund the preference shares with cash (Assumed
shareholder)
Knowledge from FAC2A)
Warranty obligations – cash Because the obligations is in cash, it meets the definition of a financial
Yes
obligation liability
Government Bond Yes Contractually obliged to settle the bond issuer in cash
Long term loan (loan to buy Contractually obliged to settle the creditor (e.g., bank) in cash
Yes
a vehicle or a house)
There is no obligation to pay cash or another financial instrument, therefore,
Warranty obligations –
No it is not a financial liability. Therefore, it is recognized under IAS 37 (to be
Repair to repair a good item
taught in FAC2B, unit 4)

Current tax payable There is no contractual obligation – there is only a statutory obligation to pay
No
the tax to SARS. Therefore, it is recognized as a liability (current liability)
11
Gripping GAAP, Chapter 21, Section 6.1
Learning Outcome 2 - Recognition of Financial Liabilities

Chapter 21: Section 6.2

Recognition of a Financial Liability
• A Financial Liability should be recognised only:
• Firstly, the definition and recognition criteria of a liability have been met, and
• Secondly, the definition of financial liability is met - which is only when, the entity becomes party to the
contractual provisions of the instrument.

DEFINTION and RECOGNITION CRITERIA (RECAP – Conceptual Framework)

Definition of a liability
• A present obligation of the entity
• To transfer an economic resource
• As a result of past events
NB:A present obligation is a duty or responsibility
that an entity has no practical ability to avoid
Recognition criteria
Assets and liabilities, and any resulting income,
expenses or changes in equity, must only be
recognized if the user would fund this information
useful, i.e., we only recognize the elements if it
means we are providing information that is:
- Relevant; and
- A faithful representation

Gripping GAAP, Chapter 21, Section 6.2 13

Learning Outcome 3 - Classification of Financial Liabilities

Chapter 21: Section 6.3

Classification of a Financial Liability
• All financial liabilities are measured at amortised cost (AC)
• Unless it is meeting the criteria to be classified as at FVPL (Out of scope for FAC2B)
• Once a financial liability is classified, it can never be re-classified

Summary of the classification of Financial Liabilities

Not applicable for FAC22B2

Gripping GAAP, Chapter 21, Section 6.3 15

Learning Outcome 4 - Initial Measurement of Financial Liabilities

Chapter 21: Section 6.5

Initial Measurement
• Financial liabilities are always initially measured at fair value
• There may be an adjustment for transaction costs depending on how the financial liability is classified

Classification Initial Measurement

Amortised cost (AC) Fair value less transaction costs
FVPL (out of scope for FAC2B) Fair value

Gripping GAAP, Chapter 21, section 6.5 17

Journal Entries

Description Debit Credit

Bank (SFP:A) XXX
Financial Liability (SFP:L) XXX
Initial recognition of financial liability classified as AC

Description Debit Credit

Transaction Costs (P/L: E) XXX
Bank (SFP:A) XXX
Transaction costs recognized as an expense

Description Debit Credit

Financial Liability (SFP:L) XXX
Transaction Costs (P/L: E) XXX
Transaction costs written off against financial liability classified as AC

18
Initial Measurement - Example
ABC Ltd issued a bond of R100 000 and incurred transaction costs of R1 000 on 1 January 2021.
The transaction costs were paid on the same day. The bond pays a coupon of 10% per annum.
The bond is classified at amortised cost.

Required:
1. How much will the bond be initially measured at?
2. Process the journal entries to recognise the initial measurement of the bond
3. On which amount will the amortisation/subsequent measurement of the bond be based on?

Gripping GAAP, Chapter 21, section 6.5 19

Initial Measurement - Solution
1. Initial recognition: (Fair value at acquisition – transaction cost)
= 100 000 – 1 000 = R99 000
2. Journal entries
Description Debit Credit
Bank (SFP:A) 100 000
Bond (Financial Liability) (SFP:L) 100 000
Initial recognition of bond received
NOTE:
Description​ Debit​ Credit​ The subsequent measurement
Transaction cost (P/L: E) 1 000​ using the effective interest rate
Bank(SFP:A)​ 1 000​ will also be based on R99 000
Transaction cost recognized as an example
Description Debit Credit
Bond (Financial Liability) (SFP:L) 1 000
Transaction cost: (P/L: E) 1 000
Transaction costs written off against bond

