Discounting in calculations for IFRS purposes. Discounting accounts receivable from customers and accounts payable from suppliers Discounting according to IFRS

Successful accounting in many organizations depends to a certain extent on the qualifications of the chief accountant and other accounting employees.

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An important aspect is the ability to apply Russian and international accounting standards. One of the international methods of maintaining accounting policies is the IFRS method.

IFRS classification

In Russia there is not yet a single standard regulating the procedure for accounting for accounts receivable. To some extent, it makes sense to use foreign standards, one of which is IFRS.

Properly organized interaction with counterparties is the basis for any company engaged in the supply of goods or provision of services. It is no secret that the basis of successful work is in personnel.

Some entities already have IFRS specialists whose task is to account for the fair value approach for the purpose of reliably measuring debts due from third parties.

The organization is obliged to take into account debt as of the end of the reporting period. The international standard classifies the debts of counterparties depending on their expected repayment periods:

Accounting for accounts receivable according to IFRS

The valuation of receivables is carried out on the basis of the IFRS 39 standard. Upon initial recognition, a receivable, like any other economic asset, should be analyzed at fair value. However, in Russian accounting, short-term receivables are taken into account at the price of the business operation for which the debt arose.

IFRS provides for an inventory of debt. Inventory according to IFRS is a procedure for detecting overdue receivables in order to work with doubtful obligations, as well as measures to confirm balance sheet data as of a certain date.

For the purposes of IFRS, it would be advisable to adopt the experience of accounting for receivables in Russia, such as a documentary reflection of inventory. But it is better to leave the documentation of business transactions in accordance with Russian standards.

Accounting for receivables according to IFRS includes two stages of assessment:

• original;
• subsequent.

Both trade and sales obligations and other types of obligations are subject to assessment. Initially, the debt is reflected at its actual cost, that is, in the amount in which it is expected to be received (including VAT).

When the effect of the time value of money is strong enough, the organization needs to record long-term receivables taking into account depreciation.

Long-term receivables may arise from the sale of assets with deferred payment.

In this case, the profit from the sale of an asset is defined as the actual amount of funds that could have been received from the counterparty on the day of sale (that is, the current price if money is paid immediately for the good or service).

During the initial valuation process, debt discounting is carried out. Subsequent valuations are monthly recalculations of the value of receivables, the results of which reflect the amortization of the discount as part of financial income.

Discounting

When making an initial valuation, you need to take into account a concept called a discount, which is the difference between the actual price (what it would be if cash was immediately received for the asset) and the price of future expected cash flows.

The discount is treated as interest income and is amortized to the statement of income over the period until the funds are received.

In the same case, if the price for a product or service (asset) is unknown for some reason, the market interest rate is used to discount the receivable.

The rate is determined based on:

• the interest rate that applies to bank loans with similar provision parameters - term, currency, amount, which are issued to the debtor organization during the period of availability of receivables;
• or the weighted average interest rate according to the statistical information of the Central Bank of Russia, which was in effect on the date of recognition of the receivable, for loans that were issued to commercial organizations with similar terms and conditions.

Important! Long-term input VAT is not a financial instrument! No discounting procedure is carried out in relation to it.

Let's look at the process of discounting receivables using an example.

Organization 1, engaged in the sale of automobile equipment, sold 2 units of transport to institutions 2 and 3 on January 10, 2019.

According to the terms of the agreement, company 2 had to make payment for the supply immediately, and company 3 - after a year. The cost of equipment for companies 2 and 3 is the same - 300,000 rubles.

Solution. We estimate the discount rate. Company 3 actually received a commercial loan.

Financial and economic instruments of organization 1 are not valued on stock exchanges, so it is not possible to reliably determine the effective interest rate.

Let's estimate the rate using the difference between the actual sale price of the car and the price under the deferred payment agreement. But since the price for both buyers is the same, assume that the sale to firm 3 was made at a reduced price.

In this case, interest rates on bank loans with similar conditions are used (ruble loan, repayment period - 1 year, without collateral). Let’s say the rate on such loans is approximately 10%.

Then the reliable value of the proceeds from the sale of equipment to the 3rd company will be 272,700 rubles (300 thousand were discounted at a rate of 10%).

Accounting for transactions:

The difference - 27,300 rubles - is interest on the use of the loan, reflected in the following posting:

Impairment of accounts receivable

In order to partially compensate for written-off receivables, the company creates a special reserve fund. The reserve funds are used to repay part of the receivables that were recognized as bad.

For the purpose of creating a reserve fund, the organization ranks the debt depending on its duration:

• up to 3 months;
• from 3 to 6 months;
• from 6 to 12 months;
• more than 12 months

Typically, the following probability ratios are established that the debt will not be repaid:

The loss a company incurs as a result of debt impairment is calculated by using an estimated percentage of the risk of non-repayment to the carrying amount of the receivable.

Thus, a receivable with a maturity of 3 months or less does not incur any losses.

Write-off

If the debt is recognized as unrecoverable on the grounds provided for (expiration of the statute of limitations, liquidation of the debtor, etc.), it is written off in full from the previously created reserve fund for doubtful obligations.

Discounting is the most important mechanism for reliably representing the financial position of an organization. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements under IFRS. In Russian accounting, similar requirements are not imposed, while in Western systems, discounting is an integral part of accounting.

In RAS, a mention of discounting is contained in PBU 19/02 in relation to debt securities and loans provided, while discounting is the right of the organization, and is carried out only for disclosure in the explanatory note, and making entries in accounting is prohibited (clause 23 of PBU 19/02 ). Similar to discounting is the procedure for accounting for the difference between the initial cost and the nominal value of debt securities for which the current market value is not determined: PBU 19/02 allows such a difference to be evenly attributed to financial results.

In IFRS, discounting can affect the carrying amount of any accounting element and thereby change a company's financial performance.

The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has different values ​​for the following two reasons:

1) risk of non-receipt;

2) the possibility of alternative investments.

For example, if a company purchased assets at the normal price, but was able to negotiate a significant deferment in payment, then it actually acquired the assets at a lower price than usual. And if the company sold an asset with a significant deferred payment, then receivables in IFRS will be reflected not at their nominal value, but at the current, discounted value, and the difference will affect financial results. By taking into account the impact of the time value of money on financial performance, the comparability of financial statements is enhanced and provides greater opportunities for investment and management analysis.

Any, even the most complex, discounting operations come down to the discounting formula:

PV = FV/ (1+i) n

FV – current value,

PV – future value,

i – discount rate,

n – term (number of periods).

