IAS 16.

1
Greenday Limited constructed a new factory during 2016:

Costs ($) Notes

Raw materials 960 000 1

Labour payments 800 000 2
Specialized platform 1 200 000 3
Safety inspection 960 000 4
Official opening ceremony 160 000 5
Replacement engine 176 000 6
Maintenance 384 000 7
Notes:

1. This includes materials of $320 000 that were purchased from an internal division (the
$320 000 included a 25% mark-up on cost).
2. The payments were made to laborers after deducting the following:
i. Employee contributions to provident funds and medical aids $480 000; and
ii. Employee’s tax $320 000.

Greenday also contributes to the abovementioned funds by matching the amount of

employee contributions.

3. The specialized platform was necessary part of the factory plant. The platform was built
by subcontractors and will be depreciated at 10% per annum to a residual value of $80
000.
4. Safety inspection is legal requirement before commissioning the plant. The first
inspection was performed on 28 May 2016 and repeat inspections must occur every 3
years.
5. A ceremony to officially open the plant took place on 31 May 2016. It was attended by
all employees as well as local mayor and other dignitaries.
6. On 21 December 2016, one of the engines failed. There was no way of repairing it and
was scrapped. The engine had not been accounted for as a separate part, but it was
estimated that its original costs was $160 000 (material). The replacement engine was
acquired and installed on 30 December 2016 (cost: $176 000) and will be depreciated to
a nil residual value over a slightly shorter useful life of 2 years.
7. The maintenance cost refers to the necessary regular weekly servicing of the plant.

It is expected that the plant will have a nil residual value and a useful life of 20 years (the
specialized platform will need to be replaced half way through this period). The straight-line
method is considered to be the most appropriate for the plant. At eth end of this 20 year
period, the plant will need to be dismantled. The future dismantling cost is expected to be $4
800 000. An appropriate discount rate is 10% per annum.

The plant was available for use on 31 May 2016, but was only brought into use on 2 July2016.

Required

Calculate the carrying amount of the plant in Greenday Limited statement of financial position
as 31 December 2016, in accordance with International Financial reporting Standards.

SOLUTION

W1.1 Basic plant (excluding platform and inspection costs and replacement engine)
Raw materials (960 000 – 320 000) + 320 000 / 125% x 100% 896 000
Labour 800 000 + 480 000 + 320 000 + 480 000 (co. contrib.) 2 080 000
Provision for dismantling W2 713 489
3 689 489
Less Depreciation of basic plant (3 689 489 – 0) / 20 years x 7 / 12 (107 610)
Less Impairment of engine Cost:
160 000 – AD: (160 000 – 0)/ 20 years x 7/12 – Recoverable amt: 0 (scrapped) (155 333)
Carrying amount: 31/12/20X6 3 426 546

W1.2 Engine replacement A separate part since the useful life now differs
Cost Given 176 000
Less Depreciation of new engine No depreciation yet (0)
Carrying amount: 31/12/20X6 176 000
W1.3 Specialised platform
Cost Given 1 200 000
Less Depreciation of platform (1 200 000 – 80 000 ) x 10%p x 7 / 12 (65 333)
Carrying amount: 31/12/20X6 1 134 667
W1.4 Major inspection
Cost Given 960 000
Less Depreciation of inspection (960 000 – 0) / 3 years x 7 / 12 (186 667)
Carrying amount: 31/12/20X6 773 333
W1.5 Carrying amount in total
Carrying amount of plant: 31/12/20X6 3 426 546 + 176 000 + 1 134 667 + 773 333 = 5 510 546

The launch party costs are not capitalised to the plant since these costs are not directly attributable to
bringing the plant to a location and condition to enable its use as intended by management. Further,
these costs are not recognised as an asset as the future economic benefits from the launch party are
not probable. Therefore, these costs are expensed as they are an outflow of economic benefits during
the period.
IAS 16.2

Spark Limited is a national carrier of fresh farm produce. Due to the high incidence of road
fatalities the government introduced legislation that requires that all long distance vehicles to
undergo roadworthiness inspections every two years. The details of one such vehicle are as
follows:

 The truck was purchased on 1 October 2018 for $320 000. The following significant parts
were identified:
 The engine was allocated a cost of $210 000 and was expected to travel 300 000
km after which, it would have no residual value.
 The chassis was allocated a cost of $110 000 and had an estimated residual value
of nil and a useful life of 5 years.
 The first major inspection was performed on 31 December 2018, the day before the
legislation became effective, at a cost of $40 000.
 The truck travelled 40 000km during 2018 and 97 000 km in 2019.
 The directors of Park limited felt that the previous inspection had not been performed
properly ( the previous inspectors have been implicated in a fraud syndicate involving
fake inspection certificates), and given the safety of its employees was at stake, decided
to perform another inspection on 1 July 2019 at a cost of $72 000.