Gripping GAAP, Chapter 21, section 6.5 20

Learning Outcome 5 - Subsequent Measurement of Financial Liabilities

Chapter 21: Section 6.6

Subsequent measurement – Amortised Cost
Amortised
Cost

Financial liabilities that are classified at amortised cost are measured at

Amortised amortised cost
Cost (AC)

Subsequent measurement of financial liabilities are measured at amortised cost

Effective using the effective interest rate (EIR).
interest in
P/L Measurement using the effective interest rate method means that interest on the
liability will be recognised in profit or loss over its life.

Gripping GAAP, Chapter 21, section 6.6 22

Subsequent measurement – Amortised Cost
How is amortise cost calculated?
Calculation
Initial Measurement
Subsequent Measurement
Carrying Amount/Closing
Balance
Gripping GAAP, Chapter 21, Section 3.6.2
Journal Entry
Initial FV less Transaction Cost (SFP) Dr Bank (SFP:A)
Plus (+) Cr Financial Liability (SFP:L)
Interest Expense (at the effective interest Dr Interest expense (P/L:E)
rate) Cr Financial Liability (SFP:L)
Less (-)
Repayments (installments/coupon Dr Financial Liability (SFP:L)
payments) Cr Bank (SFP:A)
Less (-)
Loss allowances for expected credit losses Dr Financial Liability (SFP:L)
(Out of scope for FAC2) Cr Loss Allowances (P/L:E)
(Out of scope for FAC2)
Equals (=)
Amortised Cost
23
How to use an Amortization Schedule?
• Information that will be provided to you:
➢ Effective interest rate (calculated on the financial calculator)
➢ Present value (PV)
➢ Future value (FV)
➢ Coupon rate (from which you can calculate the payments per year)
➢ Number of years

Let's learn by example:

Tempo Ltd issued bonds to Ray Ltd for R500 000. Tempo Ltd incurred transaction costs of 1%.
The bond will be redeemed in 3 years at R500 000 and will pay an annual coupon of 10%.
The effective interest rate is calculated to be 10.4050%

24
Thought Process
What information has been provided to us?

Effective interest rate (EIR) 10,4050%

Present value (PV) / Face value R500 000
Future value (FV) R500 000
Coupon rate (to calculate yearly interest) 10%
Number of years 3
Transaction cost 1% = R5000 (500 000 X1%)
Opening balance on 1 January 2020 R500 000 - R5 000 = R495 000

25
 Calculated using a financial calculator by inputting the following
Amortization Schedule values: PV; FV; interest rate, Payments, and number of payments for
the term (NB This will be provided to you)

2020→ R495 000X10,4050% =R496 504

2021 → R496 504X10,4050%=R498 166

Date GCA (opening bal) EIR @ 10.4050% Payments GCA (closing bal)
2020 0
2020 495 000* 51 504 (50 000) 496 504
2021 496 504 51 661 (50 000) 498 166
2022 498 166 51 834 (50 000) 500 000
(500 000) 0
(650 000)

This is the payments that will be paid to

the holder of the bond
Face value X coupon rate
(R500 000 X10% =R50 000)
26
Subsequent Measurement – Amortised Cost (Bonds)
Journals for Government Bonds:
J1 (Date government bond is received) R R
Dr Bank (SFP:A) XXX
Note:
Cr FL: Government Bonds at AC (SFP:L) XXX
Initial measurement of FL measured at AC (i.e., measured at fair value) Government bonds
usually have transaction
J2 (Date the transaction costs are paid) R R costs when they are
Dr Transaction costs (PL:E) XXX issued
Cr Bank (SFP:A) XXX
Transaction costs are
Recognition of transaction costs once-off costs that are
incurred and paid when
J2 (Date the transaction costs are paid) R R the government bond is
Dr FL: Government Bond at AC (SFP:L) XXX issued
Cr Transaction costs (PL:E) XXX
Reversal of transaction costs to Government Bond

