ipsas 29—financial instruments: recognition and measurement - IFAC

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FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT Disposal of a Foreign Operation IE32. This example illustrates the application of paragraphs C12 and C13 of Appendix C in connection with the amount recognized in surplus or deficit on the disposal of a foreign operation. Background IE33. This example assumes the economic entity structure set out in the application guidance and that Entity D used a USD borrowing in Entity A to hedge the EUR/USD risk of the net investment in Entity C in Entity D’s consolidated financial statements. Entity D uses the step-by-step method of consolidation. Assume the hedge was fully effective and the full USD/EUR accumulated change in the value of the hedging instrument before disposal of Entity C is €24 million (gain). This is matched exactly by the fall in value of the net investment in Entity C, when measured against the functional currency of Entity D (euro). IE34. If the direct method of consolidation is used, the fall in the value of Entity D’s net investment in Entity C of €24 million would be reflected totally in the foreign currency translation reserve relating to Entity C in Entity D’s consolidated financial statements. However, because Entity D uses the step-bystep method, this fall in the net investment value in Entity C of €24 million would be reflected both in Entity B’s foreign currency translation reserve relating to Entity C and in Entity D’s foreign currency translation reserve relating to Entity B. IE35. The aggregate amount recognized in the foreign currency translation reserve in respect of Entities B and C is not affected by the consolidation method. Assume that using the direct method of consolidation, the foreign currency translation reserves for Entities B and C in Entity D’s consolidated financial statements are €62 million gain and €24 million loss respectively; using the step-by-step method of consolidation those amounts are €49 million gain and €11 million loss respectively. Reclassification IE36. When the investment in Entity C is disposed of, IPSAS 29 requires the full €24 million gain on the hedging instrument to be recognized in surplus or deficit. Using the step-by-step method, the amount to be recognized in surplus or deficit in respect of the net investment in Entity C would be only €11 million loss. Entity D could adjust the foreign currency translation reserves of both Entities B and C by €13 million in order to match the amounts reclassified in respect of the hedging instrument and the net investment as would have been the case if the direct method of consolidation had been used, if that was its accounting policy. An entity that had not hedged its net investment could make the same reclassification. 1277 IPSAS 29 ILLUSTRATIVE EXAMPLES PUBLIC SECTOR
FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT Receipt of a Concessionary Loan IE37. A local authority receives loan funding to the value of CU5 million from an international development agency to build primary healthcare clinics over a period of 5 years. The agreement stipulates that loan should be repaid over the 5 year period as follows: Year 1: no capital repayments Year 2: 10% of the capital Year 3: 20% of the capital Year 4: 30% of the capital Year 5: 40% of the capital Interest is paid annually in arrears, at a rate of 5% per annum on the outstanding balance of the loan. A market related rate of interest for a similar transaction is 10%. IE38. The entity has received a concessionary loan of CU5 million, which will be repaid at 5% below the current market interest rate. The difference between the proceeds of the loan and the present value of the contractual payments in terms of the loan agreement, discounted using the market related rate of interest, is recognized as non-exchange revenue. IE39. The journal entries to account for the concessionary loan are as follows: 1. On initial recognition, the entity recognizes the following (assuming that the entity subsequently measures concessionary loan at amortized cost): Dr Bank 5,000,000 Cr Loan (refer to Table 2 below) 4,215,450 Cr Liability or non-exchange revenue 784,550 Recognition of the receipt of the loan at fair value IPSAS 23 is considered in recognizing either a liability or revenue for the off-market portion of the loan. Example 26 of that Standard provides journal entries for the recognition and measurement of the off-market portion of the loan deemed to be non-exchange revenue. 2. Year 1: The entity recognizes the following: Dr Interest (refer to Table 3 below) 421,545 Cr Loan 421,545 Recognition of interest using the effective interest method (CU4,215,450 × 10%) Dr Loan (refer to Table 1 below) 250,000 Cr Bank 250,000 Recognition of interest paid on outstanding balance (CU5m × 5%) IPSAS 29 ILLUSTRATIVE EXAMPLES 1278
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ipsas 29—financial instruments: recognition and measurement - IFAC

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