Question

Company A on 1 January 2014 issued a bond that required it to pay an annual coupon of €800 in
arrears and to repay the principal of €10,000 on 31 December 2023. By 2019, Company A was in
significant financial difficulties and was unable to pay the coupon due on 31 December 2019. On 1
January 2020, Company X estimates that the holder could expect to receive a single payment of
€4,000 at the end of 2021. It acquires the bond at an arm’s length price of €3,000. Company X
determines that the debt instrument is credit-impaired on initial recognition, because of evidence of
significant financial difficulty of Company A and because the debt instrument was purchased at a
deep discount.
Requirements :
a. Calculate the EIR using the estimated cash flows of the instrument
b. Calculate the interest income would be recognised on the instrument during 2020
c. Determine the carrying amount at the end of the year 2020
d. Assumed that at the end of the year based on reasonable and supportable evidence, the
cash flow expected to be received on the instrument had increase to €4,250 (still to be
received at the end of 2021), determine the carrying amount and impairment gain/loss.
e. Assumed that at the end of the year based on reasonable and supportable evidence, the
cash flow expected to be received on the instrument had increase to €3,500 (still to be
received at the end of 2021), determine the carrying amount and impairment gain/loss.

Answer 1

Answer A

Purchase date	1-Jan-20
Date of single payment	31-Dec-21
Years	2
Expected cash inflow	4,000
Acquisition cashflow	(3,000)
EIR	15.47%	3000 = 4000*(1/(1+EIR)^2)

Answer B & C

Year	Opening Carrying amount	Interest @ 15.47%	Closing carrying amount
0	3000	0	3000
1	3000	464	3464
2	3464	536	4000

Interest in 2020 would be 464 and carrying amount would be 3464.

Answer D

Revised estimate date	31-Dec-20
Date of single payment	31-Dec-21
Years	1
Expected cash inflow	4,250
Carrying amount	3,464
Original EIR	15.47%
Discounted cashflow (revised carrying amount)	3,681	= 4250 / (1+0.1547)
Impairment gain	217	=3681-3464

Answer E

Revised estimate date	31-Dec-20
Date of single payment	31-Dec-21
Years	1
Expected cash inflow	3,500
Carrying amount	3,464
Original EIR	15.47%
Discounted cashflow (revised)	3,031	= 3500 / (1+0.1547)
Impairment loss	(433)	=3031-3464