Gripping GAAP, Chapter 21, Section 6.6 27

Subsequent Measurement – Amortised Cost (Bonds)
J3 (Reporting date) R R
Dr Interest expense*(P/L:E) XXX
Cr FL: Government Bond at AC (SFP:L) XXX
EIR on FL recognized as an expense in P/L
*EIR X Gross carrying amount (GCA)
J4 (Date of payment on installment) R R
Dr FL: Government Bond at AC (SFP:L) XXX
Cr Bank (SFP:A) XXX
Payment of annual interest based on coupon rate
*Face value X coupon rate
J5 (Date of settlement of the entire government bond) R R
Dr FL: Government Bond at AC (SFP:L) XXX
Cr Bank (SFP:A) XXX
Settlement of entire government bond (carrying amount/amortised cost on date of payment)

Gripping GAAP, Chapter 21, Section 6.6 28

Example – FL measured at Amortised Cost (Bonds)
Tempo Limited issued 10% bonds for R1 500 000 on 1 Jan 20X4. The company incurred and
paid transaction costs of R100 000 on the purchase price.
- The bonds are redeemable on 31 December 20X5 at R1 569 982
- The effective interest rate was calculated to be 16, 32688%
- The bonds are classified at Amortised Cost

Required:
1. What is the initial measurement of the bond on 1 Jan 20X4?
2. Prepare the amortization schedule for the bonds issued by Tempo Limited
3. Prepare all the journals for the year ended 31 December 20X4:

29
Gripping GAAP, Chapter 21, example (amended)
Thought Process
What information has been provided to us?

Effective interest rate (EIR) 16,32688%

Present value (PV) / Face value R1 500 000
Future value (FV) R1 569 982
Coupon rate (to calculate yearly interest) 10%
Number of years 2
Transaction cost 100 000
Opening balance on 1 January 2020 R1 500 000 – R100 000 = R1 400 000

30
Solution: FL measured at Amortised Cost (Bonds)
1. Initial measurement: 1 500 000 – 100 000 = R1 400 000
2. Amortisation Schedule
• The bonds are redeemable on 31 December 20X5 at R1 569 982
• The bonds are classified at Amortised Cost
• The amortization schedule reflects the following:

Date GCA (opening bal) EIR @16,32688% Payments GCA (closing bal)
31 Dec 20X4 1 400 000* 228 576 (150 000)** 1 478 576
31 Dec 20X5 1 478 576 241 405 (150 000) 1 569 982
31 Dec 20X5 (1 569 982) 0

• Government bond less transaction costs: 1 500 000 – 100 000

• Payments: R1 500 000 X10% = R150 000

31
Gripping GAAP, Chapter 21, example (amended)
Solution: FL measured at Amortised Cost (Bonds)
3. Journal Entries
1 Jan 20X4 (Transaction Date) R R
Dr Bank (SFP:A) 1 500 000
Cr FL: Bonds issued at AC (SFP:L) 1 500 000
Issue of bonds at fair value

1 Jan 20X4 (Transaction Date) R R

Dr Transaction cost (P/L: E) 100 000
Cr Bank (SPF:A) 100 000
Transaction costs incurred on the issue oof the bond

R R
FL: Bonds issued at AC (SFP:L) 100 000
Cr Transaction cost (P/L: E) 100 000
Transaction costs capitalised to the bond

32
Gripping GAAP, Chapter 21, example (amended)
Solution: FL measured at Amortised Cost (Bonds)

31 Dec 20X4 (Reporting Date) R R

Dr Interest expense (P/L:E) 228 576
Cr FL: Bond (SFP:L) 228 576
EIR on bond recognized in P/L (NB from amortisation schedule)

31 Dec 20X4 (Reporting Date) R R

Dr FL: Bond at AC (SFP:L) 150 000
Cr Bank (SFP:A) 150 000
Payment of annual interest on bond using the coupon rate
R1 500 000X10% = R150 000

Gripping GAAP, Chapter 21, example (amended) 33

Subsequent measurement – Amortised Cost (Long Term Loan)
Journals for long term loan:

J1 (Date loan is received) R R

Dr Bank (SFP:A) XXX
Cr FL: Loan at AC (SFP:L) XXX
Initial recognition of long-term loan (FL) measured at fair value

J2 (Date the transaction costs are paid) R R

Dr FL: Loan at AC (SFP:L) XXX
Cr Bank (SFP:A) XXX
Recognition of transaction costs - payment and deduction of transaction costs