Required

Prepare all journals relating to the truck for the years ended 31 December 2018 and 2019.

SOLUTION

1 October 2018
Truck: engine: cost (A) Given 210 000
Truck: chassis: cost (A) Given 110 000
Bank/ liability Given 320 000
Purchase of truck

31 December 2018
Truck: inspection: cost (A) 40 000
Bank/ liability Given 40 000
Major inspection performed

Depreciation: truck (E) 33 500

Truck: engine: accdepr (-A) (210 000 – 0) / 300 000 x 40 000 28 000
Truck: chassis: acc depr (-A) (110 000 – 0) / 5 x 3/12 5 500
Depreciation of truck
1 July 2019
Depreciation: truck (E) (40 000 – 0) / 2 x 6/12 10 000
Truck: inspection: acc depr (-A) 10 000
Depreciation of inspection costs to date of new inspection

Impairment loss: truck (E)

(Cost: 40 000 – AD: 10 000) – RA: 0 30 000
Truck: inspection: acc impairment losses (-A) 30 000
Impairment of inspection cost (RA = recoverable amount)

Truck: inspection: accumulated depreciation (-A) 10 000

Truck: inspection: accumulated impairment losses (-A) 30 000
Truck: inspection: cost (A) 40 000
Derecognising of old inspection costs

Truck: inspection: cost (A) 72 000

Bank/ liability 72 000
Major inspection performed (second)

31 December 2019
Depreciation: truck (E) 107 900
Truck: engine: acc depr (-A) (210 000 – 0) / 300 000 x 97 000 67 900
Truck: chassis: acc depr (-A) (110 000 – 0) / 5 x 1 22 000
Truck: inspection: acc depr (-A) (72 000 – 0) / 2 x 6/12 18 000

IAS 36 Impairment of assets

IAS 36.1
Needle Limited is a sewing machine manufacturer. The entity’s Thimble division is considered
to be a cash generating unit for purposes of IAS 36 Impairment of assets. Projections suggest
the Thimble will experience cash flows in future periods. Its recoverable amount at 31
December is $208 000. Investment property and plant are measured using the cost model. The
goodwill in the CGU was acquired in a business combination. The carrying amount of the cash
generating unit is $289 600 at 31 December 2018 constituted by the following individual
carrying amounts as at this date:
 Goodwill $32 000
 Investment property $129 600
 Inventory $32 000
 Plant $96 000.

The recoverable amount at 31 December 2018 for the goodwill and investment property could
not be estimated on an individual basis but
 The recoverable amount for the plant was estimated to be $64 000
  The net realizable value of the inventory was $24 000.

Required
Calculate whether the cash generating unit is impaired and process any necessary journals.

SOLUTION
Debit Credit
31 December 2017 Impairment loss – plant (E)) W1 32 000
Plant: accumulated impairment loss (-A) 32000
Impairment of plant in terms of IAS 36
W1: Calculation of the impairments and write-downs necessary on specific individual assets
at impairment date
Plant $
Carrying amount Given 96 000
Recoverable amount Given (64 000)
Impairment loss 32 000

Inventory Carrying amount Given 32 000

Net realisable value Given (24 000)
Write down to net realisable value 8 000

Write down of inventory (E) W1 8 000

Inventory (A) 8 000
Write down of inventory in terms of IAS 2

Impairment – goodwill (E) 32 000

Goodwill: accumulated impairment loss (-A) 32000
Impairment of goodwill in terms of IAS 36

Impairment loss – investment property (E) W2 9 600

Investment property: accumulated impairment loss (-A) W3 9600
Impairment of investment property (cost model) in terms of IAS 36

W2: Impairment loss of cash-generating unit

Carrying amount: CGU (adjusted)
CA: 289 600 – Adjustments: [32 000(W1) + 8 000(W1)] 249 600
Recoverable amount: CGU Given (208 000)
Impairment loss: CGU 41 600
W3: Allocation of impairment loss
Carrying Impairment carrying amount
amount allocated after
before

Goodwill 32 000 (32 000) 0

Second round of allocation : Note 2
Assets already fully impaired/ not impaired at all
Inventory CA (given):
32 000 – WD: 8 000 Note 2 & 4 24 000 N/A 24 000
Plant CA (given):
96 000 – IL: 32 000 Note 3 64 000 N/A 64 000
Other assets possibly not yet fully impaired
Investment prop. (
Individual CA: 129 600/ Total CA of assets to
which the impairment may still be allocated:
129 600) x (41 600 – 32 000) Note 4 129 600 ( 9 600) 120 000
249 600 (41 600) 208 000

Note 1
Any impairment on a CGU is always first set-off against any goodwill that has been included in
that CGU.

Note 2
As inventory is scoped out of IAS36, it is excluded from the apportionment of any impairment
loss that remains after the initial allocation against goodwill. It does, however, get included
when calculating the impairment loss of the CGU (i.e. it was included in the calculation of the
carrying amount and the recoverable amount of the CGU: see W2). Note that investment
property was not scoped out since it was measured using the cost model (investment property
measured under the fair value model would have been scoped-out).

Note 3
We knew the RA of the plant and thus we impaired this individual asset first (see W1). Since
plant has been decreased to its recoverable amount, it may not be impaired further (IAS36.105
states that an asset may not be reduced below the higher of its value in use and fair value less
cost of disposal and zero).

Note 4
The remaining impairment of $9 600 could not be allocated to goodwill (because it is already at
nil), or to plant (because it has already been impaired to its recoverable amount), or to
inventory (because it is a scoped-out asset) and thus it is allocated entirely to investment
property.
IAS 36.2
Pizza Limited as a pizzeria where it sells pizzas with customer’s choice of toppings and it also
operates a delicatessen shop with imported Italian food. The pizzeria and the shop are separate
cash generating units. The Buildings are measured under the cost model but the equipment is
measured under the revaluation model, with revaluations performed every 2 years. The entity
revalued all its equipment on 31 December 2014 on which date the pizzeria cash generating
unit’s equipment was revalued upward by $250 000. Although another revaluation was
performed on 31 December 2016, the carrying amount of the pizzeria’s CGU equipment was
not adjusted because its carrying amount did not differ materially from its fair value at that
date.

The pizzeria has been trading very profitably until 2016 when a piazza chain opened its doors
across the road. On 31 December 2016, as a result of the fierce competition, Pizza Limited
impaired its pizzeria CGU down to its recoverable amount of $250 000. During 2018, the
competitor’s service spiraled downwards and consumers started preferring Pizza Limited’s
atmosphere. On 31 December 2018, the recoverable amount of the pizzeria was reliably
determined at $750000. The equipment and building are depreciated on the straight line
method to nil residual value. Goodwill is carried at cost and tested for impairment annually. The
implied fair value of goodwill at 31 December 2016 was $0.

Details of the pizzeria CGU’ assets, which were acquired from the previous owners on 1 January
2014 area as follows (recoverable amount were not ascertainable)

Cost Remaining useful life

1/1/2014 1/1/2014
Equipment $500 000 10years
Building $500 000 10 years
Goodwill $142 857 indefinite

Required
a) Provide the journal relating to impairment fro the year 31 December 2016
b) Calculate the carrying amount of each of the assets within Pizza CGU at 31 December
2018.
SOLUTION
Journals – reflecting the impairment loss Debit Credit
31 December 2016 Impairment loss: goodwill W3 142 857
Goodwill: accumulated impairment losses 142 857
Impairment loss: building W3 252 174
Building: accumulated impairment losses 252 174
Revaluation surplus W3 194 444
Impairment loss: equipment W3 197 826
Equipment: accumulated impairment losses 392 270
Impairment of the individual assets within the CGU (W3)