Basic rules of discounting according to IFRS

Determining the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. Discount rates tend to vary from company to company, for different transactions, at different points in time, and for different purposes.

Determining the rate is the most important thing in discounting, since it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million payable in 3 years:

• at a rate of 20% it will be $578,704,
• at a rate of 3% it will be $915,141,
• at a rate of 30% – $455,166.

Depending on the specific accounting objects, IFRS provides various options for choosing a discount rate (see Table 1). At the same time, the following basic discounting rules in IFRS can be identified, which are applicable to all situations:

1. Discounting is usually not carried out if the effect of the time value of money is not significant;
2. The interest portion generated by discounting is usually accrued not evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the compound interest method. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts expected future cash payments or receipts until maturity of the financial instrument, or when this is appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability.
3. Financial instruments are purchased throughout the entire financial year, and the period for which the discount rate is determined (in the formula - “n”) should not be a year, but the shortest possible period (usually a month is enough). Otherwise, it will be much more difficult to calculate interest at each reporting date.
4. To determine the discount rate (except in special cases), market rates are usually used, including those adjusted for similar conditions, for example, for conditions for raising borrowed funds, similar in terms of currency, term, type of interest rate and other factors attracted by an organization with a similar rating creditworthiness;
5. The discount rate used for accounting generally depends on the creditworthiness of the debtor. If receivables are discounted, the discount rate usually corresponds to the interest rate at which the counterparty could obtain borrowed funds on similar terms. If accounts payable are discounted, the discount rate usually corresponds to the interest rate at which the organization could obtain borrowed funds on similar terms.
6. Discount rates are applied before income tax, that is, cash flows before taxes are taken into account when estimating the rate.
7. Estimates of discount rates do not take into account risks for which estimates of future cash flows have been adjusted. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of rising prices.

In countries with a developed stock market, the weighted average cost of capital, WACC (weighted average cost of capital), which is calculated based on the cost of the company's equity capital and borrowed funds, can be used to calculate the discount rate. In Russia, it can be reasonably used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.

For financial instruments of other companies, a discount rate is usually calculated based on an estimate of the cumulative risk premium. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent to the financial instrument for the main risk factors.

There is no consensus among valuation and investment analysis experts on what constitutes a risk-free interest rate in Russia, or whether there is one. As already indicated, the discount rate will be different for solving different problems; moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA 540, Audit of Accounting Estimates, IFRS auditors will be required to ensure that the company has chosen the correct discount rate. At the same time, audit evidence obtained from sources independent of the audited entity is considered, according to ISA 500, to be more reliable. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).

Cases where discounting is assumed in IFRS are presented in Table 1.

Table 1 – Cases in which discounting is provided for under IFRS

IAS 2 Inventories paragraph 18,
IAS 16 “Property, Plant and Equipment” paragraph 23,
IAS 38 Intangible Assets paragraph 32

If the acquisition of an asset allows for deferred payment beyond normal terms, the asset is accounted for at the present value of future payments.

The most reliable estimate of the asset when using:
1. The rate at which the buyer can raise borrowed funds on similar terms;
2. Rates, the use of which allows you to obtain the current value of the asset when it is paid for in cash using the discount formula specified in clause 3 of the table

A portion of interest costs directly attributable to the acquisition of a qualifying asset may be included in the cost of that asset if the entity chooses the alternative option of accounting for borrowing costs under IAS 23 Borrowing Costs.

IAS 39 Financial Instruments: Recognition and Measurement paragraph 43

Financial assets and liabilities are generally measured at fair value upon initial recognition. When calculating fair value in this case, discounting is often used

Current market interest rate for similar financial instruments

Discounting the future cash flows of a financial instrument is only one type of measurement of its fair value (for more information, see IAS 39, Application Guidance, AG64-82).
Accounting for the impact of the time value of money on additional costs associated with the acquisition of an asset or liability is determined in a manner similar to that set out in paragraph 1 above

IAS 39

After initial recognition, a portion of financial assets and liabilities continue to be measured at fair value and a portion is measured at amortized cost using the effective interest method.

For those measured at fair value – upon initial recognition.
For those valued at amortized cost, the discount formula (PV = FV/(1+i) n) is applied to estimate the interest rate (i) at which the value of the asset or liability increases as the maturity date approaches. In this case, the formula is modified as follows:
i = (FV/PV) 1/n – 1, where
FV – future payments on a financial instrument;
n – number of periods until the corresponding future payment;
PV is the current book value of the financial instrument.

For the purpose of identifying impairment losses on financial assets measured at amortized cost, discounting future payments at a market interest rate is also used.

IAS 16 paragraph 31,
IAS 36 Impairment of Assets paragraph 18,
IAS 38 paragraph 75,
IAS 40 Investment Property paragraph 33
IAS 41 “Agriculture” paragraphs 21, 22,
IFRS 3 Business Combinations paragraph 26,
IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations paragraph 15
and etc.

In addition to the valuation of financial instruments, IFRS provides for a number of cases when the fair value of assets and liabilities must be determined

Current market interest rates, adjusted for the risks inherent in such assets and liabilities.

In situations where there is no active market, discounting future cash flows can be used to estimate fair value, along with other methods that can provide a more reliable estimate: applying multiples to indicators such as revenue, profit, market share, etc.

IAS 18 Revenue paragraph 11

When a counterparty is allowed to defer payment for a significant period of time, revenue is recognized at the discounted amount of future receipts

The most reliable estimate of income is calculated from:
1. The rate at which the counterparty (buyer) can raise borrowed funds on similar terms;
2. Rates, the application of which allows you to obtain the current value of the assets (services) being sold when they are paid for in cash (the rate is determined by the formula specified in clause 3 of the table).

Revenue is always measured at the fair value of the consideration received or expected.
As in all other cases, the difference between the current fair value of the future payment and its nominal amount is recognized as interest income using the effective interest method (that is, by multiplying the growing receivables by the same rate each reporting period, to the date of its repayment, the debt in accounting was equal to the nominal debt).

IAS 37 paragraph 45

Recognized reserves are generally accounted for at present value.

Current market interest rate adjusted for the risks inherent in such obligations

Provisions include liabilities of uncertain timing or amount. Discounting is applied both to reserves that increase the expenses of the reporting period, and to reserves that increase the value of assets. An example of the latter are obligations to decommission a facility, restore natural resources on the occupied site

IAS 36

An impairment loss is recognized when the carrying amount
the value of the asset (or cash-generating unit),
exceeds its recoverable amount

The current market interest rate, adjusted for the risks specific to such assets (cash-generating units).

