ExpertHard2 marksShort Answer
ACCA · Question 26 · Preparing Basic Financial Statements
Section A
A company issues $1,000,000 of 5% loan notes at a discount of 2%. The issue costs are $10,000. What is the initial carrying amount of the financial liability recognized in the statement of financial position?
Section A
A company issues $1,000,000 of 5% loan notes at a discount of 2%. The issue costs are $10,000. What is the initial carrying amount of the financial liability recognized in the statement of financial position?
How to approach this question
Financial liabilities are initially measured at fair value minus transaction costs. Fair value = Nominal value - Discount. Then subtract issue costs.
Full Answer
Under IFRS 9, financial liabilities (like loan notes) are initially measured at fair value minus transaction costs. The fair value is the cash received: $1,000,000 - 2% discount ($20,000) = $980,000. Deducting the issue costs of $10,000 gives an initial carrying amount of $970,000.
Common mistakes
Adding the issue costs instead of deducting them, or ignoring the discount.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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