b) Carrying amount of assets at 31 December 2018 – after the impairment reversal

ACA
31/12/X8 Equipment W6 $388 889
Building W6 $250 000
Goodwill W6 $ 0
638 889

W1: Carrying amount of CGU before impairment: 31/12/2016

Cost CA Revaluation CA CA
Adjustment
1/1/14 31/12/14 31/12/14 31/12/14 31/12/16
Equipment 500 000 450 000 250 000 700 000 544 444
Building 500 000 450 000 450 000 350 000
Goodwill 142 857 142 857 142 857 142 857
1037301
 Equipment: Revaluation model: depreciated cost after 1 year = (500 000 - 0) / 10 yrs x 9
years = $450 000
 Building: Cost model: depreciated cost after 1 year = (500 000 - 0) / 10 yrs x 9 years =
$450 000
 Goodwill: Cost, adjusted only for impairments = $142 857 5) Equipment: Revaluation
model – we are told the asset's carrying amount was revalued upwards by $250 000,
thus increasing the CA of $450 000 to $700 000 (CA: 450 000 + Rev Surplus: 250 000 =
new CA: 700 000)
 Equipment: Revaluation model: depreciated fair value, 2 years after revaluation = (700
000 - 0) / 9 yrs x 7 years = $544 444
 Building: Cost model: depreciated cost after 3 years = (500 000 - 0) / 10 yrs x 7 years =
$350 000
W2: Impairment of CGU: 31/12/2016 31/12/16
CGU: Carry1ng amount W1 1 037 301
CGU: Recoverable amount Given (250 000)
CGU: Impairment loss 787 301

W3: Allocation of the CGU Impairment to the individual assets in the CGU:
31/12/2016 carrying amount Impairement Carrying amount after
Before impairment impairment
31/12/2016 31/12/2016 31/12/2016
First round
Impairment to be allocated 787 301
Goodwill 142 857 (142 857) 0

Second round

Impairment to be allocated 644 444

Equipment 544 444 (392 270) 152 174

Building 350 000 (252 174) 97 826

Impairment to be allocated 0

1 037 301 (787 301) 250 000

 Goodwill is always impaired first = $142 857

 544 444 / 894 444 x 644 444 = $392 270
 350 000 / 894 444 x 644 444 = $252 17
*** equipment 544 444
Building 350000
894444

The impairment of $787 301 will not all be expensed as an impairment loss expense. This is
because one of the assets (equipment) was measured under the revaluation model and had
previously been revalued upwards. Thus, the impairment that is allocated to equipment (392
270) must first be debited against the balance in the revaluation surplus – and only when the
revaluation surplus has been reduced to a nil balance, will the decrease in the equipment's
carrying amount be expensed as an impairment expense.
Thus, the impairment of $787 301 will be credited to accumulated impairment losses but will be
debited to the following accounts:
Reversal of equipment's revaluation surplus Bal in the RS account:
Original credit: 250 000 – Transferred to retained earnings since the revaluation: (250 000 / 9
yrs x 2yrs)
194 444
Impairment loss expense: allocation
Equipment (C392 270 – C194 444 above) 197 826
Goodwill 142 857
Building 252 174
787 301

W4: Carrying amount of CGU before impairment: 31/12/2018

CA 31/12/18 Equipment (CA: 152 174 (W3) – RV: 0) / 7 years x 5 years 108 696
Building (CA: 97 826 (W3) – RV: 0) / 7 years x 5 years 69 876
Goodwill 0
178 572

W5: Impairment loss reversal of CGU: 31/12/2018:

Carrying amount: CGU W4 178 572
Less recoverable amount: CGU Given (750 000)
Impairment loss reversal (571 428)

W6: Maximum CA to which assets can be reversed at 31/12/2018

The CA of the asset cannot be increased above the lower of:

CA had no impairment
been previously recognised Recoverable amount Max CA
Equipment $388 889 Unknown 388 889
Building 250 000 Unknown 250 000
Goodwill N/A N/A 0

 In terms of IAS 36.123, in allocating a reversal of an impairment loss for a CGU, the
carrying amount of an asset (except goodwill, which must never be increased) shall not
be increased above the lower of:
a) Its recoverable amount
b) The CA that would have been determined had no impairment loss been recognised in
prior periods (i.e. had no impairment been recognised at December 2016)
 Equipment: Revaluation model: Depreciated revalued amount: (C700 000 – 0) / 9 years x
5 years = $388 889
  Building: Cost model: Depreciated historic cost: $500 000 / 10 years x 5 years = $250
000
 Goodwill: An impairment of goodwill may never be reversed.