An asset's recoverable amount is the higher of its fair value less costs to sell or its value in use, which is calculated based on the present value of future cash flows. IAS 36 provides clarifications on the discounting procedure, see paragraph 56 and Appendix A to the standard.

IAS 17

At the time of concluding the lease agreement, the cost of the minimum lease payments is discounted

The rate at which the tenant can raise borrowed funds on similar terms

If, at the inception of the lease, the present value of the minimum lease payments, that is, the amounts that the lessee would be required to pay, plus the additional amounts specified in IAS 17.4, constitute a significant proportion of the total fair value of the leased asset, this is an indication that the lease is likely to be , is financial.

IAS 17 paragraph 20

At the beginning of the lease, the lessee estimates the discounted value of the minimum lease payments

The interest rate included in the lease agreement. If this cannot be determined, the rate of interest on the lessee's borrowings shall apply, i.e. the rate of interest that the lessee would have to pay on a similar lease or, if this cannot be determined, the rate at the commencement of the lease that the lessee would have to pay on borrowings, received for the same period and with the same security, in the amount necessary to purchase the asset)

At the inception of the lease, the lessee is required to recognize finance leases as assets and liabilities on the balance sheet in amounts equal to the fair value of the leased property or, if those amounts are lower, the present value of the minimum lease payments (plus initial costs).
The interest rate implicit in the lease is the discount rate that, when applied at the beginning of the lease term, ensures that the total present value of the minimum lease payments and non-guaranteed residual value equals the sum of the fair value of the leased asset and the lessor's initial direct costs.

IAS 17 paragraph 36

At the beginning of the lease term, the lessor estimates the discounted value of the gross investment in the lease

Interest rate implied in the lease agreement (see paragraph above)

The gross investment in a lease is the sum of the minimum lease payments received by the lessor under a finance lease and any non-guaranteed residual value due to the lessor, that is, that portion of the residual value of the leased asset that is not guaranteed to be received by the lessor or is guaranteed only by a party related to the lessor.

IFRS	Application of discounting	Discount rate	Exceptions and clarifications
1. Determination of the initial cost of acquired assets
2. Determination of the historical cost of financial assets and liabilities
3. Subsequent measurement of financial assets and liabilities
4. Other cases of determining fair value
5. Income accounting
6. Accounting for reserves
7. Impairment loss
8. Rental accounting
Lease type qualification
Initial valuation of the finance lease and the liability on the lessee's balance sheet
Initial measurement of finance lease receivables on the lessor's balance sheet

There are other rarer cases where IFRS requires discounting. For example, valuation and accounting for composite (combined) financial instruments (IAS 32), accounting for costs of selling non-current assets held for sale (IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations (Non-Current Assets Held for Sale and Discontinued Operations, accounting for pension plans (IAS 19 Employee Benefits).

There are also situations where the use of discounting is not permitted by the standards, for example in relation to deferred taxes. In the IASB's view, preparing a detailed timing schedule for the reversal of each temporary difference is in many cases impractical or extremely difficult, so deferred tax assets and liabilities are not discounted. This rule is contained in IAS 12 Income taxes, paragraph 53.

Example of calculating discounted cash flows of a company

On January 1, 2005, the company acquired a fixed asset with a useful life of 10 years for $1 million with a deferred payment for 3 years, with a discount rate of 20%. Fixed assets are depreciated on a straight-line basis.

In order to understand the impact of discounting on a company's accounting and reporting, the example shows the accounting entries for a fixed asset during the period of installment payment for it and shows the reflection of these assets and liabilities in the company's balance sheet.

Transactions according to RAS and IFRS for 2005-2007 are presented in table. 2 (for simplicity – without VAT):

Table 2 – Transactions according to RAS and IFRS for 2005 – 2006

Dt Primary means

Kt Accounts payable

PV =1,000,000 / (1+0.20) 3 = 578,704

Dr Cost

Kt Depreciation

578,704 /10 years = 57,870

Kt Accounts payable

578 704 * 0,2 = 115 741

Dr Cost

Kt Depreciation

Dr Interest expense (impact of discounting)

Kt Accounts payable

(578 704 + 115 741) * 0,2 = 138 889

Dr Cost

Kt Depreciation

Dr Interest expense (impact of discounting)

Kt Accounts payable

(578 704 + 115 741 + 138 889) * 0,2 = 166 666

Dt Accounts payable

Kt Cash

	accounting entry	Amount according to RAS, dollars	Amount according to IFRS, dollars	Calculation (for IFRS), dollars	Balance sheet indicators according to IFRS (cumulatively, except for DS)
					The main thing	retained earnings	Accounts payable
Acquisition of fixed assets:
Depreciation calculation:
Impact of discounting:
Depreciation calculation:
Impact of discounting:
Depreciation calculation:
Impact of discounting:
Payment to OS supplier:

Thus, initially the fixed asset and accounts payable on it are reflected not at their nominal value ($1,000,000), but taking into account the time value of money: in fact, the item was cheaper for the company ($578,704). Subsequently, each item is depreciated based on its maturity: fixed assets over 10 years (until the end of their useful life) using the straight-line method, and accounts payable over 3 years (until the maturity date) using the effective interest rate method.

Essentially, the company uses supplier credit, and the effect of discounting accounts payable is reflected in interest payable on the income statement each period. Accrued interest ($115,741 + $138,889 + $166,666) is added to the accounts payable each period, and at the end of the deferment it will be equal to the face value ($1,000,000).

After 10 years, the amount of depreciation according to RAS will be $1 million. The amount of expenses according to IFRS will consist of:

• depreciation – $578,704;
• interest expenses – 115,741 + 138,889 + 166,666 = $421,296
• total $1,000,000

Thus, the example shows that discounting does not change the final financial result, but always changes its distribution over periods, and also changes the qualification of expenses. Given that the company is a going concern, discounting in many companies changes the financial position and financial results of operations for each reporting period.

Loans and borrowings received are initially recognized at fair value. Their subsequent accounting is carried out at amortized cost using the effective interest method.

Companies that raise borrowed funds may encounter some difficulties when reflecting them in accounting and reporting. Let's consider the basic principles of disclosing information about loans and borrowings received both for general purposes and for specific projects.

