Ind AS 109 "Financial Instruments" On 1st April, 20X1, ABC Ltd. issues a 10- year bond with a par value of 15,00,000 and an annual fixed coupon rate…

CA Final · Financial Reporting · RTP · May 2025
Ind AS 109 "Financial Instruments" On 1st April, 20X1, ABC Ltd. issues a 10- year bond with a par value of 15,00,000 and an annual fixed coupon rate of 8%, which is consistent with market rates for bonds with similar characteristics. ABC Ltd. uses Secured Overnight Financing Rate (SOFR) as its benchmark interest rate. At the date of inception of the bond, SOFR is 5%. At the end of the first year: SOFR has decreased to 4.75%; andThe fair value of bond is 15,38,110. This value is consistent with an interest rate of 7.6%.The remaining cash flows on bond are - 1,20,000 per year for nine years and - 15,00,000 at the end of nineth year. These cash flows discounted at 7.6% equals - 15,38,110. ABC Ltd. assumes a flat yield curve, that all changes in interest rates result from a parallel shift in the yield curve, and that the changes in SOFR are the only relevant changes in market conditions. Following discounting factors may be considered Discount rate @7.75% Present value of 1payable At the end of year 9 51.1 paise Cumulatively for the years 1–9 6.312 At the end of year 10 47.4 paise Cumulatively for the years 1–10 6.786 Required What is the amount transferred to the OCI at the end of Year 1 when bonds were measured at fair value?

Suggested Answer and Working Notes:

The amount of change in fair value of the bond that is not attributable to changes in market conditions giving rise to market risk is estimated as follows: Step (a) The bond's IRR at the start of the period is 8%. Step (b) Because the benchmark interest rate (SOFR) is 5%, the instrument - specific component of the IRR is 3%. Step (c) The contractual cash flows of the instrument at the end of the period are: Interest of 1,20,000 [₹ 15,00,000 x 8%] per year for the next 9 years.Principal repayment of 15,00,000 at the end of 9th year. The present value of these cash flows is calculated using a discount rate of 7.75%. This rate is arrived at as below: 4.75% end of period SOFR, plus3% instrument - specific component calculated as at the start of the period This gives a notional present value of 15,23,940 = [(15,00,000 x 0.511) + (1,20,000 x 6.312)]. Step (d) The fair value of the liability at the end of the period is 15,38,110. Hence, ABC Ltd. should present - 14,170 [₹ 15,38,110 - 15,23,940] in the OCI.

Topics: Ind AS 109, General

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic