ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments
Pilot Co has a $10m fixed-rate loan receivable from a customer. The contract contains a feature linking the interest to the price of gold, so that cash flows vary with the commodity index. Under IFRS 9, how should Pilot classify and measure the loan?
Pilot measures the entire loan at fair value through profit or loss. Embedded derivatives in financial asset hosts are not separated, and the gold-linked interest means the cash flows are not solely payments of principal and interest, so amortised cost and FVOCI are unavailable.
- ASeparate the gold-linked feature and carry the host at amortised cost
- BMeasure the whole instrument at amortised cost because the principal is fixed
- CMeasure the whole instrument at fair value through profit or loss because the cash flows fail the solely payments of principal and interest testCorrect
- DMeasure the whole instrument at fair value through OCI with recycling
Explanation
For financial asset hosts, embedded derivatives are not separated. The whole hybrid is assessed under the business model and SPPI test. Gold-linked returns are not solely principal and interest, so the asset is at FVTPL. Separation (option A) applies only to non-asset hosts.
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