W7: Allocation of the CGU Impairment Reversal to the individual assets in the CGU:
31/12/2018

Carrying amount Impairment carrying amount after

before reversal reversal reversal
31/12/18
Equipment 108 696 280 193 388 889
Building 69 876 180 124 250 000
Goodwill - - -
178 572 460 317 4 638 889

Equipment
Impairment loss reversal: Percentage to be allocated (108 696/178 572) = 60.9%* 60.9% x $571
428 = $348 000 This would increase the CA to $456 696 ($108 696 + $348 000). However, the
asset’s maximum CA is $388 889 (W6), thus the allocation is limited to $280 193 ($388 889 –
$108 696)

Building
Impairment loss reversal: Percentage to be allocated ($69 876/$178 572) =39.1%* 39.1% x
$571 428 = $223 428 This would increase the CA to $293 304 ($69 876 + $223 428). However,
the asset’s maximum CA is $250 000 (W6), thus the allocation is limited to $108 124 ($250 000
– $69 876)

The impairment reversal of $571 428 (W5) was limited to $460 317 (W7). There is no second
round where we try to allocate more (as is the case with an impairment loss) since the
individual assets in the CGU have reached their maximum carrying amounts (in the case of
scoped-in assets under the cost model, the maximum carrying amount is depreciated historic
cost and in the case of scoped-in assets under the revaluation model, the maximum carrying
amount is depreciated fair value).

IFRS 9 FINANCIAL INSTRUMENTS

IFRS 9.1
Reindeer Limited bought the following listed bond originally issued by Cougher Limited for
$1 180 888 on 1 January 2016.
Cougher Limited
Redemption amount (including a premium of $136 000) $1 224 000
Repayment date 31/12/2019
Interest rate (receivable on 31 December annually in arrears) 10%
Effective interest rate at inception 10%

Provided below are a summary of events:

i. 31 December 2017: Cougher Limited was placed under voluntary curatorship. Reindeer
Limited received the current years’ coupon. The receipts of future coupon were no
longer considered probable. Reindeer obtained a guarantee of $1 186 972 which would
be returned on 31 December 2019.
ii. 31 December 2018: Cougher Limited’s position deteriorated and Reindeer would only
be able to pay the nominal value of $1 088 000, and interest of $27 200 on 31 December
2019.
The bonds are correctly measured at amortised cost.
An analysis of the expected credit losses on the Cougher bonds were as follows:
Date 12 month expected Lifetime expected
credit losses credit losses
$ $
1 January 2016 28 688 85 000
31 December 37 060 121 550
2016
31 December 65 450 219 428
2017
31 December 48 578 306 617
2018

Required
Journalise the related entries for each of the years ended 31 December 2016, 2017 and 2018.

SOLUTION
Debit Credit
1 January 20X6 FA: Bond: at AC: GCA (A) Given 1 180 888
Bank 1 180 888
Purchase of bond (there were no transaction costs in this question)

Impairment loss (P/L: E) Given 28 688

FA: Bond: AC: Loss allowance (-A) 28 688
Loss allowance on bond measured at 12-month expected credit losses (there is no evidence of the asset
being credit-impaired on this date)

31 December 20X6
 FA: Bond: AC: GCA (A) W1: 118 089
Interest income (P/L: I) GCA: 1180 888 x EIR: 10% 118 089
Interest income recognised in P/L at the effective interest rate

Bank Nominal value: 1 088 000* x CR: 10% 108 800

FA: Bond: AC: GCA (A) 108 800
Receipt of interest at coupon rate

Impairment loss (P/L: E)

Latest estimate of 12m ECL: 37 060 – Previous balance: 28 688 8 372
FA: Bond: AC: Loss allowance (-A) 8 372
Remeasurement of loss allowance on bond - remeasured to latest estimate of 12-month expected
credit losses (ECL)

31 December 20X7
FA: Bond: AC: GCA (A) W1; Or GCA: 1 190 177 x EIR: 10% 119 018
Interest income (P/L: I) 119 018
Interest income recognised in P/L at the effective interest rate

Bank Nominal value: 1 088 000* x CR: 10% 108 800

FA: Bond: AC: GCA (A) 108 800
Receipt of interest at coupon rate

Impairment loss: FA (P/L: E)

Lifetime ECL: 219 428 (given) – Previous balance: 37 060 182 368
FA: Bond: AC: Loss allowance (-A) 182 368
Remeasurement of loss allowance on bond – remeasured to lifetime expected credit losses following
significant increase in credit risk (which also resulted in the asset becoming credit-impaired)

