Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
1. The term amortised cost refers to the amortisation of discounts/premiums on
issue if the coupon is below/above the market rate respectively. Therefore
the accrued interest will be based on the internal rate of return on the
transaction (i.e the market rate) at inception of the loan. It will not change
except in the case of variable loans.
2. Loans can be classified in many ways, as illustrated in Exhibit 6.5 below. A
key accounting classification is between those loans that are performing and
those that are non-performing. The crucial aspect here is provisioning. Under
many local GAAPs the provision has two components: historic focus
element and forward looking element. The historic element will involve
making a provision based on the historic payment (or non-payment)
experience. The forward looking component will be based on a statistical
procedure designed to pre-empt losses that are highly likely to arise. These
will be much more difficult to recognise under IFRS which places a much
more ‘backward’ emphasis on provisioning (see Chapter four – one of the
recognition criteria is a ‘past event’).
3. The initial principal recognised is based on the original outstanding amount.
If there is any objective evidence of impairment then the loan must be stated
at the present value of future cash flows. For this purpose the interest rate at
the inception of the loan is used and not the current interest rate.
Exhibit 6.5: Classification of bank loans
Loan classifications
Maturity
Long vs short
term
Customer
Mortgage vs
commercial
Pricing
Fixed vs
variable
Quality
Performing vs
non-perfoming
Investments in securities
This was fully addressed in Chapter four.
Customer deposits
The major liability for many banks will be the deposits from customers.
Accounting complications are rare for deposits as the coupon and effective yield
will be the same and hence no discount or premium complication arises. Deposits
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