Initial recognition of loans and borrowings received

According to IFRS, loans and borrowings received are financial liabilities. Their reflection in accounting and reporting is regulated by IAS 32 and 39, as well as IFRS 7 and 9. Initial recognition of received loans and borrowings is carried out at fair value, which, as a rule, corresponds to the amount specified in the agreement (see .example below). In addition, the value is adjusted to take into account direct transaction costs that would not have been incurred if the transaction had not been completed.

Example 1

The company received a loan from a bank on market terms for a period of 3 years. Loan amount - 100 million rubles. The loan agreement provides for a bank commission in the amount of 5 million rubles. As a result, not 100, but 95 million rubles were actually received. It is this amount that should be recognized as the fair value of the loan on the date the transaction is recorded.

The company may also incur costs for raising borrowed funds (see Table 1) until they are actually received, but with a high probability that the loan will be taken. In this case, these costs should be taken into account as an advance payment and, when borrowed funds are received, written off as a reduction in the borrowing amount.

Table 1. Examples of direct costs of raising financing and methods of accounting for them

There are other situations where the fair value of a financial liability will differ from the contractual value. For example, when borrowed funds are raised on non-market conditions:

• received an interest-free loan;
• interest on the loan differs significantly from market rates under other similar conditions.

According to the principles of IAS 39, the interest rate should be consistent with the lender's credit rating and rates for similar debt instruments. Similarity criteria: period and duration of the loan, transaction currency, cash flow pattern, presence of collateral (collateral, guarantee) and others. The principles of IFRS are derived from the theory of the value of money. This theory states that an amount received or paid in the future is worth less than the same amount received or paid in the current period (due to inflation, risks, and the possibility of alternative income). Consequently, the current value of the obligation must be reflected taking into account the fact that the movement of economic benefits embodied in the corresponding obligation is deferred in time. For these purposes, a discounting procedure is carried out, that is, reducing the value of future cash flows to their current equivalent (see example below). Note that discounting is not applied in the case of short-term financial instruments, since the effect will be insignificant.

Example 2

The company received a loan from its parent company on January 1, 2012 in the amount of RUB 700,000. for a period of 3 years. The annual interest amount is 5% per annum of the principal amount. It is paid annually using the simple interest method. The average market interest rate on loans and borrowings attracted on similar terms is 13.5% per annum.

To determine the fair value of the loan, it is necessary to discount all future loan payments at the market interest rate (see Table 2).

where PV is present value;

FV - future value;

r - market interest rate;

n - number of periods (days, months, years).

Table 2. Discounting future payments at the market interest rate

date	Payments under the agreement, rub.	Market rate, %		Discounted cash flow, rub.
31.12.2014
31.12.2014
31.12.2014
Total:

The fair value of the loan is RUB 560,696.

There is a difference between the fair value and the contract amount, so a profit is recognized on initial recognition. The following entries were made in the accounting:

DEBIT "Cash" account

– 700,000 rub.

CREDIT account “Loan received”

– 560,696 rub.

CREDIT to the “Income” account

– 139,304 rub. (700,000 – 560,696)

Subsequent accounting of loans and borrowings received

Subsequent accounting for loans and borrowings received is carried out at amortized cost using the effective interest rate method. The amortized cost is the sum of:

• from the amount of the financial liability upon initial recognition;
• payments of the principal amount of the debt;
• accumulated, using the effective interest method, to amortize the difference between the original cost and the maturity amount.

The effective interest method is the recognition of interest expense over the borrowing period in order to ensure a constant interest rate in each period. In essence, this method is similar to compound interest. The effective interest rate is the rate that discounts future cash payments over the expected life of the loan to the fair value of the loan. As a rule, the interest rate on a bank loan specified in the agreement corresponds to the effective interest rate. In the case of non-market terms of the transaction, the financial professional must use professional judgment to determine its value and justify his calculation.

Example 3

At the beginning of 2012, the company received an interest-free loan in the amount of 15 million rubles. She is obliged to repay it within 5 years in equal installments. The market interest rate is 13.5%.

The initial cost of the loan is determined by discounting in the same way as the previous example (see table 3).

Table 3. Calculation of the initial cost of the loan by discounting

Payments under the agreement, thousand rubles.	Market rate, %		Discounted cash flow, thousand rubles.
Total:

Interest is calculated taking into account the repayment and amortization of the difference between the original cost and the amount to be repaid (see table 4).

Table 4. Interest calculation

	Book value of the loan at the beginning of the period, thousand rubles.	Loan interest, thousand rubles.	Payments of the principal debt, thousand rubles.	Book value of the loan at the end of the period, thousand rubles.
		(3) = (2) × 13.5%		(5) = (2) + (3) + (4)

The income statement for 2012 indicates the amount of interest expense - 1,407 thousand rubles.

Capitalization of costs for loans and borrowings

In international practice (IFRS (IAS) 23), as well as in RAS, the costs of loans and borrowings associated with the acquisition, construction or production of assets are capitalized. The main difference from Russian standards is that, according to IFRS, borrowing costs include interest calculated using the effective interest method, interest payments under finance lease agreements and exchange rate differences on interest.

IFRS requirements for a qualifying asset:

• the asset is not stated at fair value;
• Preparing an asset for use requires significant time.

The capitalization start date occurs when:

• the company incurs expenses associated with the qualifying asset;
• the company incurs borrowing costs (interest expense is charged);
• actions necessary to prepare the asset for its intended use are taken.

Capitalization of borrowing costs continues until the date when the asset is ready for use.

Capitalized borrowing costs are calculated based on the average cost of financing (see example below). The exception is when funds are received directly for the acquisition or creation of a qualifying asset. For such borrowings, all actual costs are capitalized, which are reflected less any investment income from the temporary investment of borrowed funds. We also note that the qualifying asset includes advances issued for construction in progress, that is, interest can also be capitalized as part of the advances.

Example 4

On July 1, 2012, the company entered into an agreement for the construction of a production line for the amount of 22 million rubles. The facility was built within a year. During this time, the construction organization received the following:

• 07/01/2012 - 2 million rubles;
• 09/30/2012 - 6 million rubles;
• 03/31/2013 - 10 million rubles;
• 06/30/2013 - 4 million rubles.

The company attracted a loan in the amount of 7 million rubles. at a rate of 10% per annum directly to finance construction, as well as two loans for general purposes in the amount of 10 and 15 million rubles. at a rate of 12.5% ​​and 10% per annum, respectively.