31 December 20X8
FA: Bond: AC: GCA (A) GCA o/b: 1 200 395 (W1 or W4) x EIR: 10% 120 040
FA: Bond: AC: Loss allowance (-A) LA o/b: 219 428 (Given) x EIR: 10% 21 943
Interest income (P/L: I) AC* o/b: 980 968 x EIR: 10% 98 097
Interest income recognised in P/L using EIR method – asset now creditimpaired and thus the interest
income is measured by applying the EIR to the amortised cost (GCA – loss allowance) – both the GCA
account and the loss allowance account must be ‘unwound’ (using the same original EIR) Note: no
interest was received in 20X8 *AC = GCA: 1 200 396 – LA: 219 428 = 980 968

Impairment loss (P/L: E) Latest estimate of lifetime ECL:

306 617 (given & W3) – prior balance: (219 428 + 21 943) 65 246
FA: Bond: AC: Loss allowance (-A) 65 246
Remeasurement of loss allowance on bond – remeasured to lifetime expected credit losses at end
20X8 (note: the prior year balance of 219 428 has been partially unwound during 20X8 – see jnl above)
*The nominal value was given as 1 088 000 in the question and could also be calculated using other
information provided in the question, as follows: Nominal value = Redemption amt: 1 224 000 –
Premium included: 136 000 = 1 088 800

Comment:
  The question did not refer to transaction costs but had these been incurred, they would have
been capitalised to the financial asset account.
 It is assumed that the purchase price equalled the FV on date of acquisition. If it did not equal
FV, the asset would have been measured at FV and a day-one gain or loss would have had to be
recognised.
 Notice that no interest was received in 20X8. Notice that the interest income is calculated by
applying the EIR to The GCA o/b in 20X6 & 20X7 because the asset was not credit-impaired
during these periods; The AC o/b (GCA – LA) in 20X8 and 20X9 because the asset was credit-
impaired during these periods.
 Notice that the loss allowance account is increased in 20X8 due to both: the unwinding of the
discount, recognised as a reduction of the interest income, and  an increase in the expected
lifetime expected credit losses to $306 617, recognised as an impairment loss expense.

Effective interest rate table before being assessed as credit-impaired

Opening Interest income Receipts Closing

Carrying @ EIR of 10% at coupon rate Carrying Amount
Amount 10%
20X6 1 180 888 118 089 (108 800) 1 190 177
20X7 1 190 177 119 018 (108 800) 1 200 395
20X8 1 200 395 120 040 (108 800) 1 211 635
20X9 1 211 635 121 164 (108 000) 1 223 999
1 (1 224 000) 0

IFRS 9.2
Brad Limited bought listed bonds, issued by Butter Limited on 1 January 2015 for $1 519 530.
The details of the Butter Limited bonds are as follows:

 Nominal value $1 400 000

 Redemption date : 31 December 2018
 Redemption amount $1 575 000 ( including a $175 000 premium)
 Interest rate ( coupon rate ) of 10% per annum in arrears
 Effective interest rate is 10%

The bonds are held within a portfolio that is managed with the objective of collecting both
contractual cash flows from selling the assets.

Butter Limited’s financial health and ability to settle bond payments is as follows:

Year ended Financial health Excepted coupon Expected

payments redemption
$
 $ $

31 December 2016 Weak 0 (i.e. for the 1 575 000

remainder of the
term)

31 December 2017 Recovering 35 000 ( in 2018) 1 575 000

An analysis of the fair values and expected credit losses for these listed bonds is presented
below:

Date Fair value 12 month expected Lifetime expected

credit losses credit losses
$
$ $

1 January 2015 1 519 530 26 250 134 400

31 December 2015 1 580 000 23 600 123 000

31 December 2016 1 200 000 96 000 242 980

31 December 2017 1 280 000 57 150 235 458

Increase in credit risk in 2016 is significant and the asset is credit impaired from then on.

