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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

On 1 January 20X1, Valmar issues a 3-year bond with a nominal value of $2,000,000 at par, incurring directly attributable issue costs of $60,000. The bond carries 5% annual interest paid in arrears and is classified at amortised cost. Which statement correctly describes the initial measurement?

The bond is initially recognised at $1,940,000, fair value less transaction costs. Because interest and redemption are fixed on $2,000,000, the lower starting carrying amount means the effective interest rate exceeds the 5% coupon, so the cost is spread over the bond's life.

  1. AThe bond is recognised at $1,940,000 and the effective interest rate will be higher than 5%Correct
  2. BThe bond is recognised at $2,000,000 and the issue costs are expensed immediately
  3. CThe bond is recognised at $2,060,000 because costs are added to the liability
  4. DThe bond is recognised at $1,940,000 and the effective interest rate will be 5%

Explanation

Financial liabilities at amortised cost are initially measured at fair value less directly attributable transaction costs, giving $1,940,000. Since the cash interest is based on $2,000,000 and the redemption is $2,000,000, the carrying amount starts lower, so the effective rate must exceed 5% to accrete the discount. Expensing costs is only for items at fair value through profit or loss.

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