The weighted average amount of general purpose loans is (see Table 5):

Table 5. Calculation of the weighted average amount of general purpose loans

date	Expenses, thousand roubles.	Amount attributable for targeted loans, thousand roubles.	Amount attributable for general loans destination, thousand rubles	Weighted average amount general purpose loans, thousand rubles.
01.07.2012
30.09.2012				1000×9/12
31.03.2013				10,000 × 3/12
30.06.2013				2000×0/12
Total:

The capitalization rate is:

12.5% ​​× (10,000: (10,000 + 15,000)) thousand rubles. + 10% × (15,000: (10,000 + 15,000)) thousand rubles. = 11%

The amount of capitalized interest on the general purpose loan was:

3250 thousand rubles. × 11% = 357.5 thousand rubles.

Amount of capitalized interest on the target loan:

7000 thousand rubles. × 11% = 770 thousand rubles.

Total capitalized costs:

357.5 + 770 = 1057.5 thousand rubles.

Derecognition

A financial liability (or part thereof) is derecognised:

• when it is repaid (that is, the obligation specified in the contract is fulfilled or cancelled);
• it has expired.

Gain or loss on disposal of financial liabilities is determined as the difference between the carrying amount of the liability and the amount of consideration paid. The result is reflected in the income statement as financial income or expense.

Derecognition also occurs when the terms of the transaction are significantly revised. In this case, the previous financial liability is written off at its carrying amount and a new one is recognized at fair value, taking into account the changed rate. The difference forms profit or loss.

Presentation in reporting

To properly report financial liabilities, many disclosures must be made. First, in the statement of financial position itself, it is necessary to divide the borrowings received into short-term and long-term, and also include the current portion of long-term loans in current liabilities (IFRS (IAS) 1).

Example

Let's use the condition of example 3. When preparing reports as of December 31, 2013, the short-term part of the loan will be 3,000 thousand rubles, and the long-term part will be 4,024 thousand rubles. (7024 – 3000).

Secondly, according to IFRS requirements, financial liabilities also include promissory notes and bonds issued, obligations under sales and repurchase agreements and obligations under finance leases. Therefore, the cost of these instruments is included in the amount of loans and borrowings along with bank overdrafts and term loans and borrowings. The corresponding note to the financial statements discloses information for each type separately.

Thirdly, information is provided not only on the carrying value of loans and borrowings received, but also on their fair value, if it differs from the carrying amount. Next, indicate information about the collateral and guarantees issued, pledged fixed assets, inventories and investment property.

If necessary, disclose information about compliance or non-compliance with the terms of loan agreements, namely:

• data on defaults during the reporting period;
• the amount of debt on loans that have defaulted;
• whether the default was eliminated or the terms of the outstanding loans were renegotiated.

Financial Risk Management

A significant portion of the reporting disclosures must be made regarding financial risk management, as required by IFRS 7. Financial risk arising from borrowings includes foreign exchange risk, interest rate risk, credit risk and liquidity risk. Let's look at each disclosure.

Currency risk disclosures

Loans and borrowings should be presented by currency, among other financial assets and liabilities. In practice, these disclosures are made in tabular form (see Table 6).

Table 6. Sample disclosure on currency risk

In addition, the amounts of possible changes in the value of liabilities expressed in foreign currency are calculated when exchange rates change (strengthening/weakening of the reporting currency by 10%).

Interest rate risk disclosures

A general analysis of interest rate risk on loans and borrowings is presented in tabular form, broken down by the dates of revision of interest rates in accordance with agreements or repayment periods, depending on which of the specified dates is earlier (see Table 7).

Table 7. Sample disclosure on interest rate risk

Additionally, the possible impact of changes in interest rates on profits and other components of capital should be disclosed.

Liquidity Risk Disclosures

This section requires the presentation of undiscounted financial liabilities by maturity, including future payments of principal and interest.

Let's look at an example of financial risk disclosure (see example below).

Example

The company tries to maintain a stable funding base, consisting primarily of borrowed funds and accounts payable for its core activities. Therefore, it monitors its liquidity position and regularly assesses the possible effect of adverse market conditions. Table 8 below shows the distribution of liabilities as of December 31, 2013 by contractual terms remaining until maturity. The maturity amounts disclosed in Table 8 represent contractual undiscounted cash flows.

In thousands of Russian rubles	On demand and within a period of less than 1 month.	From 1 to 3 months.	From 3 to 12 months.	From 12 months up to 5 years	Over 5 years	Total
Liabilities*
Bank overdrafts (Note XX)
Term loans (Note XX)
Accounts payable
Total future payments, including future payments of principal and interest						1 121 503

*Amounts in the statement of financial position may differ from the amounts in the notes because they may be calculated using the time value of money to be stated at fair value.

All tabular data must provide comparable information, that is, for the current and previous reporting date (or for the current and previous reporting period). In addition to cost indicators, the company must disclose its financial risk management policy (monitoring interest rates, monitoring cash flow forecasts, hedging and other procedures), as well as disclose its assessment of the materiality of the risk (see example below).

Example

Fragment of financial risk management policy disclosure in reporting:

“Currency risk is assessed monthly using sensitivity analysis and is maintained within parameters approved in accordance with Company policy.

The Company performs interest rate exposure analysis, including modeling various scenarios to estimate the impact of interest rate changes on annual pre-tax earnings.

The company has a developed liquidity risk management system to manage short-, medium- and long-term financing.

The Company controls liquidity risk by maintaining sufficient reserves, bank lines of credit and reserve borrowings. Management continuously monitors projected and actual cash flows and reviews the repayment schedules of financial assets and liabilities, and implements annual detailed budgeting procedures.”

Events after the end of the reporting period

Under IAS 10, material events that occur after the reporting date but before the financial statements are issued must be disclosed. Regarding credits and loans, the following comments may be required.

Business combination

If there were business combinations (both before and after the reporting date), the fair value of the acquired loans and borrowings must be reported.

Refinancing

The following events, if any, must be disclosed:

• refinancing loans on a long-term basis;
• elimination of violation of the terms of a long-term loan agreement;
• obtaining from the lender a deferment to eliminate a violation of the terms of a long-term loan agreement for a period of at least 12 months after the reporting date.

As it may seem at first glance, the differences in accounting for received loans and borrowings under IFRS from RAS are insignificant. However, practice shows that there are significant discrepancies. Therefore, it is advisable to maintain separate registers for accounting for loans and borrowings in accordance with IFRS. Excel spreadsheets are quite suitable for this. An important point is the high-quality collection and entry into registers of all necessary information, which allows generating not only data for calculating balance sheet indicators and expense elements, but also all necessary disclosures.