Required
Provide journal entries to account for the bonds in Butter Limited in the years ended 31
December 2015, 2016 and 2017.
Hint : Since these bonds are debt instruments that are managed with the objective of collecting
both the contractual cash flows (principal & interest) and from the sale thereof, they are
classified at FVOCI. The classification of the bonds at FVOCI means they are first measured as if
they the were classified at amortised cost and then remeasured to FV with FV gains or losses
recognised in OCI

SOLUTION

January 20X5

FA: Bond: at FVOCI (A) Given: FV: 1 519 530+ TC: 0 1 519 530
Bank 1 519 530
Purchase of bond

Impairment loss (P/L: E) Given or W6.2 26 250

Loss allowance reserve (OCI) 26 250
Impairment of financial asset: Loss allowance on bond recognised, measured at 12-month expected
credit losses (no evidence that it was credit impaired on initial recognition)

31 December 20X5

Bank Nominal value: 1 400 000 x Coupon rate: 10% 140 000
FA: Bond: at FVOCI (A) Balancing 11 953
Interest income (P/L: I) GCA 1 519 530 x EIR 10%; or W6.1 151 953
Recognising interest income in P/L using EIR method (original EIR applied to GCA) and recognising
interest received

Loss allowance reserve (OCI)

Latest estimate 12m ECL: 23 600 – Previous balance: 26 250 2 650
Impairment loss reversed (P/L: I) 2 650
Impairment of financial asset is partially reversed: Remeasurement of loss allowance on bond to latest
estimate of 12-month expected credit losses

FA: Bond: at FVOCI (A)

FV: 1 580 000 – CA: (purchase 1 519 530 + movement per EIR method 11 953) 48 517
FV gain on FA (OCI) 48 517

Remeasuring FA to fair value at year-end; FV gain accumulated in OCI

31 December 20X6
Bank Nominal value: 1 400 000 x Coupon rate: 10% 140 000
FA: Bond: at FVOCI ( A) Balancing 13 148
Interest income (P/L: I) GCA (1 519 530 + 11 953) x EIR 10% 153 148
Recognising interest income in P/L using EIR method (original EIR applied to GCA) and recognising
interest received

Impairment loss (P/L: E) Latest estimate Lifetime

ECL: 242 980 – Previous balance: 23 600; 219 380
Loss allowance reserve (OCI) 219 380
Remeasurement of loss allowance on bond to estimated lifetime expected credit losses, since credit
risk increased significantly (no evidence of credit risk in 20X5 but weak financial health end of 20X6);
results in a further impairment loss expense

FV loss on FA (OCI)
FV: 1 200 000 – CA: (o/b 1 580 000 + movement per EIR method 13 148) 393 148
FA: Bond: at FVOCI (A) 393 148
Remeasuring FA to fair value at year-end: FV loss is accumulated in OCI

31 December 20X7

FA: Bond: at FVOCI (A) GCA o/b: 1 544 631 x EIR: 10%; 154 463
Loss allowance reserve (OCI) LA o/b: 242 980 x EIR: 10%; o 24 298
Interest income (P/L: I) AC o/b: (1 544 631 – 242 980) x EIR: 10% 130 165
Interest income recognised in P/L using EIR method (no interest received) Notice: because the FA is
credit-impaired at end 20X6, the interest income from then on is calculated using the original EIR but
applied to the AC o/b – not to the GCA o/b. This means that the loss allowance reserve, which now
reflects the asset’s lifetime ECL (as the credit risk had increased significantly), being the PV of all the
expected shortfalls, is now also ‘unwound’ as part of this journal. GCA o/b: (1 519 530 + 11 953 + 13
148) = 1 544 631

Loss allowance reserve (OCI) Latest estimate of lifetime

ECL: 235 458 – Prior balance: (242 980 + 24 298); 31 820
Impairment loss reversed (P/L: I) 31 820
Remeasurement of loss allowance on bond to latest estimate of lifetime ECLs (although the asset was
‘recovering’, there is no evidence that it is not still considered to be credit-impaired); this results in an
impairment loss reversal

FV loss on FA (OCI) FV: 1 280 000 – CA: (o/b:

1 200 000 + movement per EIR method 154 463); 74 463
FA: Bond: at FVOCI (A) 74 463 Remeasuring
FA to fair value at year-end – FV loss accumulated in OCI

Comment:
 Since these bonds are debt instruments that are managed with the objective of collecting both
the contractual cash flows (principal & interest) and from the sale thereof, they are classified at
FVOCI.
 Classifying the bonds at FVOCI means that: they are first measured as if they were classified at
amortised cost and then remeasured to FV with FV gains or losses recognised in OCI. Although
impairment testing is the same as for financial assets at amortised cost, and any impairment
losses would also be recognised in P/L, the contra entry for an impairment loss is not a credit to
the financial asset loss allowance account but to a separate loss allowance account in OCI. See
IFRS 9.5.5.2