Gripping GAAP, Chapter 21, Section 6.6 34

Subsequent measurement – Amortised Cost (Long Term Loan)
Journals for long term loan:

J3 (Reporting date) R R
Dr Interest expense*(P/L:E) XXX
Cr FL: Loan at AC (SFP:L) XXX
EIR on FL recognized as an expense in P/L
*EIR X Gross carrying amount (GCA)

J4 (Date of payment) R R
Dr FL: Loan at AC (SFP:L) XXX

Cr Bank (SFP:A) XXX

Installment payment (based on agreed upon installment payable)

Gripping GAAP, Chapter 21, Section 6.6 35

Example – FL measured at AC (Long Term Loan)
Millwall Limited is a company that acquired financing through a loan during the 2020 financial
year. The loan is measured at amortised cost. The following information relates to the loan:
- Date loan was acquired: 1 Jan 2020
- Loan amount: R500 000
- Repayment of R150 000 per annum
- Number of years: 4
- Transaction costs: R0
- Effective interest rate: 7,7138%

Required:
1. Using the information above, prepare the amortization schedule for the loan acquired by
Millwall Limited
2. Prepare the journal entries relating to the loan financing provided for the year ended 31
December 2020.

36
Gripping GAAP, Graded Question 2.10 (amended)
Example – FL measured at AC (Long term loan)

1. Amortization schedule of the loan acquired

GCA (opening bal) EIR @ 7.7138% Payment GCA (closing bal)

Date
[A] [B] [C] [D]
1 Jan 2020 500 000
31 Dec 2020 500 000 38 569 (150 000) 388 569
31 Dec 2021 388 569 29 974 (150 000) 268 543
31 Dec 2022 268 543 20 715 (150 000) 139 258
31 Dec 2023 139 258 10 742 (150 000) 0
Calculations:

1. No transaction cost, therefore, opening balance on 1 Jan 2020 is R500 000.

2. EIR is calculated by multiplying the opening balance each year by 7,7138% (the EIR for this
question) i.e. [B] = [A] * 7.7138%
3. Payments remain the same at R150 000 per annum
4. Closing Balance: [D] = [A] + [B] - [C]

37
Gripping GAAP, Graded Question 2.10 (amended)
Solution: FL measured at Amortised Cost (Long term loan)

2. Journal Entries
1 Jan 2020 (Transaction Date) R R
Dr Bank (SFP:A) 500 000
Cr FL: Loan at AC (SFP:L) 500 000
Acquisition of long-term loan (financial liability) classified at amortised cost
31 Dec 2020 (Reporting Date) R R
Dr Interest expense (P/L:E) 38 569
Cr FL: Loan at AC (SFP:L) 38 569
EIR on long term loan recognized in P/L (NB from amortisation schedule)
31 Dec 2020 (Reporting Date) R R
Dr FL: Loan at AC (SFP:L) 150 000
Cr Bank (SFP:A) 150 000
Repayment of annual loan amount of R150 000

38
Learning Outcome 5 - Presentation of Financial Assets and Financial Liabilities
Learning Objective 4 – Presentation & Disclosure
What’s the difference between presentation and disclosure?

Annual Financial Statements

Presentation Disclosure

Statement of Statement of Statement of Cash Flow

Comprehensive Financial Changes In Statement Notes
Income Position Equity (3rd year)

Disclosure
Presentation
This is the information that is shown in
This is the information that is shown or reflected in the face of the the Notes to financial statements
statements in the financials as listed above
The information shown expands on
or gives additional information on
The information shown is a summary of all transactions and
the transactions and balances shown
balances
on the face of the financial statements

40
Learning Objective 4 – Presentation & Disclosure
What’s the difference between presentation and disclosure?

Presentation Disclosure

41
Presentation of Information in Financial Statements
Users of financial statements need information relating to financial instruments
in order to interpret the entity’s exposure to:
✓ Markets
✓ Interest rates and
✓ Other entities correctly

Users of the financial statements use this information to:

✓ Evaluate the significance of financial assets and liabilities on the financial position
✓ The performance of the entity

Financial Accounting , IFRS Principles 5e, 5th edition (Chapter 12, section 7) 42
Financial Statements related to Financial Assets
Statement of Financial Position (SFP) – Financial Assets

Financial Asset Non-Current Asset Current Asset

1. Investments in shares
• Type/Classification: FVPL a
2. Government bonds acquired/bought
• Type/Classification: Amortised cost a
• Period of bond: with a total term of 2 years or less (The entire carrying
amount is is due in the
next 12 months at the
end of year one)
3. Accounts receivable
a
4. Loan receivable
• Period of bond: no annual re-payments and not
receivable within the next 12 months a

44
Statement of Financial Position
Entity name
Statement of financial position for the year ended 31 December 20X2
Note 20X2 20X1
R R
ASSETS
Non-current assets
Property, plant, and equipment X X
Loans granted to other entities 2&4 X X
Current assets
Inventories X X

Trade and other receivables 3 X X

Investment in financial assets (e.g. preference shares / ordinary 1
shares)
Cash and cash equivalents X X
TOTAL ASSETS XX XX

45
Statement of Profit or Loss (P/L) - Financial Assets
Amounts relating to financial assets recognised in profit or loss should be disclosed separately.

Financial Asset Classification

1. Investments in shares • Transaction Costs (expense)
• Type/Classification: FVPL • Fair value Gains and losses
• Dividend Income
2. Government bonds acquired/bought • Interest Income
• Type/Classification: Amortised cost
• Period of bond: with a total term of 2 years or less at
the reporting date
3. Accounts receivable • Allowance for expected losses and bad
debts or Impairment Loss

4. Loan receivable • Interest Income

• Period of bond: no annual re-payments and not
receivable within the next 12 months

Financial Accounting , IFRS Principles 5e, 5th edition (Chapter 12, section 7.3.1) 46
Statement of Profit or Loss
Entity name
Statement of Profit or Loss for the year ended 31 December 20X2
Notes 20X2 20X1

R R
Revenue 1 XX XX
Cost of sales (XX) (XX)
Gross Profit XX XX

Other income
Fair value gain XX XX
Interest / Dividend income XX XX

Operating Expenses
Transaction costs (X) (X)
Fair value loss (X) (X)
Allowance for Expected Losses (X) (X)
Profit or loss for the year XX XXX

47
Financial Statements related to Financial Liabilities
Statement of Financial Position (SFP) –Financial Liabilities
Financial Liability
1. Trade Creditors
2. Government Bond issued
• Type/Classification: Amortised costs
• Period of bond: Due in 2 years’ time or
less at the reporting date
3. Long-term loan
• Type/Classification: Amortised Cost
• Period of bond: Due in more than 2 years’
time at the reporting date
Non-Current Liability Current Liability
a
a
(The entire carrying amount is
is due in the next 12 months
at the end of year one)
a a
(The CB of the loan in the (CB in the current year
following year i.e. Only the MINUS the Non-current
portion that is NOT due in the portion)
next 12 months)

49
Statement of Financial Position
Entity name
Statement of financial position as at 31 December 20X2
Note 20X2 20X1
R R
Liabilities
Non-current Liabilities
Long term loans X X
Current Liabilities
Current portion of long term loans 2 X X

Trade and other payables X X

TOTAL LIABILITIES XX XX

50
Statement of Profit or Loss (P/L) – Financial Liabilities
• Amounts relating to financial liabilities recognised in profit or loss should be disclosed separately.

Financial Liability Classification

1. Trade Creditors • Not applicable
2. Government Bond issued • Interest expense or Finance cost
• Type/Classification: Amortised costs
• Period of bond: Due in 2 years’ time or less at the reporting
date
3. Long-term loan/ • Interest expense or Finance cost
• Type/Classification: Amortised Cost
• Period of bond: Due in more than 2 years’ time at
the reporting date

Financial Accounting , IFRS Principles 5e, 5th edition (Chapter 12, section 7.3.1) 51
Statement of Profit or Loss
Entity name
Statement of Profit or Loss for the year ended 31 December 20X2
Notes 20X2 20X1

R R
Revenue 1 XX XX
Cost of sales (XX) (XX)
Gross Profit XX XX

Other income
Fair value gain XX XX
Interest income XX XX
Dividend income XX XX

Operating Expenses
Transaction costs (X) (X)
Fair value losses (X) (X)
Allowance for Expected Losses / Impairment Loss (X) (X)
Interest expense / Finance Cost (X) (X)
Profit or loss for the year XX XXX

52
1. Example: Presentation of a Financial Asset classified as FVPL
Example: Financial Assets – Fair Value through P/L (FVPL) (LO 6)
On 1 November Green Limited purchased 25 000 shares in Blue Limited for R1 each for cash.
Transaction costs amounted to R2 500 which were paid on the same day.
As at 31 December 2020, the fair value of the shares was R2.20 each.
As at 31 December 2021, the fair value of the shares was R3.00 each.
Green Limited purchased the shares with the intention to sell them in the short term (i.e. they are held for
trading) and are classified at fair value through profit or loss.

Required: Prepare the statement of financial position and statement of profit and loss for the financial year
ended 31 December 2021. Comparative figures are required.

Week 1 – Example on slide 33 54

Solution: SFP and P/L
Green Limited
Extract of the Statement of Financial Position as at 31 December 2021
Note 2021 2020
Assets
Non-Current Assets
Shares in Blue Limited 75 000 55 000
2020: 25 000 shares x R2.20
2021: 25 000 shares x R3.00

Green Limited
Extract of the Statement of Profit or Loss for the period ended 31 December 2021
2021 2020
Transaction costs (2 500)
Fair value gain /(loss) 20 000 30 000
2020: (2.20 - 1) * 25 000
2021: (3 – 2.20) * 25 000
55
2. Example: Presentation of a Financial Asset classified at Amortised Cost
Example– FA measured at AC
Eternity Limited purchased government bonds for R200 000 on 1 Jan 2020. The company incurred transaction
costs of 1% on the purchase price.
- The bonds mature on 31 December 2021 at R231 484 and pay an annual coupon of 10% per annum on 31
December each year.
- Eternity Limited classifies them at Amortised Cost
- The amortization schedule reflects the following:

Date GCA (opening bal) EIR @16,6386% Payments GCA (closing bal)
2020 0
202 000 33 610 (20 000) 215 610
2021 215 610 35 874 (20 000) 231 484
Required:
Prepare the statement of Financial Position and the statement of Profit/Loss for the year ended 31 December
2021.

57
Gripping GAAP, Chapter 21, Example 6
Solution: SFP and P/L
Extract of the Statement of Financial Position as at 31 December 2021
Note 2021 2020
Assets
Non-Current Assets
FA: Government Bonds 0 0
Current Assets
Government bonds (EIR) 0 215 610
Extract of the Statement of Profit or Loss for the period ended 31 December 2021
2021 2020
Revenue XXX XXX

Other income
Interest Income 35 874 33 610
NB:
• 2020 No non-current amount because the bond is redeemed at year 2 (2021), therefore, becomes a current asset
• 2021: the bond is redeemed, therefore, no non-current asset
• Transactions Costs: There is no transaction costs expensed because they are capitalised to the financial asset

58
3. Example: Presentation of Trade Receivables
Example – Trade receivables with expected credit losses
On 1 Dec 20X5, Happy Limited entered a contract with a customer for R500 000 and correctly accounted for it in terms of
IFRS 15 by processing the following journal:

1 Dec 20X5 R R
Dr Trade receivable 500 000
Cr Revenue 500 000

There is no significant financing component in the contract. Based on the credit risk assessment of the customer, Happy
estimated the following:
1 Dec 20X5 31 Dec 20X5

The probability of default over the lifetime 24 000 28 000

The debtor pays Happy in full on 15 Feb 20X6.