Journal "Corporate Financial Reporting"

When preparing financial statements according to IFRS standards, specialists often have to use discounting. The essence of discounting is to reduce the value of future cash flows to the current value at the moment.

Effective interest rate for discounting

The discounted value is determined by the formula:

FVn = PV (1 + r)^n,

where FVn - future value in n years (Future Value);

PV – modern, reduced or current value (Present Value);

r – annual interest rate (effective rate);

n – discount period.

From here current value:

PV = FV / (1 + r)^n.

The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to calculating the effective interest rate for discounting. Experts use various methods to calculate it.

Cumulative method

This method is an adjustment (increase) of the risk-free rate for risks inherent in the country, market, company, etc. For this method, the company needs to establish the influence of individual factors on the value of the risk premium, that is, develop a scale of risk premiums.

d = R + I + r + m + n,

where d is the effective interest rate;

I – country risk;

r – industry risk;

m – risk of unreliability of project participants;

n is the risk of not receiving the income provided for by the project.

The risk-free rate is the rate of return that can be earned on a financial instrument whose credit risk is zero. 30-year US government bonds are considered the most reliable investment instrument in the world. If you compare a similar instrument in the same currency, for the same period, on the same terms in Russia, the rates will differ by country risk. If we take bonds with similar conditions, denominated in rubles, and compare them with previous securities, we will get the impact currency risk.

Organizational weighted average cost of capital (WACC) model

The weighted average cost of capital is calculated as the sum of the return on equity and debt capital, weighted by their specific share in the capital structure.

Calculated using the following formula:

WACC = Ks × Ws + Kd × Wd × (1 – T),

where Ks is the cost of equity;

Ws – share of equity capital (%) (balance sheet);

Kd – cost of borrowed capital;

Wd – share of borrowed capital (%) (balance sheet);

T – profit tax rate (%).

Capital Asset Pricing Model (CAPM)

In an efficient capital market, future stock returns are assumed to be affected only by market (systemic) risks. In other words, the future performance of a stock will be determined by the overall market sentiment.

Rs = R + b × (Rm – R) + x + y + f,

where Rs is the real discount rate;

R – risk-free rate of return (%);

Rm – average market return (%);

b – beta coefficient, measuring the level of risks, making adjustments and corrections;

x – premium for risks associated with insufficient solvency (%);

y – premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions (%);

f – country risk premium (%).

You can also contact us for information on rates. open sources of information. In particular, you can use the Bulletin of Banking Statistics of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal entities and individuals, by currencies and by terms of loan obligations.

Discounting in IFRS

The use of discounting is required by a number of international financial reporting standards.

• According to IAS 18 “Revenue”, discounting must be applied if payment for goods occurs significantly later than their delivery, that is, in essence, this is a trade credit. It will be necessary to exclude finance costs from revenue at recognition and recognize them over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
• IAS 17 Leases states that leased assets are accounted for at the lower of the present value of the minimum lease payments or the fair value of the property received.
• IAS 36 Impairment of Assets requires an impairment test to be performed when there is an indication of impairment. The recoverable amount of the asset is determined, which is calculated as the greater of the asset's fair value and value in use. An asset's value in use is calculated as the present value of the future cash flows associated with that asset, most often discounted at the weighted average cost of capital rate.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that where long-term provisions are made, the amount of the liability must be discounted.

Example 1

A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the law, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). The estimated cost of these works will be 3,000 thousand rubles. The effective rate is 9%.

According to IAS 16, the cost of liquidation work must be included in the cost of the fixed asset. In this case, the estimated liability must be reduced to its current value:

3,000,000 / (1 + 0.09)^20 = 535,293 rub.

Thus, the initial cost of the fixed asset will be formed 20,535,293 rubles. Each reporting period, the provision will increase by the amount of finance costs recognized using the effective rate.

• According to IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, if payment for an asset is made on a deferred basis, finance costs are required to be excluded from the cost of the asset upon recognition and recognized expenses during the installment period.

Example 2

Inventories were purchased under a contract in the amount of RUB 15,000. with deferred payment for 12 months. The market interest rate is 8%. When reflected in accounting, inventories and liabilities are recognized in the amount of discounted future flow: 15,000 / (1 + 0.08)^1 = 13,888 rubles.

Amount 1112 rub. – a deferment fee, which will be recognized as finance costs during the year and will reduce the value of inventories.

• IAS 39 Financial Instruments: Recognition and Measurement also requires the use of discounting. Accounting and valuation of financial instruments in accordance with this standard is carried out until December 31, 2017. From January 1, 2018, the new standard IFRS 9 “Financial Instruments” will be in force, the early application of which is permitted.

New IFRS 9 Financial Instruments

The introduction of the new standard IFRS 9 Financial Instruments has made some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.

Financial instruments are initially recognized at fair value at the transaction date less/plus transaction costs, regardless of the model used to subsequently account for the financial instrument.

A financial asset is recognized at an amount that corresponds to the actual amount of cash or other consideration paid, payable, or rights of claim accrued plus directly attributable costs to the transaction.

Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received less costs directly attributable to the transaction.

The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferral of payments. In such a case, it is necessary to discount future flows using a market rate to eliminate the delay fee.

A significant difference between the IFRS 9 standard and the IAS 39 standard is that at the time of recognition the company must not only reflect the fair value, but also assess the expected possible risks and create a provision for the initial recognition of financial assets in accounting:

• assets at amortized cost;
• assets carried at fair value through other comprehensive income;
• rent receivables;
• a number of other financial instruments.

Initially, the company must estimate and recognize expected credit losses for a period of 12 months based on the likelihood of adverse events occurring.

For trade receivables and lease receivables, expected credit risks are assessed and recognized over the entire holding period of the instrument.

At each reporting date, it is necessary to assess how expected credit risks are changing, and if they increase significantly, it is necessary to create a reserve for the entire amount of expected losses during the holding period.

A significant increase in risk occurs, for example, in the event of a late payment or unfavorable events with the borrower.

The borrower's condition may improve and he will begin making payments in accordance with the agreement. Then, having assessed the risk reduction, you can return to assessing future risks for 12 months.

Since there is no actual impairment in the above cases, financial income should continue to be accrued based on the carrying amount of the asset and the effective interest rate.

