(IFRS) for Small and Medium-sized Entities (SMEs)

IFRS FOR SMES – JULY 2009Example of determining amortised cost for a five-year loan usingthe effective interest methodOn 1 January 20X0, an entity acquires a bond for Currency Units (CU)900,incurring transaction costs of CU50. Interest of CU40 is receivable annually, inarrears, over the next five years (31 December 20X0–31 December 20X4).The bond has a mandatory redemption of CU1,100 on 31 December 20X4.YearImpairment of financial instruments measured at cost oramortised costRecognitionCarrying amount atbeginning of periodInterest income Cash inflow Carrying amountat 6.9583% * at end of periodCU CU CU CU20X0 950.00 66.10 (40.00) 976.1120X1 976.11 67.92 (40.00) 1,004.0320X2 1,004.03 69.86 (40.00) 1,033.8920X3 1,033.89 71.94 (40.00) 1,065.8320X4 1,065.83 74.16 (40.00) 1,100.00(1,100.00) 0* The effective interest rate of 6.9583 per cent is the rate that discounts the expected cashflows on the bond to the initial carrying amount:40/(1.069583) 1 + 40/(1.069583) 2 + 40/(1.069583) 3 + 40/(1.069583) 4 + 1,140/(1.069583) 5 = 95011.21 At the end of each reporting period, an entity shall assess whether there isobjective evidence of impairment of any financial assets that are measured at costor amortised cost. If there is objective evidence of impairment, the entity shallrecognise an impairment loss in profit or loss immediately.11.22 Objective evidence that a financial asset or group of assets is impaired includesobservable data that come to the attention of the holder of the asset about thefollowing loss events:(a)(b)(c)(d)(e)significant financial difficulty of the issuer or obligor.a breach of contract, such as a default or delinquency in interest orprincipal payments.the creditor, for economic or legal reasons relating to the debtor’s financialdifficulty, granting to the debtor a concession that the creditor would nototherwise consider.it has become probable that the debtor will enter bankruptcy or otherfinancial reorganisation.observable data indicating that there has been a measurable decrease inthe estimated future cash flows from a group of financial assets since theinitial recognition of those assets, even though the decrease cannot yet beidentified with the individual financial assets in the group, such as adverse© IASCF 61