Required:
Prepare the statement of financial position and statement of profit/loss for the financial year ended 31 Dec 20X5

Gripping GAAP, Chapter 21, Example 15 60

Solution: SFP and P/L
Happy Limited
Extract of the Statement of Financial Position as at 31 December 2021
Note 20X5 20X4
Assets
Non-Current Assets

Current Assets
Trade and other receivables 472 000 0
Trade receivables 500 000 0
Allowance for expected losses (28 000) 0

Happy Limited
Extract of the Statement of Profit or Loss for the period ended 31 December 2021
20X5 20X4

Allowance for expected losses (28 000) 0

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4. Example: Presentation of Financial Liability measured at Amortised Cost
Example – Financial Liability measured at Amortised Cost (Bonds)
Tempo Limited issued 10% bonds for R1 500 000 on 1 Jan 20X4. The company incurred transaction costs of R100 000 on the
purchase price.
- The bonds are redeemable on 31 December 20X5 at R1 569 982
- The bonds are classified at AC
- The amortization schedule reflects the following:
Date GCA (opening bal) EIR @16,32688% Payments GCA (closing bal)
20X4 1 400 000 228 576 (150 000) 1 478 576
20X5 1 478 576 241 405 (150 000) 1 569 982

Required: Prepare the statement of financial position and statement of profit/ loss for the year ended 31 Dec 20X5

63
Gripping GAAP, Chapter 21, Example 21
Solution – Financial Liability measured at Amortised Cost (Bonds)
Tempo Limited
Extract of the Statement of Financial Position as at 31 Dec 2020
Note 20X5 20X4
Non-current liabilities
FL: government bond issued 0 0

Current Liabilities
FL: Current portion of government bond 0 1 478 576
Tempo Limited
Extract of the Statement of Profit or Loss for the period ended 31 December 20X5
20X5 20X4

Finance costs (241 405) (228 576)

NB:
• 2020: No non-current amount because the bond is redeemed at year 2 (2021), therefore, becomes a current liability
• 2021: the bond is redeemed, therefore, no non-current liability
• Transactions Costs: Th transaction costs are deducted from the government bond

64
Example – Financial Liability measured at Amortised Cost (Long Term Loan)
Millwall Limited is a company that acquired financing through a loan during the 2020 financial year. The loan is measured at
amortised cost. The following information relates to the loan:
- 4-year Loan acquired: R500 000 on 1 Jan 2020
- Repayment of R150 000
- Transaction costs: R0
- Effective interest rate:
Amortisation schedule:

Date GCA (opening bal) EIR @ 7.7138% Payment GCA (closing bal)
1 Jan 2020 500 000
31 Dec 2020 500 000 38 569 (150 000) 388 569
31 Dec 2021 388 569 29 974 (150 000) 268 543
31 Dec 2022 268 543 20 715 (150 000) 139 258
31 Dec 2023 139 258 10 742 (150 000) 0

Required: Prepare the financial statements relating to the loan financing provided to all clients for the years ended 31 December
2021 of Millwall Limited.
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GG Graded Question – Q2.10 (Amended)
Workings for split

Workings Current Portion Non-Current Portion Total Closing Balance

2020 120 026 268 543 388 569

Option 1: 388 569 - 268 543
Option 2: 150 000 - 29 974
2021 129 285
Option 1: 268 543 – 139 258
Option 2: 150 000 - 20 715
Closing balance for the
following year
139 258 268 543
Closing balance for
the following year

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Solution – Financial Liability measured at Amortised Cost (Long Term Loan)

Millwall Limited
Extract of the Statement of Financial Position as at 31 Dec 2020
Note 2021 2020
Non-current liabilities
FL: long term loan 139 258 268 543

Current Liabilities
FL: Current portion of long-term loan 129 285 120 026

Millwall Limited
Extract of the Statement of Profit or Loss for the period ended 31 December 2020
2021 2020

Finance costs (29 974) (38 569)

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Summary
Summary
Financial Asset Financial Liability

Fair Value through

Classification Amortised Cost Trade receivables Amortised Cost
Profit and Loss

Fair value less

Initial measurement FV + trans costs FV only Transaction price
transaction costs

Fair value FV adj in

Amortised cost ( Amortised cost
Subsequent P/L Dividend/ Cost – allowance for
EIR method) All (using the EIR
measurement interest income in expected losses
adj’s in P/L method)
P/L

Trans cost are

Notes
expensed in P/L

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Abbreviations used under this section
Word Abbreviation
FA Financial Asset
FV Fair value
P/L or PL Profit or loss
AC Amortised cost
EIR Effective interest rate
GCA Gross Carrying Amount

Section 3 70
How Will This Unit Be Tested?

✓ Discussion questions
✓ Calculations
✓ Journal entries

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