If there are indicators of impairment at the reporting date (such as being more than 90 days past due), it is necessary to estimate the amount that is realistically collectible under the contract and discount it at the original effective interest rate. The difference between the carrying amount and the new discounted flow amount is credit losses, you need to create a reserve for them. If there are clear signs of impairment, interest income is accrued only on the amount that can be collected from the client, so the effective rate should be multiplied by the difference between the carrying amount and the provision.

Discounting is used in IFRS to account for the time value of money. And this is not a whim of the developers of international financial reporting standards. The use of discounting follows from the declared purpose of financial reporting - provide financial information to investors. And investing is the ability to transform money + time into added value. International standards prescribe a) in what situations discounting should be used, b) how to approach the determination of the discount rate, and c) how to approach the determination of the amounts of cash flows that need to be discounted. Read below about:

• In what situations do IFRS standards require the use of discounting?

Discounting in IFRS

1.revenue valuation principles (IFRSIAS 18) provide for the use of discounting when the impact is significant. Deferred payment for goods/services must be discounted, and in such cases, in IFRS accounting, revenue will be reflected at the discounted value of the deferred payment. The difference is finance income, which is recognized over the entire period between revenue recognition and payment for delivery. An example is the sale of goods or fixed assets in installments with payment over a long period (several months, several years). Regular sales involving payment within 1-2 months are not discounted, since the impact of discounting in such cases is insignificant.

2. when determining the accounting value of the estimated liability(IFRS IAS 37) exactly the same rule applies. If future payments are significantly delayed in time, discounting must be applied. A typical example is the assessment of the reserve for reclamation and restoration of a land plot. As a rule, restoration costs will be incurred many (tens) years from now, and the likely cash outflow in connection with land reclamation work must be discounted to the present moment. The provision is stated at present value. The discounted value will naturally be less than the future cost. The difference between them will be written off throughout the period as a financial expense. (Dt Financial expenses Kt Estimated liability)

Both the above cases deal with unit amount discounting. Discounting multiple cash flows is used to estimate the value of assets in different IFRS standards.

3. One of the methods fair value estimates IFRS 13 is an income approach. The economic meaning of this method lies in the idea that an asset is worth as much as it can generate income. These potential returns must be adjusted for the time value of money and the risks associated with the asset. This method involves discounting cash flows (expected cash inflows from an asset) to their current value at the valuation date. Discount amounts should reflect current market expectations about future cash flows.

4. The recoverable amount of assets is calculated when performing an impairment test. IAS 36 Impairment of Assets defines the recoverable amount of long-lived assets as the higher of value in use and fair value less costs to sell. According to IFRS 36 when calculating value in use of long-lived assets future cash flows expected from the asset (fixed assets and intangible assets) must be discounted to the current moment.

5. when testing for impairment of a financial asset accounted for at amortized cost, recoverable amount of a financial asset is the discounted value of the expected future cash flows from that asset (IFRS IAS 39).

6. IFRS IAS 17 “Leases” requires the recognition of asset and liability on the lessee's balance sheet the lesser of the asset's fair value or the present value of the minimum lease payments.

7. IAS 19 Employee Benefits uses discounting to calculate pension plan obligations.

Thus, discounting in IFRS is applied either when the amount of money to be received or paid is deferred in time, or to estimate the value of assets/liabilities by discounting the future cash flows expected from the assets/liabilities.

Discounting on the Dipifr exam

The difficulty of using discounting in practice is associated with determining the discount rate suitable for each specific case and with determining the amount of cash flows that need to be discounted. If the rate and cash flows are known, then discounting itself does not present any difficulty. The tasks of the Dipifr exam specifically test the ability to apply calculation skills with known rates and cash flows.

In general, discounting problems can be divided into two large groups:

1. unit amount discounting
2. discounting multiple cash flows

The first group includes the following tasks:

• calculating the amount of revenue when payment is deferred in time IFRS IAS 18 “Revenue” (an example of the problem is given)
• calculation of the amount of the reserve (estimated liability) for reclamation (oil well) (June 2012) or the reserve (estimated liability) for dismantling improvements to leased property (December 2010, June 2011) IFRS IAS 37
• calculation of the cost of an investment in a subsidiary when there is deferred payment for the subsidiary's shares. This condition was in December 2013 (previously in March 2008, in March 2010, in June 2012)

The second group includes tasks:

• calculation of the debt component of convertible bonds
• calculation of the recoverable amount of a financial asset accounted for at amortized cost when testing it for impairment

How the examiner Dipifr formulates the conditions for discounting problems

I will give here one example each of the problem of discounting a unit amount and discounting a cash flow. In general, there is nothing difficult in such tasks. Here I will not describe in detail the technique for calculating present value (discounted) value, but will focus on the complications of discounting problems that our examiner uses.

The previous articles will help you understand what discounting is.

• Read how to apply discounting and calculate the present value of a unit amount.
• How to discount several identical cash flows (annuities) is written in a separate article.

What do you need to remember in the Dipifr exam?

1) if a discount factor is given in the problem statement (it usually begins with the phrase “present value”), it means that something needs to be discounted to solve the problem.

2) the discount factor for a single amount is most often given in cents. For example,

The present value of $1 paid ten years from now is 32.2 cents

All calculations in the Dipifr exam are made in dollars, so the discount factor expressed in cents will need to be converted into dollars: 32.2 cents = 0.322 dollars

3) if it is necessary to discount a sequence of annual identical cash flows, then the discount factor will always be greater than $1:

present value of $1 receivable at the end of every year over a five-year period $3.99

4) if you need to discount several cash flows, and the discount factors are given only for a single amount (in cents), there is no need to panic, you need to multiply the cash flow amount by each of the factors.

5) it happens that the examiner does not provide the discount factor in the problem statement. He probably does this so as not to give a hint, because the discount factor directly indicates that it will need to be used to solve the problem. An example is the December 2013 consolidation issue, where it was necessary to calculate the present value of deferred payment for shares of a subsidiary.

Alpha will make a further cash payment of $50 million to former Beta shareholders on June 30, 2015. As of July 1, 2012 (the date of acquisition of Beta), Alpha's credit rating was at a level that allowed borrowing at an annual interest rate of 10%

There is no discount factor, but a rate is given. It is not difficult to calculate the present value of the deferred payment in this case:

50,000/ (1,1)(1,1)(1,1) = 37,566

6) for financial asset impairment problems and convertible bond problems, Paul Robins can (and usually does) give discount factors for two different interest rates. If you choose the wrong bet, you will make a mistake. The rules are:

1. For impairment of a financial asset— we calculate the reimbursable amount at the original rate
2. For convertible bonds— discount at a rate whose description contains the word “non-convertible”

To avoid mistakes when using discounting, I recommend using. On the time line near each date you will need to write the cash flow corresponding to this date, and below sign the corresponding discount factor (factor). Then all that remains is to multiply the sums and coefficients among themselves.

