Question

Rell Corporation reports under IFRS No. 9. Rell has an investment in Tirish, Inc. bonds the Rell accounts for at amortized cost, given that the bonds pay only interest and principal and Rell's business purpose is to hold the bonds to maturity. Rell purchased the bonds for €10,600,000. As of December 31, 2018, Rell calculates €816,000 of credit losses expected for default events occurring during 2019 and €510,000 of credit losses expected for default events occurring after 2019.

Required: 1. Assume the Tirish bonds have not had a significant increase in credit risk. Prepare the journal entry to record any impairment loss as of December 31, 2018.

2. Assume the Tirish bonds have had a significant increase in credit risk. Prepare the journal entry to record any impairment loss as of December 31, 2018.

3. Assume the Tirish bonds have not had a significant increase in credit risk, and that as of December 31, 2019, Rell calculates €710,000 of credit losses expected for default events occurring during 2020 and €410,000 of credit losses expected for default events occurring after 2020. Prepare the journal entry Rell would make with respect to any impairment loss as of December 31, 2019.

Answer 1

Question 1

As per IFRS 9, if there is no significant increase in the Credit Risk, a 12 Month Expected Credit Loss should be accounted for. Hence in this case the loss of 816,000 should be recognized.Hence the Journal entry is:

31-Dec-18		Debit	Credit
	Imparitment due to Expected Credit Loss	8,16,000
	Investment in Bonds		8,16,000

Question 2

If there is an increase in credit risk, then the entire expected future credit losses should be recognized. THis amount is 816000 + 510000 = 1,326,000 Hence the Journal entry is:

31-Dec-18		Debit	Credit
	Imparitment due to Expected Credit Loss	13,26,000
	Investment in Bonds		13,26,000

Question 3

Again, since there is no significant increase in credit risk, The losses of 710,000 needs to be recognized:

31-Dec-19		Debit	Credit
	Imparitment due to Expected Credit Loss	7,10,000
	Investment in Bonds		7,10,000