Question

Cherub purchased a financial asset on 1 October 2019, which it measured at fair value through other comprehensive income, in accordance with its business model. The asset had a nominal value of $12 million, a coupon rate of 3% payable in arrears and was purchased on market for $10 million. The effective rate of interest is 6% and the fair value of the asset at the reporting date of 30 September 2020 was $9 million. At the reporting date, the financial asset’s credit risk was low, with twelve-month expected credit losses of $0.3 million and lifetime expected credit losses of $0.8 million.

Required:

Discuss how this financial asset is recognised and measured in the year ended 30 September 2020, with calculations.         

Answer 1

In preface , best in practice accounting principle of "prudent and conservatism" describes that, accounts to prepared with caution and high degrees of verification, hense, the following points should be keep in maint while recognising and measuring a financial asset of a company;

a) All probable losses relating to financial assets are recorded when they are discovered, while
b) Gains from financial assets can only be registered when they are fully realized.
c) Valued at fair/market value or nominal value or booked/purchased value which ever is less.

So , in this case ,the said financial asset can be recognised and measured for write down on balance sheet of Cherub for the year ended 30 September 2020 are as follows;

Norminal value of finacial asset as on 1 october 2019    : $12 million
Booked/purchased value of finacial asset as on 1 october 2019
including unpaid coupon rate of 3% (10+3%) : $10.3 million
Fair value of financial asset at reporting date of 30 Sept.2020
excluding unrealized interest of 6%    : $9 million

Taking lowest ever value from normal,booked,and fair value ie. : $9 million (fairvalue at reporting date)

then apply risk factors that will happen during reporting period
for a resonable time period not account lifetime risk factor or
unforseable risk factors : $9 million(minus)twelve-month    expected credit loss of $ 0.3 million
(9-0.3= 8.7)ie. $8.7 million
Hence the said financial asset of the Cherub will show on balacesheet with value of $8.7 million for the year ended 30 September 2020.