The most important thing is that the task is never limited to calculating the given amount. The examiner always checks to see if you know what will happen in future periods.

A) For a single amount you will need to make the following entries:

1) when calculating the estimated liability (reserve for reclamation)
Dr Financial expense OPU Kt Estimated liability

2) when calculating the amount of revenue in case of deferred payment
Dr Deferred income Kt Financial income

B) If you discounted several cash flows - calculated the debt component of convertible bonds or the fair value of a financial asset - you will need to build.

Example of a unit amount discounting problem

Dipifr, June 2013, No. 3,b(iv)

On September 30, 2012, Kappa delivered to the buyer equipment manufactured in accordance with the requirements of that buyer. The production of the equipment cost Kappa $600 thousand, and the agreed sale price was $1,007,557. Kappa agreed to receive payment on September 30, 2015. Kappa's expected annual return on investment in the form of loans is 8%. The present value of $1 paid at the end of a 3-year term at an annual discount rate of 8% is approximately 79.4 cents. (4 points)

It was necessary to show how this operation should be reflected in accounting as of March 31, 2013, according to IFRS.

This is an equipment sale operation: delivery on September 30, 2012, payment on September 30, 2015. In fact, this is a sale on credit: the buyer receives a deferred payment for 3 years. Obviously, discounting must be used here. There is also a direct hint in the condition: the last sentence gives the rate and discount factor: “the present value of $1 paid at the end of a 3-year term at an annual discount rate of 8% is approximately 79.4 cents.” This means that 1 dollar in 3 years is equal in value to 79.4 cents today. To use this coefficient in calculations, you need to express it in dollars: 79.4 cents is $0.794.

If you solve such a problem using a time scale, it will be difficult to make a mistake.

Solution

1) This is a sales transaction with deferred payment. The future value is 1,007,557.

2) According to IFRS 18, revenue must be reflected at fair value; if the impact is significant, discounting is applied.

3) Discounted (present) value as of September 30, 2012 (delivery date) - 1,007,557 * 0,7940 = 800,000.

4) According to IFRS 18, the difference between 1,007,557 and 800,000 is 207,557. This is the financial income that Kappa will recognize over a three-year period.

A comment. It would be a mistake to recognize financial income evenly. Kappa acquires a financial asset that will accrue interest at a rate of 8%. There is one more hint in the problem:

“Kappa’s expected annual return on investment in the form of loans is 8%.”

Deferred payment is precisely a loan to the buyer.

As of the reporting date of March 31, 2013, it will be necessary to reflect Kappa’s financial income, for which a calculation inverse to discounting (compounding, accrual) will be applied. The rate is 8%, which means you need to multiply 800,000 x 1.08 = 864,000. 64,000 is the interest accrued for the year. Six months passed before the reporting date from September 30, 2012 to March 31, 2013, so the amount of interest must be multiplied by 6/12. Although mathematically not entirely correct, the Dipifra exam uses this simplified method of calculating interest as a fraction of an annual period.

Thus, the extract from the OSD for this task will be:

OSD for the year ended 03/31/13
Revenue – 800,000
Cost – 600,000
Finance income 32,000 (64,000/2)

Examiner Dipifr usually states the discount factor in problems, but sometimes he does not. Probably so that this is not a hint. If there is no coefficient in the problem, this does not mean that there is no need to discount! The problem will necessarily give an interest rate. Simply take the amount of deferred payment and divide by (1+%) as many times as the number of time periods will pass before the payment date. For example, in this problem it was possible not to use the discount factor, but to use the formula:

1,007,557 /[(1,08)(1,08)(1,08)] = 799,831.

Although the sum of 799,831 is different from 800,000, it is still the correct answer, the difference being due to rounding. The main thing is to show the marker how you calculated it - write a numerical formula, and then you will collect all the points for the answer.

Discounting multiple cash flows

In the Dipifr exam, multiple cash flows have to be discounted only in two cases:

• 1) calculation of the debt component of convertible bonds
• 2) calculation of the recoverable amount of a financial asset

The remaining cases for which the use of discounting is prescribed in IFRS were not encountered in the Dipifra exam (at least yet).

June 2011, No. 1

Convertible bonds

On April 1, 2010, Alpha issued 300 million bonds with a par value of $1 each. The bonds pay interest at the rate of 5 cents each at the end of each year. The bonds are due to be redeemed at par on March 31, 2015. The terms of the issue, in addition to redemption, provide for investors the opportunity to exchange bonds for Alpha shares. As of April 1, 2010, investors' expected return on Alpha's non-convertible bonds was 8% per annum. Relevant information on discount rates is presented below:

On April 1, 2010, Alpha management recorded a liability for this borrowing in the amount of $300 million. Finance costs associated with these notes of $15 million ($300 million x 5 cents) were recorded for the year ended 31 March 2011.

Exercise. How should this transaction be reflected in the financial statements of Delta Company as of March 31, 2011?

I discussed in detail how to decide in one of the previous articles. I won’t repeat myself, I’ll just give the answer to this problem.

Solution

1) Convertible bonds are a combined financial instrument that consists of a debt and equity component.

2) Debt component – ​​calculated as the present value of potential future payments.

annual payment – ​​300,000 pieces * $0.05 = 15,000
repayment at par (principal amount) – 300,000

Debt component: (15,000 * $3.99) + (300,000 * $0.681) = 264,150.

3) Equity component – ​​the difference between the proceeds received from the bond issue and the debt component

The debt component is - 264,150
Equity component (balancing figure) - 35,850
Total borrowed funds received - 300,000

(300,000 - 264,150 = 35,850)

4) The debt component is recorded as a long-term financial liability. Financial expenses for the year are equal to 264.150 * 8% = 21.132

Opening balance	Interest rate	Annual payment	Opening balance
	(b)=(a)*8%		(d)=(a)+(b)+(c)

Extracts from Alpha's reporting:

General physical training onMarch 31, 2011
Long-term financial liability – 270.282
Capital – equity component – ​​35,850
OSD for the year ended 03/31/11:
Financial expenses – 21,132